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What is Capitalism?

definition

Capitalism is an economic system in which individuals, rather than the government, own property and businesses and operate them for a profit.

🤔 Understanding capitalism

Capitalism is the financial system that most of us are probably most familiar with. In a capitalist society, private citizens, rather than the government, own businesses and the capital required to produce goods and services for the economy. In the purest form of capitalism, the government does not interfere with the market, allowing each citizen and business to set prices, design employment contracts, and so on. Capitalism is generally synonymous with a free market system, where the prices of goods and labor depend on market forces of supply and demand, not central planning from above. Today, most capitalist systems have some government regulation of how people and businesses can operate, such as minimum-wage or anti-discrimination laws.

example

Let’s say that you need a new DVD player and head to the store to buy one. In a capitalist society, there are likely to be multiple different DVD players, each with its own price. You might see a “Brand A” DVD player for $35 and a slightly different “Brand B” DVD player for $30. Each company can produce a DVD player and charge whatever price they’d like. You have to choose which to buy.

In a non-capitalist society, such as one with a command economy, the government may decide which companies are allowed to build DVD players and how much they can charge. If multiple companies are producing DVD players, the government may mandate that they cost consumers the same amount.

Takeaway

Capitalism is like the code for a computer program…

It’s not something that you see or think about when you’re interacting with it, but it’s the thing that makes our society run. Without capitalism, businesses, money, employment, our government, and our culture would all be very different.

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Tell me more...

What is capitalism?
What are the characteristics of a capitalist economy?
What is a capitalist country?
What are the most capitalist countries in 2019?
Is the U.S. a capitalist country?
What are the pros and cons of capitalism?
What is capitalism vs. socialism vs. communism vs. fascism?

What is capitalism?

Capitalism is an economic system in which private citizens own capital and businesses and are responsible for deciding what companies should produce and how much things should cost. In a capitalist society, anyone is free to choose who they work for and how much they will charge for their work or the things they sell. The government may impose regulations, such as minimum-wage laws or anti-monopoly rules, but does not take an active hand in planning national production.

One example of a capitalist country is the United States.

Contrast this with a command economy, in which the government controls capital and businesses. In a command economy, the government decides where people work, how much they are paid, what goods are produced, and what those goods cost.

A current example of a country with a command economy is North Korea.

The origins of capitalism are widely debated, but it is generally believed to have emerged from northwestern Europe. It grew from the late Middle Ages as the Black Death had greatly reduced the population of serfs who could maintain the land owned by the wealthy classes. More farmers gained ownership of the land they worked.

Over time, merchants gained status and power in society. When the industrial revolution began, the wealthy invested in the machinery required to produce goods in huge quantities, giving societies that permitted private ownership the ability to outproduce other societies.

What are the characteristics of a capitalist economy?

Though not all of these characteristics are required for a society to be capitalist, some of the essential features of a capitalist economy are:

  • Private ownership of property (though some property can be publicly owned).
  • Goods whose prices are determined by supply and demand.
  • Companies that produce goods based on consumer desires.
  • A profit motive for individuals, promising monetary and material rewards for success.
  • Minimal government interference in business.
  • A system of government that involve democratic representation.

What is a capitalist country?

A capitalist country is one that uses capitalism as the guiding idea behind how to structure its economy. This means a state whose government and society display the characteristics of capitalism, such as private ownership of property, businesses, and the means of production (the physical inputs required to produce goods, including raw materials and machinery).

A country’s culture and society will also reflect the fact that it is a capitalist nation. A culture of entrepreneurship, innovation, and working for personal profit or glory can indicate that a society is capitalist.

What are the most capitalist countries in 2019?

In modern times, most countries have capitalist economies. But countries differ in terms of how closely they adhere to pure capitalism and how much regulation the government imposes.

