What is Capitalism?

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What is capitalism? What is capitalism's essential nature? What is the role of government in a capitalist society?

Capitalism, if you are reading global newspapers, or watching well-known channels concerned with politics and economics, you will indubitably see this term. What does it mean? Why is it part and parcel in the news? What about its origins?

Capitalism is defined as an economic system in which private companies control a country's trade, industry, and profits, instead of by the people whose time and labor powers those companies. The United States and many other nations around the world are capitalist countries, but capitalism is not the only economic system available; throughout history, other countries have embraced other methods, like socialism or communism, so it's essential to explore what capitalism actually is.

The Origin Of Capitalism:

The origins of capitalism are complicated and stretch back to the 16th century when the British systems of power largely collapsed after the Black Death, a deadly plague that killed off up to 60% of Europe's entire population. A newly formed class of merchants began to trade with foreign countries, and this newfound demand for exports hurt local economies and began to dictate the overall production and pricing of goods. It also led to the spread of colonialism, slavery, and imperialism.

The death of feudalism — a hierarchical system often seen as oppressive that kept poor people bonded to their masters' land, which they farmed in exchange for a place to live and military protection — also left rural British peasants with no homes and no work, which eventually funneled them away from the countryside and into urban centers. These former farmworkers then had to sell their labor in a newly competitive work environment to survive, while the state worked in concert with the new capitalists to establish a maximum wage and "clamp down" on to exploit laborers. Read the basics of capitalism.

By the 18th century, England had converted into an industrial nation, and the dawn of the Industrial Revolution saw an explosion of manufacturing overtake the island. Within those smoky factories and flammable textile mills, our modern idea of capitalism — and the opposition to it — began to flourish fully. In 1776, Scottish economist Adam Smith published his treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, which is regarded as the bedrock upon which modern capitalism stands. Though some of his specific ideas about value and labor differ from those of modern economists, Smith is often called "the father of capitalism."

How Does Capitalism Have A Snowball Effect On People?
The kind of impact that capitalism has on your life depends on whether you are a worker or a boss. For someone who owns a company and employs other workers, capitalism may make sense: The more profits your company brings in, the more resources you have to share with your workers, which theoretically improves everyone's standard of living. It is all based on the principle of supply and demand, and in capitalism, consumption is king. The problem is that many capitalist bosses aren't great at sharing the wealth, which is why one of the significant critiques of capitalism is that it is a massive driver of inequality, both social and economic.

 Capitalism takes the position that "greed is good," which its supporters say is a positive thing — greed drives profits and profits drive innovation and product development, which means there are more choices available for those who can afford them.

Its opponents say that capitalism is, by nature, exploitative, and leads to a brutally divided society that tramples the working classes in favor of fattening the rich's wallets. For an example in recent history, the Occupy Wall Street movement began as an anti-capitalist protest against "the 1%" — the richest of the rich of the capitalist class — and asked why they are allowed to grow fat and happy while 20% of all American children live in poverty.

The Merits Of Capitalism

 "A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both." Milton Friedman
Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy that may extend into other areas of life.

Efficiency: Firms in a capitalist-based society face an incentive to be efficient and produce goods that are in demand. These incentives create pressures to cut costs and avoid waste. State-owned firms often tend to be more inefficient (e.g., less willing to get rid of surplus workers and fewer incentives to try new innovative working practices.)

Innovation: Capitalism has a dynamic where entrepreneurs and firms are seeking to create and develop profitable products. Therefore, they will not be stagnant but invest in new products that may be popular with consumers. This can lead to product development and more choice of goods.

Economic Growth: With firms and individuals facing incentives to be innovative and work hard, this creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards. This increased wealth enables a higher standard of living; in theory, everyone can benefit from this increased wealth, and there is a 'trickle-down effect 'from rich to poor.

There are no better alternatives. As Winston Churchill, "It has been said that democracy is the worst form of government except for all the others that have been tried." A similar statement could apply to capitalism.

 "Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone."  John Maynard Keynes.

Monopoly Power: Private ownership of capital enables firms to gain monopoly power in product and labor markets. Firms with monopoly power can exploit their position to charge higher prices.
Monopsony Power: Firms with monopsony power can pay lower wages to workers. In capitalist societies, there is often great inequality between the owners of capital and those who work for firms.

Social Benefit Ignored: A free market will ignore externalities. A profit mounting capitalist firm is likely to ignore negative externalities, such as pollution from production; this can harm living standards. Similarly, a free-market economy will under-provide goods with positive externalities, such as health, public transport, and education.

This leads to an inefficient allocation of resources. Even supporters of capitalism will admit that government provision of certain public goods and public services is essential to maximize capitalist society's potential.

Inherited Wealth and Wealth Inequality: A capitalist society is based on the legal right to private property and the ability to pass on wealth to future generations. Capitalists argue that a capitalist society is fair because you gain the rewards of your arduous work. But often, people are rich simply because they inherit wealth or are born into a privileged class. Therefore, capitalist society fails to create equality of outcome and fails to provide equality of opportunity.

Inequality Creates Social Division: Societies that are highly unequal create resentment and social division.

Diminishing Marginal Utility of Wealth: A capitalist society argues it is okay if people can earn more, leading to income and wealth inequality. However, this ignores the diminishing marginal utility of wealth. A millionaire who gets an extra million sees a modest increase in economic welfare, but that £1 million spent on health care would provide a much bigger increase in social welfare.

Boom and Bust Cycles: Capitalist economies tend to booms and busts with painful recessions and mass unemployment.
All types of capitalism imply that the economy is 'market-based.' However, within the broad term of capitalism, there are different varieties that can have profoundly different outcomes. For example, unregulated capitalism – sometimes termed 'turbo-capitalism' will see greater problems associated with inequality, under-provision of public services, and greater inequality. A primarily 'capitalist' society with some regulation on inequality, environment, and monopoly power can create a vastly different outcome to a pure 'capitalist' society.

When people talk about capitalist societies, e.g., the US, there is significant government intervention in areas such as education, healthcare, and transport. US government accounts for around 35% of GDP.

Even a country like France, where the government spends 50% of GDP, has an economy that may be denoted as a primarily 'free market.' There is no clear-cut point when an economy stops being capitalist and becomes a 'mixed economy.'

Why is Capitalism a threat too?

Written By- Mohammed Ghattas
Edited By- Khushi Prajapati

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