Capitalism is an economic system characterized by private ownership of property, wage labor, investment, competition, and free markets. Both advocates of capitalism (e.g., Adam Smith, John Locke) and critics of a capitalist economy (e.g., Karl Marx) agree that capitalism is a unique economic system, distinct from both agrarian Feudalism in the Middle Ages in Europe and 20th century Socialism. The special quality of money or "capital" in capitalism, where it is saved and invested to create more wealth, is a unique economic phenomenon.

British liberal philosopher John Locke described its origins in his Second Treatise of Government (1690). In Locke's theory, private property comes from a person mixing his labor or work with the common unowned earth or nature (granted to humankind by God) and producing new value. Then money is invented to represent that labor-produced value and property. If enough money is saved and used to buy other people's labor, which produces more value or profit, the money "earns" more wealth or "interest" for the owner. Money that produces more wealth is "capital." So capitalism is an economy dominated by invested capital, wage labor, banks and interest, production of commodities (goods produced for exchange or sale), and material incentives.

Capitalism has dominated Western economics since the 17th century and the world economy since the 20th century. It tends to be very efficient in exploiting natural resources, workforces, and markets. Capitalism generates enormous wealth and material prosperity, but critics claim it causes wide divisions of wealth and poverty. Karl Marx, the father of Communism, claimed that capitalism exploits all workers, is just a certain stage of human history, and inevitably leads to socialism. Socialism in Marx's view generates "capital" but uses it for general social needs rather than private profit. The historical experience of socialism has not justified Marx's claim that it would be more productive and fair than capitalism. Instead, socialist economics (the Soviet Union, Cuba, Maoist China and the like) have stagnated and declined.

Most contemporary Western economies are not purely capitalist, however. They mix capitalism and socialism (or Welfare-State Liberalism), allowing private enterprise but having extensive governmental regulation of business, social programs for the poor, public education, health care, and retirement systems.

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