What is capitalism? It is an economic system in which the means of production and distribution are privately or corporately owned. Operations are funded by profits and not controlled by a state government. Individual rights rule the capitalistic ideal and implementation. Private individuals, small businesses, organizations, and corporations make independent decisions about prices, production and distribution of goods, ideally resulting in a self-regulating market.
There are many capitalism examples in everyday life. Capitalism is fueled by the profit motive. While private companies have to comply with some government regulation, they are not under government control. They are free to develop and offer any lawful products and to compete via the free market. As you consider these capitalism examples, you'll probably think of many other ways capitalism impacts life as you know it.
- Wall Street and the stock market embody capitalism. Large, publicly-traded companies sell stock to raise capital, which is bought-and-sold by investors via a system in which prices are directly impacted by supply and demand. Everyone can participate, from individual investors to major financial investment firms.
- Pharmaceutical companies invest in research and develop treatments for various illnesses. Their innovations often pay off in increased profit, while also making new medical advances available to people.
- Innovations developed by tech companies like Microsoft, Apple, Google, and many others have changed how people communicate and the way the world operates. Fueled largely by profit motivation, these companies continue to innovate in a way that opens up even more possibilities.
- As one industry innovates, that creates additional opportunities that inspire new entrepreneurs to enter the market. Tech-based communication advances spurred the development of companies committed to developing virtual collaboration tools like Zoom, GoToMeeting, Slack, and others.
- The development of virtual meeting tools has made it possible for companies to implement remote work, which creates job opportunities for people around the world. This has also made virtual learning accessible on a large scale, something that proved critical in the Covid-19 pandemic.
- In the United States, there are multiple health insurance companies, each offering different plans with various features. When you purchase health insurance, there are several different options from which to choose.
- When you go to the grocery store, you get to choose among several places. No one entity controls the food supply. At the store, you can choose among many types of bread, milk and other food items, including different flavors, sizes, brands, packaging, and price points.
- Even though there are state-funded universities in the United States, there are also for-profit educational institutions, such as the University of Phoenix. These institutions are free to compete with each other as well as the state-supported industries, resulting in more choices for people seeking higher education.
- While the United States Postal Service (USPS) is a government-controlled entity, this does not preclude free enterprise. The USPS does not own the market on package delivery. Private enterprises like Federal Express and United Parcel Service (UPS) provide customers with multiple choices for shipping services.
- In a capitalist system, there are several car manufacturers, offering vehicles in a wide variety of price ranges. They are continually developing new features and models, as the manufacturers must compete with each other in order to sell vehicles and turn a profit.
- When individuals buy cars, there are many related businesses competing to provide related services. You don't have to go to the manufacturer to get your car serviced. You can choose among national companies or local small businesses. You also get to choose where to purchase fuel.
Capitalism creates choices for consumers and provides opportunities for entrepreneurs and employees. When competitors are free to enter the market and businesses are free to innovate, this benefits individual consumers and the overall economy. Without capitalism, due to a lack of free-market competition, chances are that prices would increase. If there was only one car manufacturer, they could charge whatever they wanted for cars. Fewer people would be able to afford them, which would limit opportunity and negatively impact many other segments of the economy.
A prerequisite to capitalism is freedom. According to the Index of Economic Freedom, a database that measures economic freedom based upon quantitative and qualitative factors, or regulatory efficiency, the following countries can be considered capitalist countries. Countries are listed in order of those with the greatest quantifiable economic freedom as of 2021.
- New Zealand
- United Kingdom
- United Arab Emirates
- The Netherlands
- United States
- South Korea
A capitalist society is one that supremely values 1) private property rights, 2) the enforcement of contracts and 3) voluntary exchange. However, there are varying deviations from capitalism's purest form, most specifically when private property rights are eroded by governmental influence. There are several notable variations of capitalism's purest form.
Crony capitalism refers to situations where a business's success is impacted by strategic influence from civil servants, politicians, or those in authority. Orson Welles' famous film, Citizen Kane, provides a good illustration of crony capitalism. This quasi-biographical film, set in the early 20th century, examines the life of a newspaper magnate (loosely based on several tycoons of the day, including William Randolph Hearst) who bought off politicians in return for favors.
Democratic capitalism assumes pluralism, recognizing that individuals have different opinions and interests, allowing them to associate freely in order to further those interests. Dr. Edward Younkins, author of Capitalism and Commerce, describes three tenets of the democratic capitalist system:
- an economy based predominantly on free markets and economic incentives
- a democratic polity
- a classical-liberal moral-cultural system that encourages pluralism
The Founding Fathers of the United States believed in democratic capitalism, firmly placing value on liberty and equality in the United States Constitution.
Finance capitalism is characterized by a pursuit of profit from the purchase and sale of financial products such as currency, stocks, bonds, and other derivatives. Lending money at a specified interest rate also comes under the category of finance capitalism.
Real estate delves deeply into finance capitalism. Buying real estate demonstrates this variant of capitalism, especially when individuals do this for investment purposes i.e. flipping houses.
Laissez-faire capitalism is an offshoot of capitalism where the economy operates under a total absence of rules. Here, the government leaves the people alone regarding all economic activities, with a complete separation of economy and state.
It has been asserted that The Great Depression resulted from a laissez-faire capitalist society. In the time leading up to The Great Depression, massive amounts of money, value, energy, wealth, capital, and power rested in the hands of a very small number of individuals, causing the United States' money velocity to grow at a slower rate.
Mercantilism is an example of an early form of capitalism, dating back to the late 16th century. The premise of mercantilism is that the wealth of a nation is increased through a well-managed balance of trade with other nations. Mercantilism is the mixture of national business interests, state-grounded interests, and imperialism.
The early American colonies practiced mercantilism. Colonists were only allowed to trade with their mother countries, such as Britain or France.
The term social market economy alludes to an economic system where government intervention is minimized. However, the state provides a lot of social services (such as unemployment benefits and social security) to reward labor rights.
Sweden operates under a social market economy. Many citizens consider themselves beneficiaries of the country's complex social welfare infrastructure. Mutual aid and common welfare embody a system that many can benefit from, such as new parents who receive extended parental leave.
There are two forms of state capitalism. With one type, there is private ownership of capitalist enterprises, but the government exerts a large degree of control. In the other type, the state actually fulfills the role of an employer, using services of workers to benefit government interests (such as a federal postal service).
A historical example of state capitalism dates back to the great powers during World War I and World War II. During this time, the government-controlled the inventory and output of production, as seen in Nazi Germany and the former Soviet Union.
To be a truly capitalist society, free market and private ownership rights must remain paramount. As renowned economist Milton Friedman, asserted, "The problem of social organization is how to set up an arrangement under which greed will do the least harm. Capitalism is that kind of a system." However, governmental forces do tend to assert themselves into even a capitalist economy.
When this happens, capitalism in its purest form becomes altered. Varying degrees of capitalism take shape. Around the world, capitalism will always have its supporters and detractors. On one hand, a free market and private ownership can present tremendous economic opportunity. On the other, greed and political corruption sometimes manifest and must be addressed — hopefully through an honest and mindful democratic process.
Now that you are familiar with the concept of capitalism, expand your knowledge and build your vocabulary by learning some basic economic terms. Then, explore other types of governmental and economic systems. Start by exploring examples of socialism. You might also want to consider some examples of communism. Getting a sense of these non-examples of capitalism will help deepen your understanding of economic systems even further.