Capitalism is an economic and social system based on the fact that the means of production must be privately owned, the market serves as a mechanism to allocate scarce resources efficiently, and capital serves as a source to generate wealth. For conceptual purposes, it is the socio-economic position contrary to socialism.
A capitalist system is based mainly on the fact that the ownership of productive resources is private. That is, they must belong to the people and not an organization such as the State. Since the objective of the economy is to study the best way to satisfy human needs with the limited resources that we have, capitalism considers that the market is the best mechanism to carry it out. For this reason, he believes it is necessary to promote private property and competition.
The fundamental factors of production are labor and capital. Capitalism proposes that work be provided in exchange for money wages and must be freely accepted by employees. Economic activity is organized in such a way that the people who organize the means of production can make an economic profit and increase their capital. Goods and services are distributed through market mechanisms, promoting competition between companies. Increasing capital, through investment, helps to generate wealth. If individuals pursue economic gain and market competition, wealth will increase. And with increasing wealth, available resources will increase.
Capitalism and socialism
Capitalist economies are mainly characterized by the fact that companies and individuals produce and exchange goods and services in the market through economic transactions through certain prices. In this way, it can be pointed out that it is the individual who, through business or financial organizations, takes the economic initiative and makes decisions.
The system opposed in terms of private property to capitalism is socialism, which basically defends the concept of social property of the elements of production or of goods. In this way, as a result of the defense of private property, the rest of capitalist characteristics emerge: defense of own and individual interests, price systems and the existence of competition in the market.
Over the years, socialist positions have evolved from their more classical premises to a more open and accepting of free trade. Under certain basic premises such as the control of governments in the economic and financial sphere and the protection of the citizen to avoid situations of inequality or social abuse. These are mixed economic systems known as market socialism or social democracy.
Origin of capitalism
Other names by which capitalism has been called from its origin are "free market economy" or "free economy."
Although both merchants and commerce have existed since the first civilizations arose, the capitalist system did not appear until the 13th century in Europe. Capitalism was the economic system that replaced feudalism in much of the world. Before capitalism, work was an obligation that derived from ties of lordly servitude, from slavery or as a socio-moral obligation of oneself towards their community. Capitalism arose to propose work in exchange for capital (wages), instead of servitude or slavery, hence its name.
See the full article on the origin of capitalism.
History of capitalism
The ideas of capitalism, which began in the 13th century as we have already mentioned, displaced those that predominated in the Middle Ages. Later, they were reinforced by the process of colonization of the American continent by the European powers from the 15th century. This, due to the commercial exchange that was generated between the metropolises and their colonies in the new continent.
Later, in the 18th century, the contribution of Adam Smith was relevant, who published "The Wealth of Nations" where he defended the principles of the free market. Smith could be considered the creator of capitalism, although this is debatable.
Using the metaphor of "the invisible hand", Smith argued that a society would achieve greater well-being if the state allows the market to function by itself, through the law of supply and demand. In this way, the Scottish thinker assured, if each person pursues his own benefit, the community as a whole will also reach the best possible situation.
The ideas of capitalism were further underpinned by the Renaissance and the Enlightenment, which displaced the system known as the Old Regime and gave rise to modern states.
Capitalism was later questioned by one of the most emblematic thinkers of the 19th century, Karl Marx, who argued that the capitalist system favored the exploitation of a group of the population, the proletariat, by the owners of the means of production, the capitalists. In this way, a current of socialist thought was born that was taken to the extreme with the communist system of the Union of Soviet Socialist Republics (USSR) in the 20th century. However, the model he proposed, of a totally centralized economy from the State, did not obtain the expected results.
In this context, there was a very important turning point in history, the fall of the Berlin Wall in 1989, which in a certain way meant the victory of economic freedom over the communist model. However, capitalism had to admit the intervention of the State in certain aspects or sectors such as education and health.
It should be noted that in each economic crisis (such as the 2008 subprime or the Great Confinement due to the coronavirus pandemic) the capitalist system is questioned, and economists are proposing new measures to ensure that the benefits of the free market can reach all (or almost the entire) population. But it is a debate that will continue, and on which it seems there will never be a unanimous agreement.
Characteristics of capitalism
The basic principles of capitalism are:
- Defense of individual rights : Private ownership of capital and productive means.
- Freedom of company : Through which it is possible to carry out business projects or put an end to them.
- Competitive market : Which means that the exchange price is given by the interaction of supply and demand with the least possible interference from the State.
- In this market with multiple options and product alternatives from which individuals have the possibility to choose. In it, the demand and supply decisions that give rise to equilibria and prices are shaped.
According to these bases, the members of the economic spectrum operate according to the pursuit of their own interest and the maximization of their benefits, accumulating and using capital for it. Alternatively, workers who participate in the system by contributing labor receive in exchange a salary or other types of remuneration that satisfy their utility and allow them to obtain the goods or services they require.
The role of the state in capitalism
The main task of government under capitalism is to control market failures. In addition, it must prevent the system from leading to abusive situations and must encourage competition. Under this concept there are different types of derivative systems, such as monopoly capitalism, financial capitalism or neo-capitalism.
In this sense, the scarce presence and influence of political power in the market stands out especially, since it allows owners or entrepreneurs to operate with a high degree of freedom and independence to obtain benefits. With these, employers achieve reinvestment in companies and payment to workers. At the same time, it supposes the reduction of power that the state has in the day-to-day financial and business. Giving, in this way, greater weight to private agents and taking care of the supervision of the markets.
Proponents of the privatization of the means of production often argue that private enterprise is generally a better manager of control and direction than the state. To which, the bureaucracy or its many responsibilities prevent them from carrying out this task efficiently. In addition to the fact that when a company is public, it is the citizens who bear the possible losses resulting from better management. On the other hand, when it is private, it is the company itself that assumes all the risk.
Liberals argue that in a market where there is competition, companies are capable of improving products and services, changing the cost structure to be able to offer more quality at lower prices. Reducing the role of the state and its interference in the markets is one of the foundations of capitalism and the more recent Western economy.
Examples of capitalism
Some examples of capitalism can be:
- The United States is the country that is most identified with capitalism, this particularly stood out during the Cold War era, when it was characterized by being an antagonist of the USSR where a communist system was implanted.
- Another type of capitalism is that applied by China, which has opted for a trade openness, despite having, politically, a single party system.
- Capitalism can be considered, in the microeconomic sphere, to a market where the State does not intervene to dictate to the companies a price and a quantity of production.