What is Capitalism? Examples and Characteristics

Table of Contents

What is Capitalism?

Capitalism is an economic system in which private individuals own and control means of production. Here, private individuals and private businesses own capital goods or factors of production. The forces of demand and supply form the basis for the production of goods and services. This economic system is also known as a free-market economy. In this case, private individuals do not face any form of restraining from carrying out productions.

Private individuals decide what to produce, how to produce, and for whom to produce. They determine the price of goods and services as well as where to invest. The free market or the laissez-faire economy carries out its operations without any form of checks and controls. In other words, there exists a minimum government interference in production activities.

Therefore, capitalism or the capitalist economic system is a system in which basic economic problems are resolved. These problems include the production of resources, distribution, and efficient use of resources. Under this economic system, economic planning takes place through decentralized and voluntary decisions. The reverse is the case under the centrally planned economy (socialism) where the government owns and controls the means of production.

Historically, capitalism developed from the previous economic systems of feudalism and mercantilism in Europe. This greatly expanded the large-scale availability of massive market consumer goods in the market as well as industrialization.

The capitalist countries/economies

The capitalist economies are characterized by private ownership of means of production, capital goods, or factors of production. This is usually in the industrial sector. The capitalist economies depend on enforcing private property/ownership rights. This right provides for the incentives for investment and the productive use of capital.

We can contrast pure capitalism with pure socialism where the government owns and controls all means of production and the mixed economy where pure capitalism and pure socialism coexist. In the real world, capitalism involves some degree of crony capitalism. This comes as a result of the demands from businesses for favorable government intervention and the incentives to intervene in the economy.

Singapore, the United States, Japan, Canada, New Zealand, the United Kingdom, Switzerland, Australia, and Ireland are examples of capitalist economies. It is obvious that these economies are highly entrepreneurial and businesses have the freedom to operate freely and engage in international trade. The entrepreneurial nature of these economies has led to their high GDP as well as their growth.

Examples of capitalism

Singapore is a typical example of a capitalist economy. It had an amazing economic development which led to its present status, geographically, it is a small economy but economically, it has great power. Because of its open economic policies, it became a manufacturing and financial center which possesses low taxation and grants businesses the freedom to operate and trade internationally. It is a country that places value on transparency. In Asia, it is the central part of trading and investment where the Asian companies operate. Singapore is a great exporter of commodities like medical devices, electronics, chemicals, etc with little or no corruption.

This has helped in the rapid growth of its GDP. Because of its open economic policies, it has become a manufacturing and financial center where people are economically attracted to. It displays a real picture of free enterprise where there is a low tax rate and freedom of trading for business enterprises.

Hong-Kong is a special administrative region of China though its economy runs separately from China, though it still benefits from the country. It is a central avenue for trade and investment because it is open for market operations, investments, and trade. There is no imposition of tariffs on the goods imported into this region. Because the Chinese government restricts trade and investment, investors and businesses go to Hong Kong. It is a region with big industries that facilitate international trade and the city benefits from being open to international trade and investors. It is one of the top economic performers and one of the most competitive economies in the world.

New Zealand as another example was a British colony. Exportation and importation have made up most of the country’s gross domestic product and income and the tariffs are low. The country is a major exporter of agricultural products as well as dairy products such as cheese, butter, and milk. Also an open center for trade and investment. Capitalism has made this country to be able to develop advanced techniques in farming with large agricultural and manufacturing industries.

Types of capitalism

Turbo capitalism

This is an unregulated form of capitalism with the removal or absence of regulation on finances and the banking system, privatization, and lower tax rates on higher-income earners. This system encourages banks to take financial risks and pursue profit. Usually, banks under this system will pursue profit through complex financial derivatives instead of the basic principles of attracting cash deposits and lending to customers.

Also, low-income taxation and low capital gains taxation offer greater rewards to the higher income earners.

Also, there exists less regulation on the abuse of monopolistic power. This means that with the absence of regulation, there tends to be an abuse of monopoly/monopolistic power. Also, when there is no regulation in the labor market, it is easy to hire and fire employees. In essence, there is a very limited regulation pertaining to working conditions. We can refer to the turbo capitalist economic system as unrestrained capitalism or free-market capitalism.

Market capitalism

This describes the pure capitalism in which private individuals and corporations own and control means of production. In this case, private investments are the vehicles that drive the economy. It is a place where private competitive markets connect or link both workers and employers. We can also call it free-market capitalism.

