Capitalism is an economic system in which individuals or companies own and distribute resources or goods for financial gain. "Free-market capitalism" is the purest form of this economic system; investments and risks are considered against the competition and are the sole decisions of individuals and companies.
Definition:
According to Business finance “Capitalism is an economic system that emphasizes private ownership of the means of production or a privately controlled economy.”Characteristics
- Emphasizes private ownership.
- Economy controlled privately
The Merriam-Webster dictionary describes capitalism as "An economic system characterized by private or corporate ownership of capital goods; and by prices, production and distribution of goods that are determined mainly by competition in a free market."
Characteristics
- Free market economy.
- Competitive market.
- Private or corporate ownership
So from the above definition we can define capitalism as an economic and political system in which a country's trade and industry are controlled by private owners for profit.
Features of Capitalist Economy
Main features of a capitalist economy are as follows:
- Class-Conflict. From this arises another feature of the capitalistic economic order that there is class-conflict. The society is divided into two classes, the "elites” and the "proletarian” which are constantly at war with each other.
- Huge Profit: The main motive behind the working of the capitalist system is the profit motive. The entrepreneurs initiate production with a view to maximize profits.
- Government Influence: 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.
- Private Property and Inheritance: The most important feature of capitalism is the existence of private property and the system of inheritance.
- Economic Freedom: Another outstanding feature of capitalism is economic freedom. This freedom means three objects:
- Freedom of contract;
- Freedom of enterprise;
- Freedom to use one's property;
- Un-Coordinated: A very remarkable feature of capitalism is its un-coordinated nature. There is no direction or central rules of financial movement. All appears to go on mechanically. The consumer is the king. It is consumers' preferences which finally decide what should be produced and what should not be produced.
- Importance of the Price System: All the central decisions of the economy like what to produce and how much to produce are arrived at through the price mechanism. In this way, the system works automatically without any central direction or control. This is why capitalist system has been described as "government by price."
- Dominant Role of the Entrepreneur: A prominent feature of capitalism is the entrepreneur. The whole industrious machinery of the nation is under his guidance. It is he who employs the supplementary features of production and agrees to disburse them.
- Control Goes with Risk: We also notice another feature of capitalism the control of business goes with risk. This has been recognized as the Golden Rule of Capitalism.
- Competitive Market Economy: Competition is the most important feature of the capitalist economy. 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.
- Economic Inequalities: Still another feature of capitalist societies is the existence of clear inequalities in income, wealth and economic power. Through the institution of private property and inheritance these inequalities tend to get accentuated.
Advantage of Capitalism
Decreased Government Interference:
Capitalism requires governments to have a minimalist approach towards interfering with and regulating business. Companies that have fewer burdensome regulations have distinct advantages over companies that are held hostage by endless government rules and bureaucratic red tape.
Private Sector Ownership of Goods:
The private ownership of goods is a major ideology of capitalism that benefits businesses. Private sector ownership of assets is important, as it allows companies to accumulate wealth.
Division of Labor:
The division of labor refers to the specialization of labor in a capitalist system and was expounded upon in great detail in Adam Smith's "The Wealth of Nations." Each worker has a specific task in which he specializes. Another worker specializes in another task.
Increased Competition:
Competition is a natural benefit and consequence of capitalism. While some may think of increased competition as a disadvantage of the system, it is advantageous because increased competition produces increased quality and decreased prices to the consumer.