For Francis Fukuyama it was the moment that marked the 'End of History'. For millions in Eastern Europe and beyond it heralded a greater freedom and prosperity than they had ever before experienced. For David Hasselhoff it was the crowning concert of a hearteningly brief music career. The fall of the Berlin Wall meant a lot of things to a lot of people.

But most important of all was what that moment said about the way economies are structured and run. To most observers, the collapse of the Soviet Union proved incontrovertibly that market economies are the best way to run a country, to make it prosperous and to keep its citizens happy. It was a victory for capitalism.

Capitalism has attracted perhaps more criticism than any other model of economics -- indeed, its name was originally a term of disparagement devised by socialists and Marxists in the 19th century to refer to the most objectionable aspects of modern economic life -- exploitation, inequality and suppression to name just three. In its early days the model came under fire from the Church since its prioritization of profit and money was regarded as a threat to religious teaching. The more enduring criticisms are that it generates inequality, promotes unemployment and instability, and has a tendency towards boom and bust. Others warn that it makes no allowance for its effect on the environment.

A Mongrel System

Capitalism is the system where capital (the companies, equipment and structures used for producing goods and services) is owned not by the state but by private individuals. This means it is the public who own companies -- taking stakes in them by buying shares, or by lending them money in exchange for bonds. Sometimes people do this directly; more often others invest on their behalf through pension funds. Almost every citizen of a major economy unwittingly owns shares in its major companies through his or her pension fund, meaning in theory that everyone has an interest in seeing business thrive.

Most economics textbooks don't actually bother to define capitalism. This is perhaps understandable. Unlike pure, relatively one-dimensional economic systems such as communism, capitalism is a mongrel. Complex and multifaceted, it steals from many other systems, and it is extremely difficult to pin down a precise definition. Not only that, but -- as the economic system most countries in the world live by -- it often seems gratuitous to try to define it.

Since it is people rather than governments who dominate the economy, capitalism usually goes hand in hand with the free market. But beyond this, a capitalist economy can take on many different guises. In practice, what we tend to call capitalist economies such as those of the United States, Britain and other European countries and many parts of the developing world -- are better described as 'mixed economies', which combine the free market with government intervention.

Fully free economies -- often called laissez-faire, from the French for 'let (them) do (as they choose)' -- have never existed. In fact, most leading nations are actually slightly less free market than they were a few centuries ago, as the history of the idea shows.

The Evolution of Capitalism

Capitalism in its earliest form evolved as the feudal system in medieval Europe -- in which agricultural laborers had to work for the profit of the landed gentry. This gave way in the late 16th century to mercantilism. This was a recognizable though crude precursor to capitalism, fueled by trade between different nations and by the discovery by Europeans of lucrative resources in the Americas. The operators of these trade routes became extremely wealthy, and for the first time in history ordinary people started making money in their own right, rather than relying on the patronage of a rich monarch or aristocrat.

This was a critical epiphany, and although Adam Smith had plenty of issues with the finer points of mercantilism, its driving force -- that individuals can profit through trade with each other -- is one of the key precepts of the capitalism he espoused in The Wealth of Nations. Traders were far more cosseted by the state then than now, allowed to operate monopolies, and aided by government-imposed tariffs on imports. However, the legal structures that evolved over a 200-year period -- private ownership, joint-stock companies -- and the economic precepts of profit and competition were the foundations for modern-day capitalism.

In the 19th century merchants were replaced as the leading wealth generators by industrialists and factory owners, in what many regard as a golden age for free markets. In the US and the UK there were fewer constraints on markets and trade, and less government intervention, than there are in these countries today. However, the tendency of some industries to generate monopolies, and the economic and social trauma of the Great Depression in the 1930s -- followed by the Second World War -- spurred governments to intervene in their economies more, nationalizing certain select sectors and creating a welfare state for their citizens.

Just before the Wall Street Crash in 1929, US government spending accounted for less than one-tenth of the country's economic output. Forty years later it accounted for around one-third. Today, it accounts for around 36 per cent, with that proportion fast on the rise. The story of capitalism over the past century has essentially revolved around this question of how much governments should spend and interfere in economies.

Capitalism and Democracy

The capitalist system has important implications for politics and freedom. Capitalism is inherently democratic. By allowing the invisible hand to function, by encouraging entrepreneurs to work hard and improve themselves, by prioritizing individuals' self-interest over the state's decisions about what might be best for people, and by allowing shareholders control over companies, it enshrines individual democratic and voting rights in society in a way other top-down systems simply can't do. It is no coincidence that non-capitalist societies have tended almost exclusively to be unelected dictatorships. However, in the case of modern China, many predict that the country's adoption of free-market values will eventually usher in a move towards democracy.

Just as there is a constant tension in democratic societies between state interference and the rights of the individual, there is an important debate constantly raging about the extent to which capitalism treats some citizens unfairly while allowing others to prosper disproportionately. However, it is hard to find an economist who disagrees with the contention that, under capitalist systems, economies have become richer and healthier, developed faster, created more sophisticated technologies and generally had more serene political existences than under alternative systems. When the Berlin Wall and the Soviet Union fell it became clear to all that capitalism had left the Western economies in a far healthier position than those previously run under communism. Economist after economist has therefore concluded that, despite its many flaws, capitalism remains the best means we have yet discovered of running a modern, thriving economy.