Responsible capitalism

This is a free-market economy with an extent of government regulation. This regulation is meant to avoid the abuse of monopolistic power and reduce financial and income inequality. It has to do with a wide extent of welfare to protect the unemployed and the low-income earners. Also, this system possesses a progressive system of taxation where high-income earners pay higher taxes than those who earn a low income. This progressive tax system is to help in finding government spending.

Though most industries are in the private sector, the government will be responsible to some extent for areas with existing positive externalities. They are also responsible for social benefits such as education, health care, and public transportation.

The system also possesses the willingness to protect the right of workers/employees as well as regulating monopolies. This is quite similar to that of the social market economy.

Crony capitalism

This is a form of capitalism that bases on the close relationship between businesses/or businessmen and the state.

Instead of the free market and the rule of law to determine the success of a business, it depends on the favoritism that the government shows on it. This usually comes in the form of government grants, tax breaks, and some other incentives. In other words, we use the term to refer to a situation in which the success of a business depends on strategic influences with civil servants, politicians, and those who possess authority. Here, businesses tend to buy off politicians in order to gain favor from them.

For example, the power of the Mafia in Italy displays crony capitalism.

Practically, it is the prevailing form of capitalism all around the world. This is because of the rewards governments face to extract resources through taxation, regulation, and encouraging rent-seeking activities. Also, the incentives that capitalist businesses face to increase their profits by obtaining subsidies, limiting competition, and putting up restrictions to entry. The effects of these forces are that they bring about a form of demand and supply for the intervention of the government in an economy. This thing arises from the economic system itself.

The crony capitalist system has been criticized for an event of economic and social grief and calamity. Both the capitalists and the socialists blame each other for the existence of crony capitalism. While socialists believe that this form of the capitalist economy came as a result of pure capitalism, capitalists believe that this came about as a result of the government trying to control the economy.

Advanced capitalism

It has to do with the integration and the extensive development of the capitalist model for a prolonged period. The term expresses the distinction between the previous forms of capitalism and the present forms. It refers to societies where there is a firm establishment of capitalism. There is a wide acceptance of the existing state of an economy and little political action over basic issues (political). Consumerism is an important concept. Under this, there also exists an establishment of welfare to fight the worst and extreme disadvantages of capitalism.

State capitalism

This is a situation whereby state-owned industries play a vital role in the market economy. Under this, the government also plays a major role in planning. For example, making decisions to invest in communication and transportation. While private sectors play a vital role, the government plays a vital role such as planning, transportation, and influence on monetary policy and exchange rate policy. It is distinct from state socialism in the sense that there is no allowance for private enterprise and competition under state socialism. China tends to be a representation of state capitalism.

Vulture capitalism

Vulture capitalism is the act of buying up struggling firms, taking away their assets, and giving a few venture capitalists the ability to make a profit at the detriment of genuine businesses and ordinary workers. This term originates from vulture which looks for distressed animals to devour them or finish them up.

It closely relates to violent take-overs. Here, the capitalists buy existing firms, lend them money, and sell away their assets. This causes those struggling firms to struggle the more, that is a prolonged struggle. Now, if the firm goes out of business/fails, the vulture capitalists have already gained from the selling of those assets and lending the firms money at profitable interest rates.

Vulture capitalists place their priority on generating personal gains order than the long-term wellbeing of the firm.

Popular capitalism

It is a theory that bases on the suggestion that everyone in a society should have the opportunity to possess personal property and shares in a company. It has to do with a wider spread of private ownership of properties and wealth.

Here, the system makes sure that everyone benefits from economic growth. It is characterized by social welfare.

In assumption, the system is willing to place higher regulation on the financial institutions to prevent excess risk involvement and growing inequality.

Social capitalism

Social capitalism can also refer to moral capitalism. It is any capitalist system that comes with the beliefs or principles of equality, liberty, and justice. It places value on every form of capital including social capital, human capital, and natural capital rather than pressing towards accumulating only the economic forms of capital. This also involves profit maximization for the entire society. The system eliminates externalities and stops labor and humans from being treated as commodities.

Venture capitalism

Venture capitalism is the type of capitalism in which an investor known as the venture capitalist makes capital available to companies that possess a high potential for growth and expansion. The venture capitalist does this in exchange for an equity stake. It involves funding a newly established venture or giving financial support to small and developing companies. These small companies are those that wish to expand but lack access to funds.

