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Table of Contents
Capitalism is an economic system where private individuals own and control property according to their interests and where supply and demand freely determine market prices in a way that can best serve society. The desire to turn a profit is capitalism’s fundamental characteristic.
See the fact file below for more information on Capitalism, or you can download our 22-page Capitalism worksheet pack to utilize within the classroom or home environment.
Key Facts & Information
HISTORY OF CAPITALISM
- The expansion of the English cloth industry in the 16th, 17th, and 18th centuries served as a catalyst for the emergence of capitalism.
- The aspect of this evolution that set capitalism apart from earlier economic systems was the utilization of accumulated capital to increase production capacity rather than investing in economically futile projects like building pyramids and cathedrals.
- The expansion of Europe’s supply of precious metals and the ensuing price inflation were further significant factors. During this time, prices did not grow as quickly as wages did, and the capitalist class benefited most from inflation. The mercantilist era development of powerful national powers was advantageous to the early capitalists.
- The thrust of capitalist development changed from trade to industry in England starting in the 18th century.
- The 18th-century essay An Inquiry into the Nature and Causes of the Wealth of Nations by Scottish political economist Adam Smith is widely seen as the origin of modern capitalism.
- During the Industrial Revolution, the steady capital accumulation of earlier centuries was used to put technological knowledge to use in real-world applications.
- The economies of the major capitalist nations did well in the decades immediately following World War II, helping to restore some of the trust in the capitalist system that had been lost in the 1930s.
- But, beginning in the 1970s, a number of people began to have second thoughts about the system’s long-term stability due to the fast rise in economic disparity on a global and national level.
HOW CAPITALISM WORKS
- In capitalism, economic decisions are planned through decentralized, competitive, and voluntary processes rather than through centralized political means, like in socialism or feudalism.
- In essence, capitalism is an economic system in which one or more private owners organize the means of production. Then, in exchange for pay, employers employ people to run the means of production.
- But neither the tools of production nor the money made from their labor belongs to the workers; instead, they belong to the capitalists.
IMPORTANCE OF PRIVATE OWNERSHIP IN CAPITALISM
- A framework that safeguards people’s legal right to hold or transfer private property is necessary for individuals or enterprises to confidently invest their capital assets. Contracts, honest dealing, and tort law will all be used in a capitalist society to support and uphold these private property rights.
- When a supposed private is shared by the public, a problem known as the tragedy of the commons may happen.
- Individuals are only motivated to extract as much as they can from a common pool resource since no one can restrict access to it, and there is no incentive for them to conserve it or reinvest in it.
- One solution to this issue, along with numerous voluntary or involuntary collective action strategies, is to privatize the resource.
An example: The things created under a capitalist system are still owned by the capitalists. It would be theft if a shoe manufacturing employee brought home a pair of their own.
- A capitalist generates the maximum profit by creating the highest-value items or services while utilizing capital assets most effectively. The more voluntary buyers, the better accuracy that the product produced is most valuable.
- Profits are a sign that lower-quality products have been converted into higher-quality ones. In contrast, when capital resources are not utilized effectively and produce less valuable outputs, the capitalist suffers losses.
- According to Adam Smith, a philosopher and the founder of modern economics:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
BENEFITS OF CAPITALISM
- Instead of only benefiting the aristocracy, industrial capitalism tends to benefit higher layers of society as well. The emergence of unions played a significant role in the rise in wages.
- The abundance of low-cost goods being mass-produced also raised the level of living.
- This development resulted in the emergence of a middle class, whose ranks gradually grew as more and more people from the lower classes joined it.
- With liberal individualism, the doctrine of natural rights, and democratic political freedoms, capitalism’s economic liberties developed.
- Capitalism has been demonstrated to be a highly successful tool for economic progress by providing incentives for entrepreneurs to reallocate resources away from unprofitable channels and into areas where customers value them more highly.
- Capitalist production methods have significantly increased productivity over the years. Wide populations could now afford more and better things, boosting living standards in ways that were previously unimaginable.
- Therefore, the majority of political theorists and almost all economists contend that capitalism is the most effective and successful system of trading.
- The capitalist system also leaves resource allocation up to the market. As a result, resources such as labor, capital, and natural resources are dispersed where they may have the greatest positive profit, and the economy starts to self-organize.
CRITICISMS OF CAPITALISM
- Capitalism has greatly increased social inequality and wealth disparities. Workers are exploited for their labor, with wages always kept below the genuine value of the work being done, while capitalists enjoy the possibility of enormous profits.
- Another sign of capitalism is unemployment, which occurs when unproductive workers are either excluded from the labor force or replaced by new technologies or inventions.
- This sparks a conflict between the working class and the capitalist class, wherein employees struggle for better working conditions, more equitable pay, and higher levels of dignity.
- Business owners and investors, on the other hand, prefer bigger profit margins, frequently achieved by lowering wages and shrinking the workforce.
- The incentives for corruption created by capitalism are a drawback. A capitalist society that is based on strong ties between business people and the government is referred to as crony capitalism.
- A company’s prosperity is based on the government’s favoritism extended to it in the form of tax breaks, subsidies, and other incentives, as opposed to the free market and the rule of law, which would otherwise decide success.
Capitalism Worksheets
This fantastic bundle includes everything you need to know about Capitalism across 22 in-depth pages. These ready-to-use worksheets are perfect for teaching kids about Capitalism. Capitalism is an economic system where private individuals own and control property according to their interests and where supply and demand freely determine market prices in a way that can best serve society.
Complete List of Included Worksheets
Below is a list of all the worksheets included in this document.
- Capitalism Facts
- The Business of a Capitalist
- How Capitalism Works
- Pros and Cons
- Types of Capitalism
- Defenders of Capitalism
- Criticisms of Capitalism
- Capitalism vs. Socialism
- Capitalism and Industrial Revolution
- The Voice of the Masses
- My View on Capitalism
Frequently Asked Questions
What is capitalism?
Capitalism is an economic system in which private individuals or businesses own and operate the means of production and distribution of goods and services. It is based on the principles of free market competition and the profit motive, with prices determined by supply and demand.
What are some advantages of capitalism?
Some advantages of capitalism include economic growth, innovation, and efficiency. Competition among businesses can drive them to create new products or improve existing ones, leading to increased productivity and growth. The profit motive can also incentivize individuals to work harder and be more productive, which can lead to higher wages and a higher standard of living.
What are some criticisms of capitalism?
Some criticisms of capitalism include income inequality, environmental degradation, and the potential for exploitation of workers. In a capitalist system, wealth tends to be concentrated among a small percentage of the population, leading to unequal distribution of resources. Capitalism can also incentivize businesses to prioritize profit over social and environmental concerns, leading to negative consequences such as pollution or deforestation. Additionally, some argue that capitalism can create a power imbalance between workers and employers, leading to exploitation and poor working conditions.
How does capitalism differ from socialism?
Capitalism and socialism are two economic systems that differ in their ownership and control of the means of production. Under capitalism, private individuals or businesses own and operate the means of production, while under socialism, the means of production are owned and controlled by the state or the community as a whole. In a capitalist system, prices and wages are determined by supply and demand, while in a socialist system, prices and wages are often set by the state.
Is capitalism the best economic system?
Whether or not capitalism is the best economic system is a subject of ongoing debate. Proponents of capitalism argue that it promotes economic growth and individual freedom, while critics argue that it can lead to inequality and exploitation. Ultimately, the effectiveness of a particular economic system depends on a variety of factors, including cultural values, political institutions, and the specific context in which it is implemented.
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