Capitalism - Explained
What is Capitalism?
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What is Capitalism?
Capitalism is an economic system that is based on private ownership of businesses and factors of production. It is also a political system where all the means of production are owned and controlled by private individuals. This is in contrast to a planned or command economy where the government controls all the means of production, and determine prices for goods and services. The laissez-faire capitalism or free market are examples of capitalism in practise. Private individuals determine what to produce, how to produce them, the materials to use and prices to offer their goods and services without any intervention from the government.
How Does Capitalism Work?
Capitalism is both an economic and political system that permits individuals or private corporate organizations to control and influence means of production.
This system also serve as an avenue through which countries resolve problems relating to production and distribution.
Capitalism operates on decentralized authority over means of production and also liberal decision making process.
In this system, private individuals have ownership of means of production and control on how goods are produced, services are rendered and the price at which they are offered.
Decisions over the use of resources are made by private individuals.
Private property refers to both tangible and intangible assets that are owned by private individuals as against public property which is owned by a state or government.
Private property is essential in the practice of capitalism because it allows private persons claim legal and exclusive ownership or properties.
These individuals also have the legal right to manage the properties or transfer them to other individuals. Since capitalism is a system based on private ownership of capital goods and other means of production are owned by private persons, then private property is crucial to its practice.
For instance, individuals who have legal right to tangible and intangible assets can confidently deploy capital gods into a capitalist system.
Capitalist systems are often characterized with profits, in the sense that private owners of good capitals and other assets needed for production only agree to deploy these items if they will greatly benefit from it. If otherwise, exchange might not take place.
In capitalist economies, private owners of capital goods maximize profits through healthy competition with other individuals or businesses in terms of the customers to reach, type of goods to produce, at what price to offer them, among others.
Likewise, the ineffective use of capital goods and resources can lead to losses.
Free Enterprise vs Capitalism
Due to the interconnectedness and similar features that both free enterprise and capitalism possess, they are often regarded as similar concepts. There are some interesting facts that distinguish both concepts.
A free market is also called a free enterprise where there products produced and the prices at which they are sold are determined by the market.
A capitalist economy, on the other hand, can exist without being a completely free enterprise. Likewise, we can have a free market without capitalism.
While factors of production in a capitalist economy are controlled by private individuals, government laws, taxes and regulations can be present. A free enterprise however is free of coercive government rules and influence.
Feudalism and Capitalism
The history of capitalism cannot be discussed without making reference to feudalism sometimes called Agrarian capitalism.
Feudalism was a dominant practice in medieval Europe, even till 12th century, only few Europeans lived in towns. In feudal systems, lands are owned by nobles who farmers, peasants or serfs depend on for living.
Feudal lords also give their workers keeps rather than real wages. However, the Black Plague and other plagues of the Dark Ages significantly shook up the feudal system and this birthed the advent of true wages instead of keeps that were previously offered.
The transition from feudalism to capitalism can be linked to the advent of true wages which witnessed more people moving into towns and explosion in birth rates. The development of capitalism can be traced to the periods of mercantilism between the 16th and 18th century.
Capitalism and Mercantilism
Mercantilism gradually replaced feudalism, it started as trade between different towns. Initially, the trade was not competitive because each merchant offered distinct goods and services.
This period witnessed the involvement of merchants in the production of goods, in which homogenization of goods occurred.
However, as mercantilism expanded from province to province and nation to nation, and because merchants offered similar goods for trade, competition began.
Adam Smith and Capitalism
Adam Smith saw mercantilism as a regressive system and he suggested the need for a free market which enabled merchants transition into capitalism.
Adam Smith's idea that a free market should replace mercantilism was timely. The need for industrial revolution which witnessed labor protests and strikes in the 19th century gave rise to Industrial Capitalism.
Industrial capitalism is an economic system which rests on the use of an enlarged division of labor and heavy machinery. It evolved to satisfy the lust for wealth by the European powers.
Given that colonialism was not the gold mine that the European powers thought it would be, industrialists pushed for industrial revolution.
These industrialists benefitted greatly from industrial capitalism, they were able to amass wealth.
Also, common people have higher hope of becoming influential during this period. This system is regarded as an equalizer of all classes or levels in the society as against the aristocratic system.
Other effects of industrial capitalism include increase in wages, affordability of products and increased standard of living which led to the formation of strong unions.
This system significantly encouraged liberal individualism and economic freedom. In this period also, individuals in the middle class lift those below them financially so that they can also become a part of the middle class.
Before the rise of capitalism between the 18th and 19th centuries, there was little to no record of an economy that was enjoying significant growth at the time. Increase in the amount of goods and services produced, creation of platform for effective use of resources, provision of incentives for entrepreneurs and workers are all attributes of capitalism that makes it a system for economic growth.
Capitalism is also linked to an increased standard of living and higher productivity capacity for countries that adopt it. Capitalism has been very effective for the attainment of significant economic growth.
Capitalism can be distinguished from socialism in the sense that the intervention of the government is ever present in a socialist economy. Private individuals own capital goods and determine what is to be produced, how they are produced and the price at which they are offered in a capitalist economy. There is liberalization of innovation and market forces in capitalist economy.
Capitalism vs Socialism
The differences between the two economic systems are the following;
- Ownership: capital goods, businesses and means of production are owned and controlled by private persons in a capitalist economy but the government claims ownership of all these in a commune, socialist system.
- Equity: socialism strives to achieve equality and fairness in the distribution of wealth in the society but capitalism has no regard for equitable distribution.
- Employment: a Socialist economy creates employment opportunities for its citizens when the need arises but in capitalism, there might be a spike in unemployment rate, especially during economic or financial crisis.
- Efficiency: it is often believed that profits and incentives are driving forces for innovations and efficiency in capitalist economies unlike in socialism, where the state has stringent control over the means of production which causes inefficiency in the market.
Although, capital goods and factors of production are owned and controlled by private persons in capitalist economies, it is possible to have a mild intervention of government in terms of taxation, rules are regulations guiding the market.
Anarcho-capitalism describes a society without government intervention, the private sector provides all necessary services and not any government agency.
However, some free-market proponents and policymakers argue that a measure of government influence in the economy is needed, the regulation or intervention must be minimal.
A Mixed economy is a combination or blend of private and state enterprise and ownership. Private property rights are safeguarded in this economy but the state places certain limits on them. Hence, despite that there is private ownership of enterprise, they are subject to government laws, regulations, restrictions, taxation and tariffs.
Pure (laissez-faire) capitalism on the other hand allows private individuals to own and control the market without any coercive Interference from the government or state. However, many economies use a blend of pure capitalism and planned or command economy which is a mixed economy.
Mixed economies vary in terms of government intervention as used in relatively all the countries of the world. Government interventions in mixed economies are often in the interest of the state.
Crony capitalism thrives on an intimate interaction between private owners and government of the state. In this type of capitalism, favorable government intervention is permitted in the free market based on personal relationships between business owners and the state.
Favorable intervention can be in form of incentives, grants and tax breaks from the state.
Socialists maintain that crony capitalism emerged as a result of pure capitalism while capitalists hold the position that the need of socialist government to control the economy resulted into crony capitalism.
In most cases, businesses build intimate relationships with the state (engage in crony capitalism) in order to thrive in the midst of overwhelming competition.
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