Capitalism is a good theory because it works in practice

Isn't capitalism a bad theory that works in practice?

No. Capitalism is a good theory because it works in practice.

How does one determine whether a theory is good or bad?

By how it works in practice. That capitalism -- and only capitalism -- works in practice is proof that it is a good theory. Like the mind and body, theory and practice are inseparably tied.

Suggested Reading:
Theory and Practice and What is Capitalism? by Ayn Rand, in  Capitalism: The Unknown Ideal (CUI). Also see Philosophical Detection in her Philosophy: Who Needs It.