CAPITALISM: ORIGIN, CHARACTERISTICS, REPRESENTATIVES, ADVANTAGES, DISADVANTAGES - CULTURE VOCABULARY - 2025

The Capitalism is an economic and social system of free trade where the various components of production such as capital and natural resources belong to private companies, while the work belongs to private individuals.

This system requires the government to follow a laissez-faire policy, where it should not intervene in economic affairs. In a capitalist market economy, it is each owner of wealth who determines his investment and decision making.

Capitalism implies that markets can operate autonomously, where the law of supply and demand is what establishes the prices of basic products, stocks and currencies.

Firms in a capitalist environment operate in competition with each other and are largely free from any state control.

In recent decades the world has moved towards capitalism. It is most prominent in today's global economic system, where the means of production are privately owned by individuals and the government has limited intervention.

Origin

Although there is some evidence that capitalism existed in some areas during the European Middle Ages, this system began to take shape later.

The origins of capitalism are complicated, dating back to the 16th century, when British power systems collapsed, largely after the deadly Black Death, which wiped out 60% of the entire population of Europe.

A new class of merchants began to trade with foreign countries. This new demand for exports hurt local economies and began to dictate general production and the price of goods. It also led to the spread of colonialism, slavery, and imperialism.

The death of feudalism, which kept the poor tied to their masters' land, cultivating it in exchange for protection and a place to live, left the peasants homeless and jobless, ultimately driving them away from the countryside to urban centers.

Mercantilism

In Western Europe, the feudal economic system was progressively displaced by mercantilism, becoming the main commercial economic system during the 16th to 18th centuries.

The old farm workers had to sell their labor in a competitive work environment to survive, while the state worked in alliance with the new capitalists to set a maximum wage.

As commerce unfolded, business owners began to accumulate capital and use it to expand their own operations, rather than investing it in cathedrals or temples as was done before the 16th century.

Industrial Revolution

In the 18th century, industrial society germinated in England, resulting in a great deal of manufacturing activity. Capital accumulated from previous businesses became the mutual funds that fueled the Industrial Revolution.

This accumulated capital allowed the growth of new businesses and set the stage for capitalism.

characteristics

Freedom

In a capitalist society, the supply and demand of various products induce the type and quantity of goods and services produced by firms.

Capitalists think that greed or greed is good because it produces profit. The desire to make a profit promotes innovation and the development of new products, generating more choice for consumers.

Many people support the idea of ​​capitalism because they feel that economic freedom opens the doors to political freedom, as allowing state-owned production would breed authoritarianism and government abuse.

Capitalism has given people both the freedom and the incentive to be more productive. However, it presents a series of problems such as the creation of monopolies, low eradication of poverty, income inequality, market instability, etc.

Many critics point out that this system is heartless, creating a society that focuses on individuals rather than the collectivity. However, the problems of capitalism can be overcome with a balanced perspective.

Pricing mechanism

The capitalist economy is based on prices, which are set exclusively by the reciprocal action of supply and demand, without any interference from other external forces.

Private property

This type of property includes all the elements that allow production, such as factories, machines, tools, mining land, etc.

The privately owned industry caters to the consumer sectors, who want products of the highest value at the lowest price.

Consumer sovereignty

The entire production pattern is guided by the wishes and demands of the buyers. Consumers have the most relevant role.

The most inefficient companies will be driven out of the market to the consumer discovering that they can obtain the same products elsewhere for a lower cost.

Freedom of enterprise

Everyone has the right to have their own means of production and can produce any type of goods or services of their choice.

Salary

The means of production are controlled by a relatively small group of people. Those who do not have these resources can only offer their time and work.

As a result, there is a significantly higher percentage of salaried workers compared to the owners.

Competition

Private companies compete with each other to provide goods and services. This competition encourages innovative products to be created and sold at competitive prices.

No government interference

The government does not interfere in the activities of the economy. Producers of goods and services have the freedom to make their own decisions.

The role of the government is to protect the legal rights of economic actors, not to regulate the free market system.

Profit motivation

Maximizing profits is what guides production levels and is the main motivation of producers. The most effective companies are those that create the most profit.

Representatives

Adam smith

He is considered by many to be the father of capitalism. He published a book in 1776 entitled An Inquiry into the Nature and Causes of the Wealth of Nations, which is considered the foundation on which modern capitalism rests.

Smith exhorted that economic decisions be determined by the free play of the forces that self-regulate the market.

John Locke

His work Two Treatises on Civil Government (1689) established the principles that later served to identify capitalism as a productive system.

David Ricardo

He showed that free trade would benefit both the industrially weak and the strong, in his famous theory of comparative advantage.

Britain embraced liberalism by aligning itself with the teachings of economists Adam Smith and David Ricardo, encouraging competition and the development of a market economy.

