Important Features of Capitalism: Modern economies in a large portion of Western society are organized around the capitalist model. Some of the most important aspects of a capitalist system are private property, private control of the factors of production, accumulation of capital, and competition.
Put simply, a capitalist system is controlled by market forces, while a communist system is controlled by the government. Here, we will discuss several of the primary characteristics of a capitalist economy.
Capitalism – What Is It?
Capitalism is an economic system in which private individuals or organizations possess capital commodities, such as factories, raw materials, and manufacturing means (tools). The production of products and services is then determined by supply and demand in the broad market, as opposed to central planning, as in a planned economy or command economy.
Capitalism in its purest form is free market or laissez-faire capitalism. Private individuals are unrestricted here. They may dictate where to invest, what to create or sell, and at what rates products and services are exchanged. The laissez-faire market works free of checks and balances.
Today, the majority of countries have a mixed capitalism system, which includes some government regulation of industry and ownership of some industries.
Proprietorship
Capitalism’s basic principle is the right to private property. Citizens cannot acquire capital if they are not permitted to own anything, if they believe their possessions will be readily stolen or confiscated, or if they are unable to freely buy, sell, or transfer ownership of their possessions. As long as the owner abides by the law’s limitations, which are often broad in capitalist regimes, the individual is free to do whatever they wish with their property.
A private citizen may acquire property from another private citizen for a mutually agreed-upon price, not one set by the government. In a capitalist system, rather than a central controlling body, the free market forces of supply and demand determine the prices at which property is purchased and sold. Private property rights are fundamental for capitalist production to function. These rights make a clear distinction between the owners of the means of production and the workers who employ them. For instance, an entrepreneur will own the factory, as well as the machinery and finished product.
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A worker working inside a facility and operating those equipment does not own them and is not permitted to take the finished product home with them for personal use or sale – this would be considered theft. The employee is solely entitled to the compensation earned in exchange for their labor.
Production Factors
Capitalism is a market economy in which private enterprise controls the factors of production, including land, labor, and capital. Private businesses manage a combination of these characteristics at levels that maximize profit and efficiency.
What happens to surplus product is a classic measure of whether the factors of production are privately or publically held. In a communist system, surplus output is distributed to the entire society, but in a capitalist one, the producer retains it and uses it to increase profit.
Capital Accumulation
Capital accumulation is the central feature of a capitalist system. Profitability is the driving factor behind economic activity in a capitalist system. Capitalists view profit accumulation as a means of providing a powerful incentive to work more, develop more, and produce goods more effectively than if the government controlled citizens’ net worth exclusively. This financial incentive explains why capitalist economies view innovation as a necessary component of their market economy.
Indeed, Karl Marx recognized the accumulation and redeployment of capital, reinvesting in the business to increase productivity and efficiency, as a defining feature of capitalism as it emerged in the aftermath of the industrial revolution.
Markets and Rivalry
The other critical characteristic of a capitalist system is competition. Private enterprises compete to supply consumers with better, faster, and cheaper goods and services. Competition forces businesses to maximize efficiency and price their products as low as the market will tolerate, or risk being displaced by more efficient and lower-priced competitors.
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While doing business with a particular company is choice in a capitalist system, the central government holds effective monopolies in all industries in a communist society. This implies it has little motivation to run efficiently or offer competitive prices, as its clients are unable to shop around.
This competition’s primary venue is the free market. A market is an abstract concept that broadly describes how supply and demand factors present themselves through prices. If demand for a good increases while supply remains constant, the price will increase. However, an increase in price signals to producers that they should produce more of that good since it is now more profitable. This increases supply to match the increased demand, bringing the price back down slightly. This process provides what economists refer to as an equilibrium state, which responds to supply and demand swings.
Capitalism’s Issues
Without a doubt, capitalism is a significant generator of innovation, wealth, and success in the modern era. Competition and capital accumulation incentivize businesses to maximize efficiency, which benefits investors and consumers alike by allowing for lower prices on a broader range of goods. However, this may not always work out as anticipated. We shall consider only three of capitalism’s difficulties here: asymmetric information; wealth disparity; and crony capitalism.
Information that is asymmetric
To ensure that free markets function as intended as a hallmark of capitalist production, a critical assumption must be true: information must be “perfect” (i.e., all knowledge is freely knowable) and symmetric (i.e. everybody knows everything about everything). In actuality, this assumption is false, which creates complications.
Asymmetric information, alternatively referred to as “information failure,” happens when one participant to an economic transaction possesses more material knowledge than the other. This is most frequently manifested when the supplier of an item or service has more expertise than the buyer; however, the converse dynamic is also feasible. Almost every economic transaction involves inequalities in information.
Asymmetric information can have near-fraudulent implications in certain circumstances, such as adverse selection, which occurs when an insurance firm encounters the chance of extreme loss as a result of a risk that was not disclosed at the time of the policy’s sale.
For instance, if the insured conceals his or her heavy smoking and frequent participation in harmful recreational activities, this asymmetrical flow of information constitutes adverse selection and may result in increased insurance costs for all customers, compelling the healthy to withdraw. Life insurance firms’ response is to conduct extensive actuarial work and rigorous health tests, and then charge consumers varied premiums depending on their honestly revealed risk profiles.
Inequality of Wealth
One persistent problem with capitalism is that its competitive markets and private firms generate a winner-takes-all mindset that leaves losers in the dust. If two companies both manufacture chairs and one can do it more cheaply or efficiently, either the laggard company will go out of business and lay off its employees, or the successful company will acquire the laggard and lay off a large proportion of its people.
More concerning is the fact that workers receive merely wages, whilst business owners and investors receive the entirety of earnings. As a result, as a corporation grows, its owners become wealthier as they hire more employees – employees who work long hours for pitiful earnings in compared to what top executives and owners earn. These differences continue to widen over time. Compounding the issue is the fact that workers frequently need to work in order to survive and support themselves and their families. They have little choice but to work for low wages in order to survive.
Capitalism Based on Cronyism
Crony capitalism is a term that refers to a capitalist society that is based on close ties between business and government. Instead of being governed by the free market and the rule of law, a business’s success is determined by the government’s favoritism in the form of tax cuts, government subsidies, and other incentives.
In practice, this is the dominant form of capitalism worldwide, owing to the powerful incentives that governments face to extract resources through taxation, regulation, and promotion of rent-seeking activity, as well as the powerful incentives that capitalist businesses face to increase profits through obtaining subsidies, limiting competition, and erecting barriers to entry. In fact, these forces represent a supply and demand for government involvement in the economy that is generated by the economic system.
Crony capitalism is often held responsible for a wide variety of social and economic ills. Both socialists and capitalists blame the rise of crony capitalism on the other. According to socialists, crony capitalism is an unavoidable outcome of pure capitalism. Capitalists, on the other hand, feel that crony capitalism developed as a result of socialist governments’ desire to dominate the economy.
The Verdict
In reality, the majority of countries and economies sit somewhere between capitalism and socialism/communism. To avoid the shortcomings of both capitalism and socialism, some countries combine the private sector system of capitalism and the public sector business system of socialism. The term “mixed economy” refers to these countries. In these economies, the government intervenes to prevent individuals or businesses from acquiring monopolistic positions and undue economic power concentration. These systems contain resources that are held by both the state and people.
