A Business Encyclopedia


Definition: Capitalism refers to an economic and political system, wherein the private individuals own and control the country’s factors of production (land, labour, capital) for making a profit. In finer terms, private property is the essence of a capitalist economy and profit works as a motivation here.

Under this system, the government does not intervene in the management of economic affairs. The capitalist enterprises carry out production activities, wherein the private owners freely operate their business, as per their will, such as:

  • Where and how much to invest
  • What, how and how much to produce
  • At what prices, goods and services are offered for sale.

Capitalism is the oldest social system, which is still prevalent in many countries of the world like United States, Australia, Canada, Mexico, Italy, France and many more. It is also known as a free market economy or laissez-faire economy.

Characteristics of Capitalism

  1. Profit Motive: In capitalism, profit motive induces individual owners to work and produce.
  2. Private property right: The capital goods like land, factories, machinery, etc. are under private ownership, and the owners have the right to employ them, in the manner they like. However, for the mutual benefit of the society government, can put some restrictions.
  3. Consumer sovereignty: In this system, consumers are free to make a choice as to how they want to spend their income. Only those goods are produced by the producers, which are demanded by the consumers.
  4. Freedom of enterprise: Every individual is free to choose and involved in the economic activity he/she thinks fit.
  5. Competition: Competition exist among various sellers to sell products and services to customers and among buyers to get the goods, so as to satisfy their want.
  6. Income inequality: In capitalism, a wide disparity of income between haves and have-nots is observed, which is caused by the unequal property distribution.

In capitalism, no central planning authority exist to solve the central economic problems, i.e. what, how, when and for whom to produce. In such a situation, it is quite difficult to identify, as to what are the forces that cause the economy to function smoothly.

Suppose, if consumers demand washing machines and producers want to produce computers, and workers choose to make cars, then a situation of disorder and disorientation may occur. But to overcome such a problem, a capitalist economy resorts to market demand and supply forces and price mechanism (also known as a market mechanism) to solve the central economic problems.

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