Human capitalism

Human capitalism implies that humans are more important than money. The private properties are dormant and almost useless if there is no human to control them, putting them to productive use. Capitalism has led to great improvement and innovation in the economy, in the human condition. Rather than focusing on each unit/currency, human capitalism is each person in the capitalist economy. This takes us back to the human capital which has to do with social personality and creativity.

Characteristics of capitalism (features)

Private ownership

In a pure capitalist economy, private individuals own all the means of production in a country’s economy. On the other hand, the government maintains laws and order. In essence, private ownership exists which is the major feature of this economic system. An individual is able to gather property and use it at his will.

Price mechanism

It has a pricing system that works freely which guides production and consumption. The producers and the consumers who are able to afford scarce resources allocate them for production and consumption. Here, the price system is the factor that determines what producers should produce. They take into consideration the demand of consumers for that commodity and the price they offer the commodity for sale.

In other words, the price system refers to the forces of demand and supply without external intervention. The pricing system helps producers to determine what to produce, how to produce, for whom to produce, when to produce, and where to produce.

The system allows supply to adjust to demand and all economic processes move according to its directions. These economic processes include production, distribution, consumption, saving, and investment. Adam Smith refers to the price system as the invisible hand that controls the capitalist economy.

Profit motive

Under this system, producers carry out their activities with the motive of maximizing profit. The profit motive is the mystery that lies behind every decision that relates to what to produce, how to produce, etc. The desire to make a profit is the most important factor that induces every economic activity. Every entrepreneur sets up a business firm that they believe will generate the highest profit returns for them. They abandon the industries that they presume to run at loss. We can therefore say that the profit motive is the lifeblood of a capitalist economy.


Free competition exists in a capitalist economy because entrepreneurs compete to get the highest profit. Buyers also compete to purchase goods and services. Also, workers compete among themselves for carrying out a particular job.


There exists freedom of enterprise, ownership, occupation, and control. Everyone has the right and freedom to start any business of his choice as well as entering into a contract. Every individual has the right to own capital assets and properties. One can accumulate property and use it as he wishes. An individual is free to own and control factors of production. The government controls the right to own private property so that after death, successors take over. We can say that the system of inheritance exists. In essence, everyone is entitled to acquiring private property.

Consumer sovereignty

Under the capitalist economy, the consumer is always right. We compare the consumer to a sovereign king. The entire production performance works according to his direction. The tastes and preferences of the consumer rule the line of production. This is so because the firms, entrepreneurs, and producers have to sell their products. If the consumers like a particular type of production, it is certain that the producers will gain higher profit

Class conflict

There is usually class conflict that arises under this economic system. Usually, the society will be in two segments, the ones that have and the ones that do not have. Or we can say the higher class and the lower class. These classes of people are usually in conflict with each other. In capitalist economies, there is usually a conflict between labor and capital. This problem seems to have no solution. In essence, the problem of class conflict is peculiar to the capitalist economy.


Entrepreneurship is the starting point of a capitalist economic system. The entire economic formation of capitalism is based on the entrepreneurial class. The role of entrepreneurs is very important. They play a leadership role in various production fields. When good entrepreneurs are present, the competition will be healthy.

Minimum government interference

Government interference is minimum both in the individual lives and the business sector. In this case, the government aims at providing general justice to the people. They ensure that individuals maintain law and order. Social services such as education, roads, electricity, water, individuals cannot provide conveniently. In this case, the government steps in. Another thing the government does here is to defend the citizens.

Freedom of choice

Capitalism provides choices for individuals. Consumers can choose whatever brand of products they want to buy. Everyone has the right to choose his occupation as well as work wherever they want to. This makes every individual to be entitled to his own choice.

Capitalism Pros and Cons

1. Advantages of capitalism

Efficient resource allocation

Competition leads to the most efficient resource allocation. This is because companies utilize the factors of production. This fosters efficient production. Producing firms adopt strategic means of cutting down their costs as well as improving competitiveness and productivity. If firms become unproductive, they will go out of business.

Capitalism is theoretically is the invisible hand of the market that ensures the distribution of resources based on the preferences of the consumers. Firms do not gain rewards for producing what consumers do not want. In other words, producers produce goods according to the demands of the consumers. Firms that are not efficient will not be able to survive in a competitive business environment.

