Capitalism

What Is Capitalism?

A widely adopted economic system where private ownership and profitability are key drivers for economic growth and progress.

In a capitalistic system, people can launch their own businesses, invest in the economy, and compete for customers in a free market environment.

As companies aim to offer better products and services at competitive prices, innovation, and progress are often the end result.

Fundamentally, it provides citizens with a greater degree of economic freedom and choice. People are free to pursue their own economic interests and decide how they invest their time, talent, and money.

As a result, it is seen as a system that rewards hard work, innovation, and creativity and incentivizes individuals to contribute to the economy and society.

It's noteworthy that it can also lead to disparities in wealth and access to resources; not everyone has equal opportunities.

Despite challenges, the system remains prevalent, with many countries having a mixed capitalistic system that includes some gubernatorial intervention.

Pillars of Capitalism

Different forms are differentiated by the extent to which these principles are implemented. For example, regulation is minimal in the free market or laissez-faire economies.

While in mixed economies, markets play a leading role but are subject to greater regulation to address market failures, promote social welfare, and for other reasons, such as defense and public safety. As a result, the majority of capitalist economies today are mixed.

The United States is based on a mixed market economy. Both private individuals and businesses can enjoy a degree of economic freedom and choice.

However, the government still steps in to regulate certain industries, provide social services, and manage macroeconomic policies.

Let’s take a look at the pillars or core principles based on the following:

1. Private property ownership 

It allows individuals to hold tangible assets like real estate and intangible assets like stocks and bonds.

These assets can potentially increase their value over time concerning the laws of supply and demand.

2. Self-interest

Individuals act to further their interests without considering societal or political factors. This can lead to collective benefits, as described by Adam Smith's "invisible hand" in "The Wealth of Nations."

3. Competition

With firms free to enter and exit markets, it optimizes social welfare for both producers and consumers.

Competition improves innovation and prices, a benefit for consumers.

4. Supply and demand

The market mechanism sets prices through the interaction of buyers and sellers, allocating resources in a decentralized manner to the areas where they can generate the highest return.

Companies will invest in higher-demand areas to increase their profits.

5. Freedom of choice 

Citizens' free choice in consumption, production, and investment enables customers to switch products, investors to seek more profitable ventures, and workers to seek better pay.

With more competition, the consumer has more than one choice. For example, they choose from different car companies when purchasing a car.

6. Limited role of the government 

It is to safeguard private citizens' rights and maintain an orderly environment that supports the market function.

According to the laws of free markets, companies will ultimately seek the best interest of the private citizens.

Pros and Cons of Capitalism

In this system, citizens and businesses create and exchange goods and services in a free market, where prices are determined by supply and demand.

It has been extensively adopted as the dominant economic model in many countries worldwide. This economic model has been praised for its ability to drive economic growth, promote market innovation, and increase economic prosperity in the country.

Though, the model has spurred its fair share of criticisms. These criticisms include the potential for income inequality; worker exploitation; environmental degradation; monopolies and oligopolies; and financial instability.

Overall, the merits and drawbacks have stirred hot debates: economists and policymakers worldwide are still exploring them.

The following highlights the pros and cons:

Pros:

• Encourages growth and innovation with incentives for individuals and businesses
• Promotes competition, leading to lower prices and improved quality
• Gives individuals and businesses economic freedom
• Adaptable to changes in consumer demand
• Can lead to greater wealth and prosperity for those successful in the market

Cons:

• Income inequality
• Exploitation of workers
• Environmental degradation
• Monopolies/Oligopolies reduce competition
• Financial instability and crises

Varieties of Capitalism

Throughout history, it has transformed to fit better the cultural, political, and economic circumstances of different countries and regions. This has resulted in various forms, each offering a unique combination of capitalist and non-capitalist elements.

Some of the most recognized variations include Laissez-Faire, State, Social, Green, and Anarcho-Capitalism.

These variations seek to strike a balance between components of it, such as economic freedom and competition, and other important factors, such as social welfare, environmental sustainability, and religious values.

The following highlights the variations of free markets:

1. Laissez-Faire (Free Market)

A system of economic principles that advocates for minimal government intervention and allows for maximum freedom in the market. This type relies on supply and demand to dictate prices, wages, and production levels.

The government's role is limited to ensuring property rights, enforcing contracts, and upholding the rule of law, and it is believed to foster innovation, economic growth, and increased prosperity.

Though, there are also concerns that this system can result in unequal distribution of wealth, market inefficiencies, and inadequate protections for workers and consumers.

In practice, most capitalist economies are not purely laissez-faire but incorporate government regulation and intervention elements. Still, the degree of intervention varies across countries and remains a contentious political issue.

There has been a debate if government intervention is needed to protect consumers. Some argue that in a pure free market.

2. State Cap

This is a type of economic system where the government plays a major role in the control and direction of the economy.

In this variation, the state typically owns and controls key industries and resources, such as natural resources, transportation, and energy production, and also exerts significant influence over other areas of the economy.

Examples include

• China, where the government heavily regulates and controls various industries and encourages private enterprise and foreign investment.
• In the former Soviet Union, where the government controlled nearly all aspects of the economy, and private enterprise was minimal.
• North Korea, where the government controls most of the economy and private enterprise, is virtually non-existent.
• Cuba, where the state controls most of the economy and private enterprise, is tightly regulated.

3. Social Cap

It is an economic system combining elements of capitalism with social welfare policies to reduce income inequality and promote social justice.

In this system, the government plays a larger role in regulating the market, providing social safety nets, and implementing policies to ensure a more equitable distribution of wealth and opportunities.

In this system, businesses are still free to operate and make profits. Still, they are expected to contribute to the greater good by paying fair taxes, providing adequate working conditions, and investing in communities.

