Capitalism is an economic system that is classified by private ownership of most of the financial decisions rather than government decisions. In capitalism, private entities are the ones who own many production factors like natural resources capital goods entrepreneurship and labor. The owner of wealth, production ability, or property determines investment and decision making in capitalism. On the other hand, computer goods and services which are present in the same market determine the distribution of products and services and their prices.
Capitalism is one of the oldest economic systems found during the mid 18th century around the industrial revolution. Because private individuals own the means of production and government has no interference in commercial activities, it is also known as a free-market economy. According to Karl Marx, the capitalist works about 12 hours, and the wages that he gets his for about six hours.
Capitalism has few disadvantages like, establishing power in the hands of the capitalist class, which forms a minority in the society. These minorities exploit the majority working class and aim profit over social good or natural resources and environment. Capitalism is considered an unequal and corrupt form of economy which heads only to instability in the future.
On the other hand, the positive points of capitalism include that it provides innovative products because of competition. Also, the wealth is distributed equally to all the productive people irrespective of their class while promoting pluralism and power decentralization. Capitalism also encourages productivity and prosperity, which helps to develop the society in its entirety.
1. Profit Motive
In capitalism, the profit motive assumed is as a desire to own money from the profit. In other words, the reason business exists, is only for profit, and it acts as the primary motivator for all the decisions taken for the growth of the organisation. The profit motive functions as per the rational choice theory, which says that individuals perceive the things that are in their self and best interest.
Efficient resource location is said to be ensured in the profit motive. It is considered that, if there is no profit in reducing a particular product, then it can be regarded as a sign that the capital and labor which are devoted to its production are misguided. It is the profit that will determine whether an item or a product is worth manufacturing or not. It is said that ensuring high profits results in the least wasting of resources.
The capitalist class works solely on the profits since capital is required to run the economy. The labor class mostly generates a business, which is the majority. Selling to labour class at reduced prices but keeping a decent profit margin is the aim of the capitalist class.
Theoretically, the assumption is that when the economy is most competitive and has no market imperfections, which include monopolies or externalities, the profit motive allocates the resources efficiency. With the help of competition, markets overcome the individual organization’s profit-maximization incentives. One of the significant criticism that profit motive has faced is that the idea which states that profit is better than the needs of people.
For example, In the case of the healthcare industry, patients cannot be prioritized over profits. On one side, while this is a disadvantage, thinking from a capitalism point of view, it is a norm to consider profit as a significant motive. If the capitalists do not prioritize profit as an important motivating factor, then the companies will not focus on increasing productivity, and thus there will be no productivity, and the companies will not generate enough business.
This will prevent them from paying the labour class enough money, and it will result in overall disappointment. Profits are the core strength of capitalism because the government does not interfere in the economy, and in case the companies do not work out enough profit; the entire economy may be at the risk of collapsing.
In the case of free markets of capitalism, there is maximum use of markets with little or no regulation over the pricing. This increase in pricing is not in sync with the customers but favors the industrialists. In the case of a mixed economy, the market place an essential role since they are regulated by the government to some extent to rectify market failures, fun to the defense and public safety, conserve the available natural resources, promote social welfare.
In the case of state-capitalist systems, the markets have least relied on, and the state relies heavily on the state-owned companies. Demand is the measure of goods value that the buyers are willing to buy while supply is the amount of product or service which is available for sale or purchase. When the demand for resource increases, then the price increases, or in other words, its supply reduces.
The competition takes place when more than one manufacturer is trying to sell the same or similar products to the same set of buyers. According to capitalism, competition is the first chance in the return of innovation, and without competition, a cartel or monopoly may develop, which will not be beneficial for society. When the firm is granted an exclusive right over a market, then the monopoly takes birth.
This is the reason why the firm can engage in behaviors like reducing output or increasing prices since it has no fear of competition. There are rules implemented by the government for preventing Monopoly and cartels.
There exist different types of markets like monopoly, competitive markets, oligopoly, perfectly competitive market, etc. But in the case of capitalism, as described above, monopoly is undesirable. A monopoly may shift the power balance from capitalist leaders to specific companies, which will not be desirable for the capitalist who runs the economy.
While the monopoly is not expected, oligopoly is a desirable outcome. An oligopoly is when different companies compete with each other to earn better. This develops industrialization and gives more control for capitalist leaders.
3. Private Property
The relation between capitalist society is, and state and its formal mechanisms have been a question of debate in many social and political theories. Private property is a legal designation that is issued by Non-governmental and legal entities to get ownership of a particular property. Private property is considered as a legal concept which is enforced and defined by the political system of a country.
Private property can be either personal property, which is consumer goods, or can also be capital goods. The laws that deal with the subject of property are termed as property laws. A common justification defense of property is used by many defendants who think that they should not be held liable for any injury or loss that they may have caused because they were protecting their property.
In some cases, they lose ownership because of public interest, and these states may be confiscated to build government property, for example, the roads or parks. There are few limitations associated with the right to private property, and local government may enforce specific rules about the building built on private land.
