Capitalism: Definition and Features
The global economic scenario is a diversified framework with different countries showing different economic as well as socio-political trends. These social, political, play considerably important roles in determining the shape of the economy of a country, thereby determining different aspects like the overall welfare of the population, the prosperity of the concerned country, its relation with the other countries in the global framework as well as the significance and magnitude of importance of the governing bodies of the countries (Holland 2018).
Keeping this into account, different types of economic and political systems and frameworks have developed over the years and have been implemented and have also been in operation in different countries, at different points of time, yielding diverse outcomes for the countries and their populations. One of such political and socio-economic structure found to be present in the contemporary global scenario is that of Capitalism (Levi-Faur 2017). In the generalised framework, Capitalism can be defined as the socio-political and economic framework, in which the industries and commercial aspects of a country are profit driven and by the private sectors, with less roles of the state or the governing authorities. However, the notion of Capitalism can be seen to be varying according to different schools of thought.
Taking this into account, the concerned essay tries to discuss the notions and concepts regarding Capitalism, which can be seen to be present in the two eminent schools of thoughts in economics- the Classical theory and the Neo-Classical theory, thereby discussing the similarities and the differences between the notions of Capitalism present in the domain of these schools of thoughts. Incorporating this, the essay also tries shed light on the structure and nature of Capitalism present in one of the predominant economies, the economy of China.
In terms of economics, any commodity or service is produced with the help of four factors of production, which are land, labour, capital and entrepreneurship. The ownership of these factors and the nature of their usage varies according to the types of socio-economic and political system prevailing in the country (Tawney 2017). In this context, Capitalism is that economic system, in which all the factors of production mentioned above, are owned by the private entities or individuals. In this construct, the individuals, who are the owners of the productive resources have their own profit maximizing incentives.
The primary features of Capitalistic framework are as follows:
Advantages and Disadvantages of Capitalism
In this type of socio-economic structure, the owners of the productive factors are the ones who control the same and their usage. The owners of the productive factors derive their income from the ownership of the same and are also profit maximisers. Capitalism operates in a free market economy, where efficiency and profit maximisation are given more importance than that of equity aspects (Dirlik 2018). In the capitalistic framework of an economy, the supply of commodities and services are directly linked to the profit prospects of the owners of factors of production in producing the same and those competitors which produce the products more cost effectively and efficiently stay in the market while the inefficient ones eventually need to exit from the market.
Capitalism, like any other socio-economic construct, has its advantages as well as disadvantages. In this construct, best products can be seen to be available for best prices which increases the benefit of the customers. Capitalism also has an intrinsic reward for innovations and efficiency increasing productive technologies (Bowles and Gintis 2012). However, this efficiency driven construct of capitalism ignores the aspects of equity and societal welfare as a whole. There is little provision of welfare for those lacking competitive and efficient skills in Capitalism. In spite of the presence of the notion of “level playing field”, this construct does not cater to the aspects of equality of opportunities to all the people in an economy.
The notion of Capitalism, although having several general characteristics, have been perceived differently by different schools of thoughts in economics. These schools of thoughts and conceptual frameworks in the economic theoretical structure, have their own assumptions and views of operations of an economy and its implications. Of these eminent schools of thoughts, two of the most popular and highly relevant schools of thoughts are the Classical and the Neoclassical ones.
The classical school of thoughts in economic framework, is one of the most dominant and preliminary schools of thoughts, with Adam Smith being the progenitor of the same. This school of thought developed after the birth of the concept of Capitalism in the western world, in the era of Industrial Revolution (Wolff and Resnick 2012). Different classical economists have tried to explain the notion of Capitalism from the perspective of one of the primary concepts of “Laissez-faire” present in the conceptual framework of Classical framework, which means free market operations with no intervention of the government in regulating the operations of the same.
Classical Theory of Capitalism
The idea of Capitalism, as analysed by the Classical theory, is supported by the theory of “Invisible Hand” as proposed by Adam Smith, which in turn indicates towards the assertion that the markets in an economy operate more efficiently when they are left in the hands of the supply and demand forces, which through mutual interaction leads to the equilibrium price and quantity levels. Keeping this as the underlying notion, the Classical economists support the idea of Capitalistic society as the one in which the individuals work on their self-interests and maximise their own profit or welfare, which in turn leads to the maximization of profit as well as efficiency in the economy as a whole. As per the assertions of the Classical economic school of thought, free and unrestricted markets are the best ways to utilize all the factors of production most efficiently and profitably, due to the presence of competition in the economy, while the intervention of government leads to market distortions, by driving the bias to one or more parties, depriving others, thereby hampering the efficiency in production.
Thus, the Capitalism in the light of the supply-side economic theory, the Classical theory, refers to the economic system, in which all the factors of production are utilised based on the free market operations, thereby ensuring most efficient utilization of resources and also the profit maximization of the owners of the productive resources (North 2016). From the assertions of the Capitalistic framework, it is evident that the concerned theory views Capitalism from the perspectives of efficient allocation of productive resources and profit maximization of the owners of the factors of production, in a market framework where there is no government interventions or regulations for productive activities.
