pros and cons of capitalism essay

Pros and cons of capitalism

Capitalism is an economic system characterised by:

• Lack of government intervention
• Means of production owned by private firms.
• Goods and services distributed according to price mechanism (as opposed to government price controls)

Pros of capitalism

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” ― Milton Friedman

• Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may extend into other areas of life.
• Efficiency. Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste. State-owned firms often tend to be more inefficient (e.g. less willing to get rid of surplus workers and fewer incentives to try new innovative working practices.)
• Innovation. Capitalism has a dynamic where entrepreneurs and firms are seeking to create and develop profitable products. Therefore, they will not be stagnant but invest in new products which may be popular with consumers. This can lead to product development and more choice of goods.
• Economic growth. With firms and individuals facing incentives to be innovative and work hard, this creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards. This increased wealth enables a higher standard of living; in theory, everyone can benefit from this increased wealth, and there is a ‘ trickle-down effect ‘ from rich to poor.
• There are no better alternatives. As Winston Churchill, “It has been said that democracy is the worst form of government except for all the others that have been tried.” A similar statement could apply to capitalism.

Cons of capitalism

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” – John Maynard Keynes (1)

• Monopoly power. Private ownership of capital enables firms to gain monopoly power in product and labour markets. Firms with monopoly power can exploit their position to charge higher prices. See: Monopoly
• Monopsony power. Firms with monopsony power can pay lower wages to workers. In capitalist societies, there is often great inequality between the owners of capital and those who work for firms. See: Monopsony exploitation
• Social benefit ignored. A free market will ignore externalities . A profit maximising capitalist firm is likely to ignore negative externalities, such as pollution from production; this can harm living standards. Similarly, a free-market economy will under-provide goods with positive externalities, such as health, public transport and education. This leads to an inefficient allocation of resources. Even supporters of capitalism will admit that government provision of certain public goods and public services are essential to maximise the potential of a capitalist society.
• Inherited wealth and wealth inequality. A capitalist society is based on the legal right to private property and the ability to pass on wealth to future generations. Capitalists argue that a capitalist society is fair because you gain the rewards of your hard work. But, often people are rich, simply because they inherit wealth or are born into a privileged class. Therefore, capitalist society not only fails to create equality of outcome but also fails to provide equality of opportunity .
• Inequality creates social division. Societies which are highly unequal create resentment and social division.
• Diminishing marginal utility of wealth . A capitalist society argues it is good if people can earn more leading to income and wealth inequality. However, this ignores the diminishing marginal utility of wealth. A millionaire who gets an extra million sees little increase in economic welfare, but that £1 million spent on health care would provide a much bigger increase in social welfare.
• Boom and bust cycles. Capitalist economies have a tendency to booms and busts with painful recessions and mass unemployment. See: Boom and bust economic cycles

Economists on the pros and cons of capitalism

“I react pragmatically. Where the market works, I’m for that. Where the government is necessary, I’m for that. I’m deeply suspicious of somebody who says, “I’m in favor of privatization,” or, “I’m deeply in favor of public ownership.” I’m in favor of whatever works in the particular case.” – John K. Galbraith [2]

Most economists take a nuanced approach to capitalism. Supporting broad principles of free-market, but concerned with abuses of free markets, such as monopoly, inequality and externalities. However, some like Hayek are more passionate in support of limited government intervention and virtues of capitalism.

Economists supporting the virtues of capitalism

• Friedrich Hayek – The Road to Serfdom (1944)
• Milton Friedman – Capitalism and Freedom (1962)
• Adam Smith – The Wealth of Nations (1776)

Economists critical of capitalism

• Karl Marx – Das Capital / Communist Manifesto
• Joseph Stiglitz
• Thomas Piketty

Different types of capitalism

All types of capitalism imply that the economy is ‘market-based’ However, within the broad term of capitalism, there are different varieties which can have profoundly different outcomes. For example, unregulated capitalism – sometimes termed ‘turbo-capitalism’ will see greater problems associated with inequality, under-provision of public services and greater inequality. A primarily ‘capitalist’ society with some regulation on inequality, environment and monopoly power can create a very different outcome to a pure ‘capitalist’ society.

See: different types of capitalism

When people talk about capitalist societies, e.g. the US, there is actually significant government intervention in areas such as education, healthcare and transport. US government accounts for around 35% of GDP.

Even a country like France, where the government spend 50% of GDP has an economy which may be considered to be primarily ‘free market’. There is no clear cut point when an economy stops being capitalist and becomes a ‘ mixed economy’ .

• List of government spending as % of GDP
• Capitalism v socialism
• Capitalist economic system
• Pros and cons of supply-side economics

[1] Attributed. Moving Forward: Programme for a Participatory Economy Michael Albert, (2000) [2] Interview with Brian Lamb, on Booknotes C-SPAN, 1994-11-13.

Last updated: 10th July 2019, Tejvan Pettinger , www.economicshelp.org, Oxford, UK

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Study Abroad

Essay: Pros and Cons of Capitalism

May 8, 2020 //  by  Amit Kumar

An economic system in which private entities own the factors of production is known as Capitalism. These four factors are entrepreneurship, capital goods, labour and natural resources.

The owners of these four factors exercise control through companies. The individual owns their labour needs. The only exception left here is slavery, whereas, on the other hand, someone else takes hold of a person’s labour. 

As we all know that slavery is illegal throughout the world, but still, it is highly practised. In this article, we will discuss the pros and cons of Capitalism . First we all, we will take a glance at its key components, requirements and also the most capitalist countries.

