Capitalism is the name of an economic system in society that advocates private property and market economy.
What is capitalism?
The word ‘capitalism’ comes from the Latin caput , which means ‘head’. The meaning refers in the sense of the economic term ‘mainly’, which is a total sum of money. The word ‘capital’ comes from this and plays a central role in understanding capitalism. The capital is usually the resources that a person or company owns – for example, buildings, machinery, tools and other means of production.
The term ‘capitalism’ originated in the mid 1800s, where it was primarily used by the growing working class in Europe, which criticized the development of the existing society towards a consumer-based production community. Industrialization, which accelerated in the late 1700s, had greatly changed the structures of society, and driven people from the country to the cities. The growing working class worked for the production of goods (eg textiles, machinery, raw materials and food) which, due to industrialization’s efficiency, could be produced much faster than before. The workers who served for production were employed and led by factory owners. The owners of factories named as capitalists.
The original definition of capitalism can also be understood in more modern contexts. Today production of goods is characterized by the capital. A capitalist produces his goods for a market in a capitalist society where he is in competition with other capitalists.
The manufacturer needs labor so that he can produce his goods. In order to ensure that it is possible to keep the plant running, the manufacturer must keep an account of his expenses (including raw materials, machinery, employee salaries) and income (including sales of products).
Once the difference between revenue and expenses has been eliminated, the manufacturer has calculated his profit. In order to increase profits, production must be constantly developed to meet market demand and competition from other manufacturers.
Capitalism advocates a society in which everyone is entitled to own a private property (eg as a factory) and there should be free competition between all producers of goods and services in society. However, there are no capitalist societies, where all means of production are privately owned. Most modern societies are governed by mixed economy principles, where some parts of the economy are under state control, and other sectors are left for private initiatives.
The mixed economy is therefore based on both elements from the planned economy and the market economy. In a mixed economy, market economy factors determine the supply and demand of goods, the size of the production and the prices. In addition, the state sometimes decides to regulate the economy on the basis of policy objectives.