Utilization of available resources

Under this economic system, there exists an optimum utilization of resources that are available. Producing firms put their scarce resources to the most efficient and economic use to avoid waste as much as possible. In other words, every producer gives in his best in trying to use productive resources at his disposal in the most economic way in order to maximize profit. When this happens, there will be efficient production of commodities and services. Where firms find out more superior production methods in order to derive high-quality products at the lowest possible cost. This is the process of utilization of available resources thereby making methods of production more efficient.

Financial incentives

Usually, every business carries out research and development to expand their firms and make sure that they do not go out of business. Entrepreneurs get the motivation to be constantly innovative  This happens because companies compete. Producers compete for the consumer’s money by improving the quality of their products. Business firms take risks in setting up businesses. This is because of the large financial rewards that follow. If the scope for private profit is not present, then new firms will not come up. Businesses only produce the goods and services that are profitable.

Minimal discrimination

This economic system is a tool to bring people together and overcome discrimination. It encourages both domestic and international trade. This incentive also works towards breaking down barriers. It also works towards bringing people and countries together. It ignores racial differences, tribal differences, and religious differences. People who hate one another can deal with and help one another. Quoting Gary Becker, profit motive would penalize those firms and individuals who practice racial discrimination.

Raising the standards of living

There is an improvement in the standard of living of the people and the reduction of poverty. When the economy grows, there will be a rise in the standard of living within an economy. We can trace an improved standard of living to a fall in the poverty rate.

Consumer choices

You can choose the price to pay for a particular product as well as the brand you want to pay for. In other words, consumers choose whatever they want to consume. Competition develops in the private sector. This is to provide the best quality of possible goods and services. Competition develops as a result of these choices. This advantage boosts the level of innovation. The reason is that everyone wants to buy the commodity he can afford at its best quality. Affordable items with better quality always exist under this economic system.

Creative destruction

If firms lose their efficiency, they will go out of business. Because of this, short-term problems such as unemployment will result. As a result of this, the capitalists become more innovative in handling factors of production, that is, labor and capital become more innovative and efficient.

Dynamic efficiency

Firms under capitalism can respond to changes in consumer preferences. They respond to new consumer trends. It has to do with efficiency in response to changes in consumer taste and preferences.

Minimal government control

Basically, when the government attempts to control the economy, it ends up with problems. These problems include corruption, poor information, and lack of incentives.  The economy will be in danger when a corrupt government controls it, it does more harm than good. In this case, the economy can be eroded.

Freedom of Choice

Consumers have the right to choose from the varieties of commodities offered to them by different companies and brands. So you do not have to buy a specific product or brand from a specific company all the time. In other words, there are varieties of consumer goods in sizes, designs, shapes, etc.

Also, every individual has the right to own and retain their properties as well as freedom of enterprise and choice of occupation. A worker can demand higher pay. This helps to channel labor force/manpower into various fields. You do not need to direct people or impose any occupation on them. The freedom of contract also exists. This helps to ensure a flexible operation of various units of production.

There exists economic freedom which as well fosters political freedom. A strong relationship exists between these variables. These rights include setting up new businesses and choosing where to work. This economic system, therefore, fosters political freedom.


Every individual is free to pursue his own interest and satisfaction. This implies that one can do whatever he wants to do without experiencing any form of political and civil pressure. This bases on the idea that the actions of people will help the entire society. Humans are the most productive factors. This happens when they are able to earn money that gives them both political and financial freedom.


Because of the fact that everyone is free to own assets, companies are able to study the demand of consumers and produce commodities that will satisfy their wants. With the growth of demand, businesses go into the market and compete with one another for the consumer’s patronage and money. This is good because firms get more motivation to produce goods of higher quality and sell at lower prices. Companies will also need to hire more labor and pay them better wages.

Invention and innovation

The idea of capitalism encourages businesses to bring up new business ideas. this will as well encourage efficiency in the market environment. Finding new business ideas and applying them to production processes leads to rapid expansion, more employment opportunities, and greater income. Innovators enjoy the benefits of their research as they bring to existence things that never existed before.

2. Disadvantages of capitalism

Higher-income and wealth inequality

As a result of high competition, businesses will not care for the disadvantaged and less privileged.  This class of people includes the aged, disabled, and orphans. This deviates focus from the benefits of society leading to higher income inequality. This is because capitalism bases on self-interest rather than the interest of society. Some businesses can exploit consumers.

