What Is Capitalism?

The dictionary defines capitalism as

"an economic system in which all or most of the means of production and distribution, as land, factories, communications, and transportation systems, are privately owned and operated in a relatively competitive environment through the investment of capital to produce profits: it has been characterized by a tendency toward the concentration of wealth, the growth of large corporations, etc. that has led to economic inequality, which has been dealt with usually by increased government action and control."

Also known as free market economy or free enterprise economy, capitalism is found in much of the Western world.

Capitalism, in its earliest stages, is referred to as mercantilism, a term that conjures up images of early merchants traversing the oceans, selling and trading their goods to make a profit. The basic idea is that goods are acquired for less than they are sold, with the merchant pocketing the difference.  

These early systems of capitalism originated in Rome and the Middle East, with merchants purchasing items in one place, then taking the goods somewhere else and selling them for a higher price.  Exploring other parts of the world was driven by this system, as countries wanted to sell their goods where they could make a profit.

Today's Meaning

Though capitalism is a European term coined during the Enlightenment, today the word carries a heavier meaning than that referring to an easily understood economic system. Much debate surrounds the social, economic, religious, and psychological effects of a capitalistic society.  Any economic system practiced by a society will influence the way those in that society think, and capitalism is no exception.

Capitalist Ideology

Capitalism focuses on the person as an individual. Rather than working for the good of society at large, individuals in capitalistic economies work for themselves, and often for their families as well. People are able to own personal property, and to keep what they earn (after taxes, that is – which is another debate entirely).  

Ideally, capitalism rewards a person fairly for his work. Because few things work out ideally, this of course does not always happen – not all jobs pay well and not all bosses are fair and honest.  However, capitalism does work with the grain of human nature.

Because there is no limit to how much work someone can do or how much he can earn for himself, capitalism encourages competition and high productivity, because good performance can lead to higher pay, promotions, and getting a job in the first place. When people perform well they turn out better goods and services, which in turn enhance the society that partakes of them.

Capitalism vs. Socialism and Communism

Capitalism is often juxtaposed with communism and socialism, which focus on the people in a society as a group rather than as unique and independent individuals.  

Though communism is an extreme form of socialism, both systems seek to take away individual ownership of goods, working instead towards shared ownership of goods by the people (communism), or ownership by a centralized government that distributes the goods to the people (socialism).  

For either system to work, each person in that society must buy into the idea that he is not working for the good of himself or his family, but rather the good of all of society. This goes against the grain of human nature, which is probably why citizens in countries under communist or socialist rule are not happy with their governments. (Pure communism can never happen, because someone needs to take charge, therefore creating a government.)  

These government leaders genuinely need to have the best interests of their people in mind for true communism or socialism to work (or, at the very least, the people need to believe that their leaders want their best interests) - which also, as history shows, goes against the grain of human nature.

Social Classes View of Capitalism

If you asked people of different socioeconomic classes about capitalism you might get different answers. The wealthy will most likely sing its praises, while the poor may say it is the very system that keeps them poor. Capitalism is not perfect; it does not by itself prevent selfishness or greed. However, it does protect individual freedom and encourage creativity.