Freedom, Capitalism and Human Behavior Chapter 4: Capitalism

30 Pages Posted: 19 Oct 2005 Last revised: 18 May 2013

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

William H. Meckling

Simon School, University of Rochester (Deceased)

Date Written: June 30, 1999


Capitalism is far and away the most effective system ever invented for peacefully organizing cooperation among large numbers of human beings. The success enjoyed by capitalistic economies during the last 70 years is in sharp contrast to the dramatic and widespread failure of communist and socialist centrally planned closed economies. The economies (primarily in the West) organized more or less as capitalistic have created enormous wealth and living standards for their members, while virtually all others have resulted in impoverishment. And it is becoming clear that they have accomplished this with much less damage to the environment than non-capitalist societies. Moreover, the difference is not merely one of resource endowments.

The current move toward more capitalist, open societies is drastically changing the world, and promises to go on for several generations. Because capitalism is widely misunderstood, it is paradoxically almost always under attack by those who would like to see societies organized in different ways. Private property capitalist systems are distinguished by the fact that most decision rights are assigned to private individuals or organizations. In contrast, socialist or communist systems assign most decision rights to the state or the governing party.

This chapter identifies the essence of capitalism, and demonstrates its remarkably close relationship to the Jensen-Meckling concept of freedom explained in the first three chapters. To do this I first give a brief definition (without much discussion) of alienable decision rights, which are the foundations of ownership and capitalism. Then I discuss the role of knowledge in society, the essential nature of capitalism and what makes it work.

Keywords: alienability, freedom, capitalism, decision rights, role of government, transfer costs, agency costs

JEL Classification: A00, H00, K00

Suggested Citation

Jensen, Michael C. and Meckling, William H., Freedom, Capitalism and Human Behavior Chapter 4: Capitalism (June 30, 1999). Harvard Business School NOM Unit Working Paper No. 1999, Available at SSRN: or

Michael C. Jensen (Contact Author)

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Harvard University - Accounting & Control Unit ( email )

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William H. Meckling

Simon School, University of Rochester (Deceased)

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