Capitalism is defined as an economic system of a country where the economy of the country is controlled by private companies instead of people. They control almost the entire economy, including profits, trade, industries, etc. Unlike other economies, people do not control these things in a capitalist economy.
There are many examples of capitalist countries in the world, including the United States, Hong Kong, Canada, etc. recently though, many states have combined capitalism with other forms of the economy like socialism or communism.
Principles of Capitalism
Capitalism is found on certain principles which are as follows:
- Private Property – This allows the residents of the capitalist countries to own assets such as house, land, and also intangible assets like bonds, shares, funds, etc.
- Self-interest – This allows people to act in search of their good without taking the socio-political pressure. Adam Smith says these people nevertheless benefit society as if they were guided by an invisible hand.
- Competition – The competition allows the companies to enter and exit different markets and maximise social welfare, which is the joint welfare of both consumers as well as producers
- A market Mechanism – This mechanism determines the prices in a decentralised way via the interactions between the seller and the buyers.
- Freedom of Choice – The freedom of choice concerns production, consumption, and investment. The customers who are not satisfied are free to buy other products, shareholders and investors can go ahead and look for more lucrative ventures, and the employees can leave their jobs for better pay.
- Limited Government Role – The government has a limited role in protecting the rights of citizens and in maintaining order in society, which will help in the proper functioning of the markets.
Capitalism is distinguished based on the degree to which these principles operate. In Laissez-faire economies, markets work with very little or no regulation. In the case of mixed economies, its called so because it has a mix of markets and government.
The markets play a dominant role even in mixed economies, but they are regulated by the government to a much greater extent so that it can correct market failures. These may be failures like air pollution or traffic problems.
They also help to promote social welfare, and for the reasons of public safety and defence, government involvement is mandatory. Amongst all the types, mixed economies play an important role.
History of Capitalism
Capitalism originated way back in the 16th century, and like most of the economies, it originated as something else. When British power was affected because of the Black Death plague, a new merchant class formed, which began trading with foreign countries.
This export of products affected the local economy and controlled the overall production and pricing of a few products. It slowly led to slavery, colonialism, and imperialism.
The predominant Feudalism in which the poor people were kept attached to their master’s land, left the rural British workers homeless and jobless. Thus, to survive, these labourers had to work in this new work environment. This was done to establish a maximum wage so that the beggar numbers went down.
England was transformed into an industrial nation by the end of the 18th century. The industrial revolution was taking place, and there was a proliferation of industries. It is there where the idea of capitalism was born.
Adam Smith published a book named ‘The Wealth of Nations,’ which is regarded as fundamental of capitalism. He is considered to be the father of capitalism.
Characteristics of Capitalism
There are two meanings of capitalist ownership. The first is that the owner controls all the production factors, and the second is that the income is derived from their ownership. This gives the capitalist people the ability to conduct the operation of their companies efficiently. It also helps them with the incentive maximisation and profitability. The incentives are probably the reason why capitalists justify that ‘Greed is good.’
In many companies, the stockholders are considered as owners. The percentage of their control depends on the number of shares that they own. The stockholder can elect a board of directors, and they can also hire chief executives to manage the company.
The free market economy is significant for capitalist countries. The success of capitalism depends entirely on the free market economy. The distribution of goods and services according to the laws of demand and supply and the rule of demand says that when the demand goes up for a particular product, then the price will increase. When the competition realises that they can make a much higher profit, then they can also increase production. The higher the supply, the lower are the prices because only higher quantity can reduce the costs.
The supply owners usually compete against each other to gain maximum profit. They set goods at the highest prices and keep their costs as low as possible. The prices are controlled because of the competition.
Another essential component of capitalism is free operation. For the services of capital markets following the law of supply and demand are useful in setting the prices for stocks derivatives and bonds and also for currency and commodities. Capitalist markets allow companies to expand and raise funds.
Laissez-faire economic theory says that the government should take a ‘hands-off’ approach for capitalism. The government should interfere only to maintain a level playing field. The government must protect the free market and prevention of unfair advantages that are obtained by Monopolies. The government is expected to prevent manipulation of information and should ensure that all of it is distributed equally to everyone.
As a part of protecting the market, it is essential to keep orders with the national defence. The government is expected to maintain the infrastructure in the country, and it should tax on the capital gains and income so that it can pay for these goals. Global government bodies mediate international trade.
Private property rights are considered fundamental to capitalism. The theory of homesteading by John Locke is regarded as the root of most of the modern concept of private property. In this, human beings claim ownership by mixing unclaimed resources with labour. The only legitimate way to transfer the property after owning it is by voluntary exchange, inheritance, or gift.