Economic instability

It is pleasurable to live in a capitalist society during the period of expansion. When the economy begins to contract, there will be a higher chance of a recession occurring thereby increasing the unemployment rate. Those with higher wealth can withstand this period. This is because they go back to fetch wealth from their reserves to maintain their quality of life. Low-income earners will not have the opportunity to enjoy that luxury.

Sometimes the growth rate is slow even though the capitalist economy works automatically. Even as the economy progresses, there is no complete or all-around development. Some industries tend to develop faster than others.

A capitalist economy can be unstable where there is a recurring business cycle. There are times that economic activities experience a slump. There is a tendency that when prices fall, firms may close down thereby rendering workers unemployed. In essence, capitalism does not always stay on the growth pattern.

Fewer advantages for the low-skilled people

Real capitalism expects people to remain competitive. Competition is needed to remain active in the economy. If you lack the skills in demand, there may be no place for you to exist. Social safety and empowerment programs are not part of the theory. It is either you contribute or you do not. You will face life-threatening experiences when you are not able to contribute. Every individual always looks out for themselves above every other person. There will be less emphasis on social welfare and security.

Requirements for successful consumption

Capitalism is more effective only when consumers spend their money. If consumers decide to save, then there will be struggles to survive as profit is the sole aim and objective. In essence, capitalism requires consumption to be successful to survive.

Ignorance of ongoing opportunities

The capitalist does not define “fairness” the same way as other market systems will. Even though everyone has an equal opportunity to pursue success, some factors can limit this possibility. Those with more money have more chances than those with less money.

Consumerism and environmental costs

We describe the capitalist economic system as the engine of productivity and growth. Though it has pushed the economy to the future, it has led to environmental disasters thereby raising questions pertaining to sustainability. This economic system requires endless production for it to remain stable. It is a true fact that production is highly dependent on consumption. The higher the consumption, the higher the rate of productivity. Higher production is equal to higher sales and this leads to higher profits. Usually, production processes come with effects on the environment.

While capitalism sets one of its goals on cheaper and accessible goods in the short run, it can lead to a long-term impact that is detrimental to the environment. Firms usually ignore environmental pollution and climatic changes in the process of production. while making commodities available at lower prices in the short run, capitalism depletes natural resources in the long run thereby lowering the overall quality of life in society.

Greed while seeking profit

In a capitalist economy, profit comes first but this can lead to greed. Focus on profit tends to make producing firms compete with one another. It does not stop there, they sell their goods at the highest price while keeping their costs low. There is no equal opportunity because the system may not be favorable for those that lack competitive skills.

Therefore, obsession with profits amounts to both social and economic inequality. The group of people controlling production tend to gather more wealth than the employees who contributed to creating that wealth. Workers receive pay that is far below their productivity.  Because the rich pass their wealth to their heirs, the rich become richer while the poor get poorer. This economic system widens the gap between the rich and the poor.

Monopoly power

It is very possible for a single firm to become dominant in the market since this is a free market. When this thing comes about, a firm can charge any price it wishes to. In this case, consumers will have no other choice but to pay higher prices. This leads to the abuse of monopoly power. When few competitors gain more understanding, they begin to exploit consumers. There are times that larger firms buy over or eliminate the smaller firms. They usually do this in order to establish their supremacy in some specific lines of production. In this instance, when they charge higher prices, they do not face any compulsion or pressure to improve their efficiency in production.

Workforce limitations

Theoretically, factors of production should be able to graduate from an unprofitable to a profitable business. It is unfortunate that this does not work for the labor force. There usually exists some unemployment. This is because the market mechanism is slow to adjust to changing circumstances. The fluctuations in business have more negative effects on the labor force, resulting in massive unemployment. This usually becomes fatal during economic depressions. In this case, workers will not be able to secure full-time jobs unless during an economic boom.

Neglect of social benefits

Usually, capitalists tend not to care about providing social benefits like healthcare and education. Social welfare benefits do not generate profit for the capitalist since profit is his motive. Because of this, the government has to step in to provide these services.

