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. The defining characteristic is that 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.
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.
Who Makes Decisions in Capitalist Markets?
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.
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 the 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.
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.
- Motivation: Socialist systems experience issues with individual motivation and the drop in productivity that accompanies the inability to advance one's personal wealth or ownership of property.
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.
What is Anarcho-Capitalism?
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.
What is a Mixed Economy?
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.
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.
What is Laissez-Fair Capitalism?
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.
What is Crony Capitalism?
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.