Capitalism: The World’s Dominant Form of Economic Model

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Capitalism can be “defined as an economic system that is based on private ownership of the means of production and distribution” (Capitalism’s Economic and Political Crisis , pars. 1-4). “The prices for goods and services are determined by the free market, and businesses are operated for the economic gain of the owners” (Lovins, Lovins and Hawken 3). The capitalistic economic system was developed in Europe between the 16th and the 19th century. This paper seeks to describe capitalism as the world’s most dominant form of economic model.

Capitalism can simply be defined as an economic model that is based on private ownership of property. The perception of what constitutes capitalism has been changing from the “first time the concept was developed” (Lovins, Lovins and Hawken 4). The perception changes depending on the political point of view and the analytical approach being used (Iversen and Thue 9).

Historically, a section of capitalism proponents have put emphasis on the central role played by markets in analyzing capitalism. This group sees the market as the common factor that promotes corporation among different individuals and thus facilitating innovation, economic growth and liberty (Capitalism’s Economic and Political Crisis, pars. 3-5). Others proponents such as Immanuel Wallerstein think capitalism has more to do with economic systems where trading in goods and services is done in markets and in which the goods and capital belong to individuals rather than the state (Lovins, Lovins and Hawken 7).

Still others like Karl Marx define capitalism from a labor market point of view whereby the majority of individuals sell their labor power in order to survive (Iversen and Thue 5). There are several versions put forward by different personalities to explain the term capitalism. But the common terms in all the definitions is that capitalism is private ownership of property and capital. Thus a more general definition is that it “capitalism is a system where capital (the companies, equipment and structures used for producing goods and services) is owned not by the state but private individuals” (Capitalism’s Economic and Political Crisis, pars. 2). Unlike other systems such as socialism and communism, capitalism is a multi-dimensional and intricate system that borrows a lot from other systems.

The conception of capitalism can be traced to medieval Europe. It evolved from a feudal system in which agricultural laborers had to work for profit of the land gentry” (Capitalism’s Economic and Political Crisis, pars 7). This was replaced by mercantilism in the 16th century which can be identified as simple form of capitalism. Mercantilism was encouraged by inter-country trading activities that had begun to pick up and also by the discovery of vast resources in the Americas by Europeans (Iversen and Thue 6).

The individuals who operated these trade routes ended up being enormously rich, and this was the first time people begun to generate wealth as individuals rather than depending on the stewardship of the wealthy monarch or aristocrat (Capitalism’s Economic and Political Crisis, pars 3). The modern day capitalism is based on the legal structures that have been developed for the past 200 years. This has greatly influenced the definition of “private ownership, joint ventures or companies and the economic perception of profit and competition” (Lovins, Lovins and Hawken 9).

The 19th century saw the replacement of merchants as the main wealth creators with the operators of factories and other industrialists. During this period there were fewer limitations on the markets and trade and minimal intervention from the governments as it is the case today. Government intervention was prompted by the “rapid development of monopolies, the social and economic trauma of the great depression in the 1930s followed by the Second World War” (Iversen and Thue 9). This period saw many vital sectors being nationalized and the creation of welfare organizations for citizens.

In spite of the fact that there is no universally agreed definition of the word ‘capitalism’ and the ranging arguments on the economies that can be considered as capitalist and to what extend, a wide range of features are accepted for characterizing capitalism by both critics and advocates of the system. These characteristics are broad and “include property rights, economic growth, private sector, economic mobility, unequal distribution of wealth, competition, social arrangements, evolving entrepreneurial and the existence of free markets” (Iversen and Thue 6).

The first characteristic of capitalism is property rights, this is one of the main differentiating factors with the other systems such as the early social system that had little in this regard (Capitalism’s Economic and Political Crisis, pars. 5). In the early systems the weak in the society were required to accept the ruling elite. The introduction of property rights which was facilitated by powerful formal property and legal system resulted into: “more independence; clear and provable protected ownership; standardization and the integration of property rules and property information for whole states; and finally increase in trust and complex writings to represent ownership” (Iversen and Thue 4).

Things also facilitated the development of other features that relied on the convenience brought about by the introduction of property rights. These features include better access to loaning services as more options became available for security purposes; simple and dependable information on things such as an individual’s property worth and credit history; facilitation of transport of goods in complex networks between continents and countries. All these factors have led to the robust economic development (Lovins, Lovins and Hawken 7).

The second characteristic of capitalism is economic growth or development. The centrality of commerce and ownership in a capitalistic system has put more emphasis on capital growth. Various parameters are utilized in the measurement of growth, this include; “the Gross Domestic Product (GDP), Capacity utilization and the standard of living” (Lovins, Lovins and Hawken 5).

example of GNDP chart
Figure: example of GNDP chart.

Economies that are based on capitalism have the ability to achieve a sustained growth and improvement in their stock due to the role played by free markets. Many analysts have argued that GDP/capita remained unchanged for most countries until the industrial revolution era. However, economic development or growth is not universally regarded as an entirely good phenomenon. It has its own implications which may be referred to “as ‘externalization of costs’ within the discipline of economics”. These down sides include “pollution, disruption of traditional living patterns and cultures, spread of pathogens, wars over resources or market access, the creation of classes among others” (Lovins, Lovins and Hawken 5).