Class struggle

Class conflicts and struggles are inevitable in the capitalist system. The class of people is few while those that do not have are in majority. Because of this, wage earners tend to face exploitation from capitalists. This, in turn, will result in conflicts between the employers and the employees thereby leading to labor unrest. These unrests include strikes, riots, etc. This has a very negative effect on both production and employment.

Capitalism and private property ownership

The right to own private property is fundamental to the capitalist economy. possessing private property promotes efficiency. This happens because it gives the owner incentives to maximize their property’s value. A property possesses more trading power for the owner when it is more valuable. This means that the owner of the property is entitled to any value associating with the property.

For businesses and individuals to be confident while deploying their resources, there must be an existing system that protects their legal right of ownership as well as the transfer of property. A capitalist environment will have to depend on the use of contracts, fair dealing, and the law of torts to facilitate these private property rights.

There will be a problem which we call the tragedy of the commons when the property is not privately owned but shared with the public. When there is a pool of resources that everybody can make use of, no one can limit access. This makes every individual have an incentive to derive as much value as possible from the use. There is no incentive to conserve or reinvest in these productive resources or properties. One possible solution to this problem alongside some collective action approaches (either voluntary or involuntary).

Development of capitalism

We can trace the historical development of capitalism from the previous economic systems; feudalism and mercantilism in Europe. As a result of this, the large-scale availability of massive consumer goods in the market and also industrialization. We shall look at feudalism as the root of capitalism, how mercantilism replaced feudalism, and the growth of industrial capitalism as well as its effects on the economy.

Feudalism the root of capitalism

We can see feudalism as a system in which those of higher rank gave land and protection to people. These people in return would work and fight for property ownership.

Capitalism evolved from European Feudalism and less than 5% of the population of Europe lived in towns until the 12th century. Though skilled workers were living in the city, they received their allowances from their feudal lords instead of the real wage. Most workers then were agricultural laborers who worked for the lords thereby enjoying some little legal and customary rights. In the late middle ages, urbanism was rising with the cities as centers of industry and trade. This increasingly became economically important.

The arrival of true wages that trades offered motivated more people to migrate to the towns where they would generate more income instead of just subsistence in exchange for labor. Offsprings of families who needed to be put to work were able to get new sources of income in the towns of trade. Child labor was part of the economic development of the towns just as serfdom was part of rural life.

Mercantilism Replaces Feudalism

Gradually, mercantilism replaced the feudal economic system in the Western part of Europe. In the 16th to 18th centuries, it became the fundamental economic system of trade and commerce. Mercantilism, though it was not necessarily a competitive trade, it started as trade between towns. In an initial state, every town had widely different goods and services that were made homogenous by demand over time.

After homogenizing goods, people carried out trade in broader circles. That is from town to town, from country to country, from province to province, and from nation to nation. Trade started becoming competitive when too many nations were supplying similar commodities for trade. This trade then began to take on a competitive edge which was sharpened by strong feelings of nationalism within the continent.

Colonialism and mercantilism

Colonialism together with mercantilism prospered but the nations allocating the world with settlements were not working towards increasing trade. Most colonies were in an economic system that flavored feudalism with their raw materials returning to their motherland. The coercion of British colonies to repurchase the finished products using the pseudo currency hindered them from engaging in trade with other nations.

Adam Smith discovered that mercantilism was not a driving force of change and development. He discovered that it was a system regressive in nature that was responsible for creating an imbalance in trade between nations. This in return was a factor that was hindering them from advancing. It was his idea for a free market that opened up the world to capitalism.

Industrial capitalism

As a result of Adam Smith’s ideas, the industrial revolution began to cause vibrations that would shake the Western world. Colonialism brought about new wealth as well as new demand for products of domestic industries. This brought about mechanized production thereby leading to expansion of production in industries. As technology kept on springing forth, it was no longer necessary for industrialists to build factories close to waterways or windmills to function properly. They started to build these factories in cities containing thousands of people to supply labor readily available.

wealthy and powerful (industrial) business people were the first to accumulate their wealth in mass. Usually, they were leaving behind the landed nobles and money-lending families. They built more factories, requiring labor as well as producing more commodities to purchase.

Its growth and impact

It was during this period that capitalism originated from a Latin word, “capitalis”. This Latin word means “head of cattle”. In 1850, French Socialist Louis Blanc first used the word to signify “a system of exclusive ownership of industrial means of production by private individuals instead of collective ownership. In contrary terms, Karl Marx did not makeup and establish the word “capitalism”, but he contributed greatly to facilitating the rise of its use.

