Capitalism Examples

Updated on January 19, 2024
Reviewed byDheeraj Vaidya, CFA, FRM

Capitalism Definition & Examples

Capitalism is an economic system in which factors of production such as capital goods, natural resources, labor, and entrepreneurship, are owned by private individuals or businesses. Capitalism requires that the government follow a laissez-faire policy that should not intervene in economic matters. In a capitalist market economy, investment and decision-making are ascertained by wealth-owners.

Capitalism example

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Capitalism involves the free operation of capital markets where the laws of demand and supply set the prices of bondsPrices Of BondsThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more, stocks, currency, and commodities. This article will discuss some natural capitalism examples among other types to understand it in depth. The world, in general, has moved in the direction of capitalism in the last few decades.

Key Takeaways

  1. A capitalist economy is a country’s economic structure where private individuals and businesses own all entrepreneurship, resources, trade, and ownership. 
  2. In the US, big corporations like Apple, Microsoft, and Google are owned by private individuals and, thus, have unleashed productivity in many industries.
  3. Capitalism leads to creative destruction, such as in the case of the photography company, Kodak. People now want better technology, and thus, a company like Kodak couldn’t survive. A similar situation happened with landline phones fading away in the ushering of wireless phones. 
  4. Capitalism has generated a capital market, bringing enormous wealth to the nation of the United States and vibrant stock markets.

Capitalism Explained

Capitalism is an economic and social system characterized by private ownership of the means of production and the pursuit of profit through competitive markets. In a capitalist system, individuals, rather than the government, control and manage businesses and resources. This framework encourages entrepreneurship, innovation, and investment, aiming to create wealth and economic growth.

Central to capitalism is the principle of supply and demand, where prices are determined by market forces. Businesses compete to offer goods and services that consumers want, leading to efficiency and improved quality. Social capitalism examples foster a decentralized decision-making process, allowing for a diverse range of products, services, and ideas.

Capitalism is most prominent in our current global economic system in aspects where individuals privately own the production, and the government has limited interference. Capitalism has given people liberty and the incentive to be more productive.

On the other hand, it has several drawbacks like creating monopolies, eradicating poverty, income inequalityIncome InequalityIncome inequality refers to the crucial imbalance of income dispersal across the population.read more, market instability, etc. Many critics point out that this system does not have a heart. However, the problems of capitalism can be overcome by a balanced approach.Individuals in a capitalist system have the freedom to make economic choices, whether it’s buying, selling, investing, or starting a business. This economic freedom, however, can lead to income inequality as those with more resources can accumulate greater wealth.

While capitalism has driven remarkable economic development and technological progress, it also faces criticism. Concerns include unequal distribution of wealth, environmental degradation, and potential market failures.

Examples

Now that we understand the basics of natural capitalism examples and other such types, let us apply the knowledge into practical application through the detailed discussion below.

Example #1

The United States of America is one of the only major countries to follow capitalism. Innovation led by capitalism has been one of the major reasons the US has global corporations like Apple, Microsoft, Amazon, Google, and Facebook.

The US Federal government does not own these corporations. Capitalism has unleashed productive energy in the people of the country, playing a crucial role in the US being recognized as a superpower.

Some important legal provisions in the US Constitution enable capitalism in the US. Private property is protected as unreasonable government searches and seizures are prohibited. Certain sections in the constitution protect freedom of choice and free enterpriseFree EnterpriseFree enterprise in economics refers to the private sector that operates at will without government interference.read more. Innovation is protected through stringent copyright laws. States are prohibited from taxing each other’s production. Ownership of private property is also protected.

The renowned chief investor of Berkshire Hathaway, Warren Buffet, had mentioned to the investors in a meeting that he is a card-carrying capitalist. He thinks the US has done an incredible job deploying resources and human ingenuity. However, Warren Buffett warned that capitalism could not be left unchecked.

Example #2

Under examples of capitalism, inefficient work methods are not protected through government intervention but can die naturally. This process is known as creative destruction. Creative destruction involves conventional institutions giving way to newer, better, and more efficient practices and organizations. Capitalism inherently rewards innovation.

One of the examples of creative destruction is the fall of the photography company Eastman Kodak. Kodak cameras were replaced by far better technologies involving digital cameras and smartphones. In a socialistic environment, an organization like Kodak wouldn’t have died, and incidentally, society would be compelled to follow older ways of taking photographs. However, capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more recognizes the futility of saving businesses running on old technology that hampers the development of newer and better technologies.

A new incumbent doesn’t need to destroy an older company in the process of creative destruction. For example, an organization like HDFC bank itself brought in digital banking instead of going to the branch to get banking transactions done. Another example of creative destruction is mobile phones’ wireless technology replacing older landline technology.

Thus, capitalism through creative destruction enables the ushering of newer technology, which improves people’s lives and standard of living.