In 2019, the Fraser Institute’s Economic Freedom of the World study produced the following list of the ten most capitalist countries. 1. Hong Kong 2. Singapore 3. New Zealand 4. Switzerland 5. United States 6. Ireland 7. United Kingdom 8. Canada 9. Australia 10. Mauritius

Some of the factors the study considered in its ranking were:

  • Level of government spending: More indicated less capitalist societies, and less suggested more capitalist societies.
  • Tax rates: A higher personal tax rate meant less capitalist societies, while a lower one indicated more capitalist societies.
  • Government-controlled enterprises: The more there were, the less capitalist the society is.
  • Legal protection of property rights through courts that prevent unauthorized use of property that is privately owned.
  • Volatility of the nation’s currency: high inflation is a sign of less capitalist societies.
  • Freedom and ease of international trade: The fewer the restrictions, the more capitalist the society is.
  • The level and transparency of regulation: Capitalist societies have high transparency and low regulation
  • Gender disparity: Societies with significant work restrictions for women are less capitalist

Is the U.S. a capitalist country?

Yes, the United States is a capitalist country. It has all of the significant hallmarks of a capitalist nation, including private ownership of property and companies that produce goods based on consumer desires. Think about the stock market. Anyone can buy and trade shares in a business. While there are regulations, such as minimum-wage laws and tariffs on international trade, individuals and businesses are free to operate as they wish, within the law.

What are the pros and cons of capitalism?

The pros and cons of capitalism are a long-debated topic.

Proponents of capitalism argue that the system produces benefits for everyone in society. For example, the Fraser Institute’s Economic Freedom of the World report shows that even the poorest residents of nations who rank highly in economic freedom make far more than those who live in the lowest-ranked countries. Another argument in favor of capitalism is that it incentivizes individuals to work hard and produce innovative products. New companies emerge regularly and bring new products to the market. People who succeed can make a lot of money by selling parts of their business. Supporters of capitalism argue that this incentive makes people more willing to work hard at whatever they do. They also claim that competition between businesses forces those businesses to reduce prices and operate efficiently.

One typical argument against capitalism is that it can produce inequality because individuals can own property and rent it to others. Plus, people who have money can use the money to make more money by investing it or putting it in an interest-bearing account. On top of the money that their money makes, those who already have capital can earn additional money by working more. People who don’t have money to invest can only earn income through their own labor. As time goes on, the people who can earn money both from investing and labor usually make more money than those who only earn money through work. They can use that increased income to invest even more money, driving their incomes even higher. As this cycle continues, inequality increases.

What is capitalism vs. socialism vs. communism vs. fascism?

Capitalism, socialism, communism, and fascism are different ways of organizing a nation’s governance or economy. Since there’s a close relationship between a country’s government and its economic system, many people use these terms loosely when referring to either one.

Socialism is an economic system that relies on group ownership of the means of production. Rather than an individual owning a business and employing workers, each worker at a company owns a portion of the business. This is different from communism, where all companies are collectively owned by all citizens and the economy is completely managed by the government. Consider the difference between the Soviet Union, a communist nation with a centrally planned economy, and a European nation with a strong social safety net, such as Norway, which exhibits many socialist features like free healthcare and education.

There are many different types of socialism, each with a different focus. Some systems look similar to capitalism, while others might go so far as to eliminate the concept of money. A modern example of a country with a socialist government is Bolivia. The country has retained concepts like private ownership of property and a currency but has increased government intervention in the economy and government spending on public goods such as roads.

Under communism, the means of production are commonly owned by all people. In an ideal communist society, everyone works toward the common good, and there are no social classes and no money. People produce the things they are able to produce, giving those goods to others. In return, everyone receives the goods that they need. Many countries, including the Soviet Union and the People’s Republic of China have called themselves Communists but did not achieve communism in its pure form because powerful leaders have retained their wealth.

While different schools of thought vary on the details, one of the guiding principles of communism is the belief that capitalism gives rise to two groups: the working class (proletariat) and the capitalist class. Many communists believe that the conflict between these groups is the root of all social problems. Therefore, they believe eliminating the divide by having all people own the means of production in common will eliminate societal strife.

Fascism is a system of government in which the person or people in power exercises supreme authority and suppresses all opposition. Economically, fascist countries are characterized by a rejection of both capitalism and socialism. Fascist economies allowed private ownership and the creation of a financial elite. However, the government expects all businesses to operate for the benefit of the state.

Often, fascist governments act explicitly to benefit certain businesses or sectors of their economies, to the detriment of workers and other nations’ businesses. Where labor organizations exist, the government is typically behind running them, and membership is required. Activist activities, such as strikes, are banned as they would reduce production, thereby weakening the nation.

Historical examples of fascist countries include Italy under Benito Mussolini, and Spain under Francisco Franco.

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