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Main Dictionary C

Capitalism

Capitalism is a way an economic system is organized and controlled, the key characteristics of which are that a person or a business is able to own the factors and assets of production and operate them for profit. Another important aspect of capitalism is that production and markets operate freely based on the prices and conditions demanded and set by competing in a free market.

Capitalism and government

A type of relationship between government and production is a fundamental feature in defining the economic system of a given country or region.

The opposite of capitalism is an economic system of socialism where all capital goods are owned by the society or the government, and the production and distribution are fully controlled and planned by the government. While capitalism in its purest form suggests no control by authorities, the owners of the capital goods are not restricted by anything, and they decide freely what and how they want to produce, where they want to invest, what prices they set. In theory, such a system of capitalism, also called a laissez-faire capitalism, would operate without any sort of reporting to anyone. But a pure capitalism with a total lack of government involvement doesn’t actually exist, and most capitalist economies of the world are still regulated by governments on some levels.

Since that uncontrolled ownership and use of goods and production might lead to social problems, governments have to put limits on these aspects of capitalism. Most modern economics are partially restricted by such means as taxes, laws controlling employment and wages, antitrust measures, etc. Additionally, some specific spheres of industry, especially profitable or essential for a welfare (for example, oil and gas extraction and production) are often fully or partially owned by governments in order to control and distribute their goods. So, in reality, economic systems of different countries are usually mixed, combining features of capitalism and socialism with some regional characteristics.

Private ownership of properties and its role for capitalism

The right to own property is essential for capitalism, because it provides individuals with the possibility to gain maximum profit from any possible source. If the goods are owned by everyone, a number of problems appear, such as uncontrolled and sometimes irrational use or waste of resources while private ownership gives the owner a possibility to put the resource to a profitable use or sell it to another individual while receiving profit. Capitalism enables an individual to use properties more efficiently by providing the ability to fully plan and control the use of resources, its possible outcomes, gains and losses.

Capitalism as a system is not only about having the right to own property, it also provides mechanisms of protecting these property rights and relies on a legal basis such as laws, contracts and other possible ways to exercise the rights. 

The key mechanism of capitalism

Private ownership of goods is important, but it’s not enough for a full and sufficient description of capitalism. Capitalistic society also functions on the ground of a free market where participants are able to choose, but at the same time they have to take each other into consideration. The main principle of capitalism is that everyone’s goal is to gain as much as possible, so the consumers and buyers demand the best quality at the lowest price, the owners of resources and sellers offer the highest acceptable price with minimum losses, and all economic activities are driven by voluntary exchange. Trying to meet each other's interests, the parties balance the prices, maintain efficient production and distribution and satisfy the society’s need for goods. 

The history of capitalism

Though some separate phenomena similar to capitalist attributes have been occasionally popping up in societies since the ancient time, capitalism as a system started to evolve only in the 16th century. The appearance of capitalism was determined by several factors:

  • expanding importance of cities and towns and increase of their population;
  • growth of trade between those cities and regions;
  • emergence and fast development of factories and industries;
  • start of an efficient use of accumulated capital by individuals and parties.

Feudalism as a system based on military hierarchy and agriculture was gradually replaced by mercantilism with the growing importance of trade and markets. Other factors including colonialism and increasing amount of gold and silver being delivered to Europe also affected the economic system, as well as a rapid evolution of technology and industrial sphere in Great Britain in the 18th century. All these elements combined together resulted in a natural change in society, with people gaining access to new goods and ways of profiting, rising standards of living and an overall rearrangement of the economic system. Alongside the rise of the industrial sphere, a dramatic change in the financial field occurred as well. Bank operations, investments and trading were made available to a wide range of individuals and businesses, and by the 20th century this aspect of capitalism became one of the most important.

The disadvantages of capitalism

Nowadays capitalism is believed to be one of the most sufficient and stable economic systems, though alongside its benefits there are a number of disadvantages closely connected with the key attributes of capitalism. The main points of criticism revolve around the following things:

  • fairness and equality;
  • profitability;
  • employment.

Capitalism as a system based on a principle of gaining as much as possible in a competition doesn't take into consideration those who miss competitive skills and possibilities, so inequality is one of the problems in capitalist society. While inequality might serve as a driving force of development, at the same time a lot of individuals with a lesser access to basic goods aren’t able to use their potential skills as sufficiently as those who have better social conditions.

Another point of criticism is that capitalist ways of using resources often dismiss consequences of the excessive production and heavy industry, for example air and water pollution, climate change and unsafe working environment for employees. Capitalism is focused on producing more goods, faster, cheaper and more accessible, ignoring the possible decrease in the quality of life in the future.

Employment problems are also frequently criticized when discussing capitalism, because the main capitalist objective to profit often exclude workers’ welfare and might lead to abuse, mass unemployment during recession times and insufficient support of those who aren’t able to work.

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