when property isn t privately owned but rather is shared by the public a problem known as the tragedy of the commons can emerge with a common pool resource which all people can use and none can limit access to all individuals have an incentive to extract as much use value as they can and no incentive to conserve or reinvest in the resource privatizing the resource is one possible solution to this problem along with various voluntary or involuntary collective action approaches 3
under capitalist production the business owners retain ownership of the goods being produced if a worker in a shoe factory were to take home a pair of shoes that they made it would be theft this concept is known as the alienation of workers from their labor capitalism and the profit motiveprofits are closely associated with the concept of private property by definition an individual only enters into a voluntary exchange of private property when they believe the exchange benefits them in some psychic or material way in such trades each party gains extra subjective value or profit from the transaction the profit motive or the desire to earn profits from business activity is the driving force of capitalism it creates a competitive environment in which businesses compete to be the low cost producer of a certain good in order to gain market share if it is more profitable to produce a different type of good then a business is incentivized to switch 4voluntary trade is another related mechanism that drives activity in a capitalist system the owners of resources compete with one another over consumers who in turn compete with other consumers over goods and services all this activity is built into the price system which balances supply and demand to coordinate the distribution of resources 1a capitalist earns the highest profit by using capital goods such as machinery and tools most efficiently while producing the highest value good or service by contrast the capitalist suffers losses when capital resources aren t used efficiently and instead create less valuable outputs capitalism is a system of economic production markets are systems of distribution and allocation of goods already produced while they often go hand in hand capitalism and free markets refer to two distinct systems precursors to capitalism feudalism and mercantilismcapitalism is a relatively new type of social arrangement for producing goods in an economy it arose largely along with the advent of the industrial revolution some time in the late 17th century 5 before capitalism other systems of production and social organization were prevalent capitalism grew out of european feudalism up until the 12th century a very small percentage of the population of europe lived in towns skilled workers lived in the city but received their keep from feudal lords rather than a real wage and most workers were serfs for landed nobles however by the late middle ages rising urbanism with cities as centers of industry and trade became more and more economically important under feudalism society was segmented into social classes based on birth or family lineage lords nobility were the landowners while serfs peasants and laborers didn t own land but were under the employ of the landed nobility the advent of industrialization revolutionized the trades and encouraged more people to move into towns where they could earn more money working in a factory than existing at a subsistence level in exchange for labor mercantilism gradually replaced the feudal economic system in western europe and became the primary economic system of commerce during the 16th to 18th centuries mercantilism started as trade between towns but it wasn t necessarily competitive trade initially each town had vastly different products and services that were slowly homogenized over time by demand 6after the homogenization of goods trade was carried out in broader and broader circles town to town county to county province to province and finally nation to nation when too many nations were offering similar goods for trade the trade took on a competitive edge that was sharpened by strong feelings of nationalism on a continent that was constantly embroiled in wars colonialism flourished alongside mercantilism but the nations seeding the world with settlements weren t trying to increase trade most colonies were set up with an economic system that smacked of feudalism with their raw goods going back to the motherland and in the case of the british colonies in north america being forced to repurchase the finished product with a pseudo currency that prevented them from trading with other nations it was economist adam smith who noticed that mercantilism was a regressive system that was creating trade imbalances between nations and keeping them from advancing his ideas for a free market opened the world to capitalism 7adam smith s ideas were well timed as the industrial revolution was starting to cause tremors that would soon shake the western world the often literal gold mine of colonialism had brought new wealth and new demand for the products of domestic industries which drove the expansion and mechanization of production as technology leaped ahead and factories no longer had to be built near waterways or windmills to function industrialists began building in the cities where there were now thousands of people to supply labor capitalism involved reorganizing society into social classes based not on ownership of land but ownership of capital in other words businesses capitalists were able to earn profits from the surplus labor of the working class who earned only wages thus the two social classes defined by capitalism are the capitalists and the laboring classes 8industrial tycoons were the first people to amass wealth often outstripping both the landed nobles and many of the money lending banking families for the first time in history common people could have hopes of becoming wealthy the new money crowd built more factories that required more labor while also producing more goods for people to purchase during this period the term capitalism originating from the latin word capitalis which means head of cattle rose to prominence in 1850 french socialist louis blanc used the term to signify a system of exclusive ownership of industrial means of production by private individuals rather than shared ownership 9pros and cons of capitalismmore efficient allocation of capital resourcescompetition leads to lower consumer priceswages and general standards of living rise overallspurs innovation and inventioncreates inherent class conflict between capital and laborgenerates enormous wealth disparities and social inequalitiescan incentivize corruption and crony capitalism in the pursuit of profitproduces negative effects such as pollutionmore efficient allocation of capital resources labor and means of production follow capital in this system because supply follows demand competition leads to lower consumer prices capitalists are in competition against one another and so will seek to increase their profits by cutting costs including labor and materials costs mass production also usually benefits consumers wages and general standards of living rise overall wages under capitalism increased helped by the formation of unions more and better goods became cheaply accessible to wide populations raising standards of living in previously unthinkable ways spurs innovation and invention in capitalism inequality is the driving force that encourages innovation which then pushes economic development creates inherent class conflict between capital and labor while capitalists enjoy the potential for high profits workers may be exploited for their labor with wages always kept lower than the true value of the work being done generates enormous wealth disparities and social inequalities capitalism has created an immense gap between the wealthy and the poor as well as social inequalities can incentivize corruption and crony capitalism in the pursuit of profit capitalism can provide incentives for corruption emerging from favoritism and close relationships between business people and the state produces negative effects such as pollution capitalism often leads to a host of negative externalities such as air and noise pollution and these costs paid for by society rather than the producer of the effect capitalism vs socialismin terms of political economy capitalism is often contrasted with socialism the fundamental difference between the two is the ownership and control of the means of production in a capitalist economy property and businesses are owned and controlled by individuals in a socialist economy the state owns and manages the vital means of production however other differences also exist in the form of equity efficiency and employment the capitalist economy is unconcerned about equitable arrangements the primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor out of fairness and to ensure equality in opportunity and equality of outcome equality is valued above high achievement and the collective good is viewed above the opportunity for individuals to advance the capitalist argument is that the profit incentive drives corporations to develop innovative new products desired by the consumer and in demand in the marketplace it is argued that the state ownership of the means of production leads to inefficiency because without the motivation to earn more money management workers and developers are less likely to put forth the extra effort to push new ideas or products in a capitalist economy the state doesn t directly employ the workforce this lack of government run employment can lead to unemployment during economic recessions and depressions in a socialist economy the state is the primary employer during times of economic hardship the socialist state can order hiring so there is full employment also there tends to be a stronger safety net in socialist systems for workers who are injured or permanently disabled those who can no longer work have fewer options available to help them in capitalist societies philosopher karl marx was famously critical of the capitalist system of production because he saw it as an engine for creating social ills massive inequalities and self destructive tendencies marx argued that over time capitalist businesses would drive one another out of business through fierce competition while at the same time the laboring class would swell and begin to resent their unfair conditions his solution was socialism through which the means of production would be handed over to the laboring class in an egalitarian fashion 10varieties of capitalismtoday many countries operate with capitalist production but this also exists along a spectrum in reality there are elements of pure capitalism that operate alongside otherwise socialist institutions the standard spectrum of economic systems places laissez faire capitalism at one extreme and a complete planned economy such as communism at the other everything in between could be said to be a mixed economy the mixed economy has elements of both central planning and unplanned private business by this definition nearly every country in the world has a mixed economy 1