The Neoclassical theory came into existence in the nineteenth century, following the criticisms faced by the strict assertions of the Capitalistic theory, regarding the over-emphasis on Invisible Hand theory and excessive focus on the non-human and materialistic aspects of economic operations of a country. This school of thought, although closely linked to and mostly derived from the Classical economic theories, primarily differ from the Classical theory in the aspect that while Classical school of thought views the operations of an economy and businesses from the aspects of optimal and efficient usages of factors of production and allocation of their prices and revenues to cater profit maximization of the owners of the resources, the Neoclassical views relate the supply and demand activities in any economy with that of the intensions, interests and rationality of the individual economic agents, thereby incorporating the humane factor in the economic operations (Lawson 2013).
Neoclassical Theory of Capitalism
As per the conceptual framework of the Neoclassical theory, each of the individuals are rational and the primary concern of all of them is to maximise their own level of satisfaction, for which they take decisions based on the fully informed evaluations of their utility. The main difference between the Classical and Neoclassical theory is that, while the former is primarily a supply side theory, the latter also takes into account the consumers’ or demand side perspectives of the economy and its activities (Rapley 2013).
Keeping this into consideration, in the Neoclassical domain, a Capitalistic economy is one, in which the value of the commodities and services are not only derived from the cost of the productive resources but also from the perceived value of the products as viewed by the consumers (Schumpeter 2017). Both the Neoclassical as well as the Classical school of thought emphasizes on the need for the presence of free market environment and lack of government regulation for stability of the economy and its production and allocation process. The Neoclassical assertions regarding Capitalism also includes the monetary aspects of an economy and highlights the need for unregulated demand supply in the money market.
Thus, in terms of this school of thought, Capitalism refers to that structure where there remains deregulated labour market, profit maximizing or satisfaction maximizing tendencies of the demand and supply side players, neutral government, capital market-based financing and corporate governance by the financial owners.
The economy of China, which used to be Communist economy in the previous years, started shifting towards a more Capitalistic structure in the recent decades, as can be seen from the opening up of the economy to foreign investors, increase in the number of private and profit targeting businesses as well as a considerable increment in the size of the private sector in the economy. From the 1980s, the economy of China started showing Capitalistic traits, with increased privatisation and trade and investment dynamics both inwards and outwards from the country, which in turn can be seen to have resulted in high economic growths for the country (at an average of 10% growth rate in the economy from 1980s) (Redding 2013).
However, the capitalistic traits in the country can be seen to be highly different from the views of Classical school of thought in the aspects that while the theory asserts towards the absence of any kind of intervention or regulation on part of the governing authorities of the economies as a whole, the Capitalistic structure of China shows widely different traits (Rattner 2018). The economy of the concerned country, shows the traits of a state-directed Capitalism, in the recent periods, where the liberal environment of trade openness, investment inflow and privatisation of the economy have been designed and implemented as well as monitored to some extent by the government of the country in order to increase the economic efficiency as well as welfare of the country (Dees 2017). Thus, the form of Capitalism in China, can be seen to be different from the notions of both the Classical and Neoclassical theories regarding the concept as there is significant presence of government control in the capitalistic environment created in the country.
Conclusion
From the above discussion, it can be seen that the concept of Capitalism has been viewed variedly by the Classical and Neoclassical school of thoughts, though both the schools assert the need for absence of government regulation in this type of market operations. However, the trends of Capitalism which can be seen in China, in the recent periods, is found to be differing from both the notions as it is state designed and implemented and the government of China plays crucial roles in the implementation of Capitalism in the economy.
References
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Dees, J.G., 2017. 1 The Meaning of Social Entrepreneurship. In Case Studies in Social Entrepreneurship and Sustainability(pp. 34-42). Routledge.
Dirlik, A., 2018. The postcolonial aura: Third World criticism in the age of global capitalism. Routledge.
Holland, J.H., 2018. The global economy as an adaptive process. In The economy as an evolving complex system (pp. 117-124). CRC Press.
Lawson, T., 2013. What is this ‘school’called neoclassical economics?. Cambridge Journal of Economics, 37(5), pp.947-983.
Levi-Faur, D., 2017. Regulatory capitalism. Regulatory Theory, p.289.
North, D.C., 2016. Institutions and economic theory. The american economist, 61(1), pp.72-76.
Rapley, J., 2013. Understanding development: Theory and practice in the third world. Routledge.
Rattner, S. (2018). Opinion | Is China’s Version of Capitalism Winning?. [online] Nytimes.com. Available at: https://www.nytimes.com/2018/03/27/opinion/china-economy-state-capitalism-winning.html [Accessed 5 Jun. 2018].
Redding, G., 2013. The spirit of Chinese capitalism (Vol. 22). Walter de Gruyter.
Schumpeter, J.A., 2017. Theory of economic development. Routledge.
Tawney, R.H., 2017. Religion and the Rise of Capitalism. Routledge.
Wolff, R.D. and Resnick, S.A., 2012. Contending economic theories: neoclassical, Keynesian, and Marxian. MIT Press.
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