Capitalism is an economic system that focuses on the free market to determine the most efficient allocation of resources and sets prices according to supply and demand.
Socialism is often presented as the opposite of capitalism, where there is no free market and the allocation of resources is determined by a central body.
Capitalism has many unique features, some of which include a two-class system, private ownership, profit motive, minimal government intervention, and competition.
What are the Characteristics of a Capitalist Economy?
Nations around the world use several different economic systems; socialism and capitalism. Capitalism is often called a free market economy in its purest form. A common type of socialism is communism.
These economic systems are embedded with political and social elements that affect the degree of purity of each system. In other words, many capitalist nations have intertwined elements of socialism. Thus, while there are varying degrees or levels of adherence to the ideals of capitalism, there are several features common to all capitalist economies.
The Two-Class System
Historically, capitalist society has been characterized by a split between two classes of individuals: the capitalist class (owners) who owns the means to produce and distribute goods, and their labor. working class who sell to the capitalist class for wages.
The economy is managed by individuals (or companies) who own and operate companies and make decisions regarding the use of resources. However, there is a ‘division of labor’ that typically arises through education and training, allowing for specialization that further subdivides the two-class system (for example, the middle class).
Private property
Estimating more than the two-class system in which one class owns the means of production is private property. In capitalist economies, there is a private sector that owns property, plant and equipment. Production owners decide how to run their business, how much to produce, and how many people to hire.
Nationalization is the transfer of private property to state ownership, that’s what happened in Russia after the Soviet Union. Conversely, when the Soviet Union collapsed, privatization took place, the transfer of business and industry from state ownership to private ownership.
This is in stark contrast to socialist economies where there is no private property. The government controls all means of production and determines through central planning how much is produced and how all resources are allocated.
Snow Pattern
Companies exist to make a profit. For all companies, the goal is to make and sell goods and services for profit only. Companies don’t just exist to meet people’s needs. While some goods or services meet needs, they will only be available if people have the resources to pay them and provide a benefit to the producer.
The profit motive leads to the accumulation of wealth and is the main factor enabling individuals to work and innovate. This innovation advances society through the introduction of new technologies and cheaper goods.
Minimum Government Intervention
Capitalist societies believe that markets should be left alone to function without government intervention , this idea is known as laissez-faire. True capitalists believe that the free market will always create the right amount of supply to meet demand and all prices will be adjusted accordingly.
Free market capitalists also believe that any government intervention, for example, through regulations or labor laws, hinders the efficiency of a free market economy and leads to inefficiencies that harm both society and the economy.
However, a capitalist society completely independent of government exists only in theory. Even in the United States, which is the poster child for capitalism, the government regulates certain industries for financial institutions, such as the Dodd-Frank Act.
By contrast, a purely capitalist society would allow markets to set prices based on supply and demand for the sole purpose of making profits, without much consideration of working class status or other negative externalities.
Competition
True capitalism needs a competitive market. There are monopolies without competition, and instead of the market setting the prices of goods and services, the seller is the price setter, which is against the conditions of capitalism.
Competition drives companies to strive to be better than their competitors so that they can gain a larger market share for the given product or service, increasing their profits, often leading to innovation to stand out from the competition. As discussed earlier, this innovation advances society in terms of technology and thought. Competition is also beneficial for consumers as businesses try to make themselves more attractive compared to their competitors, resulting in lower prices.
Capitalism in its purest form is a society in which the market sets prices for the sole purpose of profit. Any inefficiency or interference that reduces profit making will be eliminated by the market. In a capitalist economy, individuals have the right to choose their desired occupation and own property, facilities and equipment to start a business. They are allowed to run the business as they see fit, while competition with other businesses leads to lower prices and innovation.
