Capitalism: the Definition and Theory explained
Capitalism: This article explains capitalism in a practical way. The article contains the definition and meaning of capitalism, its origins and an explanation of the rule of supply and demand. Enjoy reading!
What is Capitalism?
Capitalism is an economic system in which individuals (citizens or corporations) own and manage capital assets. The production of goods and services is based on the supply and demand of the entire market, rather than production based on central planning. This is also known as a market economy.
Other central features of capitalism are: private property, capital accumulation, property rights, wage labor and exchange.
Definition
Capitalism is an economic system in which capital and goods are controlled and managed by individuals, rather than the government, with the aim of making profit.
Meaning of Capitalism
Currently there is no country on earth that operates a purely capitalist system. In every country there is some form of government intervention and meddling in the market, including government control over the prices of certain goods or services.
The purest form of capitalism is free market economics, or laissez-faire capitalism. There is no economic frontier or limit in this system and individuals are basically uninhibited. They can decide where to invest and how much, what to produce and sell and at what prices.
This laissez-faire market has no control.
Origin of capitalism
Capitalist societies, or societies that operated a capitalist economic system, have existed in many times, places and cultures. Today’s modern capitalist societies developed mainly in Western Europe in a process that eventually led to several industrial revolutions.
This type of economic landscape has since become dominant in the Western world and continues to expand. However, there is a difference between these ‘management styles’ when it comes to the degree of government involvement. More on this later.
Strong economic growth, and with that social growth, is a characteristic of systems that switch to a capitalist system.
Father of modern capitalism
The man known as the father of capitalism, or the father of economics, is Adam Smith. In 1776 Smith published the Wealth of Nations. In it he described an industrialized capitalist system that would end mercantilism, which believed that wealth was finite and fixed.
Smith previously wrote The Theory of Moral Sentiments, in which he proposed the idea of the invisible hand. He argued that free markets tend to self-regulate through competition, self-interest, and supply and demand.
Smith is also known for the concept of Gross Domestic Product (GDP) and for his vision on compensating wage differences. According to Smith, dangerous or unwanted jobs often pay better wages to attract workers.
Supply and demand in pure capitalism
In a capitalist system, supply and demand are a model for pricing. In a perfectly competitive market, the unit price of a product will settle at the level where the quantity demanded by consumers will be equal to the quantity of products supplied by producers. This results in a balance of price and volume.
The basic laws of supply and demand are as follows:
- If demand increases while supply remains the same, there will be a shortage leading to a higher equilibrium price.
- If the demand decreases while the supply remains the same, then there will be a surplus which causes prices to fall.
- If demand remains unchanged and supply rises, a lower equilibrium price will arise.
- If demand remains the same and supply falls, the equilibrium price will rise.
The above demand chart, shown as a curve (line), represents the amount of products that consumers are willing to buy at different prices. Stable determinants are then assumed such as income, taste, preferences, price of substitute goods, price of complementary goods, etc.
Capitalism vs Communism
The communist socio-economic system is in many aspects diametrically opposed to the capitalist socio-economic system. The two perspectives represent two opposite ways of thinking. Where capitalism is highly individualistic, communism puts the interests of society first.
Societies and nations that adhered to these forms regularly clashed with each other, for example in the Second World War. It caused extreme polarization worldwide.
The main differences between capitalism and communism are described below.
Ownership of resources
The main difference between communism and capitalism is who owns product means or resources.
In communist systems, the state owns all vital resources and means of production.
The state means the entire community. All land and resources that contribute to any production process then belong to everyone. At least, that’s what people are told. In reality, they will experience little of this possession.
The same applies to decision-making regarding these means of production. All decisions are ideally made by the entire community, through democratic techniques. Wages will also be the same for everyone. All decisions made should contribute to what is good for the community.
On the other side is capitalism. Capitalists believe in private ownership of land, resources and means of production. Each person will have to create value for themselves.
If profit is made, the greater part of it goes to the person who owns the means of production. Workers get a small share of this and are responsible for running a business. Everyone will get what he or she deserves in value.
The people who have the resources, or those who are worth so much that they have climbed the hierarchy of an organizational structure, are also the ones who make the most important choices.
Individual freedom
Another important difference between communism and capitalism is the individual freedom that people have in these systems. Here, too, there are opposing views between the two extreme perspectives.
Communism requires the inhabitants of a country to put society and the interests of society above individual interests. Capitalism puts individual interest above common interest.
In fact, this is about individualism versus social well-being. Capitalism attaches more importance to the aspirations and ambitions of individuals. The inherent selfish nature of people is the result of the instinct of self-preservation and capitalism builds on that.
Communism appeals to the social side of people. People are supposed to think about others rather than themselves. This is a noble thought that appeals to many people.
Both views are again extreme perspectives. Both have advantages and disadvantages, and history has shown that a 100% fair system that takes care of everyone is not feasible.
Construction society
Another major difference between communism and capitalism is the way society is constructed. Communism mainly advocates an egalitarian society without classes. Preferably there are no differences in religion, race, class or nationality. That way, according to idealists, there would be no reason to fight or argue.
On the contrary, capitalism promotes the establishment of classes and class distinctions. In the system of capitalism, especially the rich get even richer. Although it is assumed that the poor are getting poorer, in many cases this is a misconception and there is no guarantee that the poor will get better in a communist system. The free market and the capitalist system ensure that companies and individuals can develop and continue to grow, something that ultimately can benefit society as a whole.
Marx capitalism
Karl Marx was a philosopher, social theorist and economist. He is best known for his views on capitalism and communism. Together with Friedrich Engels, he wrote and published The Communist Manifesto. Das Kapital was later published, in which he discussed the labor theory of value. The second and third parts of Das Kapital were released after his death.
Karl Marx condemned capitalism. He saw it as a system that alienates the masses from reality. According to him, workers produce everything needed in the system, but have no control or influence at all. People have to work for powerful capitalists who have complete control and power over the workplace. This, Marx pointed out, makes work a humiliation and very monotonous.
Moreover, the work could be taken over by robotic mechanisms that have nothing to do with human contact anymore.
Marx was convinced that capitalism blocks human ability to create a humane and fair society.
Key Points of Capitalism
Capitalism as a socio-economic system can be summarized in the following key points:
- Capitalism arose from other socio-economic systems such as mercantilism and feudalism. Industrialization dramatically increased the availability of mass consumer goods.
- Capitalism is characterized by private ownership and encourages investment for productive use of resources and capital.
- Pure capitalism does not exist and is in stark contrast to pure socialism, where all means of production and resources are owned by the government.
Now it’s your turn
What do you think? Do you recognize the explanation of capitalism? How did you get capitalism explained? What associations do you have upon hearing this topic? Do you think other political ideologies would be better? Do you have any tips or comments?
Share your experience and knowledge in the comments box below.
More information
- Albert, M. (2009). Capitalism against capitalism (Vol. 1). John Wiley & Sons.
- Greenfeld, L. (2009). The spirit of capitalism. Harvard University Press.
- Hodgson, G. M. (2015). Conceptualizing capitalism. University of Chicago Press.
- Paskhaver, A. (2021). Introduction to Political Science – with a Concentration on Political Ideologies. Retrieved 02/12/2024 from Udemy.
How to cite this article:
Janse, B. (2022). Capitalism. Retrieved [insert date] from Toolshero: https://www.toolshero.com/sociology/capitalism/
Original publication date: 03/07/2022 | Last update: 08/08/2024
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Ben Janse
Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.