Table of Contents

Keys of Capitalism:

• In Capitalism, owners usually control the factors of production and derive their income from it.
• It also incentivizes the people so that they can maximize the amount of money they earn through a tough competition.
• Competition is termed as the driving force of innovation as it creates more opportunities for individuals to do tasks more efficiently.

The Requirement of Capitalism:

Capitalism requires a free market economy to make progress. It distributes goods and services according to the fundamental laws of supply and demand. The law of demand states that when the need for a particular product increases, its price also rises. When competitors come to know that they can make a higher profit, in this way, they increase productions.

Most significant supply will only reduce the price to the level where the only best competitors remain.

Component of Capitalism:

Another essential component of Capitalism is the free operation of all the available capital markets. While the law of supply and demand set fair prices for commodities, stocks, brands, currency and derivatives. Moreover, the capital market allows all the business companies to raise their funds to expand.

Capitalist Countries Praising Democracy:

Monetarist economist Milton Friedman suggested that democracy can exist only in capitalist countries such as the U.S. But many countries these days have socialist economic components and democratically elected government. 

More, others are communist but having thriving economies but the bundle of thanks to the existing capitalist elements. For example, China and Vietnam. Some other countries are also capitalists, but monarchs or despots govern them.

The United States is the most capitalists of all. One main reason is that the federal government doesn’t own corporations. Another reason is that constitution of U.S protects the free capitalist market.

Top Capitalists Countries:

• New Zealand
• Switzerland 
• United Kingdom
• United Arab Emirates

So, the United States comes at the rank of 12. The reason is massive government spending and poor health conditions. But it also holds strong points such as business freedom, labour freedom and trade freedom.

Characteristics of Capitalistic Systems:

Do you want to learn the concept of Capitalism quickly? Below here are listed some of the characteristics:

• Means of production in Capitalism are privately owned.
• Companies are provided with incentives to increase their profits
• Supply and demand laws run markets.
• Capital markets operate freely without any interruption.
• Laws related to inequality are high.
• Involvement of government in capitalist societies is low.
• The legal system is reliable.

Pros of Capitalism:

How does society look at the overall role of the government? If that society envies a lack of government intervention within various economic systems and production, completely based on marked based competition and demand/supply requirements instead, then that company will envy for Capitalism.

In Capitalism, goods or services are distributed based on mechanisms set by societies, instead of government controls or mandates.

Primary Pros and Cons of Capitalism:

The primary advantage of Capitalism is that every individual has some sort of control over their fortune in life. They can have many choices to choose from; they can own their business, works as a specific employer, work online part-time or as a full-time freelancer or not work at all. Whatever dream they have, they got opportunities to pursue it at some level.

It can also segregate people into socioeconomic classes that will limit the availability of opportunities to them. People who belong to a high class or are rich tend to reinforce their position because they have easy access to societal mechanisms which in turn bring wealth.

Because those are poor who have less access, they have only fewer opportunities available to change their circumstances. This causes rich people to become more prosperous and poor to stay low.

In this article, we are going to elaborate additional key points to consider while looking at the overall pros and cons of Capitalism.

What are the Pros of Capitalism According to you?

These are as follows:

• Capitalism brings innovation
• Creates of society that is based on the services of others
• Also promotes equality
• Encourages freedom
• Controls self-regulation
• Provides us with a broader range of services or goods
• Embraces the presence of smaller world
• Gives the opportunity of being involved in governance

1. Capitalism Brings Innovation:

Capitalism is a system that brings innovation like no other systems of economics because there is a strong need to compete in the market if one wants to remain profitable. It occurs almost at every level. Business owners invest in development and research to create better products.

Moreover, employees also focus on improving their acceptable practices to remain as productive as possible. The quality of services provided by employees is more improved to solve problems.

This is how Capitalism encourages innovation in an increasing era of science and technology.

2. Creation of Society Based on Services of Others:

There exist two ways of how someone can look at Capitalism. First, and most popular these days is that a capitalist society works for their own benefits. Secondly, every job that is available in a company relating to Capitalism serves other needs in some way. 

People who manufacture goods and services can easily earn a good paycheck while creating something that solves the problems faced by other people living in the same society. And there is no doubt that in Capitalism, goods and services are designed to help someone live a better life.

Yes, Capitalism creates a society based on the needs of others.

3. Promotes Equality:

Although the rich tend to become richer and the poor tend to stay low, everyone that is residing in a society focused on Capitalism does have an initial chance to find out success in many ways.

Some may work even harder than others as everyone is surely going to get an opportunity at some level. However, the rewards are not always mandatory. There is one golden principle that if you work hard in your life, you have somehow a chance of reaching your definition of success

4. Encourages Freedom among People:

Governments that intervene in an economic market are doing so for their advantage, not for an individual of capitalist society. While on the other hand, in Capitalism, our primary focus is on the individual. So, Pricing and supply of the goods or services are driven by demand.

People have the freedom to choose their goods and services that best meet their needs instead of being given only a certain amount of goods or services. Also, due to the interference of government, all goods are intended to preserve the structure of the ruling body.

These are some of the most discussed pros and cons of Capitalism. We have some more pros to discuss Capitalism.

5. Capitalism Promotes Self-regulation:

It is a truth universally acknowledged that only businesses in a capitalist society have this power of self-regulation because consumers want them to have this as essential. If potential buyers are not interested in buying goods or services that are being offered by the organization, then that business will no longer continue to exist.

This also means that the company should create goods or services that are being desired by people living in society. This serves them to meet the needs of the individuals and also households.

6. Wide Range of Goods or Services:

People living in the same society may suffer from different sort of problems. This wide array of needs allows for businesses to find out a particular niche so that they can exist.

