What is Capitalism?
Capitalism is an economic and social system in which participants privately own the means of production -- called capital. Free market competition, not a central government or regulating body, dictates production levels and prices.
How Does Capitalism Work?
Under capitalism, prices and wages are determined by the forces of supply and demand.
Members of a capitalist economy are driven to obtain the maximum amount of utility ("benefit" or "profit") at the least cost. Privately owned industry caters to a consumer sector that wants goods and services of the highest value for the lowest price. Competition forces companies to keep prices low to attract consumers. The role of government in a capitalist society is to protect the legal rights of actors in the economy, not to regulate the free market system.
In capitalism, the most effective companies are those that create the greatest amount of utility. The most inefficient companies will be forced out of the market when the consumer discovers he can obtain the same goods for a lower cost elsewhere.
Why Does Capitalism Matter?
Capitalism characterizes the behavior of the global economy. Since the disintegration of the Soviet Union, capitalism has become the dominant economic system worldwide.
Capitalism is often considered the antithesis of Socialism -- an economic and political system where the ownership of capital (the means of production) is commonly owned. Socialist industry and production is regulated by the central government.
The Efficient Market hypothesis, an ideal of capitalism, states that finance market prices are always at the correct level at any given time considering all public information and expectations. Supporters of this theory believe that prices are necessarily always fair and correct. Dissidents believe that prices are often the result of random mistakes and misunderstandings and do not always represent the true value of a stock.
Through the ongoing balancing act of supply and demand, a capitalist economy is constantly striving to reach a level of long-term equilibrium where supply matches demand causing prices to stabilize. In the real world, political policy, natural weather events, consumer confidence and a whole host of other outside effects constantly affect the market, making the long-term equilibrium goal nearly impossible to achieve.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
The bond market is a massive part of the global financial system. In fact, it's almost twice as large as the ...Read More →
In today’s world, it feels like everyone struggles with credit card debt. Because of market uncertainty and constantly changing job market, credit card debt may feel more insurmountable than ever...Read More →