What is capitalism in simple terms? | Definition, Examples, Disadvantages

What is capitalism?

Capitalism is an economic and social system based on the fact that the means of production must be privately owned, the market serves as a mechanism to allocate scarce resources efficiently and capital serves as a source of wealth. For conceptual purposes, it is the economic-social position contrary to socialism.

After the fall of feudalism, the economic model that emerged in Europe during the 16th century and succeeded in establishing itself at that time was baptized as capitalism.

Capitalism
“Capitalism is turning luxuries into necessities.”
– Andrew Carnegie

Among its main characteristics is the accumulation of capital as the axis of economic life.
It is a system based on the ownership of the resources that are produced and that are of a private nature. In other words, companies own their production, which promotes competitiveness and private ownership.

The production of goods and services seeks to meet the needs of consumers.

How did Capitalism come about?

The origins of capitalism go back to the time of the Industrial Revolution in the late 19th century and the precursor was the Scottish philosopher Adam Smith, who was the first to write the basic economic principles that defined this economic system.

In the past, people were obliged to work because of the bonds of servitude or slavery that existed in feudalism. But, with the appearance of capitalism, the labor proposal changed and since then people have been working in exchange for a salary.

In a capitalist society, people and companies produce and exchange goods and services through transactions involving prices and markets.

Capitalism is now adopted by most countries to develop their economies. The term”mixed economy” is often used to refer to the capitalist system with some state intervention, a situation that prevails in the economies of most industrialized countries.

Other names by which capitalism is called from its origin are”free market economy” or “free economy”.

Basic principles of capitalism

The basic principles of capitalism are:

  1. Defence of individual rights: private ownership of capital and productive means.
  2. Freedom of enterprise, through which it is possible to carry out business projects or put an end to them.
  3. Competitive market, which means that the exchange price is determined by the interaction of supply and demand with the least possible interference from the State.

In this market with multiple options and product alternatives from which individuals have the possibility to choose. In it, demand and supply decisions are shaped that give rise to balances and prices.

The definition of capitalism, however, is not exact. Liberal democracies, for example, understand capitalism as a system where the production, marketing, and values of goods and services are established and conditioned by some form of free market.

Characteristics of capitalism

Capitalism is a system that constantly seeks to obtain an economic benefit by increasing its capital, hence its main characteristics are the following:

  1. Its fundamental factors are labour and capital.
  2. It increases competition in the supply and demand of goods and services, which in turn generates the free market.
  3. It is a socio-economic system based on the recognition of individual rights, thus respecting the private character.
  4. In the capitalist system, the state has hardly any involvement.
  5. In the logic of capitalism is the increase in economic income, which can be concentrated or distributed without this having anything to do with the very essence of the system. Capitalist income depends on the particular conditions of each society.
  6. Any person or group of people who have the necessary economic resources can legally open a business and generate employment and competitiveness in the supply of goods or services.
  7. Capitalism can only work when there are sufficient social and technological means to secure consumption and accumulate capital.
  8. It can create social inequality by offering low wages or job opportunities.

Industrial capitalism

Industrial capitalism is a phase of capitalism that was generated in the second half of the 18th century when important political and technological changes took place. It emerged along with financial capitalism.

Its greatest impact was with the Industrial Revolution, at which time technological changes and modes of production were promoted. Craftsmanship and manufacturing were replaced by mechanized manufacturing.

Financial capitalism

There are different variants of capitalism that differ according to the relationship between the market, the state, and society.

Financial capitalism corresponds to a type of capitalist economy in which big industry and big business are controlled by the economic power of commercial banks and other financial institutions.

Capitalism and Socialism

In contrast to capitalism, there is socialism that seeks the appropriation and control of the means of production by the working class, which can also be state-owned and is dominated by social or collective production, where”everyone is the owner of everything”.

It is also understood as the evolution of Communism developed by Karl Marx and which seeks to combat the disadvantages of capitalism, the free market, and private property, through regulation and control by the state.

Capitalism and globalization

One of the phenomena of capitalism is globalization, a process of deepening economic, social, cultural and political integration, driven by the low prices of means of transport and communication between the countries of the world at the end of the 20th century.

