Capitalism. It’s something you’ve heard of, but do you truly know what it is? In simple terms, capitalism is an economic system where a country’s production and means of operation are controlled by private owners for profit. Most countries nowadays, such as the US, France, and Ireland, practice a form of capitalism that is a combination of free markets and government intervention, called mixed economies. These capitalist economies operate on the pillars of private property, supply and demand, competition, freedom, and incentive. Today we will explore what these entail when it comes to capitalism.
Private property allows people to own tangible and intangible assets, with examples of the former being land and houses, the latter stocks and bonds. By having a private property, efficiency in the economy is promoted since owners of resources will be given incentives to maximize property value. Their incentive may be money or any form of profit deemed worthy when an individual exchanges their private property in a mutually beneficial transaction.
Supply and Demand
Supply and demand determine the prices of goods and services. If the good or service you are selling is in high demand, it is worth more. For example, if you want to buy land in the middle of nowhere, it won’t cost that much because it is not close to the best schools, jobs, nor the best places for goods and services. If there is a high supply of land but low demand, you can buy a lot of land for a lot less than, say, land in an area that offers great schools, jobs, and services. Overall, if you would like to purchase land where supply is lower and demand is greater, then the cost of buying that land will also be higher.
Competition is at the heart of a capitalist system. Competition drives businesses to work at maximum efficiency and offer their products at the best prices with high quality to avoid getting beaten out by competitors that have better prices, efficiency, and quality. Having competition creates more productivity and innovation in the workplace, as each company aims to improve in order to make more desirable / cheaper goods and services for consumers.
Freedom in a capitalist economy means that no one can tell you what to do in order to earn money, and no one can tell you how to spend it. Everything is ultimately up to you. You can make your own choices, whether you want to go to college, go straight to the workforce, or become an electrician or lawyer. It’s entirely up to you and what you plan to do with your life.
An incentive in economics is the financial motivation for people to take certain actions. It allows businesses to become more creative and inventive, as everyone competes to have products or services that are better than their competitors. As a result, more desirable or cheaper products and services are formed, which is ultimately better for the consumers. Therefore, this is your incentive to make more money than your competitors.
While no country operates on a pure, or “laissez-faire” capitalist economy, the many mixed economies of today’s world rely on these five pillars to drive their markets. Together, we have explored the basics of a system that is very broad, with both good things and drawbacks.
Sharon Lee, Voices of Capitalism