Another key aspect of a capitalistic economy is economic mobility. Economic mobility can be broadly defined as a big change or “shift in the socio-economic strata which can be measured by large changes in the populations in the various deciles or quintiles of income and wealth and a big change in an individual’s lifetime in actual wage earning power” (Iversen and Thue 11). Thus a capitalist economic system creates more opportunities for people to increase the quality of their lives by specialization or by establishment of business ventures. However, the economic strata that is characteristic to capitalism creates an instability that is not found in other systems such as the feudal that are seen to have a more stabilized wealth relationship.

The fourth aspect, distribution of wealth has been the main focus for capitalist economy critics. All capital economies tend to show irregular wealth distribution (Iversen and Thue 6). It is generally seen that about 0.5% to 1% of the people in a capitalist economy own more than half of the productive power (Capitalism’s Economic and Political Crisis, pars. 2-4). Different studies conducted on selected capitalist economies indicate distributions with “peak distribution that is close to zero with less individuals owning progressively higher wealth” (Iversen and Thue 7).

Criticisms directed towards uneven distribution of wealth have tended to get nasty as follows; most features of human beings such as height or weight have been associated with an individual’s ability to be productive. This is shown by the “standard normal curve which is sometimes referred to as the bell shaped curve” (Lovins, Lovins and Hawken 8). For instance, there are few individuals whose height or IQ can be said to be twice the mean or average. Due to the fact that capitalism doesn’t behave in similar fashion it is generally seen to favor those who are already wealthy or have access to bigger resources.

For instance, wealth individuals are better placed to offer superior education to their children and even provide wealth through inheritance. This is seen to create a big distinction in terms of wealth between people of similar ability. There are many other different explanations for inequality which point towards other factors that may result in inequality. Things such as personal preferences, lifestyle, geographic location, climatic conditions and culture are known to significantly contribute to economic inequality.

example of inequality chart
Figure: example of inequality chart.

The fifth characteristic of capitalism is “competition, survival of the fittest and evolving network structure” (Lovins, Lovins and Hawken 6). In capitalist economies there are several different companies and individuals are often free to enter into different forms of agreement with each other. These economies react to different changes such as change in technology, discoveries, and other circumstances that come with re-evaluation and re-engagement in business dealings.

Thus the “control mechanisms of the economy, and the way information flows through it changes over time and is subject to form of survival for the fittest form of selection and evolution not unlike biological entities” (Iversen and Thue 4). Evaluation of networks that connect different provisions in an economy is more or less comparable to the network that connects the telephone system or the internet (Capitalism’s Economic and Political Crisis, pars. 2-5).

Another significant characteristic of capitalist economies is the ability to create employment/unemployment. Capitalist economies create a situation whereby different people typically earn their living by working for companies. It not possible that everyone will find a suitable company that will need their labor at a given time (Lovins, Lovins and Hawken 2).

This is usually not a problem in other economies where people have free access to different resources such as land which provides them with an opportunity to make a living. Thus it is a common finding that all major capitalist economies across “the world have fluctuating unemployment rates that range typically between 3 and 15%” (Iversen and Thue 10). Economies in the less developed that use the capitalist system have much higher unemployment figures that can get as high as 30%.

The final characteristic of capitalism in this analysis can be said to be the “Unknown/ unapproved direction of capitalist economies” (Lovins, Lovins and Hawken 3). In spite of using great deal of planning by firms and other entities that form capitalist economies, their lacks a broad direction for such economies and “even reliable prediction of how the economy will perform more than a year into the future” (Iversen and Thue 8). Critics claim that it is virtually impossible to accurately predict certain occurrences such as weather and economy. They see “unplanned development of capitalism as one of the greatest strengths, arguing that many solutions are tried and that real world competition finds good solution” (Iversen and Thue 3).

This paper sought to describe capitalism as the world’s most dominant form of economic model. There is a contention on what constitutes capitalism but It has been generally identified that capitalism is simply an economic system that thrives on private ownership and free market (Iversen and Thue 4). The development of capitalism as a form of business model can be traced to medieval Europe and the discovery of vast resources in the Americas. Capitalism is the most practiced economic model and has been found to posses the following characteristics; “property rights, economic growth, private sector, economic mobility, unequal distribution of wealth, competition, social arrangements, evolving entrepreneurial and the existence of free markets” (Capitalism’s Economic and Political Crisis, pars 3-5)

Works cited

Capitalism’s Economic and Political Crisis“.  2010. Marxist. Web.

Iversen, Martin Jes and Lars Thue. Creating Nordic capitalism- the business history of competitive periphery New york: palgrave Macmillan, 2008.

Lovins, Amory, Hunter Lovins and Paul Hawken. ” A roadmap for natural capitalism.” Harnard Business Review (2005): 10: 345-67.

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