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12 Characteristics of the Capitalist Economic System

12 Characteristics of the Capitalist Economic System

Capitalism is an economic system in which most financial choices are made by private individuals rather than by governments. Many production variables, including natural resources, capital goods, entrepreneurship, and labor, are owned by private entities in capitalism. 

In capitalism, the owner of wealth, productive ability, or property controls investment and decision-making. Computer goods and services that exist in the same market, on the other hand, govern the distribution of products and services as well as their prices.

Capitalism is one of the oldest economic systems, having emerged at the time of the industrial revolution in the mid-eighteenth century. It is also characterized as a free-market economy since private persons own the means of production and the government has no involvement in commercial activity. According to Karl Marx, a capitalist works for around 12 hours and receives wages for approximately six hours.

Capitalism has a number of drawbacks, including the concentration of power in the hands of the capitalist class, which is a minority in society. These little groups prey on the working class and prioritize profit over social good, natural resources, and the environment. Capitalism is viewed as an unjust and corrupt economic system that will only lead to future unrest.

On the other hand, one of capitalism's advantages is that it produces creative products as a result of competition. Furthermore, income is dispersed equally to all productive people, regardless of class, supporting pluralism and power decentralization. Capitalism also promotes production and affluence, which aids in the overall development of society.

1. Motive for Profit

The profit motive is understood in capitalism to be a desire to own money made from profit. In other words, the sole reason for the existence of a business is to make a profit, and this serves as the major motive for all decisions made for the organization's growth. The profit incentive operates according to the rational choice theory, which states that people perceive things that are in their best interests.

Profit motives are said to ensure efficient resource allocation. If there is no profit in reducing the price of a product, it is seen to be a sign that the capital and human resources allocated to its production are misdirected. Profit will determine whether or not a product or item is worthwhile to manufacture. According to popular belief, maintaining high profits results in the least amount of resource waste.

Because capital is essential to run the economy, the capitalist class works purely for profit. The majority of businesses are created by the worker class. The capitalist class aims to sell to the working class at low prices while maintaining a healthy profit margin.

The profit incentive, in theory, allocates resources efficiently when the economy is most competitive and there are no market defects, such as monopolies or externalities. Markets, with the help of competition, are able to overcome the profit-maximizing motives of individual organizations. One of the most serious criticisms leveled towards profit motive is the notion that profit is more important than people's needs.

Patients cannot, for example, be prioritized over profits in the healthcare industry. On the one hand, while this is a disadvantage, it is the standard under capitalism to consider profit as a significant motivation. If capitalists do not value profit as a key motivator, corporations will not focus on growing productivity, and as a result, there will be no productivity and no business.

This will prohibit them from adequately compensating the working class, resulting in disappointment. Profits are capitalism's basic strength since the government does not intervene in the business, and if corporations do not make enough profit, the entire system may be at risk of collapsing.

2. The Market

In the case of capitalism's free markets, there is maximum utilization of markets with little or no pricing restriction. This price increase is not in line with the needs of the customers, but rather benefits the industrialists. 

In a mixed economy, the market plays an important role since it is regulated to some extent by the government to correct market failures, contribute to national security and public safety, conserve natural resources, and promote social welfare.

In state-capitalist systems, markets are the least trusted, and the government relies largely on state-owned businesses. Demand is the amount of a product or service that is available for sale or purchase, whereas supply is the amount of product or service that is accessible for sale or purchase. When demand for a resource grows, the price rises, or in other words, the supply decreases.

When more than one manufacturer tries to sell the same or similar products to the same group of purchasers, it is called competition. According to capitalism, competition is the first step toward the return of invention, and without it, a cartel or monopoly may form, which is harmful to society. When a company is given exclusive control over a market, a monopoly is formed.

Because the firm has no fear of competition, it can participate in actions such as lowering output or raising prices. The government has put in place laws to avoid Monopoly and cartels.

Different types of markets exist, such as monopolies, competitive markets, oligopolies, and completely competitive markets. Monopoly, on the other hand, is undesirable in capitalism, as mentioned above. A monopoly may shift authority from capitalist leaders to certain corporations, which is undesirable for the capitalist in charge of the economy.

While a monopoly is unlikely, oligopoly is a desired result. Different enterprises compete with each other to generate more money in an oligopoly. This promotes industry and gives capitalist leaders more power.

3. Private Property

Many sociological and political theories have debated the relationship between capitalism, society and the state and its formal procedures. A legal designation issued by non-governmental and legal bodies to obtain ownership of a certain property is known as private property. Private property is regarded as a legal term that is enacted and defined by a country's political system.

Personal property, or consumer items, and capital goods are both examples of private property. Property laws are the laws that deal with the subject of property. Many defendants who believe they should not be held accountable for any injury or loss they may have caused because they were protecting their property use the property justification argument.

They may lose ownership due to public interest in some situations, and these states may be confiscated to develop government property, such as roads or parks. There are limited restrictions on the right to private property, and local governments may impose particular laws regarding the construction of structures on private land.

