What Is Capitalism?

Capitalism is an economic system in which private individuals or businesses own capital goods. The business owners (capitalists) employ workers (labor) who only receive wages. Labor does not own the means of production but only uses them on behalf of the owners of capital.

The production of goods and services under capitalism is based on supply and demand in the general market, known as a market economy.

Today, most countries practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries.

Understanding Capitalism

Economic planning under capitalism occurs via decentralized, competitive, and voluntary decisions.

Capitalism is essentially an economic system whereby the means of production (i.e., factories, tools, machines, raw materials, etc.) are organized by one or more business owners. Capitalists then hire workers to operate the means of production in return for wages. Workers do not have any claim on the means of production nor on the profits generated from their labor. These belong to the capitalists.

Capitalism depends on the enforcement of private property rights, which provide incentives for investment in and productive use of capital. The person who owns the property is entitled to any value associated with that property. Private property promotes efficiency by giving the owner of resources an incentive to maximize the value of their property. The more valuable the resource is, the more trading power it provides the owner.

Capitalism and the Profit Motive

The driving force of capitalism is the profit motive, or the desire to earn profits from business activity. Profits are closely associated with the concept of private property. By definition, an individual only enters into a voluntary exchange of private property when they believe the exchange benefits them. In such trades, each party gains some profit from the transaction. The profit motive creates a competitive environment. Businesses compete to be the low-cost producer of a certain good in order to gain market share. If it is more profitable to produce a different type of good, then a business is motivated to switch.

Capitalism dramatically expanded industrialization and the large-scale availability of mass-market consumer goods.

Source: Capitalism
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