Capitalism is a type of social system that follows the belief of individual rights. From political perspective, capitalism is the system of laissez-faire (freedom). Lawfully, it is a system of objective laws that is rule of law in contrast to rule of man. In financial terms, when such freedom is applied to the domain of production its result is the free-market. Earlier, this notion was not clearly explained. Several economists and theorists assumed that capitalism has existed for most of human history. In the Oxford English Dictionary, the phrase Capitalism was first used by novelist William Makepeace Thackeray, in 1854 in his novel ‘The Newcomes’, where he described capitalism as “having ownership of capital and not as a system of production”. During 19th century, capitalism was described by numerous theorists as “an economic system characterized by private or corporation ownership of capital goods, by investments that are determined by private decision rather than by state control, and by prices, production and the distribution of goods that are determined mainly in free market” Capitalism is commonly elucidated as an economic system where private actors are permitted to own and control the use of property according to their own interests, and where the invisible hand of the pricing mechanism coordinates supply and demand in markets in a way that is automatically in the best interests of civilisation. In this system, Government is responsible for peace, justice, and tolerable taxes.
Basically, Capitalism is a private ownership based on the ways of production and distribution of goods categorised by a free competitive market and incentive by profit. It can be said that it is an economics system based on survival of the fittest.
Historical review of Capitalism: In theoretical review, it has been described by numerous theorists that there are three periods of Capitalism such as early, middle and late periods, while others academicians consider capitalism to be a social characteristic that cannot be confined by historical period, but rather by the recognition of unending elements of the human condition. Earlier, capitalism was originated in the fourteenth century emergency, a conflict that developed between the land-owning aristocracy (the lords) and the agricultural producers (the serfs). Feudalism subdued the development of capitalism in numerous ways. The serfs were forced to produce sufficient food for the lords as a result of this the lords had no interest in the advancement of technology, but rather expanded their power and wealth through military means. There was no competitive pressure for them to revolutionize because they were not producing to sell on the market. The changeover from feudalism to capitalism was mainly driven by the mechanic of war and not by the politics of prosperity and production methods. Conversely, in current period, modern capitalism ascended in the early middle ages, between the 16th and 18th century, when mercantilism was established. Mercantilism is described as a distribution of goods that are bought at a certain price and sold at a higher price in order to generate profits. It provided the basic principles of capitalism in that it was the “large-scale realization of a profit by acquiring goods for lower prices than to the sell them”. During the period of 18th century, mercantilism weakened when a group of economic theorists led by Adam Smith challenged mercantilist principles. They supposed that a state could only escalate its wealth at the expense of another state’s wealth while the amount of the world’s wealth remained constant. After the decline in mercantilism, Industrial capitalism emerged in the mid-18th century due to the huge accretion of capital under the period of merchant capitalism and its investment in machinery. Industrial capitalism marked development of manufacturing factory system and led to the global supremacy of capitalist mode of production. In the 19th century, capitalism allowed great increase in efficiency. It generated great social changes, which remained in place during the twentieth century where it was established as the world’s most predominant financial model after the failure of the USSR. In the twenty-first century, capitalism had become an extensively universal economic system at global scale.
It is commonly visualized that capitalism broadly corresponds to that developed by the classical economists and by Marx. In this view, capitalism is an economic system in which control of production and the allocation of real and financial resources are based on private ownership of the means of production. It is a theory expounded through observation of the economic system prevailing in Great Britain in the late eighteenth and early nineteenth centuries. Capitalism is an indirect system of governance based on a multifarious and continually evolving political bargain in which private actors are endowed by a political authority to own and control the use of property for private gain under definite laws and regulations. Workforces are free to work for incomes, capital is free to earn a return, and both labour and capital are allowed to enter and exit from various business. Capitalism depends upon the pricing mechanism to balance supply and demand in market. It relies on the profit motivation to assign opportunities and resources among contending suppliers and it relies upon a political authority to establish the rules and regulations so that they include all applicable societal costs and benefits. Government and its representatives are responsible to deliver physical security for persons and property as well as the laws and regulations. Capitalist development is built from investment in advanced technologies that enable to enhance productivity, where various initiatives are selected through a Darwinian process that favours productive uses of those resources, and from the periodic modernization of the legal and regulatory framework as specified by altering market conditions and societal urgencies.
