Capitalism is an economic system in which capital goods are owned by private individuals or businesses. The production of goods and services is based on supply and demand in the general market (market economy), rather than through central planning (planned economy or command economy). The purest form of capitalism is free market or laissez-faire capitalism, in which private individuals are completely unrestrained in determining where to invest, what to produce or sell, and at which prices to exchange goods and services, operating without checks or controls. All modern countries practice a mixed capitalist system of some sort that includes government regulation of business and ownership of select industries.
– Capitalism is an economic system characterized by private ownership of the means of production, especially in the industrial sector.
– Capitalism depends on enforcement of private property rights, which provide incentives for investment in and productive use of productive capital.
– Capitalism developed historically out of previous systems of feudalism and mercantilism in Europe, and dramatically expanded industrialization and the large-scale availability of mass market consumer goods.
– Pure capitalism can be contrasted with pure socialism (where all means of production are collective or state-owned) and mixed economies (which lie on a continuum between pure capitalism and pure socialism).
Functionally speaking, capitalism is one process by which the problems of economic production and resource distribution might be resolved. Instead of planning economic decisions through centralized political methods, as with socialism or feudalism, economic planning under capitalism occurs via decentralized and voluntary decisions.
Private property rights are very important in capitalism. Most modern concepts of private property stem from John Locke’s theory of homesteading, in which human beings claim ownership through mixing their labor with unclaimed resources. Once owned, the only legitimate means of transferring property are through voluntary exchange, gifts, inheritance, or re-homesteading of abandoned property. Private property promotes efficiency by giving the owner of resources an incentive to maximize its value. The more valuable a resource, the more trading power it provides the owner. In a capitalist system, the person who owns property is entitled to any value associated with the property. When property is not privately owned, but shared by the public, a problem known as the tragedy of the commons can emerge. With a common pool resource, which all people can use and none can limit access to, all individuals have an incentive to extract as much use value as they can and no incentive to conserve or reinvest in the resource. Privatizing the resource is one possible solution to this problem along with various voluntary or involuntary collective action approaches.
Profits are closely associated with the concept of private property. By definition, an individual only enters into a voluntary exchange of private property when he believes the exchange benefits him in some psychic or material way. In such trades, each party gains extra subjective value, or profit, from the transaction.
Voluntary trade is the mechanism that drives activity in a capitalist system. The owners of resources compete with one another over consumers, who in turn compete with other consumers over goods and services. All of this activity is built into the price system, which balances supply and demand to coordinate the distribution of resources. A capitalist earns the highest profit by using capital goods most efficiently while producing the highest-value good or service. In this system, information about what is highest-valued is transmitted through those prices at which another individual voluntarily purchases the capitalist’s good or service. Profits are an indication that less valuable inputs have been transformed into more valuable outputs. By contrast, the capitalist suffers losses when capital resources are not used efficiently and instead create less valuable outputs.
Free Enterprise or Capitalism?
Capitalism and free enterprise are often seen as synonymous. In truth, they are closely related yet distinct terms with overlapping features. It is possible to have a capitalist economy without complete free enterprise, and possible to have a free market without capitalism. Any economy is capitalist as long as the factors of production are controlled by private individuals. However, a capitalist system can still be regulated by government laws and the profits of capitalist endeavors can still be taxed heavily.
Free enterprise can roughly be understood to mean economic exchanges free of coercive government influence. Although unlikely, it is possible to conceive of a system where individuals choose to hold all property rights in common. Private property rights still exist in a free enterprise system, although private property may be voluntarily treated as communal without government mandate. Many Native American tribes existed with elements of these arrangements, and within a broader capitalist economy families, clubs, co-ops, and joint-stock business firms like partnerships or corporations are all examples of common property institutions.
By creating incentives for entrepreneurs to reallocate away resources from unprofitable channels and into areas where consumers value them more highly, capitalism has proven a highly effective vehicle for economic growth.
Prior to the rise of capitalism in the 18th and 19th centuries, rapid economic growth occurred primarily through conquest and extraction of resources from conquered peoples. In general this was a localized, zero-sum process. Research suggests average global per-capita income was unchanged between the rise of agricultural societies through approximately 1750, when the roots of the first Industrial Revolution took hold. In subsequent centuries, capitalist production processes have greatly enhanced productive capacity. More and better goods became cheaply accessible to wide populations, raising standards of living in previously unthinkable ways. As a result, most political theorists and nearly all economists argue that capitalism is the most efficient and productive system of exchange.
Capitalism or Socialism?
In terms of political economy, capitalism is often pitted against socialism. The fundamental difference between capitalism and socialism is the ownership and control of the means of production. In a capitalist economy, property and businesses are owned and controlled by individuals. In a socialist economy, the state owns and controls the major means of production. Other differences include:
– Equity: The capitalist economy is unconcerned about equitable arrangements. The argument is that inequality is the driving force that encourages innovation, which then pushes economic development. The primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor, out of fairness and to ensure equality in opportunity and equality of outcome. Equality is valued above high achievement and the collective good is viewed above the opportunity for individuals to advance.
– Efficiency: The capitalist argument is that the profit incentive drives corporations to develop innovative new products that are desired by the consumer and have demand in the marketplace. It is argued that the state ownership of the means of production leads to inefficiency, because without the motivation to earn more money, management, workers and developers are less likely to put forth the extra effort to push new ideas or products.
– Employment: In a capitalist economy, the state does not directly employ the workforce. This can lead to unemployment during economic recessions and depressions. In a socialist economy, the state is the primary employer. During times of economic hardship, the socialist state can order hiring, so there is full employment. In addition, there tends to be a stronger safety net in socialist systems for workers who are injured or permanently disabled. Those who can no longer work have fewer options available to help them in capitalist societies.
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