Capitalism is an economic system in which the economy which consists of factors such as businesses, resources, capital goods, and labor, etc. is owned by private entities, and the income of these entities 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.
- Economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others. are owned by private entities and shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares..
- Shareholders are the owners of the entities and the number of shares decides their ownership upon the entity.
- The main motive under capitalism is to maximize shareholders’ wealth.
- Capitalism works upon the law of supply and demand. If the demand for goods increases in comparison to supply then prices of those goods also increase.
- Government control is less in the capitalized economy. The government intervenes only to ensure level playing field and to ensure completion among industries is fair.
Examples of Capitalism
There are many economies and countries in the world which are capitalist. Below are some examples of capitalist economies –
- New Zealand
- United Kingdom
- United States
- Hong Kong
- United Arab Emirates
Pillars of Capitalism-
- Private Property – People can own private properties such as lands, houses, etc. in the capitalized economy.
- Self-Interest – The main motive of capitalism is to maximize profit and thus people works on self-interest.
- Competition – Each firm in the capitalized economy tries to maximize its profit. So there is cut-throat competition in this kind of economy.
- Supply-Demand Market – Capitalism works on supply and demand. If the demand for a particular item increases, then the price also increases.
- Government Role – Government role is minimum on the private firms in the capitalized economy. They intervene to prevent monopoly advantage and ensure fair completion among the firms.
- Consumers Choice – Many private firms exist in the capitalized economy because of the free market. That’s why consumers have many choices for consumption and investment.
- Consumers can find the best products at the best prices because of the various choices available due to the free market.
- Since profit is the main motive hence more innovation happens in the capitalized economy because of more freedom.
- Capitalism encourages people to work harder and hence gain maximum profit.
- Low process time because of less government intervention.
- There is a high level of inequalities between the upper class and the lower class in capitalism.
- Since the upper class has more power, they can use this power to rig the system.
- In some cases, existing businesses use their powers to create more barriers to entry for new corporations.
- The natural resource depletion rate is higher because of lower government intervention.
- Because of the high gap between low and high class, there can be dissatisfaction in the lower class.
- The risk of unemployment is higher in the capitalist economy at the time of recession.
Capitalism advocates the freedom of the economy outside the government’s hands. Private players are having more control over resources than the state. Thus there is a high degree of competition among these players. States and governments in the capitalist economy need to review the fair play in the competition to ensure smooth functioning.
This has been a guide to Capitalism and its definition. Here we discuss characteristics, pillars, examples of capitalism along with advantages and disadvantages. You may refer to the following articles to learn more about finance –