Fundamentally, it prioritizes collective interests, such as environmental sustainability and access to quality healthcare, over individual profit.

4. Green Cap

It refers to the incorporation of environmental sustainability policies and practices. The main aim is to promote economic growth while reducing the negative impact of industrial activity on the environment.

Examples of green capitalistic practices include:

• Implementing carbon taxes and other incentives for companies to reduce their carbon footprint.
• Encouraging investment in renewable energy sources, such as wind and solar power.
• Implementing energy-efficient technologies in production processes.
• Encouraging businesses to adopt environmentally friendly practices, such as reducing waste and using recycled materials.
• Promoting sustainable tourism and agriculture, as well as eco-friendly consumer products.

These practices balance economic development with protecting and conserving our environment, ensuring a sustainable future for future generations.

5. Anarcho-Cap

It advocates for a society without a state or government, where all goods and services are privately owned and controlled by citizens: and where the market regulates the economy. It is based on classical liberalism, individual liberty, and the Austrian school of economics.

The term was coined by Murray Rothbard, who envisioned a society, including those typically provided by the state, where all goods and services would be exchanged through voluntary agreements between individuals.

A legal code would limit this based on self-ownership and nonaggression. Proponents of these libertarian ideas have cited historical examples, such as medieval Iceland and ancient Ireland, as societies that closely resembled their theories.

The idea remains largely theoretical and has not been implemented on a large scale.

Capitalism Alternatives

Economic systems beyond this system hold significant value as they offer a contrasting perspective on how society can organize its production and distribution of goods and services.

Alternative models like socialism, communism, fascism, feudalism, and mercantilism, present distinct approaches to property ownership, allocation of resources, and state intervention in the economy.

These systems have been experimented with, to varying degrees, worldwide and throughout history.

While some have successfully achieved certain objectives, such as reducing poverty and increasing equality, they have also faced criticism for impeding innovation, creating inefficiencies, and limiting personal freedoms.

Fascism, for instance, with its emphasis on authoritarian control and military aggression, resulted in widespread destruction and economic turmoil. On the other hand, feudalism eventually led to the rise of European free markets and nation-states.

Mercantilism, marked by government regulation and protectionist trade policies, paved the way for classical liberalism and the development of free markets.

Regardless of their merits and drawbacks, these alternative economic systems hold important implications for studying economics and politics.

They offer a rich understanding of the various possibilities for economic arrangements and the trade-offs involved in choosing one system over another.

In that sense, they provide a crucial backdrop for analyzing the evolution of the free market and its current form.

Types Of Capitalism Alternatives

Let’s take a look at these different alternatives:

1. Socialism 

A system where the means of production are owned and controlled by the state or the people collectively to provide for the needs of all citizens.

Here are some key points about socialism:

• The government or collective entity manages key industries to provide essential goods and services to all members of society.
• Profits are reinvested or distributed as social welfare programs.
• The aim is to achieve equality and fairness in wealth distribution.
• Contrast to the free market’s private ownership and control of production.
• There are no universal definitions but rather different interpretations and visions.
• Past experiments have had varying levels of success and criticism.

2. Communism 

This is a political and economic ideology that seeks to create a classless society by eliminating private property and creating a centrally planned economy.

Here are some critical points about communism:

• Each person contributes and receives according to their abilities and needs.
• Based on the theories of Karl Marx and Friedrich Engels.
• No private ownership: goods and services distributed by the state.
• Criticized for lack of prosperity, innovation, and political/personal freedoms.
• Real-life examples include the Soviet Union and China.

3. Feudalism 

A social, economic, and political system in Europe from the 9th to the 15th centuries. In this system, the land was held by lords and worked by serfs.

Here are some key points about feudalism:

• Lords owned land and granted it to vassals in exchange for loyalty and military service.
• Vassals then sub-granted land to serfs who performed labor for the lord.
• Hierarchical structure with the king at the top and serfs at the bottom.
• It declined in the late Middle Ages due to the growth of towns and commerce and the development of the money economy.
• Legacy had a lasting impact on European society and shaped modern state structures.

4. Mercantilism 

An economic system prevalent in the 16th to 18th centuries was characterized by government regulation of the economy to ensure a favorable trade balance and a buildup of bullion (precious metal) reserves.

Here are some key points about mercantilism:

• Mercantilism was an economic theory and system in Europe from the 16th to 18th centuries.
• Believing the stock of gold and silver measured wealth, the government should regulate trade to maximize exports and accumulate precious metals.
• Regulated trade and colonies and promoted domestic manufacturing.
• It is characterized by a strong state presence in the economy and government intervention for economic goals.
• It is challenged by Adam Smith's idea of free trade and competition.
• Replaced by classical economics, the legacy is still seen in modern trade policies and the balance of trade concept.

5. Fascism 

A political and economic ideology prevalent in Italy and Germany in the 20th century, characterized by totalitarian government control of the economy, a cult of personality, and aggressive militarism.

Here are some key points about fascism:

• Fascism is a political ideology with authoritarian rule, nationalism, and belief in the superiority of one's race or nation.
• Totalitarianism involves complete state control over society.
• Belief in strict control of society, with the state and leader having absolute authority.
• It is associated with aggressive militarism, expansionism, and glorifying violence.
• Suppresses opposition and dissent with secret police, propaganda, censorship, and violence used to maintain control.
• Examples include Nazi Germany under Hitler and the Italian National Fascist Party under Mussolini.
• Widely discredited and condemned, often used as a pejorative to describe extreme political systems.

Researched and authored by “Won S. Mejia Helfer” | LinkedIn

Reviewed and Edited by Max Guan | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Capital Account
• Capital Controls
• Capital Deepening
• Capital Flight
• Demand