In rare situations, the owner of private property may request that the property be passed down to his family members as an inheritance after his death.

4. Competition in Market

One of capitalism's most important traits is competition. Because businesses are the ones who govern the economy, there is competition between them. Because industries are the primary source of revenue for the labor class, which is the primary source of population, they are one of the critical aspects of the capitalist economy.

Because it is a sellers' market, multiple companies provide the same goods to customers. Buyers have a variety of sellers from which to choose, which creates competition. When many sellers compete for the same goods, the firms compete for the sale of the product. This can occasionally result in a reduction in product prices, which benefits the buyer.

Because the capitalist economy encourages business and the establishment of enterprises, many new businesses emerge in the marketplace, and many of them end up providing replacements for the same commodity. Monopolies may occur in the absence of competition, resulting in higher product prices, increasing the burden on the labor class and disrupting the economy.

Competition is necessary to ensure that all enterprises earn equally. If other competing companies earn more money, so will the labor class of those people who work for them. As a result, competition benefits everyone involved in the capitalist system.

Rivalry among sellers is common in a capitalist market because everyone are seeking to attain their own aims by growing profit margins. They want to boost sales volume, which will lead to a larger market share. They achieve their objectives primarily through manipulating the marketing mix's parts of product placement, price, and promotion.

In general, competition is described as a situation in which two or more similar parties operate independently in order to secure a commitment or business from a third party who is unrelated to both of them by offering the best conditions. 

It was also discussed in Adam Smith's book The Wealth of Nations. Competition is defined as a condition in which buyers compete with other buyers, just as sellers compete with other sellers, and it is distributed entirely through the market and its operations.

Competition arises when there is a scarcity of something or when there is an abundance of it. If there is just one store that sells a particular product, for example, consumers will compete to purchase the goods for a higher price. The product will be awarded to the highest bidder. 

If, on the other hand, the product is overly or abundantly available, the sellers will compete with one another to provide the lowest feasible price in order to entice the buyer. As a result, there will be competition among sellers.

Competition can sometimes result in an unwelcome monopoly, in which a single buyer has exclusive rights to sell a commodity. A monopoly is usually bad because it results in the majority of the buyer section being exploited. When there is little rivalry, the market becomes a buyer's market, also known as an oligopoly.

There are numerous sellers of the same commodity, and the bid is won by the seller who sells for the lowest price. Competition is a necessary component of capitalism and is widely recognized as a global standard. Healthy competition is likely to drive down prices and benefit customers.

5. Economic Development


Capitalism has been pushed as a source of economic growth and is thought to have the power to do so. Economic growth can be measured in terms of gross domestic product (GDP), standard of living, and capacity utilization.

Adam Smith argued for a free market that would regulate price and production, as well as resource distribution. Many economists have observed that GDP growth is linked to the emergence of capitalism in the economy over time.

After 1819 April 1995, the global economy increased at a rate that was up to 50 times faster than population growth. This is why many people have seen their income increase by an average of 8 to 9 times.

The economy in America, Australia, and Europe expanded by as much as 19 times per person during this time, despite the fact that these regions were already at a greater level; and in countries like Japan, which was already at a lower level in 1819, the rise was as much as 30 times.

In third-world countries like India, the growth was also noticeable, but only by around five times per person.

6. Production Methodology

A capitalist mode of production is a mechanism for managing distribution and production within a capitalist society. Banking, renting output for profit, commercial commerce, and other kinds of money making take precedence over the development of the capitalist mode of production.

It is founded on private property and vegetable technology, as well as industrial technology, which grew in popularity in Western Europe as a result of the industrial revolution, and eventually spread to other areas of the world. The phrase capitalist mode of production refers to the extraction of extra value by the owning class for the sole purpose of capital accumulation and wage-based labor.

It is a market-based system when it comes to commodities. Capitalism has always existed in the form of money making activity in the form of money lenders and merchants, who often function as a middleman between producers and customers, engaged in simple commodity production. 

Since the dawn of civilization, this has been the case. The capitalist mode of production is characterized by the fact that the majority of manufacturing outputs and inputs are obtained through the market, and the majority of production is carried out in this manner.

When feudalism is flourishing, for example, the governing feudal elite owns all of the factors of production, including labor. Because the products are created primarily for consumption inside the social unit of feudal class, which includes a minimum trade, they are also consumed without any kind of market.

As a result, the entire organization of the production process is organized and reshaped to conform to economic rationality as bonded with the help of capitalism, which is expressed in price relationships between output and input rather than the broader national context in which overall society is confronted.

To put it another way, the entire process is reformed and rearranged to align with business logic. Capitalist accumulation in capitalist production defines economic rationality.

If the principal source of money and products created and dispersed is a capitalist activity in and of itself, the country or region is deemed capitalist.