Globalization is generated by the need for the dynamics of capitalism to form a global village that allows greater markets for developed countries.

Wild capitalism

It is a term used to describe the new capitalism that emerged from 1990 onwards. It refers to an uncontrolled economy with quite negative consequences for the less developed countries, as it leads to a massive increase in poverty, crime, and unemployment.

Other Characteristics of Capitalism

Freedom of the market

The market is governed by the free competition of the law of supply and demand. The exchange of goods and resources is done through free trade. In this field, all kinds of goods and services that are demanded by society are manufactured, bought and sold.

Minimal state intervention

Government activity is only necessary to manage national defense, enforce private property and ensure that contracts are enforced. The state acts as a regulator only in high-risk companies to avoid monopolies (telecommunications, water, energy companies).

Respect for private property

In capitalist systems most of the means of production are private. This indicates that the construction of this system is based on a regime of industrial capital goods and private land tenure and use.

Free price formation

The interaction of the laws of supply and demand shapes and regulates the prices at which goods and services are exchanged. This allows for the allocation of resources and the distribution of wealth among individuals.

Free enterprise and labour contracting

Persons with economic resources can open any type of business that is legal and is free to obtain economic resources to produce goods or services.

This freedom also extends to workers and consumers, as workers can do any job within their capabilities and consumers have the freedom to choose what they want to consume, looking for the product to meet their needs and be within their reach.

Advantages and disadvantages

Advantages of the Capitalist system

  1. Private capital can generate a lot of wealth, which is difficult in other systems.
  2. You have access to private property.
  3. Everyone can exercise both his or her individual rights and those of the sector to which he or she belongs.
  4. Entrepreneurship is promoted.
  5. There is constant economic movement, even if it is only a small percentage of the country’s wealth.
  6. There is decision-making based on each person’s freedom of thought.
  7. The forces of work have been modified until reaching the figure of the free wage earner.

Disadvantages of the Capitalist system

Decentralization of power allows production not to be shared so that the system will not always meet the basic needs of the population or offer the same possibilities for participation in the distribution of wealth.

  1. There is enormous competition for money because it is the only social engine.
  2. There are bad working conditions such as exploitation or dismissal, which are justifiable for capitalism to offer and achieve what it promises (human freedom and economic development).
  3. It does not meet the needs of those who have the least.
  4. There is a strong tendency towards monopoly (although this should not be the case).
  5. Individual freedom takes precedence over other human rights.

Social inequality

Clearly, over time, an inequality is created between those who make a profit without being aware of effort or merit and those who make an immensely smaller profit by working much harder.

This leads to unequal opportunities and ends up leading to situations of employer domination over the employee (which was intended to be eradicated) and even social exclusion.

Socio-economic classes

In a capitalist system, there is the class that owns capital and therefore the means of production, and the working class that does the work. These classes are formed by a social-economic stratification and by the distribution of income that depends on the purchasing power of the different social positions within the production structure.

Social mobility

In capitalism, belonging to a social class is mobile, not static. Ideally, societies should tend to achieve greater social mobility. This means that people who strive and have the merits can improve their quality of life and move up the social ladder.

Economic growth

There is evidence that specialization in agriculture and other areas leads to increased production and trade in raw materials. The consequence of this is an increase in the circulation of capital that stimulates society’s wealth, increases savings and consequently generates investment.

Earning a profit

In a capitalist society, all the investment made is focused on obtaining economic profits. In the past, investors did not care about social welfare, but today companies are concerned about the welfare of society because they make more money from it.

Types of capitalism

Capitalism is called capitalism because it is a system organized around production and capital allocation. The way in which this capital is allocated varies from country to country.

Shareholder capitalism: where individuals invest in stocks and bonds and evaluate the potential of companies by buying those of the most promising ones. The shares are distributed among many people and the companies are managed by professional executives.

Family capitalism: The management of the main companies falls to the richest families. This generally prevails in countries where individual investors have fewer legal rights.
Bank capitalism: Investors deposit their savings in banks, and banks invest by buying shares in companies.

State capitalism: Citizens pay taxes and the state is responsible for allocating capital through its own companies, industrial policies, tariff protection, and tax benefits.

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