Capitalism is a type of economic system where business is privately owned and run by the people, rather than by the government. This is different from a command economy like communism where the government controls business.
Free Market
Another name for dis economic system is the free-market system. The “free” in free market system means that the market is free to work itself out without government intervention. Businesses can decide what products to make and how much to sell them for. People can decide what products to buy and how much they want to pay.
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Supply and Demand
One of the basic ideas of capitalism is the idea of supply and demand. Supply and demand says that the price of a product will eventually settle at a point where the demand for a product will equal the supply of a product. This way the market will find the perfect price and volume of a product. This is different from a command economy where the government might set the price and volume of a product.
Adam Smith
The idea of the free-market system was first introduced by Scottish economist Adam Smith in 1776. He wrote a book called The Wealth of Nations that described how a free-market economy would work. He said that government should stay out of the economy and let pure competition determine pricing and products.
Modern Capitalism
Modern capitalism is somewhat different than what Adam Smith described. Today, many countries have a capitalist economy, but the government takes an active role in stabilizing the economy and providing regulations to protect the public. This type of economy is called a mixed economy.
The United States is considered a capitalist economy. However, the government has all sorts of laws to monitor businesses and the economy. There are the law against monopolies, regulations to make workplaces safe, anti-discrimination laws, regulations to protect the environment, taxes to redistribute wealth, and Social Security to help the elderly. Although much of the economy is run on capitalism, the government is very much involved.
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Pros of Capitalism
- Efficiency – Capitalism forces companies to compete for business. This competition makes companies be more efficient.
- Freedom – People and companies are free to do what they want in a capitalist economy. Governments in a capitalist economy have less control and less power. This leads to greater political freedom.
- Innovation – In a capitalist economy, people and companies are rewarded for innovation. This leads to greater technological advances.
- Economic Growth – Capitalism leads to economic growth and a higher standard of living.
Cons
- Social inequality – Capitalism can lead to an unfair distribution of wealth with a few people holding a significant amount of the money.
- Monopolies – Capitalism can create powerful monopolies where one company can control pricing and supply without government intervention.
- Bad labor conditions – Capitalism can lead to unsafe work conditions and unfair wages for the working class.
A mixed system of capitalism with some government intervention can enable economic growth, freedom, innovation, and efficiency. Government intervention is needed to prevent monopolies, social inequality, and poor labor conditions.
Interesting Facts
- Most countries in the world today have a mixed form of capitalism with varying degrees of government regulation. There are really no countries that are purely capitalist.
- Although China has a communist government, much of their economy today is based on capitalism.
- According to the Heritage Foundation’s 2014 Index of Economic Freedom, the most capitalist country in the world is Hong Kong followed by Singapore and Australia. The United States ranks 12th.
- An important characteristic of capitalism is private property.
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