If there is a value in goods and services being offered by the organization and also they can solve problems of society, then the business will continue to operate. That results in a wide range of goods or services offered than those that generally operate with government interference or mandate.

7. The Opportunity for Involvement in Governance:

Capitalist society encourages people to get involved in all possible aspects of society to create the best outcome for themselves. That usually means it is a system that promotes the involvement of individuals with their governance.

From voting to serving local boards or running for a national office, people quickly get involved with government so that they can create their outcome being preferred.

8. Embraces Presence of Smaller World:

There are people with tremendous skills in this world that are not adequately utilized. Global Capitalism allows businesses to tap into these resources so that they can innovate.

These innovations also create improving chances to continue for this developing world, which will undoubtedly end towards hunger, water scarcity, and other potentially life-threatening conditions.

Overall Benefits of Capitalism:

The main benefit of Capitalism is that it provides strong incentive and motivation to grow, produce, innovate, improve and move forward constructively.

Those who believe in the notion of a free market system argue that free markets and competition result in superior business and thus would get better products or services.

These motivators for business operations and benefits for consumers combine to form more positive feedback loop or virtuous cycle where consumers invest more money and companies innovate more.

In addition to the above, capitalist society lets the market decide on how to allocate resources. This means that capital, labour and natural resources are distributed somewhere they can make high profit, and thus economy lies on self-organizing techniques.

1. Political Freedom:

Economic freedom helps to promote political independence. If the government takes charge of the means of production and set prices, it invariably leads to a more robust and powerful state. It creates a large bureaucracy which may usually extend into other areas of life.

2. Product Development and Innovation:

Capitalism environment has a dynamic where entrepreneurs and firms are seeking to develop and create profitable products. Thus, in this way, they will not be stagnant but invest in new products which may be famous among consumers. This can lead to product development and an even better choice of goods.

3. Incredible, Extraordinary Growth:

With firms and individuals facing incentives to be innovative and work hard, this develops a climate of innovation and economic expansion. This helps to increase real GDP and also lead to improved living standards of individuals.

This increased wealth enables a higher standard of living, and according to an economist theory, everyone can take benefit from this increased wealth. 

4. Efficiency:

Firms in a capitalist society face incentives to be efficient and produce goods or services which are in high demand these days. These incentives create pressures to cut the cost and avoid ourselves from waste.

State-owned firms often tend to become more inefficient.

Capitalism brings us the best results in the best prices. The fact is that consumers will pay more for what they want the most. Also, businesses offer goods or services which customers wish to even at the highest prices they will pay.

Prices of offered goods or services are usually kept low by competition among the businesses. They try their best to make products as efficient as they can to maximize their profits.

An essential part is an economic growth, that is the reward of innovation for a capitalist society. This includes innovation process in different development methods. It also brings out the design of new goods or services in Capitalism.

As the founder of Apple Steve Jobs said in an interview that you just can’t ask the customer what they want but also try to provide them with what they are looking for. As time pass, they will indeed get the desired one. These are the pros and cons of Capitalism. 

Does Capitalism have some drawbacks? To overweigh the argument, Capitalism also has many disadvantages over benefits.

Let’s take a look at the most discussed cons of Capitalism.

Cons of Capitalism:

• Creates an economy based on consumption
• Gives more importance to the needs of business above the needs of individual
• Equal opportunities provided by the government can be unique
• People having the inability to prove them productive are neglected
• Unregulated Capitalism leads to consolidation
• No Incentives Available to Pay the Workers Fairly
• Competition is dragged out of the market
• No environmental or social point of focus is left behind
• Governance serves as best in Capitalism

1. Creation of Economy Based on Principles of Consumption:

In Capitalism, there is no specific focus on money in society. Here you will only need money to consume those items that are being produced. Also, you need to earn enough money so that you can quickly finish the things that you want.

This means that now a day more people are preferring to work as an employer than working for themselves. So, the employer has a choice of work but choosing not to do makes it difficult for the participant to be an active part of Capitalism.

2. More Emphasis Is Laid on the Needs of the Business over the Individual:

Businesses can take the place of government in a strong capitalist society. If companies want to remain operational, then they must introduce innovation in goods or services they offer and should also try to reduce costs.

Because as we all know that the most considerable expense of most businesses is labour, they need to produce goods or services. So, strong emphasis is laid to eliminate the needs of workers in Capitalism instead of creating more for them. Self-checkout stands at restaurants, and grocery stores are a fine example of this new evolution. 

3. Brief Equal Opportunities by the Government:

Everyone should get opportunities to succeed in their lives, but without some extent of government interference, those opportunities can be too brief. People who have access to more and the latest resources can easily create more opportunities and achieve in life.

Similarly, people with limited access to resources focus their efforts and use their potential on self-perseverance than building wealth. This usually creates two groups of people who have or have not’s. Everyone in life gets opportunities in life to proceed well in the future, but it depends on the person how they use them.

4. People with Inabilities to Prove Them Productive Are Neglected:

The main focus of Capitalism is too non-disabled individuals. If someone is unable to be productive, no matter what either because of injury or disability, they no longer have the ability to contribute.

Ultimately, these individuals are left behind and are discarded because they no longer participate virtually in the survival of society. The primary focus of Capitalism is a competitive supply and demand. So, if you can’t provide a pool and also no longer part of the demand chain, then obviously you are not needed.

5. Unregulated Capitalism Finally Leads to Consolidation:

Businesses will finally consolidate in a pure form of Capitalism until when only one provider is available in the market. Hence the ultimate goal is to limit the competition so that most of the profits can be gained by goods or services that are being offered.