In some cases, the owner of private property may request that after his death, the private property in question should be transferred to his family members by inheritance.
4. Competition in Market
Competition is one of the crucial characteristics of capitalism. There exists competition between companies since they are the ones who are running the economy. The industries are one of the critical parameters of the capitalist economy since they are the prime generator of the source of income for labor class, which forms the primary source of population.
Multiple companies offer the same product to people since it is more of a sellers’ market. Buyers are presented with a choice from various sellers, and this gives rise to competition. When there are multiple sellers for the same product, the firms compete with each other to sell the product. This sometimes results in a lowering of prices of the products, and the buyer gets the advantage.
Capitalist economy promotes business and formation of companies, which is why many companies are born in the marketplace and more often than not, they result in selling substitutes of the same product. Monopolies may exist without competition, which would result in increased prices of the products, and it would increase the burden on the labour class and also disrupt the economy.
Competition is essential to keep a check that other companies earn equally. If the other competing companies earn better, the labor class of people working in those companies will also gain better. Thus competition is a win-win situation for everyone involved in the capitalist economy.
The rivalry among sellers is typical in the capitalist market who is trying to achieve their individual goals by increasing the profit levels. They aim to increase sales volume, which thereby results in expanding the market share. They achieve their goals primarily by varying the elements of the marketing mix, which are product place price and promotion.
In general terms, the competition is defined as, the situation when two or more similar parties act independently in order to secure a commitment or business from a third party unrelated to both of them by offering the most favorable terms. It was also described in the book The Wealth of Nations by Adam Smith. Competition is inevitably spread entirely through the market and its processes and is defined as a condition when the buyers compete with other buyers just like sellers compete with other sellers.
Competition results either from scarcity or excessiveness of something. For example, if there is only one store that provides a particular product, the competition will be amongst the buyers who will try to pay more money to get the product. The highest bidder will get the product. On the other hand, if the product is excessively or abundantly available, then the sellers will compete with each other and try to offer the lowest possible price to attract the buyer. This will result in competition between sellers.
The result of competition sometimes is an unwanted monopoly; that is, a particular buyer will have the right to selling the product. A monopoly is always undesirable as it results in the exploitation of the majority of the buyer section. When there is very little competition, it becomes the buyer’s market, which is called an oligopoly.
Here, there are multiple sellers of the same product, and the seller who sells for the lowest price wins the bid. Competition is an essential form in capitalism and is accepted as a universal norm. Healthy competition is expected to lower the costs and be beneficial for buyers.
5. Economic growth
Capitalism was promoted as economic growth and answer and is considered to have the ability to increase growth. The measurement of economic growth can be done by gross domestic product or GDP standard of living and capacity utilization.
The argument that Adam Smith put forth was to have a free market that would control the price and the production, along with the allocation of resources. Many economists have noted that growth in the GDP over time is synonymous with the emergence of capitalism in the economy.
After 1819 April 1995, the world economy grew by as high as 50 times and at a much faster rate than the growth of the population. This is the reason why many individuals have enjoyed an average of 8 to 9 times increase in income.
During this period in America, Australia, and Europe, the economy grew by as high as 19 times per person even though these regions were already on a higher level; and in countries like Japan, which was more reduced in 1819, the growth was as high as 30 times.
The increase was also seen in third world countries like India, but it was only about five times per person.
6. Mode of Production
The system of organizing distribution and production within the capitalist society is called a capitalist mode of production. Different forms of moneymaking like banking renting production for profit merchant trade and so on gets priority over the development of the capitalist mode of production.
It is based on private ownership and vegetable and also on industrial technology when it began to multiply in western Europe because of the industrial revolution, which later extended to many parts of the world. Private ownership of means of production defines the term capitalist mode of production, which is the extraction of extra value by the owner class for the sole purpose of the accumulation of capital and wage-based labor.
As far as commodities are concerned, it is market-based. Capitalism has always existed in the form of moneymaking activity in the shape of money lenders and merchants who usually act as a neutral party between the producers and consumers and engaging simple commodity production. This has been happening since the beginning of civilization. The main feature of the capitalist mode of production is that most of the outputs and inputs of manufacture are provided through the market, and the primarily entire production is made in this mode.
For example, when feudalism is flourishing, all of the factors of production, which include labor, are owned only by the ruling feudal class. In this case, the products also are consumed without having a market of any type because it is produced solely for usage within the social unit of feudal class, which includes a minimal trade as well.
This results in a necessary consequence which is the entire organization of the production process is organized and reshaped to confirm with the economic rationality as bonded with the help of capitalism which is expressed in price relationships between output and input rather than broader national context which is faced by overall society.
In other words, the entire process is reshaped and reorganized so that it confirms with the commercial logic. Economic rationality is defined by capitalist accumulation in capitalist production.
The nation or region is considered to be a capitalist if the primary source of income and products produced and distributed is a capitalist activity in itself.
