All You Need to Know About Capitalism

Introduction

Though imperfect, free markets are arguably the greatest way to organize an economy.

Capitalism is an economic system in which private actors own and manage property and demand and supply freely decide market prices in the best interests of society.

Capitalism requires profit. Adam Smith, the founder of modern economics, observed, “It is not from the charity of the butcher, the brewer, or the baker that we expect our dinner, but from their respect to their interest.” Both parties to a voluntary trade transaction have an interest in the outcome, yet neither can get what they want without considering the other. Rational self-interest can boost the economy.

In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is paid for, capital gains accrue to private owners, and prices allocate capital and labor between competing uses (see “Supply and Demand”).

Today, capitalism underpins most economies, but for most of the 20th century, it was one of two main economic models. Socialist firms maximize social good rather than profits because the state owns the means of production.

Capitalism Rests on the Following Pillars:

• private property, which permits people to own real things like land and houses and intangible assets like stocks and bonds;
• self-interest, where people behave in their own best interests without consideration of societal pressure. However, these uncoordinated individuals benefit society as if, in Smith's 1776 Wealth of Nations, they were guided by an invisible hand;
• competition, through firms' freedom to enter and exit markets, maximizes social welfare, that is, the joint welfare of producers and consumers;
• a market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers—prices allocate resources,

These pillars determine capitalism's intensity. Laissez-faire economies have unregulated markets. In mixed economies, markets dominate but are heavily controlled by the government to address market failures like pollution and traffic congestion, promote social welfare, and provide defense and public safety. Mixed capitalist economies dominate.

The Many Shades of Capitalism

Economists categorize capitalism by several characteristics. Production organization divides capitalism into two sorts. Liberal market economies, like the US and UK, have a competitive market and decentralized production. Unions and business organizations in coordinated market economies like Germany and Japan communicate confidential information (Hall and Soskice 2001).

Recently, economists have recognized four forms of capitalism based on the role of entrepreneurship (creating enterprises) in innovation and the institutional context in which new ideas are implemented to boost economic growth (Baumol, Litan, and Schramm 2007).

State-guided capitalism selects growth sectors. This style of capitalism, initially motivated by development, has various drawbacks: excessive investment, picking the wrong winners, corruption, and difficulties in removing support when necessary. Oligarchic capitalism serves a small elite. This kind has high inequality and corruption and does not prioritize economic progress.

Big-firm capitalism exploits scale. Mass production requires this type. Entrepreneurial capitalism created the car, phone, and computer. Individuals and startups create these breakthroughs. Big corporations mass-produce and promote new items, so a blend of big-firm and entrepreneurial capitalism looks optimum. This kind best describes the US.

Keynesian Critique

During the Great Depression, sophisticated capitalist economies had high unemployment. John Maynard Keynes, a British economist, stated in his 1936 General Theory of Employment, Interest, and Money that capitalism cannot recover from investment slowdowns because a capitalist economy might remain in equilibrium with high unemployment and no growth. Keynesian economics questioned the idea that laissez-faire capitalist economies could operate successfully without state intervention to increase aggregate demand and battle 1930s-style high unemployment and deflation. He believed government intervention—cutting taxes and raising spending—was essential to end the crisis.These measures tried to moderate the business cycle and revive capitalism after the Great Depression. Keynes merely advocated for occasional government intervention, not a market-based economy.

Capitalism might fail due to its success factors. Governments must set rules, such as property rights legislation, and provide infrastructure, such as roads and highways, for free markets to thrive. However, organized commercial interests may influence governments to use laws to maintain their economic position at the expense of the public interest, such as by restricting the free market that made them successful.

According to Rajan and Zingales(2003),society must "rescue capitalism from the capitalists" by protecting the free market against powerful corporate interests that aim to obstruct it. "Crony capitalism" may result from political interest and the capitalist elite, promoting nepotism above efficiency. The competition requires limiting productive asset ownership concentration. Losers must be compensated since competition creates winners and losers. Free trade and robust competitive pressure on incumbent enterprises will also deter powerful interests. The public must value free markets and oppose government action to protect powerful incumbents at the price of economic growth.

Conclusion

Capitalism has outperformed other economic systems, yet inequality is one of its most problematic features. Does private capital expansion inevitably concentrate wealth in fewer hands, or do growth, competition, and technological development diminish inequality? Economists have tried many ways to explain the economic disparity. The latest study analyses a unique set of 18th-century data to reveal crucial economic and social themes (Piketty 2014). 

In modern market economies, investment returns often exceed growth. If that difference maintains, capital owners' wealth will grow faster than wages, eventually surpassing them. This study has as many critics as supporters, but it has added to the discussion on wealth distribution in capitalism and strengthened the notion that government policies and the public must lead a capitalist economy in the proper direction to keep Smith's invisible hand working for society.

Written by Chitraksh Mayank