I'll be speaking on these issues as an American, but many of the ideas that I present will be applicable to all of western society.
Let me start off this post by saying that I'm a registered Republican and I voted for Mitt Romney (somewhat begrudgingly). I'm an almost universal social conservative, being pro-life, pro-gun, pro-religion, pro-self sufficiency, pro-drilling, pro-fracking, and pro-logging. I'm aligned with the conservative base of the Republican party on basically every issue... except one. Unfortunately, that one issue is the hottest topic in the entire political sphere of western society.
Many of my super-conservative friends seem to extol capitalism as if it's a universal virtue sent by revelation from Heaven for the benefit of mankind. In reality, capitalism is an extreme on the opposite side of the economic system spectrum from socialism. Either one, in pure form, is just as likely to collapse in on itself and to leave society in ruin. Many pundits on both sides of the aisle would have you believe that these two ideals are mutually exclusive, when in reality, any functional society requires balanced elements of both self service (capitalism) and social service (socialism).
Any blue-blooded American who's not a clove-smoking hippie can tell you why pure socialism, aka communism, doesn't work. Under this sort of system, all people work for the benefit of the whole and resources are distributed as evenly as possible. Any individual's prosperity is not based on how hard or how effectively that one person works, but on how well people work around him or her. Under a purely socialist system, it's easy to give a minimal effort and receive a similar reward, because everyone around you can pick up your slack. However, when too many people do this, the system collapses because nothing actually gets done. Communism is the liberal extreme of the economic system spectrum and does not provide sufficient individual incentive to be sustainable.
In contrast, many Americans seem to have difficultly identifying why pure capitalism doesn't work, even though the answer should be more obvious to an objective observer (if such a person exists). Part of this phenomenon is probably due to the fact that essentially pure socialist economies have existed for relatively short periods of time. Nazi Germany, Soviet Russia, and Red China (until more recently) are all good examples of societies that existed for a time with more or less socialist economies and eventually collapsed or, in the case of China, transitioned to a sort of pseudo-capitalism. On the other hand, a purely capitalist society has either never existed or didn't last long enough to create any lasting records. There are basically two reasons why. One should be obvious, though people seem to have a hard time grasping it, and the other is more subtle.
First, I have two words for you: Market Failures. A purely capitalist economy is incapable of providing certain public goods that are essential for a healthy, functional society. Two excellent examples of market failures of public goods are the military and civil infrastructure. There are several others both in and out of the realm of public goods, but these two are among the best simple examples. These public goods can only be provided by a socialist system. Many conservatives would balk at the idea that the military is a socialist program, but these folks haven't really thought about it. For this program, the government is taking a little bit of wealth from everyone in order to preserve the nation as a whole. The military is certainly not the most socialist system set up by the federal government, but it's along the same lines. As far as public infrastructure goes, I'll let POTUS speak for himself. Mitt Romney's heyday of taking this quote out of context made it slightly painful to vote for him.
If a society has a system that provides for these essential public goods, it is not a purely capitalist society. These things can only be provided by a system that is inherently socialist in that it takes some proportion of the wealth from the populace in order to provide for the general welfare. If a society does not have these public goods, there is a very high probability that it will soon collapse and be replaced by a society that does.
Now that we've covered what should be obvious, let's move on to the more subtle. I've said for a few years now that an economist is also a political philosopher, even if he/she is a really bad political philosopher. The ideas and analyses of wealth and trade cannot be totally divorced from those of power. Not only does material wealth, in and of itself, bring power with it, those who are powerful are also more capable of obtaining material wealth by virtue of their power. Free-market economics assumes that men would rather trade than steal. While this is often true, there are clearly those who are willing to break to rules for the sake of wealth and increased power.
Any society that doesn't, at least somewhat, regulate the exertions of the powerful upon the weak, will eventually fail. Power held by individuals and small groups leads to isolation of those individuals and groups from the rest of the populace. Essentially, the very few ruling elite sit in a gated inclosure atop a hill and manage the numerous lower classes remotely. A society in this state is volatile and there are many ways in which it can fail. One way is that the powerful do not allocate enough of their wealth for public goods, resulting in a market failure, as previously mentioned. Another is the small groups of the powerful spending resources to fight against each other, attempting to shrink the others' wealth and power, until the society collapses by attrition (see next paragraph). There's also my personal favorite, which is united rebellion by the weak against the powerful. Though few individuals may hold large quantities of power, a large majority is almost always more powerful in aggregate. This rebellion can manifest itself as a peaceful refusal to work for the powerful, at some personal risk, or blood can flow down the streets of Paris (figuratively speaking:). Regardless of the precise circumstances, a society that does not prevent the powerful from becoming too powerful will fall eventually.
It's been asked before how deregulation of economic players can possibly lead the economy to shrink. I have another word for you: Rent-seeking. Economic regulation is only universally bad if it's assumed that all participants in a capitalist economy are acting to grow their wealth in absolute terms and not merely relative to the wealth of others. Rent-seeking is essentially using one's wealth and power to gain a larger proportion of the existing wealth, rather than creating new wealth. Left unchecked, rent-seekers will almost universally shrink the total wealth available and cause a society to decline. A purely capitalist society has no checks for the power plays of rent-seekers that can lead to economic and societal decline and collapse.
I said at the beginning of this post that both pure capitalism and pure socialism are extremes in the spectrum of economic systems and neither can exist in a functional society, at least not for very long. As such, there is a need for balance between elements of both self service and social service. For the political problems faced in much of the western world, I like the application of the far eastern philosophy of Yin and Yang. For the description of this philosophy, I give mad props to whoever wrote the opening line of the Wikipedia article I just linked above. It's pure gold. "In Chinese philosophy, the concept of Yin-Yang, literally meaning 'shadow and light,' is used to describe how polar opposites or seemingly contrary forces are interconnected and interdependent in the natural world, and how they give rise to each other in turn in relation to each other." Capitalism and socialism are polar opposite and seemingly contrary ideas that necessarily have to be applied in tandem in order to maintain a healthy and functional society. Without essential elements of both schools of thought, a society will collapse sooner, rather than later.
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