What is Capitalism?

Capitalism is an economic system in which capital assets are owned privately and products and servicces are sold in a public free market. Capital, in its true sense, refers to the means of production. Capital assets are things that a company needs to produce its goods or deliver a service, like machinery, computer equipment, vehicles, etc.

The system encourages open competition and private investment and business, as opposed to being controlled by the government. A good example of a country that has a capitalistic system is the U.S.

A transaction in a capitalistic economy allows participants to agree on the prices at which products or services are traded.

According to Oxford Dictionaries, capitalism is:

“An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.”

Adam SmithThe Scotsman Adam Smith (1723-1790) is known as the ‘father of capitalism’. He is still currently among the most influential thinkers in the field of economics. (Image: Wikipedia)

The free-market system has existed for hundreds of years. It became the most popular economic system in the Western world after the end of feudalism, and is now currently the most dominant economic system in the world – after the downfall of communism.

The word Capitalist comes from the word capital, which derived from “capitale”, a late Latin word based on the word “caput”, meaning “head”.

Private individuals own assets

In capitalism, assets are owned by private individuals and labor is acquired through employment and  wages.

There are various recognized forms of capitalism, each with different levels of public capital control, including:

  • Welfare capitalism – capitalistic economies that provide welfare services to employees.
  • State capitalism – form of capitalism in which the central government controls most of the capital and industry.

Capitalism is the opposite of an economic system called socialism – the social ownership of production (some purists dispute this comparison, saying that as capital is the means of production, even communist systems are capitalists with the state controlling the means of production).

People who are for capitalism believe it is the best wealth-producing system in history, while those who criticize capitalism associate it with economic instability and argue that it is not in the best interest for all the people. Many criticize capitalism for creating growing inequality (gap between rich and poor).

The countries in red do not follow a capitalistic system:

countries in red do not follow a capitalistic system.

Most nations have mixed economies

While most Western nations believe they have entirely capitalist systems, they are, in fact, mixed economies – with both a system of markets and centralized economic planning combined into one.

The all have certain degrees of central planning, as well as private enterprise contributing to their GDPs (gross domestic products) and employment.

When the financial crisis of 2008 plus its subsequent Great Recession hit, governments in North America and Europe bailed out their major banks and larger companies to the tune of hundreds of billions of dollars with taxpayers’ money.

Bailouts halt capitalism’s destructive creative cycle

In a totally capitalist society, those failing businesses should have been allowed to die, and after a while new ones would have taken their place.

What governments did by bailing out failing companies went against what many economists say is the greatest advantage of capitalism, specifically its ‘creative destruction’ quality – when something new takes over something older.

Joseph Alois Schumpeter (1883-1950), an Austrian-American economist and political scientist, wrote “(creative destruction is) the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

By supporting companies that had clearly failed, governments had done two things which significantly undermined capitalism’s ability to create wealth, proponents of creative destruction say:

1. They had destroyed competition – other entrepreneurs with new ideas, energy and perhaps the ability to change and improve products and services, were unable to compete, because the failing companies had been given an unfair advantage.

2. Behaviors which led to the businesses becoming failed companies were allowed to perpetuate.

According to merriam-webster.com, the word capitalist has two meanings today:

“A person who has a lot of money, property, etc., and who uses those things to produce more money,” and “a person who believes that capitalism is the best kind of economic system.”

Video – Explanation of Capitalism