ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Economic Philosophies: Capitalism

  • Capitalism is one of the most popular economic ideologies in the world
  • It is at the core of most of the so-called western economies
  • As already said capitalism is just one of many economic philosophies
  • At the heart of capitalism is the belief that factors of production (resources) should be privately owned and operated on a for-profit basis

Features of capitalism

  • As already said the main feature of capitalism is the belief that factors of production should be held by private individuals ( or groups of individuals) and operated on a for-profit basis
  • Here the (capitalist) economy is driven mainly by the self-interest of those who own the factors of production
  • It is assumed that the owners of the resources are rational human beings who want to increase their wealth (self-interest) and in the process of trying to do so they will be able to efficiently satisfy the human needs and wants of the societies in which they live
  • Adam Smith captured this belief perfectly in his book The Wealth of Nations:

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.

Adam Smith-The Wealth of Nations 1776
  • The word capitalism comes from the French word capitalis which means head of cattle, thus reinforcing the idea of ownership of the means of production
  • Capitalism gained prominence during the inception and rise of the industrial revolution
  • It replaced/supplanted feudalism as the dominant economic ideology
  • Capitalism is also characterised by the idea of property rights
  • Once an individual or like-minded group of individuals has a legitimate claim to an asset they can only lose it through
    • Free exchange e.g. selling it for money or shares
    • Inheritance where they bequeath it to their chosen heir
    • Gifting i.e. giving it away freely as a gift
  • Another distinguishing feature of capitalism is capital accumulation where capital (wealth) is accumulated by those who are most successful in the market
  • This gives individuals a powerful incentive to work, innovate and improve things
  • Ultimately capitalism leads to capital concentration where wealth is in the hands of a few individuals
  • In the western world, these are sometimes colloquially referred to as the 1% who may or may not be 1% of the population
  • This (the concentration of wealth in the hands of a few) is also known as the Pareto principle or the 80-20 rule
  • Another feature of capitalism is the belief in voluntary participation
  • This means that individuals are free to start a company in any field that they want or pursue a career of their choice
  • In capitalism, free markets make decisions instead of the government/leaders of society
  • The market forces of supply and demand, for example, are used to set prices
  • As already said eventually capital and other means of production will in the hands of a few people
  • The rest of the population makes their living as wage labourers
  • They ply their services, knowledge and skills in return for a wage
  • These people are known as the working class
  • Like with most things the wage they earn is also determined by the forces of supply and demand
  • An inherent feature of capitalism is competition
  • The idea is that competition will be used to efficiently allocate resources,s improve quality of products, lower prices etc
  • Proponents of capitalism believe that if the government intervenes, it will tilt the delicate balance between competing firms and result in inefficiency
  • However, in pure capitalism, monopolies have been known to grow and thrive, this is because if a certain firm starts dominating a sector, it can prevent new entrants from coming into the sector
  • In a pure form of capitalism known as Laissez-faire firms (businesses) are left to fend for themselves without any government intervention
  • This is something that never happens in the real world these days because eventually, problems like market failure arise
  • In reality, governments have to intervene:
    • They set regulations for example safety regulations to prevent pollution that would arise if pure capitalism was left unchecked
    • Raise taxes so as to be able to provide necessary public and merit goods such as roads and defence
    • Offer subsidies to some temporarily struggling sectors whose failure could lead to catastrophic outcomes for example farming subsidies
  • Like all the other ideologies capitalism has its merits and demerits

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