“What Is Capitalism?”
Capitalism refers to an economic system in which fixed assets are owned by private entities rather than the government. Workers (labor) are employed by capitalists (who own the means of production) and paid a wage in exchange for their services (which they do not own).
Capitalism, also known as a market economy, differs from central planning, also known as a planned economy or command economy, in that production of goods and services is based on supply and demand in the general market.
Learning About Capitalism
Capitalism serves as a generic economic production and distribution system. Capitalism’s economic planning is done through decentralized, competitive, and voluntary decisions as opposed to the centralized political systems of socialism and feudalism.
Capitalism can be defined as an economic system in which the means of production (including plants, equipment, raw materials, and so on) are owned and controlled by a group of individuals called capitalists. Workers are then hired by capitalists to operate the means of production in exchange for wages. However, workers have no rights to the tools of production or the profits made by their labor; these resources rightfully belong to capitalists.
Therefore, the concept of private property rights is central to the capitalist system. John Locke’s conception of homesteading—wherein people lay claim to resources by combining their labor with those of those who haven’t laid claim to them—is often credited as the origin of contemporary ideas of private property. Only by mutual agreement, by gift, by inheritance, or by re-homesteading abandoned property may property be legally transferred from one owner to another. The motivation for resource owners to increase their assets’ worth is one way in which private property encourages productivity. Therefore, the greater the value of the resource, the more the bargaining leverage its owner enjoys. Owners in a capitalist system are entitled to all profits made from their possessions.
Why Protecting Individual Property Rights Is Crucial to Capitalism
A framework that safeguards the ownership and transfer of private property is essential before people or corporations can feel comfortable investing in capital goods. To promote and enforce these private property rights, a capitalist society will rely on contract law, the doctrine of fair dealing, and tort law.
The tragedy of the commons occurs when resources that might otherwise be owned privately are instead used by the general population. All users of a shared resource have the same incentive to take as much benefit from it as they can, while those who have access to the resource have no reason to take care of it. Numerous collective action strategies, both voluntary and involuntary, as well as privatizing the resource, have been proposed as potential answers to this problem.
Products made under capitalist production remain the property of the business owners (capitalists). A factory worker who steals a pair of shoes they manufactured for themselves is committing larceny. Workers’ alienation from their employment describes this phenomenon.
The Profit Drive in Capitalism
The idea of private property is inextricably linked to the pursuit of profit. Private property is only voluntarily exchanged when both parties believe they will benefit emotionally or financially from the transaction. Both parties benefit monetarily and emotionally from such exchanges. The motivation behind capitalist enterprise is the pursuit of financial gain. To get a larger portion of the market, businesses now have to compete with one another to make goods at the lowest possible cost. If a company would make more money making a new product, it would be in its best interest to do so.
Another force that drives activity in a capitalist environment is voluntary trade. Owners of these resources battle for the attention and dollars of consumers, who in turn face competition from other shoppers for the same goods and services. The price mechanism itself coordinates the allocation of resources by balancing supply and demand.
Capitalists maximize their returns by maximizing the value of the commodities and services they produce through the most efficient use of capital items (such as machinery, tools, etc.). Prices at which a customer freely buys a capitalist’s product or service reveal how highly that product or service is valued. Turning cheaper resources into more valuable products is how businesses make money. When capital resources are misallocated and produce inferior goods, however, the capitalist loses money.
A mode of economic production is known as capitalism. The things that are already produced are distributed and allocated through market mechanisms. Capitalism and free markets are sometimes used interchangeably, but they actually relate to two different economic systems.
The Roots of Capitalism
Capitalism, as a social organization for the production of goods in an economy, is a recent development. Its emergence roughly coincides with the beginning of the industrial revolution, which occurred in the late 17th century. Capitalism developed from previously existing production and social organizing systems.
Capitalism’s Buried Past in Feudalism
From European feudalism, capitalism emerged. Only a tiny fraction of Europe’s population resided in urban areas prior to the 12th century. Most employees were serfs for landed nobility, and those who were not skilled got their keep from the feudal lords rather than a genuine pay. By the end of the Middle Ages, however, cities had emerged as major hubs of economic activity as a result of rising urbanisation.
The feudal system institutionalized preexisting social divisions based on one’s place in the family tree. The landed nobles (lords) owned the land, while the landless serfs (peasants and workers) worked for them.
Industrialization ushered in a period of profound change for the trades, luring more people to urban areas in search of better economic opportunities. Families with extra boys and daughters who required work may supplement their income by working in the trading towns. Like serfdom, child labor was essential to the growth of the city’s economy.
Over the course of the sixteenth to eighteenth century, mercantilism supplanted feudalism as Western Europe’s dominant economic and trading model. The origins of mercantilism can be traced back to non-competitive trade between cities. Eventually, consumer demand standardized what had been widely available in each municipality.
Because of the standardization of products, commerce expanded from town to town, county to county, province to province, and nation to nation. When too many countries on a continent that is perpetually at war offered largely identical items for trade, the competition between them grew fierce.