This is sometimes termed as a monopoly. When such kind of circumstances occurs, all the power in business to consumer- relationships lies within the roots of the company. Moreover, they can change any price of goods or services, and the customer must have to pay it without question.

Capitalism is an economic system that brings us both pros and cons of Capitalism. But it has more pros than cons as observed till now.

6. No Incentives Available to Pay the Workers Fairly:

Capitalism in its purest form is a race to all its available competitors. If businesses envy to retain their workers, they are encouraged to pay the least possible amount. On the other hand, they are allowed to charge the highest possible prices for their productive capability.

There will always be workers available even to work at low wages which in turn means that workers either should accept or reject to work at low salaries or even without any wages.

7. Competition Is Forcefully Dragged out of the Market:

Capitalism only pays to heed to provide the only best. This means that larger businesses with more capital work to force smaller companies that lie out of their niches. It also means that workers with superior skills are forced out to workers that usually may have e average based skillset. 

That’s why Capitalism tends to create differences between different socioeconomic groups. At the same time, people and businesses either manage themselves to learn new creative ideas and trending skills. In this way, they will be able to find out new ways to compete or become discarded in society.

8 . No Environmental or Social Point of Focus There:

The primary goal of Capitalism is based mainly on consumption, so almost all of the energy is spent on that particular purpose alone. There is no consideration given to the environmental and social structures of the society, and no responsibility is shown so whatever harm may be done in another area.

If actions are profitable, then they are indeed worth pursuing. This, in turn, creates a natural outcome of more individualistic and corporate greed.

9 . Governance Serves Best and Neglects Worst in Capitalism:

The government indeed supports the best businesses and wealthy individuals as they contribute most towards the infrastructure of society. The poor also get the same services, but their contribution is less as compared to others.

The overall discussion of the pros and cons of Capitalism reveals that it strongly encourages development in capitalist societies. They also suggest that people should pair themselves with likeminded people in order to contribute to the fullest in their capacity. It can be significantly beneficial. 

Capitalism is a notion that is highly practised these days. People and businesses should work hard to bring innovation, economic stability, and also pay heed to better governance principles.

In my opinion, capitalist societies can lead to a polarized society where the needs of a few overweigh the needs of many.

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21 Capitalism Pros and Cons

The structures of capitalism are relatively new to global societies. Although the roots of this society option are often debated, there is a general consensus that it developed in Britain, the Netherlands, and Belgium as early as the 16th century. Because of its emphasis on collecting capital to influence economic power and wealth, it has become one of the most dominant economic systems in today’s world.

There are several different forms of capitalism used around the globe, from a truly hands-off approach to one that is closely monitored. The United States practices a form of capitalism within a mixed economy where characteristics of socialism are also present. This system protects private property, allows for capital to leverage economic freedom, while allowing the government to intervene for the social good of the public.

Because wealth accumulation is the primary point of emphasis in this society option, most decisions are made by the owner of the wealth. Private ownership of property in any form, from real estate to copyrights, is a point of emphasis with capitalism. Public rights always take a back seat to privatization.

With more than five centuries of development and innovation creating the world we see today, here are the capitalism pros and cons to review.

List of the Pros of Capitalism

1. Capitalism encourages people to achieve through their own potential. Capitalism offers people an opportunity to use their own skills and talents to create a future for themselves. They are the navigators of their own destiny. Other forms of government or societal structures place the emphasis on the welfare of all to assign careers or force people into specific lines of work. Although some ideas flounder or fail, you can always try taking a new path when a capitalist perspective is in place.

J.K. Rowling is an excellent example of how capitalism transforms lives. She went from being on welfare to having a net worth of $650 million in 2017, according to reporting from Forbes.

2. People are involved in the choices that society makes each day. Capitalism offers representation to the average person – if they want it. You can choose to be involved in society at any level: all-in, as you feel like it, or not at all. You’re always in control of how far you get involved with the choices being made. This structure makes self-governing feasible at local, regional, and national levels.

Because of capitalism, a person’s vote actually counts for something. You’re also encouraged to become involved in the governing process as another way to ensure the goals or dreams you have can be achievable.

3. There is more innovation available to society under capitalism structures. People have unique pain points which affect their daily lives. Businesses earn revenues when they make positive impacts on those needs through their expertise and value. Consumers look for the best combination of relief vs. price when shopping within a capitalist environment. That is how businesses grow or fail.

When businesses operate under capitalism, the free-market system controls whether or not they find success. The firms which offer the best value propositions while consumers shop for relief are the ones who will grow. That process encourages innovation to be constantly present in society as it is the foundation of how goods or services are introduced to households.

4. It self-regulates the actions and behaviors of those involved. Capitalism, in its purest form, encourages everyone to look out for their self-interests first. That means households meet their needs by spending the least amount to get the most value. It also means firms spend the least amount possible to develop the revenue-generating goods or services. If a group of consumers does not like the offerings of a business, then that firm with a slide toward bankruptcy.

That is how capitalism self-regulates itself. When firms act unethically, consumers stop making purchases. The firm is then left with a choice: conform to societal standards or go out-of-business.

5. The structures of capitalism promote equality. The same rules about self-regulation apply to equality when dealing with a capitalist society. When a business refuses to embrace diversity, or it pays one group of people more than another for the same work, then consumers hold the final say. They can stop working with organizations like this to create leverage against their internal actions.

Capitalism promotes socioeconomic equality at the individual level too. Although it would be fair to say that some groups receive more chances to achieve economic success than others, the goal of this society is to give everyone at least one chance to succeed. With hard work, ingenuity, and a little luck, anyone can make a name for themselves within this type of society.