Example #3

Up to 1991, India’s policies were more socialistic. But, the 1991 reforms started tilting India in favor of capitalism. Today, India is not capitalistic, but its policies are.

Before 1991, India followed the license-permit raj, where too many licenses and permits were required for doing business. Red tapes accompanied this. Since 1991, the number of licenses and permits required has been progressively brought down in line with capitalistic thinking. As a result, tariffsTariffsA tariff is levied by a government on the import of goods or services from another country. The charges increase government revenue, restrict trade with other countries, and protect domestic manufacturers from stiff competition.read more and government intervention have been reduced, and there is automatic approval of foreign direct investments (FDI) in many sectors. Many public monopolies have also ended.

These measures have led to huge economic growth and development. A significant increase in FDIFDIA foreign direct investment (FDI) is made by an individual or an organization, into a business located in a foreign country. The host nation receives job creation prospects, advanced technology, a higher standard of living, infrastructural development, and overall economic growth.read more has accompanied these capitalistic policies. As a result, India now has global corporations like Infosys, TCS, and HCL Technologies. Low government intervention in the software sector, which is one of the characteristics of capitalism, is to be credited for the rise of these software giants.

Each nation strives to adapt to democracy and capitalism to discover the apt combination of market competition, political pluralism, participation, and welfare. Over the years, the Indian capital market has developed and has opened doors for more investment opportunities, thereby attracting foreign investmentForeign InvestmentForeign investment refers to domestic companies investing in foreign companies in order to gain a stake and actively participate in the day-to-day operations of the business, as well as for essential strategic expansion. For example, if an American company invests in an Indian company, it will be considered a foreign investment.read more. Competition has ultimately forced Indian companies to produce good quality products and upgrade their technical skills.

Example #4

One of the examples of capitalism has been the creation of mega-corporations owned by a set of private individuals and institutions. Minimal government intervention and protection of private property rights have enabled the creation of humongous companies. Another result of capitalism is the development of capital marketsDevelopment Of Capital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more in well-known companies such as Alphabet, Apple, Facebook, Berkshire Hathaway, and JP Morgan Chase are examples of mega US corporations. In addition, Alibaba and Tencent are major Chinese corporations.

Capitalism has resulted in vibrant stock markets where stocks are freely traded worldwide. As a result, capitalism has resulted in a huge surge in global wealth. The world has a wealth of USD 317 trillion as per Global Wealth Report 2018 published by Credit Suisse.

Capitalism Vs Socialism

Here are the differences between capitalism and socialism that shall help us understand the differences in their fundamentals and implications.

Capitalism

  • Private Ownership: Capitalism emphasizes private ownership of resources, industries, and businesses.
  • Market-driven: The economy is guided by market forces, where supply and demand determine prices and resource allocation.
  • Competition: Competition among businesses fosters innovation, efficiency, and economic growth.
  • Profit Motive: The pursuit of profit drives entrepreneurial activities and investment decisions.
  • Limited Government Intervention: The government’s role is generally minimal, with fewer regulations on business operations.
  • Income Inequality: Capitalism can lead to varying levels of income inequality due to differential access to resources and opportunities.
  • Individual Freedom: Capitalism promotes individual economic freedom and autonomy.
  • Consumer Choice: Consumers have a wide range of choices in products and services.

Socialism

  • Collective Ownership: Socialism advocates for collective or state ownership of key industries, resources, and means of production.
  • Central Planning: The economy is often planned and directed by the government to achieve equitable distribution of resources.
  • Equality Emphasis: Socialism aims to reduce income inequality and provide essential services to all citizens.
  • Social Welfare: The government plays a significant role in providing social services such as healthcare, education, and housing.
  • Public Interest: The goal is to prioritize the welfare of the entire society over individual profits.
  • Reduced Income Inequality: Socialism seeks to address income disparities by redistributing wealth.
  • Limited Private Ownership: Private ownership exists but is often restricted, particularly in strategic sectors.
  • Collective Decision-Making: Economic decisions are often made collectively, reflecting societal needs and goals.

Frequently Asked Questions (FAQs)

Was the US founded on capitalism? Why?

The US has been founded on capitalism and free enterprise since the origins of markets and the subsequent history. Since the Great War, the US has been a powerhouse of capitalism.

How is capitalism deciphered today?

Businesses are motivated to operate as efficiently as possible by competition and capital accumulation, which enables investors to profit from that expansion and customers to enjoy cheaper pricing on a greater variety of goods.

What are the different types of capitalism?

The four types of capitalism include laissez-faire or free-market capitalism, anarcho-capitalism, state capitalism, and welfare capitalism.

Is capitalism good or bad for the poor population of a nation?

Capitalism gives the underprivileged a sense of dignity by assuming their agency. In addition, capitalism gives the underprivileged a way to enhance their well-being by reaffirming that everyone has a right to their labor, regardless of where they fall on the economic scale.

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