Karl Marx

He is the most important theorist to analyze capitalism. His economic theories were exposed in Capital (1867).

He deployed the concepts of base and superstructure, which describe the reciprocal relationship between the means of production (machines, factories, land), the relations of production (private property, capital, commodities) and the cultural forces that work to maintain capitalism (politics, law, culture, religion).

John Maynard Keynes

This economist challenged the notion that capitalist economies could function well on their own, without state intervention to combat the high unemployment and deflation observed during the Great Depression of the 1930s.

In his 1936 General Theory of Employment, Interest, and Money, Keynes questioned that capitalism struggled to recover from the slowdown in investment because it could last indefinitely with high unemployment and no growth.

Keynes did not seek to change the capitalist economy for a different one, but postulated that to get the economy out of a recession, repeated government intervention was necessary, cutting taxes and increasing public spending.

Types of capitalism

Pure capitalism

The State does not generate norms nor does it have control over economic activity. All existing companies are private, even those of public services. This implies:

- A lower income tax, rewarding those who earn more more.

- Fewer controls on abuse of the monopoly.

- Absence of regulations for the financial system.

- An unregulated labor market, where it is easy to hire and fire workers, with very limited regulations on working conditions.

Responsible capitalism

Although the concept is that of a market economy, government measures are taken to some extent to avoid excesses and inequalities. This implies:

- A gradual tax system, where those who receive more income pay a greater proportion to finance government expenditures.

- Measures to protect those who are unemployed or with low income.

- There is a willingness to regulate monopolies and protect the rights of workers.

- Most of the industries are in the private sector, but the government could take responsibility for areas with social benefit, such as education, health care, public transport.

State capitalism

It occurs when state industries play an important role in the market economy.

Private companies play a key role, but the government also has a role in planning, influencing monetary and exchange rate policy.

Popular capitalism

It seeks to take advantage of the benefits of capitalism, but ensuring that everyone benefits from economic growth.

This implies a certain degree of redistribution, guaranteeing a certain social security.

Crony capitalism

It is based on close relations between businessmen and the government. Rather than success being determined by the free market and the rule of law, it will depend on the favoritism displayed by the government in the form of tax breaks, grants, and other incentives.

Advantage

Encourage innovation

Because people are free to produce whatever they want and sell it at whatever price the market can pay, this environment encourages innovation because entrepreneurs seek to get rich.

This includes innovating both in more efficient production methods and in new products.

Efficiency

Due to the highly competitive market environment, companies have good reasons to operate efficiently.

Prices are kept low by competition between companies. They make their products as efficient as possible to maximize profits.

Financial incentives

Entrepreneurs risk setting up businesses solely for the potential for great financial reward. Likewise, people work harder when there is a personal financial incentive. If you are absent to make a profit, then no new businesses will be created.

Consumer oriented

Consumers can choose the products they want and require something that does not yet exist, so that some company can supply it.

As a result, you have excellent products at the best prices. This is because buyers are willing to pay more for what they most crave and companies will offer what customers want at the highest prices they can afford.

Avoid government interventions

A government with a large bureaucracy is prevented from intervening. As the economist Milton Friedman says, "the economic freedom of capitalism is associated with political freedom."

If a government limits people's rights to freely start a business or choose where to work, it will engage in further political obstruction.

Mechanism to bring people together

Trade between different nations and people is encouraged. This economic incentive works to break down barriers and overcome sectarian differences.

It doesn't matter what color people are or what their religion is, it only matters if they can produce something you want to buy.

Disadvantages

Creation of monopolies

Capitalism can give rise to large and powerful companies that form monopolies to exploit the wants and needs of consumers, by continually increasing prices and limiting supply.

Exploitation of workers

Companies can exploit workers if they are in a position of monopsony. This means that there is only one buyer for the company's products.

Certain workers will not be able to find employment elsewhere as the company uses its monopsony power to pay lower wages.

Ignore the damages

In a for-profit economy, companies are likely to ignore the damage they cause, such as pollution from factories or the exploitation of natural resources.

This makes the products cheaper and more accessible in the short term. However, natural resources are gradually being depleted, the quality of life is reduced in the affected areas and costs are increasing for everyone.

Little motivation to help

Profit generators have little motivation to fund public goods and services, which means public health, transportation, and education suffer.

Equal opportunities are not promoted. Those without good nutrition, support and education will not be able to easily reach the high-level workforce. Society will never benefit from your valuable skills.

Divisions in society

Although people can work hard and be financially rewarded for it, the well-being from previous generations is ignored.

Fair opportunities and equal outcomes are not offered for all, the gap between rich and poor continually widening.

Inequality leads to divisions in society, generating resentment due to unequal opportunities.

Cyclical recessions

One feature is the boom-bust cycle, which stimulates mass unemployment and also subjects consumers to painful recessions.

References

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