6. There is more freedom offered to individuals and corporations through capitalism. The structure of capitalism gives each person the freedom to control their own destiny. There is a constant focus always placed on the individual within this society. Supply and pricing are driven by the demands of each demographic or segmented group. Households can choose to spend or save. People may opt to go into debt to purchase items, or they may decide to set a budget to live within their means.

Businesses often think they drive capitalism forward. That is not true. Consumers are always in control. They make all the decisions, which is why corporations and governments work hard to influence those choices.

7. Capitalism encourages people to help one another. Although the structures of capitalism rely on self-motivation for success, it isn’t a society which is based on selfishness. Individuals must rely on one another to create mutual benefits. The employee at a bakery relies on customers for their paycheck, while the consumers who shop at the business rely on the baker to meet their breakfast needs during their commute. Every action taken in a capitalist society works to benefit another person in some way. Even when someone’s perspective is 100% selfish, their actions still benefit someone other than themselves.

8. It provides consistency through predictability. Winston Churchill may have said it the best. “It has been said that democracy is the worst form of government except for all the others that have been tried.” One could say the same thing about capitalism. The backbone of a capitalist society is consistency. You know what to expect because everyone, including corporations, is focused on the provision of mutually beneficial services. The government does not interfere or dictate production levels for goods and services. Life becomes predictable, which offers safety and security at the individual level, as the emphasis is on growth and opportunity.

List of the Cons of Capitalism

1. Capitalism encourages the rich to hoard their wealth. The root of capitalism is the accumulation of wealth. When someone purchases real estate, buys items for their home, or shops for groceries, these activities all transfer money from one person to another, or from an individual to a business. The actions in this society may offer mutual benefits, but over time, those opportunities become one-sided.

Wealth eventually accumulates more often in the accounts of those who are already rich. When you own money, it creates more currency over time. People who spend to meet their basic needs have no way to accumulate additional funds on top of their initial transfers. That’s why the long-term outcomes of a capitalist society are always that the rich grow their wealth while the poor struggle to survive.

2. Businesses are encouraged to monopolize in capitalism. Disruptors in the business world are defined as small companies who create innovative products which compete in value against the goods or services from larger companies. Capitalism encourages disruptors. It also encourages other companies to put those firms out of business in some way as soon as possible.

Through mergers and acquisitions, research and development, or price leveraging, the goal of a business in a capitalist society is to generate the most profits possible by obtaining the most customers. If that process eliminates the competition, then the firm can set its own prices and quality standards to maximize revenues. That structure ultimately reduces consumer choice.

3. People must produce for societal inclusion. Work is a requirement in capitalism, just as it is in any other societal form. The only difference with this structure is that the society, not the government, hands out the consequences to those who choose not to participate. If you are not physically able to produce goods or services, then your lack of contribution eliminates your importance.

Pure capitalism doesn’t offer safety nets to people for any reason. Even if an employer acts unscrupulously, or an employee is laid-off through no fault of their own, it becomes the responsibility of the individual to correct that situation. The point of focus is always on the outcome instead of the journey to get there.

4. Growth only comes with continuing opportunities in capitalism. Despite the advantage that everyone gets an initial fair shot in a capitalist structure, actual wealth accumulation occurs when ongoing opportunities are present. That process starts when children are in school receiving their education.

Kids who live in poverty often come to school without enough sleep. The chances are good that they didn’t have an effective breakfast. Low-income homes are at a higher risk of child abuse, family violence, poor clothing, secondhand smoke exposure, and limited experiences. According to The Edvocate, funding to low-income Title I schools has decreased since 2010, even though schools in wealthier areas see funding increases.

5. Governing prioritizes businesses in a capitalist society. Capitalism focuses on private ownership over public possession of property. That structure requires the government to fund itself through a series of taxes and other sources of income. All wealth, including the funds earned by individuals, is subject to a portion the government declares ownership over.

When a mixed economy is present, like what the U.S. and most nations have, then the collected taxes are also used for social welfare and infrastructure programs. Because labor is the most significant expense the average corporation faces, it is the workers, not the firms or the government, assuming the highest levels of risk within the society.

6. Capitalism only works when consumers are spending. The structures of capitalism start breaking down when individuals and businesses focus on saving money instead of spending it. Economies grow only when goods and services are bought and sold. Without new purchases, there cannot be new employment. That is why innovation is a top priority in this societal structure. Consumers must have access to continually new products to resolve ongoing pain points. Without it, they stop spending, which causes firms to stop spending, and that cycle eventually creates a recession.

7. Wealth transfers are not equal within capitalism. People and businesses with more money have additional research and development opportunities and investments. That gives them more chances to create goods or services that consumers will want to purchase in the future. Compared to the household living paycheck to paycheck, it is the former, not the latter, who will have a better opportunity for long-term wealth accumulation.

According to a survey conducted by CareerBuilder, 78% of full-time workers in the United States report they are living paycheck to paycheck. 56% say they save less than $100 per month. Even 10% of households earning $100,000 or more say that can’t make ends meet today. Most workers say they are in debt now and believe they will always be. That is the reality of capitalism.

8. The entire society could fail if the largest corporations become unviable. During the global recession years of 2007-2009, several systematically important businesses in the United States received “bailouts” from the government because of illiquid assets, many involving mortgage-backed securities.

The bailout list was extensive. Wells Fargo received $25 billion. General Motors received $50.7 billion and still owes the government more than $11 billion. Chrysler received $10 billion and still owes some of that balance as well. AIG received $67.8 billion. Although the government eventually made money from these payouts, without the bailout structure, the entire U.S. society could have collapsed. If the largest employers become unviable, everyone suffers.