7. Demand and supply relations
Demand and supply are primary structures in the capitalist economy. It follows the conclusion that in a competitive market, the per-unit cost of a particular product will change until it settles at an equal price. That is when the quantity demanded by the buyer and the amount supplied by the seller is the same; then, the resulting product will be an economic equilibrium for number and price.
The four basic laws of supply and demand say that if demand increases and supply remains constant, then the shortage of product occurs, which leads to a higher price equilibrium. If the demand reduces and the supply remains constant, then an excess production of occurs, which leads to the lower price equilibrium.
If the demand is constant and supply increases, then there is excess production, which leads to a surplus, which finally leads to a lower price equilibrium. If demand remains the same and the supply reduces over time, then there is a shortage of products, which leads to a higher price equilibrium.
The supply schedule is the one that shows the relationship between the price of a product and the supplied quantity. When perfect competition is assumed, then supply is determined entirely by marginal cost. In other words, the companies will be able to produce more output, and the cost of producing extra output would be less than the price that the companies would be receiving.
Just like supply, demand is also an integral part of the capitalist economy. Demand schedule, on the other hand, is nothing but a demand curve, which is the representation of the number of products so that the buyers are willing to purchase at different prices with the assumption that all the other determinants remain constant. According to the law of demand, the representation of the demand curve is always down word, which means that as consumers play by more and more products, the price of the product goes down.
Marginal utility curves determine the demand curve. Customers are more willing to buy a specific quantity of products at a specific price if the margins utility of excess consumption and the opportunity cost are equal. In other words, the demand schedule can be defined as the ability and willingness.
If customers are more willing to buy a specific quantity of products at a specific price if the margins utility of excess consumption and the opportunity cost are equal. In other words, the demand schedule can be defined as the ability and the willingness of customers to buy a product at any given point in time.
8. Two class system
Capitalism has a story to the characterized by differences between two classes of people, which are the capitalist class who is known for producing and distributing the goods, and the second is the working class, which is the labor to the capitalist class and does labor work in exchange for money. The capitalist class is also known as the owner class.
The entire economy is run by people or corporations who operate and own companies and also make important decisions regarding the utilization of resources. This class is usually a capitalist class. But there exists a division of labor which allows for specialization, and that occurs with training and education.
this training and education break the class into two further subclasses, which are the middle class and lower class. Having a dual-class system is the characteristic feature of capitalism, as described by Karl Marx in Das Capital.
9. Minimum Government intervention
Another prime characteristic of capitalism is that the economy has a minimum or no government intervention. The capitalist government does not interfere in major economic decisions since the capitalist class or owner class controls the entire economy. From the viewpoint of basic capitalist ideas, this is a good thing in one way because it is in view with capitalistic principles.
Since the owner class is the most dominant and controls all the industries, which drives money in the market, it makes sense to keep government intervention to a minimum. On the downside, having minimum intervention is not people-friendly. Since the capitalist class controls the economy, the class of people who work very hard will be eligible to get paid.
This increases the gap between the poor and the rich to a very high level. This difference is stark in capitalism between the owner class and the labor class, and without government intervention, it causes further economic instability.
Profit-making becomes the sole motive of the capitalist economy and government falls on backfoot because the values and benefits of people become secondary. This does not often go well with people – especially the majority, which is the labour class.
10. Capital accumulation
The accumulation of capital is a dynamic motive which motivates the profit personnel and also involves an investment of money or relevant financial asset with the only cause of increasing its monetary value. Accumulation of capital aims to create new Working capital or a fixed class which can be in any form.
It is the basis of capitalism and is one of the defining characteristics of a capitalist economic system. More often than not, capital accumulation also refers to the real estate investment in other productions such as research and development or acquisition.
It also includes investment in many financial assets such as the ones which represent on paper and yield rent or profit or royalties or capital gains. In the capitalist economy, it is considered that both financial, as well as non-financial accumulation of capital, is crucial to growing the economy. Because additional funds are required for additional production, increasing the scale of production is one of the important factors.
Capital can be in any form, such as human capital or social capital also.
11. Commodity production
Production of the commodity is one of the characteristics of the capitalist economy. Production can be of any commodity right from essential goods to luxury goods. The idea is to keep the production going on. As long as there will be production, the labour class can earn to survive, and the capitalist class can earn money as profit. This profit is used to run the capitalist economy.
Thus without proper production of commodities, the entire process of capitalism may be collapsed, and enough profits won’t be generated to run the capitalist economy. Unless the companies pump money to produce commodities for consumption, enough profits will not be generated.
This will affect the capitalist class more and less for the government since the government is not involved in running the economy. If commodity production stops, there will be no source of income for the capitalist class to earn profits.
12. Wage labor
Wage labor is like the currency of a capitalist economy. The worker class generates wages against their work in companies. The capitalist class who runs the economy owns these companies. The capitalist class disperses the profits generated from the selling of products to the labour class in the form of wages. These wages help the labour class to purchase products.
The harder they work, the more wages they will generate, and these wages, in turn, flow back into the economy. The cycle helps to keep the economy afloat. Wages are an important part of the capitalist economy.