The Theory of Capitalism

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Capitalism developed historically as part of the movement or philosophy of Individualism. In religion, the individualist movement produced the Reformation; in learning, the growth of the physical sciences; in human relations, the social sciences; in politics, democratic government; and in economics, the capitalist system. It developed in 18th century Britain and was transplanted later to Northwestern Europe and North America. Today, most of the nations of the World run their economies with varying degrees along capitalistic lines.

Capitalist Theory:

We can identify five (5) basic traits that are characteristic of Capitalism: private ownership of property, a market driven economy, competition, the profit motive, and stable prices.

Under Capitalism, ownership of the means of production is held for the most part by individuals and corporations, not government. This promotion of private ownership is primarily based on two considerations. First, ownership of productive property means power over the lives of other people. It is better that this power be diffused among many property owners than concentrated in the state. Secondly, economic progress is best attained when people are free to advance their own interests, and have a personal stake in doing so. The characteristics of a market economy are specialization and division of labor, prices determined by supply and demand, individual decision-making, consumer sovereignty, and limited government. Competitionis the free interplay between buyers and sellers and it leads to optimal productivity. Theprofit motiveis one of the strongest drives humans possess. A capitalist economy provides more opportunity for profit than any other economy because it guarantees three freedoms: freedom of trade and occupation, freedom of property, and freedom of contract. But don’t forget that people do lose money under a capitalist system. It’s a risky venture. Under no other system have so many lost so much.

The system of Capitalism desires stable prices. For the most part, prices are a product of the amount of money in circulation and the amount of goods and services available. Inflation results when the amount of money increases at a faster rate than the amount of goods and services. It’s basically too much money chasing too few goods. In a free market economy there will always be specific changes in prices based on supply and demand for particular commodities. Inflation is a general rise in prices. There are at least sixproblems withinflation: (1) the role of prices as signals is distorted, (2) inflation has serious long run negative repercussions for the economy, (3) inflation rewards borrowers and punishes savers, (4) it discourages thrift and encourages consumption, (5) slows economic growth, and (6) it robs the value of money. This is why government monetary policy is so important and legitimate in a capitalist economy.

How does capitalism fit with democracy? Good question. Democracy is the attempt to include all people, or as many as possible, in a collective governance of the community in which majority rules either directly or indirectly. Capitalism is a type of freedom in the realm of economic activity. It is a matter of historical record that modern democracy has developed exclusively in nations that practice free markets. The first and foremost link between capitalism and democracy appears to be that capitalist practices are the most economically productive of any system. Because tolerable economic circumstances are a precondition for political stability, capitalism is tied to democracy to the extent that it creates the larger circumstances within which democracy can operate. A second and perhaps deeper tie between capitalism and democracy extends to the values it engenders and sustains. Capitalism is built in large part on individual initiative. A combined political-economic order emphasizing the individual is more likely to result in a democratic outcome. A third link is between private property and freedom. Private property is essential to democracy because, when individuals do not control the fruits of their labors, meaningful freedom cannot exist. A fourth link, and one closely associated with private property, is the rule of law. Meaningful legal equality is a paramount feature of democracy and is made necessary in part by a capitalist economic order. A fifth link between capitalism and democracy is in the area of civil rights. Because capitalism values innovation and experimentation in new ways of material lifestyle, it helps to create the climate within which civil rights can flourish. And a sixth and final link is the right to vote. Capitalism furthers voting through its emphasis on the individual.


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