9. Capitalism encourages a reduction in wages. Labor fuels capitalism. It is a market where scarcity encourages higher wages. When there is a worker shortage, then employment offers must include better salaries and benefits to entice acceptance offers. That is the only time when wages increase in capitalism structures: when there is a shortage for a specific skill.

Wage recession is the foundation of this society type because businesses are encouraged to find workers who will accept lower pay while offering the firm similar results. Employees must then either accept the lower wage or find themselves unemployed. It is a principle called the “race to the bottom.”

10. Wealth accumulation is the only point of emphasis for capitalism. The only reason to protect the environment from a capitalist’s point of view is that doing so guards their ability to accumulate wealth. This rule applies to social protections also. The energy spent in this society is always on earning more or protecting what has already been accumulated.

In the 250 years since the Industrial Revolution changed human societies, stunning changes have come to the planet. Population growth reached 400% in the 20th century, compared to the .001% growth achieved between the 1st century through the 8th century. The oceans reached record acidification levels. Global temperatures are higher. Consumption is at record levels. Some scientists believe these issues are unsustainable as we continue moving forward.

11. It eliminates competition from the market. Larger businesses seek to consolidate their position by absorbing smaller companies who become disruptors. Employees and workers do the same thing. They firm up their position in society by increasing their skills and experiences to force other people out of the jobs market. Superior skills earn the best wages in capitalism because of their scarcity. That is how socioeconomic gaps begin forming. There is more scarcity in a skillset which can lead a Fortune 500 business when compared to someone who knows how to flip burgers in a quick-service restaurant.

12. Economic cycles tend to become extreme at both ends. Capitalism creates an all-in boom or an overwhelming bust because of the way it cycles. That forces people to save during the good times so they can survive during the down years. Households and businesses on the edge of survival during the peak periods become the first casualties of a bear market. Even though consumers are still free to choose the goods and services they want, if there is no wealth, then there are no purchases. That is why government intervention often occurs during a strong recession. By artificially changing the market, the positive elements of capitalism can begin encouraging growth once again.

13. Inherited wealth changes the starting point. When a capitalist society offers inheritance rights within a family, then the socioeconomic structures change. Future generations that come from a wealthy family do not face the same decisions that individuals from poor households face each day. You still gain rewards through wealth accumulation, but for those born into “privilege,” the need for work or innovation reduces or eliminated completely. That shifts the equality of opportunity which is advantageous in capitalism.

These capitalism pros and cons encourage individual development. They promote innovation while offering chances to everyone, from any socioeconomic background, to earn the success they want in life. The structures encourage hard work and dedication. Capitalism also leaves behind those who cannot participate in some way without regard to the reasons behind the lack of inclusion. That is why most capitalism markets are mixed economies which are regulated instead of being a true form of this structure.

17 Pros and Cons of Capitalism

How does society see the role of the government? If that society desires a lack of government intervention within the production and various economic systems, relying on market-based competition and supply/demand needs instead, then that society will desire Capitalism. In Capitalism, goods or services are distributed based on societal mechanisms instead of government controls or mandates.

The primary benefit of Capitalism is that every individual has some level of control over their own fate in life. They can choose to own a business, work at a specific employer, work as a freelancer, or not work at all. Whatever dream they have, there is an opportunity to pursue it at some level.

Capitalism can also segregate people into socioeconomic classes that limit the opportunities that are available to them. People who become rich tend to reinforce their position because they have a greater access to the societal mechanisms which bring wealth. Because those who are poor have less access, they have fewer chances to change their circumstances. This causes the rich to become richer and the poor to stay poor.

Here are some additional key points to consider when looking at the overall pros and cons of Capitalism.

What Are the Pros of Capitalism?

1. Capitalism encourages innovation. Because there is a need to compete to remain profitable, Capitalism is a system that encourages innovation like no other system of economics. This occurs at every level. Businesses invest into research and development to create better products. Employees focus on improving their best practices so they can remain as productive as possible. Services are improved to solve more problems.

2. It is a society that is based on the service of others. There are two ways to look at Capitalism. The first, and most common, is that people in a Capitalistic society are working for their own benefit. The second is that every job in a society focused on Capitalism helps someone else in some way. People who manufacture goods can earn a good paycheck while creating something that solves a problem for another person in that society. Goods and services in Capitalism are all designed to help someone live a better life.

3. Capitalism promotes equality. Although the rich do tend to get richer and the poor tend to stay poor, everyone within a society focused on Capitalism does have an initial opportunity to find success. Some may need to work harder at it than others, but there is always an opportunity available at some level. The rewards are not always monetary. There is one guiding principle: if you work hard, then you have the chance to meet your definition of success.

4. It provides freedom. Governments that intervene in an economic market are doing so for their benefit, not that of the individual. With Capitalism, the focus is on the individual. Pricing and supply is driven by demand. People have the freedom to choose the goods and services that best meet their needs instead of being given a limited set of options due to government interference that is intended to preserve the structure of the ruling body.

5. Capitalism promotes self-regulation. Businesses in a Capitalistic society only have power because consumers allow them to have it. If buyers are not interested in the goods or services that are offered by an organization, then that business will not continue to exist. This means businesses must create goods or services that are desired by the society and this helps to serve the needs of individuals and households.

6. It provides a wider range of products or services. People have unique problems which must be solved. This wide array of needs allows for businesses to find a niche so they can exist. If there is value in the goods or services being offered, defined as being able to solve a problem, then it will continue to operate. That results in a society that offers a wider range of products or services than those that operate with government interference or mandate.

