Capitalism Definition & Examples
Capitalism is an economic system in which factors of production which include capital goods, natural resources, labor, and entrepreneurship are owned by private individuals or businesses. Capitalism requires that the government follows a laissez-faire policy where it should not intervene in economic matters. In a capitalist market economy, investment and decision-making are ascertained by every owner of wealth. 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., stocks, currency, and commodities. In this article, we will discuss some examples of capitalism to understand it in depth.
Examples of Capitalism
The following are examples of capitalism
Capitalism Example #1
The United States of America is one of the foremost major countries to follow capitalism. Innovation led by capitalism has been one of the major reasons why the US has global corporations like Apple, Microsoft, Amazon, Google, and Facebook.
The US Federal government does not own corporations. Capitalism has unleashed productive energy in the people of the country. This has played a crucial role in the US is recognized as a superpower. This has led to a higher quantity of wealth and prosperity in the US.
There are some important legal provisions in the US Constitution that enable capitalism in the US. Private property is protected as unreasonable government searches and seizures are prohibited. Certain sections in the Constitution protect freedom and choice and free enterprise. 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 investor and Berkshire Hathaway chief Warren Buffet had mentioned to the investors in a meeting that he is a card-carrying capitalist. He is of the opinion that the US has done an incredible job in terms of the deployment of resources and human ingenuity. However, Warren Buffett warned that capitalism cannot be left unchecked.
Capitalism Example #2
Under examples of capitalism, inefficient ways of doing work are not protected through government intervention but are allowed to die naturally. This process is known as creative destruction. Creative destruction involves the older ways of thinking and old 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 camera was replaced by far better technology involving digital cameras and smartphones. In a socialistic environment, an organization like Kodak would not be allowed to die in order to save jobs. Thus, the society would be compelled to follow older ways of taking photographs but 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. recognizes the futility of saving businesses running on old technology that hampers the development of newer and better technologies.
It is not necessary that a new incumbent destroys an older company in the process of creative destruction. An older company can also reinvent itself. An organization like HDFC Bank itself brought in digital banking as opposed to an older way of banking, which involved going to the branch to get banking transactions done. Another example of creative destruction is the wireless technology of mobile phones replacing older technology of landlines.
Thus, capitalism through creative destruction enables the ushering of newer technology which improves the lives and standard of living of people.
Capitalism Example #3
Up to 1991, India’s policies were more socialistic in nature. But, the 1991 reforms started the process of tilting India’s policies in favor of capitalism. Today, India is not a capitalistic country but its policies are more capitalistic in nature.
Prior to 1991, India followed the license-permit raj where too many licenses and permits were required for doing business. This was accompanied by red tapes. Since 1991, the number of licenses and permits required has been progressively brought down in line with capitalistic thinking. Tariffs and government intervention have been reduced and there is automatic approval of Foreign Direct Investment (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, or FDI, is a financial investment made by an individual or an organization in a business based in another country. In such investment, an organization or an individual owns a minimum of ten percent of the shares of a foreign firm. has accompanied these capitalistic policies. Today, India 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 is striving to adapt to democracy and capitalism in order 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 investment. Competition has ultimately forced Indian companies to produce good quality products and to upgrade their technical skills.
Capitalism Example #4
One of the examples of capitalism has been the creation of mega-corporations which are owned by a set of private individuals and institutions. Minimal government intervention and protection of private property rights has enabled the creation of humungous 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.. The well-known companies such as Alphabet, Apple, Facebook, Berkshire Hathaway, and JP Morgan Chase are examples of mega US corporations. Alibaba and Tencent are major Chinese corporations.
Capitalism has resulted in vibrant stock markets throughout the world where stocks are freely traded. 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.
The world, in general, has moved in the direction of capitalism in the last few decades. Capitalism is most prominent in our current global economic system in aspects where the means of production are privately owned by individuals and the government has limited interference. Capitalism has given people liberty and the incentive to be more productive. It has a number of problems like creating monopolies, low eradication of poverty, income inequalityIncome InequalityIncome Inequality is defined as an unequal distribution of income between the masses or a situation when a large proportion of total income is held by the small percentage of the population. It happens due to variation in sources of income, number of dependents, easier availability of resources, etc., 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.
This has been a guide to Capitalism & its Examples. Here we provide the definition along with the top 4 examples of capitalism along with detailed explanations. You may learn more about financing from the following articles –