Colonialism and mercantilism coexisted, but the countries who began spreading their citizens around the globe did so for reasons other than expanding their trading networks. The economic structure of most colonies was reminiscent of feudalism, with raw materials being sent back to the mother country and, in the case of the British colonies in North America, the finished product being repurchased with a pseudo-currency that prevented them from trading with other nations.
Adam Smith was the first to recognize mercantilism for what it really was: a retrograde system that prevented progress by fostering trade imbalances and stagnation among states. When he proposed his ideas for a free market, it ushered in the era of capitalism.
At a time when the Western world was just beginning to feel the tremors of the Industrial Revolution, Adam Smith’s ideas couldn’t have come at a better time. New riches and a growing need for domestic industries’ output stemmed from colonialism’s (often metaphorical) gold mine, fueling their expansion and industrialization. Industrialists moved their operations to urban areas because they had fast access to thousands of workers without having to be located near canals or windmills.
The first persons to become extremely wealthy throughout their lifetimes were industrial tycoons, who often surpassed the riches of landed aristocrats and several banking dynasties. People from all walks of life finally have a chance to dream of getting rich. The newly wealthy constructed more factories, creating demand for more workers and more consumer items.
During this time, French socialist Louis Blanc coined the term “capitalism” (from the Latin “capitalis,” meaning “head of cattle”) to describe a system in which private individuals, rather than a collective, owned the means of industrial production.
Capitalism restructured society into social classes based on capital ownership rather than land ownership. The surplus labor of the salaried working class provided capitalists with a means to enrich themselves. Capitalism, therefore, distinguishes between the capitalist class and the working class.
Capitalism: the pros and cons
Pros Unlike feudalism, which mostly benefited the ruling elite, industrial capitalism benefited all segments of society. Unionization was a key factor in the rise in wages. Mass production of low-priced goods raised the general quality of life. As a result of this expansion, a middle class emerged, and it began to attract previously impoverished individuals.
Democracy’s political freedoms, liberalism’s individualism, and the doctrine of natural rights all contributed to the development of capitalism’s economic liberties. However, just because all capitalist systems have reached this stage of development does not mean that they are politically free or promote individual liberty. Pro-capitalist and pro-liberty economist Milton Friedman argued in his 1962 book Capitalism and Freedom that “capitalism is a necessary condition for political freedom…it is not a sufficient condition.”
Along with the rise of industrial capitalism came a meteoric rise in the size and importance of the financial sector. In the past, banks were used as storage facilities for valuables, clearinghouses for international trade, or lenders to aristocrats and governments. Now they’re here to facilitate regular business operations and the sourcing of long-term investment capital. Some economists in the 20th century identified a variant of the system they called “financial capitalism” as public stock exchanges and other investment vehicles became more accessible to ordinary people.
Prosperity and Capitalism
Capitalism has been shown to be a very successful vehicle for economic growth because it provides incentives for business owners to reallocate resources away from unprofitable channels and toward areas where customers value them more highly.
Fast economic growth was achieved mostly through conquest and the exploitation of conquered peoples for their resources prior to the emergence of capitalism in the 18th and 19th centuries. As a rule, this was a zero-sum game that only affected a small area. The growth of agricultural communities and the beginning of the roots of the first Industrial Revolution may have coincided with a global plateau in per capita income, according to the available evidence.
Productivity has increased dramatically over the years as a result of capitalist industrial methods. The availability of more and better commodities at lower prices to larger populations raised living standards in ways that had previously been unimaginable. Therefore, most political theorists and almost all economists contend that capitalism is the best system of commerce since it maximizes efficiency and output.
On the other hand, capitalism is to blame for enormous income gaps and social injustices. Workers are exploited for their labor while capitalists reap the rewards of huge profit margins because workers’ pay are kept below the market rate. Another manifestation of capitalism is unemployment, which occurs when inefficient workers are either fired or replaced by machines or other forms of technology. Workers are pitted against capitalists in a quest for improved working conditions, higher pay, and greater respect. Business owners and investors, meanwhile, typically prioritize increased profits over employee satisfaction and wage growth.
Capitalism also has the unfortunate side effect of creating many types of pollution, both audible and otherwise. Costs associated with a negative externality are borne by society as a whole rather than the externality’s source. Factory waste dumped into a river or smoke released into the air is the responsibility of the surrounding community, not the factory itself.
Capitalism with a crooked face
Corruption incentives are a major drawback of capitalism. When business leaders and government officials have cozy ties, we speak of a “crony capitalist” system. Government favoritism in the form of tax cuts, government subsidies, and other incentives has replaced the free market and the rule of law as the primary determinants of a company’s success.
Due to the strong incentives for governments to extract resources through taxing, regulating, and encouraging rent-seeking activity, and for capitalist businesses to increase profits through obtaining subsidies, limiting competition, and erecting barriers to entry, crony capitalism has become the dominant form of capitalism around the world. These factors might be seen of as a supply and demand for government intervention in the economy that is intrinsic to the economic system.