7. There is an opportunity to be involved in governance. Capitalism encourages people to get involved in all aspects of society to create the best possible outcome for themselves. That means it is a system that encourages people to be involved with their governance. From voting to serving on local boards to running for a national office, people get involved with government so they can create their preferred outcome.

8. Capitalism embraces a smaller world. There are people with tremendous skills in the developing world that are under-utilized. Global Capitalism allows businesses to tap into these resources so they can innovate. These innovations allow for the developing world to continue improving conditions for local populations, which can eventually work toward ending hunger, water scarcity, and other potentially life-threatening conditions.

What Are the Cons of Capitalism?

1. Capitalism creates an economy that is based on consumption. There is a specific focus on money within a society that is based on Capitalism. You need money to consume items that are produced. You need to earn money so that you can purchase items that you want to consume. This means more people are driven toward working for an employer than working for themselves. There is a choice to work, but choosing not to work makes it difficult to be a participant in a society that is based on Capitalism.

2. It places the needs of the business above the needs of the individual. Businesses take the place of the government in a Capitalistic society. The business must continue to innovate and reduce costs for it to remain operational. Because the largest expense of most businesses is the labor needed to produce goods and services, the emphasis of Capitalism is to eliminate the need for workers instead of creating more needs for them. Self-checkout stands at restaurants and grocery stores is an example of this evolution.

3. Equal opportunities can be brief and fleeting. Everyone may have their own opportunities to succeed, but without some level of governmental interference, those opportunities can be extremely brief. People who have access to more resources can create more for themselves. At the same time, people with limited access to resources often focus their energy on self-perseverance instead of wealth-building. This creates two basic groups of people: haves and have nots.

4. People with an inability to be productive are left behind. Capitalism focuses on able-bodied individuals. If someone is unable to be productive, either because of injury or disability, then they no longer have an ability to contribute. These individuals get left behind, discarded because they are essentially not necessary to the survival of the society. The focus on Capitalism is competitive supply and demand. If you can’t provide a supply and have no resources to be part of the demand, then you’re not needed.

5. Unregulated Capitalism eventually leads to consolidation. Businesses will eventually consolidate in a pure form of Capitalism until only one provider is available in the market. The goal is to limit competition so the most profits can be obtained by the goods or services being offered. This is called a “monopoly.” When such a circumstance occurs, all the power in the business-to-consumer relationship lies with the business. They can charge any price for what is being offered and the customer must pay it.

6. Even when workers are needed, there is no incentive to pay them “fairly.” Capitalism, in its pure form, is a race to the bottom for workers. Businesses are encouraged to pay the least amount possible to retain workers while charging the highest possible prices for their productive capability. There will always be someone willing to work for a lower wage, which means workers must either accept the lower wages or be without any wages.

7. Competition is forced out of the market. Capitalism focus on providing only the best. This means larger businesses with more capital work to force smaller businesses out of their niche. It also means that workers with “superior” skills work to force out workers that may have an average skill base. That is why Capitalism creates gaps between different socioeconomic groups. At some point, people and businesses must either choose to learn the skills or find new ways to compete or they become discarded in the society.

8. There is no social or environmental point of focus. The goal of Capitalism is based on consumption, so energy is placed on that need alone. There is no consideration given to the environment, the social structures of the society, or whatever harm may be done in any other area. If the actions are profitable, then they are worth pursuing. This creates a natural outcome of corporate and individualistic greed.

9. Governance serves the best and ignores the worst in Capitalism. Governments support the best businesses and the wealthiest individuals because they contribute the most to the infrastructure of the society. The poor receive services as well, but not to the same extent, because their contribution levels are “less” than others.

The pros and cons of Capitalism encourage development. They also encourage people to surround themselves with like-minded individuals to create polarized cliques. It can be beneficial, but if left unregulated, can lead to a polarized society where the needs of the few outweigh the needs of the many.

Socialism vs. Capitalism: What Is the Difference?

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• U.S. Economy
• Supply & Demand
• Archaeology
• B.S., Texas A&M University

Socialism and capitalism are the two main economic systems used in developed countries today. The main difference between capitalism and socialism is the extent to which the government controls the economy.

Key Takeaways: Socialism vs. Capitalism

• Socialism is an economic and political system under which the means of production are publicly owned. Production and consumer prices are controlled by the government to best meet the needs of the people.
• Capitalism is an economic system under which the means of production are privately owned. Production and consumer prices are based on a free-market system of “supply and demand.”
• Socialism is most often criticized for its provision of social services programs requiring high taxes that may decelerate economic growth.
• Capitalism is most often criticized for its tendency to allow income inequality and stratification of socio-economic classes.

Socialist governments strive to eliminate economic inequality by tightly controlling businesses and distributing wealth through programs that benefit the poor, such as free education and healthcare. Capitalism, on the other hand, holds that private enterprise utilizes economic resources more efficiently than the government and that society benefits when the distribution of wealth is determined by a freely-operating market.

The United States is generally considered to be a capitalist country, while many Scandinavian and Western European countries are considered socialist democracies. In reality, however, most developed countries—including the U.S.—employ a mixture of socialist and capitalist programs.

Capitalism Definition

Capitalism is an economic system under which private individuals own and control businesses, property, and capital—the “means of production.” The volume of goods and services produced is based on a system of “ supply and demand ,” which encourages businesses to manufacture quality products as efficiently and inexpensively as possible.

In the purest form of capitalism— free market or laissez-faire capitalism—individuals are unrestrained in participating in the economy. They decide where to invest their money, as well as what to produce and sell at what prices. True laissez-faire capitalism operates without government controls. In reality, however, most capitalist countries employ some degree of government regulation of business and private investment.