The owner of resources gets an incentive so that they can maximise the value of their property by the concept of private property in capitalism. This is why the more valuable the resources, the higher bargaining power it will provide to the owner. In a capitalist system, a person who owns this property is entitled to any value associated with that property.
For people or businesses who use their capital goods, there should be a system that will protect their legal rights to transfer or buy a property. The capitalist system will depend entirely on the use of contracts, Tort laws, and fair dealing to facilitate and apply these private property rights.
When the property is not privately owned but is shared by the public, then the problem, which is called a tragedy of commons, can emerge. With a common resource between people, there is no limit on the access that people can have, and people will try to extract as much value from it as they can, and there is no incentive on conserving or investing the resource. Privatisation of resources is the only possible solution for this problem, along with involuntary or voluntary actions and approaches.
Profits and Losses
The concept of private property and profits are very closely related. Any individual who is involved in the voluntary exchange of private property when they are under the impression that these exchange benefits them in some tangible way. In these transactions, each party involved gets an extra subjective value or profit from the deal.
The capitalist system by voluntary trade primarily drives the activity. The owners of the house usually compete with one another over customers, and these customers compete with other customers on goods and services. There is a price system built-in these activities, which balances the demand and supply to coordinate the distribution of resources.
A very high profit is owned by a capitalist with the use of capital goods in an efficient way while producing a good or service of the highest possible value. Benefits show that less valuable input is used to transform into a more useful output. On the contrary, capitalism suffers losses when the capital’s resources are not used efficiently, and they create less valuable outputs.
How does capitalism affect people?
The impact of capitalism depends on whether you are the boss of the worker in the company. For someone who is the owner of the company and has many workers employed under him, capitalism surely makes sense.
The more profits your organisation brings in, the more resources we will have to share with your workers, which improves the standard of living of everyone. It is all based on the simple principle of demand and supply and consumption is the king in the case of capitalism. The problem starts when the capitalist bosses do not share their wealth, which is one of the significant disadvantages of capitalism.
Capitalism is of the thought process that greed is good. The supporters of capitalism always agree on these things that desire is what gets profits, and profits generate innovation as well as they get more of the payment. On the contrary, the opposers of capitalism say that it is exploitative by nature, and it leads to a divided society that works on the working class and favours the rich.
There are several advantages of capitalism that people believe in. they are as follows:
- Political freedom is influenced by economic freedom, and having the means of production which are owned by the state can lead to authoritarianism and federal overreach. This is viewed as the only sensible way to organise a society. Alternatives like communalism, socialism, or anarchism are doomed to fail is what is insisted.
- People believe that capitalism creates a negative impact on the environment and in depleting natural resources, which only makes those resources more valuable. They will be able to generate more capital as they continue to drain. They also believe that the competitor companies benefit the customers by making the product more economical and affordable and the atmosphere that capitalism has is a dog eat dog world which encourages people to work harder to achieve their dreams.
- The concerns of anti-capital this population are dismissed by pro-capitalist people saying that rich people are rich because they work hard and are more productive than their weaker counterparts.
- The central importance is placed on the individual rather than the collective. This is the classic hallmark of capitalism, and they follow the principles of put yourself up narrative that is found so compelling by capitalists.
Although there are the advantages of capitalism, it goes without saying that there are disadvantages which follow the benefits.
Following are a few disadvantages of capitalism
- Capitalism is often viewed as antidemocratic, inhuman, very exploitative, and unsustainable. It is an economic system that should be dismantled at earliest. This is what anti-capitalist people believe.
- The comparison is with democracy and the view that capitalist bosses who hold more power in the workplace have more capital. The more capital one has, the more powerful he is, and this is what is wrong in capitalism. Karl Marx, in his book Das Kapital, said ‘just as man is governed in religion by the outcomes of his brain, thereby in a capitalist economy, he is guided by the products created by his hand.
- The basis of capitalism is poverty in the middle of plenty, and that is the essence on which anti-capitalist argue. The immense suffering and violence which is forced upon the labour class are because of the exaggerated profits which are reaped by people sitting on top. People have no choice but to sell their labour, which is seen in every industry – right from corporate to fast food.
- Karl Marx also emphasised that the capitalist system can dehumanise workers and the productivity methods of the capitalist economy. You deplete the labourer into a tiny portion of a man and reduce him and degrade him to a level of a machine and destroy every remaining part in his work and turn it into a hated toil. The threat of automation is real, and the definition of public healthcare puts more pressure on the working class. The opponents of capitalism worry that the thirst of capitalism for profit above everything would mean that one day the labourers would be worked to death.