To develop capitalism, government must have to perform many roles such as administrative role, in which providing and maintaining the institutions that support capitalism. Capitalism contrasts with previous economic systems characterized by forced labour, self-sufficiency, barter, and/or reciprocal relationships based upon family, tribe, or locally known relationships. It is also dissimilar with modern systems where governments have acted directly through ownership and/or central planning to control of the use of resources. Government’s approach of intervention in a capitalist system is mainly indirectly. It creates, legitimates, administers and intermittently updates the various market frameworks that elucidate the conditions in which the economic actors may obtain and employ capital and labour to produce, distribute, and sell goods and services. Consequently, economic players receive the right to use their power in competition with others, subject to predominant laws and regulations.
The market structures can have quite dissimilar policy priorities, from protecting the status quo to the advancement of growth and development, from protecting consumers to protecting producers, and from protecting labour to protecting capital. Governments identify the responsibilities of the various participants in these transactions such as for the safety and serviceability of the products, as well as the conditions under which they are produced and distributed. Therefore, this indirect system of governance certainly exemplifies a strategy, though this strategy is often largely implicit rather than overt and created progressively over time instead of huge plan. While positive capitalism depends upon the granting of power to private companies to enter, compete in, and exit from markets, it also depends upon the state’s power to confine the private actors so that they do not abuse these powers. To be authentic as well as productive, private economic actors must be bound by the rule of law, and this rule of law must be backed by the coercive powers of the state. The powers of the state are engaged to confine the private players from breaking the rules and, if need be, to settle clashes. Efficacious capitalism is reliant upon a state control of forced powers. Capitalist systems typically rely on the state to make direct provision of certain public goods, such as highways, schools and law enforcement, as well as to refrain from the temptation to own, operate, or directly control the economic actors. If the state does become a direct economic player, it becomes a player as well as a referee. This puts state agents in roles that conflict for example, as a regulator and as player that need not be subject to the discipline of the markets.
Capitalism as a three level system: Capitalism has three level systems. On the first level, the markets, firms compete to secure their labour and capital as well as to serve their customers. In second level, there is basic institutional foundations, including physical and social infrastructure; physical infrastructure includes, among other things, transportation and communications, and social infrastructure includes the educational, public health, and legal systems. Additionally, the second level consists of the agents of the state who enforce the rules and regulations, including specialized regulators who oversee behaviour in certain industries, such as those that deal with food and drugs or transportation, and those who protect societal resources such as the physical environment or safety in the workplace. The third level comprises of a political authority typically one with specialized functions such as executive, legislative, and judicial branches. In turn, a set of political institutions connect the political authority to the political markets and ultimately to civil society, to which such an authority is finally responsible.
level of capitalism
Capitalism is planned to uphold the industrious use of public resources in order fulfil consumer needs in the short period and to enhance living style of people through time. As a result, its supervisory frameworks give priority to promoting productivity instead of equalizing competitive resources on a given day or during a given season. Same time, it is established that capitalism is controlled after the fact, and not in real time the way organized sports are. The regulators do not stop the play to assess a foul, nor halt the competition to scrutinise a controversial event via “instant replay.” The economy moves on and disputes are settled after the fact, in court if need be.
Figure: Capitalistic system: Level1 and 2 (Source: Bruce R. Scott)
Types of capitalism:
There are many alternatives of capitalism that differ according to country and region. They vary in their institutional character and by their economic policies. The common features among all the dissimilar forms of capitalism is that they are based on the production of merchandises and services for profit, predominately market-based allocation of resources, and they are structured upon the accretion of capital. The major types of capitalism are mentioned below.