Industrial capitalism contributed to the growth of the economy. More levels of society benefited, the formation of unions helped wages to increase. There arose the standard of living, there was massive production thereby making the products to be affordable. Also, the lower class of people began to experience lifting to the middle and the higher class.

A great expansion in the financial industry really facilitated the growth of industrial capitalism. Banks served as warehouses for valuables, lenders of last resort, etc. Commerce became promoted, there were loan facilities available and long-term investment projects. In the 20th century, economists were able to identify a variation on the system called “financial capitalism” which came about as a result of an increase in the stock exchanges. The investment was open to more individuals even as the stock exchanges increasingly became public.

Capitalism Vs Socialism

Differences between Capitalism and Socialism

The opposite of capitalism is socialism and in the political economy, capitalism is preferable against socialism. The basic difference between capitalism and socialism is the ownership as well as the control of the means of production. While under capitalism, private individuals own and control all means of production, under socialism, it is the state/government that owns and controls all means of production. These means of production include property and businesses. We can also look at some visible differences in the aspect of equity, efficiency, and employment. It is


The capitalist economy does not place its concerns on equitable arrangements. Here, the argument states that inequality is the force that drives and encourages innovation thereby pushing economic development. Socialism places its concerns on redistributing wealth and resources from the rich to the poor. This act is out of fairness in order to make sure that there is equality in opportunity and of outcome in place. Socialism values equality above high achievement. Also, the system views the collective good and welfare of the people above the opportunity available for individuals to advance.


Under capitalism, the profit incentive is the factor that drives firms to be innovative and bring in new ideas. Doing this has to be according to the desires of the consumers as well as the demand in the market. On the other hand, many have argued that when the state owns and controls the means of production, there will be inefficiency in the use of resources. This is because workers, management, and developers tend not to put on more effort into bringing in new ideas and products when there is no motivation to earn more money.


The state does not directly hire labor under the capitalist economic system. AS we have seen in the disadvantages, this can lead to unemployment in an event of a recession or economic depression. On the other hand, the state is primarily the employer under the socialist economic system. In cases of economic hardship, the state will be able to order hiring in order to foster full employment. There also seems to be a stronger safety net or protection under socialism for the injured and permanently disabled as well as a conducive working environment. Those who are no longer able to work under the capitalist economy have fewer options available to them.

Capitalism Vs Communism

Difference between Capitalism and Communism

In a simple definition, capitalism is an economic system in which private individuals own and control all means of production with the motive of making profits. On the other hand, communism is a social system in which the community owns and controls all means of production as well as the country’s trade and industry.

While under capitalism, the principle is based on individual rights, the principle is based on the community right under communism.

Capitalism is a system that promotes class distinction and conflict while communism is a classless society, everyone is equal.

While capitalism possesses a democratic system of government, Communism operates based on the totalitarian system of government. Totalitarian is a system of government where the people have almost no authority. The state has absolute control over every sector of the country. While under capitalism there is minimum government interference, under communism there is a high rate of government interference.

The wealth distribution under the capitalist economy is based on the fact that every individual work for himself to create wealth. On the other hand, the wealth distribution is based on needs and ability under communism. The former possesses individual freedom to privately own factors of production while the latter possesses societal freedom and state ownership of all factors of production.

Capitalism is a free and competitive market while communism is not competitive but state-owned.

Frequently asked questions

What is capitalism in simple terms?

Capitalism is simply defined as an economic system in which private individuals, businesses, and corporations own and control all means of production. It is also known as a free enterprise or free-market economy. There are no restrictions on private ownership of private property.

Is capitalism good or bad?

As we have seen in the pros and cons of capitalism, the economic system is both good and bad. It is good because it provides an avenue for choices, there is minimum government interference, competition leads to improved production as well as invention and innovation. It is bad because it can lead to greed. See the pros and cons above.

How is capitalism bad? Why is capitalism evil?

The disadvantages of capitalism explain in detail why it is bad or evil. Among these disadvantages, it leads to greed in the quest for profit. This, in turn, leads to consumer exploitation when price becomes uncontrolled. While the rich get richer, the poor keep getting poorer thereby widening the gap between the rich and the poor. Also, there tends to be an abuse of monopoly power in this system. These are few factors out of many that make the system bad/evil.