As someone who owns a (very) small business (obligatory self-promotion), I sometimes find it frustrating when people talk about capitalism solely as a tool for the greedy. Capitalism exists as a replacement for old systems that weren't working as society became more complex, and remains a valuable way of running society.
I must first acknowledge those who have said these same ideas more eloquently and more profoundly, most importantly Hayek, whose books on the nature of the decentralized economy and the history of economics are terrific resources for understanding how capitalism works. I am not a professional economist, but I find myself on occasion engaged in conversation with people who have no understanding of the basic notion of capitalism, and who indeed feel that it is a great social ill. I find the exact opposite to be true: capitalism, when kept free of corruption as all systems must be, is an enabling tool for progress.
Why is this? Because capitalism is built on the notion of demand. There will always be times when people rely on cronyism or malice to get an unfair advantage (a problem likely more for ethics and governance than economics), but the fundamental reward of capitalism comes from service.
Adam Smith, original sculpture by James Tassie, engraver unknown.
The most famous pioneer of the capitalist worldview is, of course, Adam Smith. His Wealth of Nations would be a model for an entire way of approaching economic systems. Though he was not the first to practice capitalism, Smith defined the economic system in a way that was easy to understand and approachable to a broad audience.
With Smith, the foundations for what we today think of as capitalism–the exchange of goods and services for money and the ownership of the means of production by a private individual or organization–was firmly set in time for the Industrial Revolution.
And the Industrial Revolution benefited greatly from this clarity of ideals, though the market had been deriving benefits from many of the notions (like separation of labor) found in Smith's work.
The notion of this early capitalism is to apply resources toward making profit, and the basic principle remains to this day (high-risk investing often is called capitalism, though it differs greatly from more traditional forms of business).
Why is capitalism so important, and why does it need defense?
Because many people object to the notion that individuals should control the means of production. At best, they say that capitalism will lead to a monopoly, and at worst it is an injustice in its own right.
But the entire nature of capitalism is to provide services and goods. It is an institution that exists to serve, and has brought about a standard of living in the modern world that had never been matched in prior times.
Without producing something of value, a capitalist has failed. Of course these values often run contrary to what would be perceived as "good" outcomes (such as profiting off of vice or weapons of war), but even in these things the capitalist is not the one driving the demand.
To put it more succinctly; capitalism works because it seeks to fulfill demands placed upon resources. There is no notion that a producer must be greedy–altruism is entirely independent of one's method of earning–and in circumstances where coercion can be kept out of the system (again, a problem not stemming from capitalism itself but from the nature of people in a society, where predatory behavior often supersedes more positive actions because it is rewarded by the society itself in different ways), capitalism exists to serve the greater demands of the whole, not just those who own the means of production.
Consider other systems where the methods of distributing wealth and resources are controlled by committee or vote; socialist and communist systems. Even where there is a perceived need, these systems often allocate resources unfairly (giving to those who play the system more than those who legitimately strive their best), and there is much more room for corruption among the managers of these systems than there would ever be among capitalists, who need at least to ensure that their method of producing goods is efficient enough to keep them ahead of competitors.
Many people point to capitalism and claim that it has no method of taking care of the poor and needy, those who are unsuccessful by no fault of their own. While this is perhaps fallacious (after all, capitalists still require employees to fully capitalize on their resources), it is worth noting that other systems designed to create a utopia entirely void of suffering have generally had the opposite effect, as we saw in countries behind the Iron Curtain and other places where socialism has led to unsound economic decisions on "principle" (like where minimum wage has increased to the point of bloating the cost of basic costs of life and punishing employers who are looking for unskilled labor).
A final word to defend capitalism must be made from the standpoint of freedom: capitalism assumes that people are free to pursue their desires and satisfy their needs using the means that they consider best.
Even in the 21st century, where technology has advanced greatly, an externally managed system fails to consider all the needs and wants of people who live under it (though it attempts to pretend it does, often through manipulation as we can see with the constant intrusion of advertising and propaganda in daily life), the person who is typically best suited to make good decisions in a particular case is the person at the center of that case.