Mercantilism: Mercantilism is a nationalist system of initial capitalism that was practiced in the later phase of 16th century. It is characterized by the interweaving of national business interests to state-interest and imperialism, and subsequently, the state apparatus is utilized to improve national business interests abroad. Mercantilism was determined by the conviction that the prosperity of a nation is increased through a positive balance of trade with other nations. It relates to the phase of capitalist development and sometimes called the Primitive accumulation of capital. Mercantilist arguments for protectionist policies and their central concept of profit upon alienation, obtained in circulation, often tied to unstable transitory and immature character of capitalist economy of their age (Makoto Ito, 1988). Mercantilist capitalism involves more cooperation and coordination between government and economic entities including large cooperation and sometimes whole sectors of economy (Mattern, 2006).
Free-market economy: Free-market economy is described as a capitalist economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without interference by government plan. It characteristically involves in support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market economy where the role of the state is limited to protecting property rights.
Social market and Nordic model: A social-market economy is a supposedly free-market system where government involvement in price formation is kept to a minimum but the state provides substantial services in the area of social security, unemployment benefits and recognition of labour rights through national collective bargaining arrangements. The social market economy forms an essential part of free and open society, which is also characterised by solidarity. It has proven itself as an economic system that allows for prosperity and full employment whilst also providing welfare and promoting a strong social system. This model is conspicuous in Western and Northern European countries, and Japan, although in slightly different configurations. The huge majority of enterprises are privately owned in this economic model.
Rhine capitalism: It is described as the modern model of capitalism and adaptation of the social market model that exists in continental Western Europe today. State capitalism: State capitalism includes state ownership of the means of production within a state, and the organization of state enterprises as commercial, profit-seeking businesses. The argument between proponents of private versus state capitalism is focused on issues of managerial efficacy, productive efficiency, and fair distribution of wealth.
Aldo Musacchio, leading expert stated that state capitalism is a system in which governments, whether democratic or autocratic, exercise an extensive influence on the economy, through either direct ownership or various subsidies. Musacchio also said that there is a significant difference between today’s state capitalism and its predecessors. In his views, earlier, governments appointed bureaucrats to run companies but in present situation, the world’s largest state-owned enterprises are now traded on the public markets and kept in good health by large institutional investors.
Corporate capitalism: Corporate capitalism refers to a free or mixed-market economy categorised by the supremacy of hierarchical, bureaucratic corporations.
Mixed economy: Mixed economy is a mainly market-based economy consisting of both private and public ownership of the means of production and economic interventionism through macroeconomic policies intended to correct market failures, reduce unemployment and keep inflation low. The degree of involvement in markets differs among different countries. Some mixed economies, such as France under dirigisme, also featured a degree of indirect economic planning over a largely capitalist-based economy. Contemporary capitalist economies are described as “mixed economies”.
Characteristics of Capitalism:
Capitalism, generally referred to a free enterprise economy, is considered as an economic system distinguished by some traits, whose development is condition by still other elements. The main characteristics of capitalism are mentioned below.
1. Private Ownership: Private individuals are the owners of the means of production, which is, land, labour, capital, entrepreneurship (as opposed to state ownership and communist ownership). These owners decide what to produce, in what quantities, how it is going to be produced, and the rewards of labour. It is demand and supply that determines the price of the finished good (s).
2. Decentralized Decision Making: In a capitalist economy, the process of decision making takes the structure of devious decentralization. Individuals, make the decision with their self-interest. However, the government controls these decisions by manipulating its respective environment that is, affecting prices, taxes, subsides.
3. Freedom of Choice: Capitalism also referred to as a market economy, which highlights on the freedom of the individual, both as a consumer and as an owner of the factors of production. Principally, an individual can work wherever he or she wants, while entrepreneurs are also free to set up enterprises of their own choice. Within a market economy, decisions or choices are mainly determined by material encouragements.
It is found in vast literature that Capitalism is an economic system in which each individual in his capacity as a consumer, producer and resource owner is engaged in economic activity with a great degree of economic freedom. The factors of production are privately owned and managed by individuals. The main purpose of the capitalist system is the profit motive. The entrepreneurs initiate production with a view to maximize profits. Income is received in financial form through the sale of services of the factors of production and from profits of private enterprise. Capitalist economy is not planned, controlled or regulated by the government. In this system, economic decisions and activities are guided by price mechanism which operates automatically without any direction and control by the central authorities. In capitalist economy, competition is the most important element. It means the existence of large number of buyers and sellers in the market who are motivated by their self-interest but cannot influence market decisions by their individual actions.
