Guide to Capitalism: 4 Characteristics of Capitalism

Capitalism is an economic and social system defined by the private ownership of property, production, and assets with little government intervention. Capitalism can be a free-market economy in which the production and sale of goods is based on the supply and demand of the market. This is the opposite of a command economy, in which the central government dictates what goods should be produced. The United States and much of Europe have mixed-market economies which combine elements of both a capitalist market economy and a socialist-style command economy. These systems generally allow a degree of economic freedom while allowing exceptions for government intervention, usually for certain social aims. Economic activity in a capitalist society is driven by the principle that businesses will sell their products at the highest price that consumers are willing to pay, while the consumers attempt to purchase those products at the lowest available price from the variety of options on the market. A capitalist system is defined by a number of key characteristics. Here is an overview of some of those characteristics. 1. __Competition__: A capitalist economy is guided by market forces in which consumers will pay the highest price for the items they want the most, and businesses will produce those items that will return a profit. Companies will compete to create better products for less money to attract more customers, which encourages competition. 2. __Private property__: Capitalism depends on economic freedom and protected ownership of resources to facilitate profit. In a capitalist society, the means of production are acquired through private enterprise, providing the owner of the private property with resources and value. There are systems in place, like contracts or deeds, for individuals or businesses to transfer their own property or capital goods 3. __Profit motive__: Private individuals and companies in capitalist societies are strongly incentivized by economic self-interest—whether through more money, rewards, or other benefits—to continuously produce their goods and services that benefit themselves, and may, directly and indirectly, benefit society. This concept is also referred to as “[The Invisible Hand](https://www.masterclass.com/articles/what-is-the-invisible-hand-in-economics),” coined by the eighteenth-century economist Adam Smith, who used this metaphor in his book *The Wealth of Nations* to describe the unintended greater social benefits and public good brought about by individuals acting in their own self-interests. 4. __Little government intervention__: As an economic theory, capitalism promotes the idea that the government should take a hands-off approach to the market and allow the economy to self-regulate. However, most capitalist countries operate under a mixed economy in which the government intervenes to provide regulations or impose taxes and tariffs to help stabilize its industries, promote social welfare, fund defense and public safety, or conserve natural resources. In mixed-market capitalist societies, the government does not make direct economic decisions for private individuals or incorporate central planning for production or price mechanisms, like in a command economy. Capitalism is an economic system that has a number of potential advantages, such as: 1. __It encourages efficient production__. Mixed-market capitalism rewards the most efficient producers since they can sell more goods and earn more money than inefficient producers. Companies strive to be reliable suppliers for consumers, leading to large-scale availability of products to meet growing or high demand. 2. __It facilitates rapid economic growth__. Limited government intervention encourages producers and consumers to accumulate wealth by offering their services to as many parties as they can. Before the widespread adoption of capitalism in the Industrial Revolution of the eighteenth and nineteenth centuries, resources were often acquired through conquest. Under capitalism, resources are required through free trade between any two parties allowing the producers of any resource to accumulate wealth and satisfying the needs of the consumer. 3. __It rewards innovation__. Capitalism provides incentives for economic growth. Exciting new products may satisfy consumer demand better than existing products, and competitors will recognize that they can increase their profit by producing an innovative product. Higher profits mean a higher accumulation of wealth, which can further incentivize people to invest in bigger and better technologies and systems. 4. __It offers social and financial freedom__. Those who live in capitalist societies are allowed to choose their own occupations to earn money and have the freedom to choose where to invest or spend their money to pursue a higher standard of living. Competitive market economies encourage successful businesses to invest in up-and-coming companies, thus increasing the quality of production. Capitalism has a number of potential disadvantages as an economic system, such as: 1. __It pressures production__. Since capitalism is largely driven by competition, companies may be pressured to produce goods or services at a rapid speed that may reward quantity over quality. This can sometimes lead to businesses short-cutting the factors of production, like opting for lower-quality raw materials or rushing jobs, instead of focusing on producing the best products possible. 2. __It limits economic checks and balances__. Capitalism intends to encourage competition but the limited checks and balances on economic growth may backfire to discourage it. If one company or business becomes a monopoly, they can hold exclusive power over one particular sector and be able to manipulate the market in potentially unfair ways. 3. __It limits equal opportunity__. In a capitalist market economy, there is no mechanism to help those who are inherently disadvantaged, such as the elderly or people with disabilities. The caretakers of those people are also at a disadvantage, as they must allocate their time and resources towards caretaking instead of pursuing a better opportunity for profit. Ownership of property also can create inherited wealth or capital accumulation, where an unequal allocation of resources means that the majority of wealth is concentrated in fewer hands. This can lead to unsustainable economic inequality and an imbalance between classes. Get the [MasterClass Annual Membership](https://www.masterclass.com) for exclusive access to video lessons taught by the world’s best, including Paul Krugman, Doris Kearns Goodwin, Ron Finley, Jane Goodall, and more. Capitalism is an economic system that encourages the private accumulation of profit and involves little government intervention.