What Is Capitalism? The Meaning and Definition of Capitalism (1)

Hello, this is Bitpunk. Today we live in a capitalist society, and we often find ourselves asking what this capitalist society really is. In this post, I'll explain the meaning, definition and characteristics of capitalism.

What Is Capitalism?

Capitalism is an economic system in which individuals or companies own capital. The production of goods and services is usually regulated by supply and demand in the market, rather than following a planned economy or central control.

The purest form of capitalism is free-market or laissez-faire capitalism. In this case, individuals act without any restrictions. They can decide where to invest, what to produce and sell, and at what price to exchange goods and services.

Under laissez-faire, the market operates without restraint or control. Today, most countries maintain a mixed capitalist system that includes some degree of government regulation of business and ownership of certain industries.

Understanding Capitalism

In functional terms, capitalism is one process for solving the problems of economic production and resource distribution. Instead of making economic decisions centrally, as in socialism or feudalism, capitalism forms economic plans through decentralized and voluntary decisions. The key concepts of capitalism can be summarized as follows.

• Capitalism is a system characterized by private ownership of the means of production, especially in the industrial sector.
• Capitalism centers on the enforcement of private property rights, which encourages the investment and productive use of capital.
• Capitalism historically developed out of Europe's feudal and mercantilist systems, accelerating industrialization and maximizing the supply of everyday consumer goods.
• Capitalism in its pure form can be compared with socialism in its pure form (where all means of production are owned collectively or by the state) and with a mixed economy (somewhere between pure capitalism and pure socialism).
• Real-world capitalism tends to take the form of crony capitalism (a capitalist economy where business is run through nepotism rather than merit or competitive bidding), due to business-friendly government intervention and the government's involvement in the economy.

Capitalism and Private Property

Private property rights are the foundation of capitalism. The modern concept of private property comes from John Locke's homesteading theory, which holds that "people claim ownership of unowned resources by mixing their labor with them." Once someone owns such an originally unowned resource, the only legitimate ways to transfer that property are voluntary exchange, gifts, inheritance, or re-acquiring abandoned property.

Private property gives the owners of resources an incentive to pursue the efficiency that maximizes the value of those resources. The more valuable a resource is, the more power its owner has. So in a capitalist system, those who own property also hold the value associated with that property.

For individuals and companies to use their assets efficiently, there must be institutions that protect the legal right to own or transfer private property. Capitalist societies encourage and enforce these private property rights by implementing laws on contracts, fair dealing and torts.

Problems can arise if property is held in common rather than privately. If there is a shared resource that everyone can use and that no one can restrict, no individual will conserve or reinvest in the resource; everyone will simply try to take as much of it as possible. Turning resources into private property can therefore be one way to solve this problem.

Capitalism, Profit and Loss

Profit is closely related to the concept of private property. Individuals voluntarily take part in exchanging private property only when they believe the exchange will benefit them, psychologically or materially. Through such transactions, each party gains personal, subjective value, in other words, profit.

Voluntary exchange is the mechanism that keeps the capitalist system going. Owners of resources and property compete with one another to win consumers. These activities are part of a system that distributes resources by balancing supply and demand.

Capitalists use their capital as efficiently as possible to produce the most profitable goods and services. In a capitalist system, "what is most valuable" is determined by how much individuals voluntarily pay for a capitalist's goods and services. In other words, profit means that greater value was produced from a smaller investment of value. Conversely, when capitalists fail to use their capital efficiently and produce something of lower value, they suffer a loss.

Free Enterprise or Capitalism

Capitalism and free enterprise are often treated as synonyms. In fact, although the two are closely related, they have different characteristics. A capitalist economy can be maintained without complete free enterprise, and a free market can be maintained without capitalism.

Any form of economy in which individuals control the means of production is capitalism. However, a capitalist system can be regulated by government legislation, and the efforts and profits of capitalists can be heavily taxed.

Roughly speaking, "free enterprise" can be understood to mean economic exchange free from the coercive influence of government. Although it's unlikely, imagine a system in which individuals hold all property rights in common. Private property rights could be treated as shared by the members without any government coercion, and private property rights would still exist within the enterprise system.

Many Native American tribes maintained arrangements like this, and within broader capitalist economies, groups such as partnerships, clubs, cooperatives and joint ventures can all be considered common-property institutions.

If the central principle of capitalism is accumulation, ownership and profit through capital, then freedom from state coercion is the central principle of free enterprise.

(Continued in Part 2)

Investing & EconomicsWhat Is Capitalism? The History of How Capitalism Developed (2)5 min read