Benefits of Capitalism: Capitalist economic system has many benefits.
This is an economic growth through open competitive market that provides individuals with far better opportunities of raising their own income. Capitalism results in a decentralized economic system which is major advantages of capitalism where individuals are exposed to various options which can lead to competition hence leading to firms producing only the best, and a capitalist economy is believed to encourage innovations in technology and industry. The advantages of capitalism entail;
Consumer choice where Individuals choose what to consume, and this choice leads to more competition and better products and services.
Efficiency of economics in which Goods and services produced based on demand creates incentives to cut costs and avoid waste.
Economic growth and expansion. Capitalistic economy increases the gross national product and leads to improved living standards.
General Drawbacks of Capitalism: Besides numerous advantages, capitalistic economy has several disadvantages.
1. Inequality: There tends to be a rise in disparity as benefits of capitalism are not fairly distributed. As wealth tends to redound to a small percentage of the population, the demand for luxury goods is often limited to a small percentage of the workforce, one of the main capitalism disadvantages.
2. Irrational Behaviour: People tend to get caught up in hypothetical suds but disregard economic fundamentals, leading to illogical behaviour.
3. Monopoly Behaviour: Other major drawback of capitalism is that companies gain monopoly over power in a free market allows and exploit customers by charging higher prices. They often pay lower salaries to labours.
4. Immobility: Main issue of capitalism is that a free market is supposed to be able to easily move factors of from an unprofitable sector to a new profitable industry. However, this is much more difficult practically.
Other drawbacks are that there is extravagant competition which does not confer any corresponding social benefit.
Effect of capitalism on society: Capitalism has some good consequences on habitants.
High Standard of Living: Capitalism is the artefact of industrialization. Industrialization has amplified production.
Economic Progress: Capitalism encourages society to utilize the natural resources more and more. The people exert themselves maximum for earning money. This had led to many inventions in the field of industry, agriculture and business which have contributed to economic growth.
Exchange of Culture: Capitalism intends to encourage all people to partake in activities that appear beneficial to them. Capitalism facilitates international trade and exchange of know-how. People of different countries have come close to each other. The development of the means of transport and communication has facilitated contacts among the peoples of the world thus leading to exchange of ideas and culture.
Progress of Civilization: Capitalism is tool to explore new machines and increasing the production of material goods. Man is today more civilized than his ancestors. Decreasing of Racial Differences: Capitalism has also led to diminish the differences based on race, doctrine, caste and nationality.
Major effect of capitalism includes, profit for owners of production/business, industrial vs agricultural economies, market competition, increased supply of “things”/goods and focus on personal responsibility.
To summarize, the capitalist system is reflection of the aspirations of human nature. Actually, capitalism can be described as a system that identifies and protects private property, free enterprise, freedom of choice for the human person, the authority of consumers over the objectives of production through free markets of the products chosen or ordered by the consumers, guide the programs of production. Capitalism makes economy money oriented. Businesses look at the economy with a materialistic point of view. Huge business companies take over smaller companies. Employment rights are compensated with the aim of higher productivity and some believe that because of fierce competition in capitalist economies it can give rise to unfair competition.
There are different views about capitalism. Some experts believe in its strengths, while others criticise about the unfair distribution of wealth it may lead to. The opposition of capitalism is Marxian Economics, named after Karl Marx. He believes that capitalism brings about class segregation i.e. there are two classes the capitalist class and the working class. Under capitalism, economic personal property, such as commodities or the means of production may be withheld from others by its owners. This is done so as to yield higher profit margins. Reviewing major facts about capitalism, it is found that in Capitalism economy, individuals own and control land, capital, and production of industry. Individuals are free to purchase and own their own homes, cars, furniture, and other goods People have liberty to live where they want and what type of job field they want to pursue.