7. Supply and demand relationships

The capitalist economy's primary structures are demand and supply. It follows from the fact that in a competitive market, a product's per-unit cost would fluctuate until it reaches a stable price. When the quantity sought by the buyer and the quantity given by the seller are equal, the resulting product is an economic equilibrium in terms of both quantity and price.

According to the four basic laws of supply and demand, if demand rises but supply remains constant, a product shortage emerges, resulting in a higher price equilibrium. If demand falls but supply remains constant, an excess of production arises, resulting in a lower price equilibrium.

If demand remains constant while supply rises, excess production occurs, resulting in a surplus, which eventually leads to a lower price equilibrium. If demand remains constant and supply decreases over time, a product shortage occurs, resulting in a higher price equilibrium.

The supply schedule depicts the relationship between the product's pricing and the amount delivered. When perfect competition is assumed, marginal cost is the sole determinant of supply. In other words, the corporations will be able to generate more product, and the cost of creating additional output will be less than the price they will be paid.

Demand, like supply, is an important aspect of the capitalist economy. On the other hand, a demand schedule is nothing more than a demand curve, which is a representation of the number of products that buyers are willing to purchase at various prices under the premise that all other drivers remain constant. 

The representation of the demand curve, according to the law of demand, is always downward, which means that as consumers play with more and more products, the price of the product decreases.

The demand curve is determined by marginal utility curves. If the utility of extra consumption and the opportunity cost are identical, customers are more ready to acquire a certain number of things at a specific price. To put it another way, the demand schedule may be described as the ability and willingness to meet the demand.

If the utility of extra consumption and the opportunity cost are identical, customers are more ready to acquire a certain number of things at a specific price. To put it another way, the demand schedule is the ability and willingness of customers to purchase a product at any given moment.

8. Two-tiered System

The tale of capitalism is marked by differences between two classes of people: the capitalist class, which is known for manufacturing and distributing things, and the working class, which is known for providing labor to the capitalist class in exchange for money. The owner class is another name for the capitalist class.

The entire economy is governed by individuals or corporations who own and operate businesses as well as make crucial resource allocation choices. Typically, this is a capitalist class. However, there is a division of labor that allows for specialization, which is accomplished through training and education.

The class is divided into two subcategories based on training and education: middle class and lower class. According to Karl Marx's Das Kapital, capitalism's defining feature is the existence of a dual-class society.

9. Government Intervention is Kept to a Minimum

Another important feature of capitalism is that it allows for little or no government intervention in the economy. Because the capitalist or owner class controls the whole economy, the capitalist government does not intervene in important economic decisions. In one perspective, this is a good thing from the standpoint of core capitalist concepts because it is in line with capitalistic principles.

It makes sense to maintain government participation to a minimum because the owner class is the most powerful and controls all industries, which drives money in the market. On the other hand, having minimal intervention is not conducive to people's well-being. Because the capitalist elite controls the economy, only those who work really hard will be eligible for compensation.

The gap between the rich and the poor widens dramatically as a result of this. In capitalism, the divide between the owner and working classes is considerable, and without government action, it exacerbates economic instability.

Profit becomes the sole motivation of the capitalist economy, and the government is forced to play catch-up since people's values and advantages become secondary. This does not sit well with the majority of people, particularly the working class.

10. Capital Accumulation

The accumulation of capital is a dynamic motivation that drives profit professionals to invest money or a relevant financial asset only for the purpose of growing its monetary value. The goal of capital accumulation is to develop new working capital or a fixed class that can take any shape.

It is the cornerstone of capitalism and one of the most distinguishing features of a capitalist economic system. Capital accumulation is frequently used to refer to real estate investment in other types of output, such as research and development or acquisition.

It also covers investments in a variety of financial assets, such as those that represent rent, profit, royalties, or capital gains on paper. In a capitalist economy, both financial and non-financial capital accumulation are thought to be important for economic growth. Because additional finances are required for additional manufacturing, one of the most significant things is to increase the scale of production.

Capital can take many forms, including human and social capital.

11. Commodity Production

One of the hallmarks of the capitalist economy is commodity production. Production can be of any commodity, ranging from necessities to luxuries. The goal is to keep the factory running. The labor class will be able to earn enough money to subsist as long as there is production, and the capitalist class will be able to profit. Profit is utilized to keep the capitalist economy running.

As a result, without adequate commodity production, capitalism's entire process may collapse, and enough profits will not be made to keep the capitalist economy afloat. There will be insufficient earnings unless corporations put money into producing consumer goods.

Because the government is not involved in operating the economy, this will have a decreasing impact on the capitalist class. There will be no source of income for the capitalist class to profit if commodity manufacturing ceases.

12. Work for a Wage

The currency of a capitalist economy is wage labor. Wages are generated by the working class as a result of their employment in businesses. These businesses are owned by the capitalist class that dominates the economy. 

The earnings created from the sale of products are distributed to the labor class in the form of wages by the capitalist class. These earnings assist the working class in purchasing goods.

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