Capitalist systems make little or no effort to prevent income inequality . Theoretically, financial inequality encourages competition and innovation, which drive economic growth. Under capitalism, the government does not employ the general workforce. As a result, unemployment can increase during economic downturns . Under capitalism, individuals contribute to the economy based on the needs of the market and are rewarded by the economy based on their personal wealth.

Socialism Definition 

Socialism describes a variety of economic systems under which the means of production are owned equally by everyone in society. In some socialist economies, the democratically elected government owns and controls major businesses and industries. In other socialist economies, production is controlled by worker cooperatives. In a few others, individual ownership of enterprise and property is allowed, but with high taxes and government control. 

The mantra of socialism is, “From each according to his ability, to each according to his contribution.” This means that each person in society gets a share of the economy’s collective production—goods and wealth—based on how much they have contributed to generating it. Workers are paid their share of production after a percentage has been deducted to help pay for social programs that serve “the common good.” 

In contrast to capitalism, the main concern of socialism is the elimination of “rich” and “poor” socio-economic classes by ensuring an equal distribution of wealth among the people. To accomplish this, the socialist government controls the labor market, sometimes to the extent of being the primary employer. This allows the government to ensure full employment even during economic downturns. 

The Socialism vs. Capitalism Debate  

The key arguments in the socialism vs. capitalism debate focus on socio-economic equality and the extent to which the government controls wealth and production.

Ownership and Income Equality 

Capitalists argue that private ownership of property (land, businesses, goods, and wealth) is essential to ensuring the natural right of people to control their own affairs. Capitalists believe that because private-sector enterprise uses resources more efficiently than government, society is better off when the free market decides who profits and who does not. In addition, private ownership of property makes it possible for people to borrow and invest money, thus growing the economy. 

Socialists, on the other hand, believe that property should be owned by everyone. They argue that capitalism’s private ownership allows a relatively few wealthy people to acquire most of the property. The resulting income inequality leaves those less well off at the mercy of the rich. Socialists believe that since income inequality hurts the entire society, the government should reduce it through programs that benefit the poor such as free education and healthcare and higher taxes on the wealthy. 

Consumer Prices

Under capitalism, consumer prices are determined by free market forces. Socialists argue that this can enable businesses that have become monopolies to exploit their power by charging excessively higher prices than warranted by their production costs. 

In socialist economies, consumer prices are usually controlled by the government. Capitalists say this can lead to shortages and surpluses of essential products. Venezuela is often cited as an example. According to Human Rights Watch, “most Venezuelans go to bed hungry.” Hyperinflation and deteriorating health conditions under the socialist economic policies of President Nicolás Maduro have driven an estimated 3 million people to leave the country as food became a political weapon. 

Efficiency and Innovation 

The profit incentive of capitalism’s private ownership encourages businesses to be more efficient and innovative, enabling them to manufacture better products at lower costs. While businesses often fail under capitalism, these failures give rise to new, more efficient businesses through a process known as “creative destruction.” 

Socialists say that state ownership prevents business failures, prevents monopolies, and allows the government to control production to best meet the needs of the people. However, say capitalists, state ownership breeds inefficiency and indifference as labor and management have no personal profit incentive. 

Healthcare and Taxation 

Socialists argue that governments have a moral responsibility to provide essential social services. They believe that universally needed services like healthcare, as a natural right, should be provided free to everyone by the government. To this end, hospitals and clinics in socialist countries are often owned and controlled by the government. 

Capitalists contend that state, rather than private control, leads to inefficiency and lengthy delays in providing healthcare services. In addition, the costs of providing healthcare and other social services force socialist governments to impose high progressive taxes while increasing government spending, both of which have a chilling effect on the economy. 

Capitalist and Socialist Countries Today 

Today, there are few if any developed countries that are 100% capitalist or socialist. Indeed, the economies of most countries combine elements of socialism and capitalism.

In Norway, Sweden, and Denmark—generally considered socialist—the government provides healthcare, education, and pensions. However, private ownership of property creates a degree of income inequality. An average of 65% of each nation’s wealth is held by only 10% of the people—a characteristic of capitalism.

The economies of Cuba, China, Vietnam, Russia, and North Korea incorporate characteristics of both socialism and communism .

While countries such as Great Britain, France, and Ireland have strong socialist parties, and their governments provide many social support programs, most businesses are privately owned, making them essentially capitalist.

The United States, long considered the prototype of capitalism, isn’t even ranked in the top 10 most capitalist countries, according to the conservative think tank Heritage Foundation. The U.S. drops in the Foundation’s Index of Economic Freedom due to its level of government regulation of business and private investment.

Indeed, the Preamble of the U.S. Constitution sets one the nation’s goals to be “promote the general welfare.” In order to accomplish this, the United States employs certain socialist-like social safety net programs , such as Social Security, Medicare, food stamps , and housing assistance.

Contrary to popular belief, socialism did not evolve from Marxism . Societies that were to varying degrees “socialist” have existed or have been imagined since ancient times. Examples of actual socialist societies that predated or were uninfluenced by German philosopher and economic critic Karl Marx were Christian monastic enclaves during and after the Roman Empire and the 19th-century utopian social experiments proposed by Welsh philanthropist Robert Owen. Premodern or non-Marxist literature that envisioned ideal socialist societies include The Republic by Plato , Utopia by Sir Thomas More, and Social Destiny of Man by Charles Fourier. 

Socialism vs. Communism

Unlike socialism, communism is both an ideology and a form of government. As an ideology, it predicts the establishment of a dictatorship controlled by the working-class proletariat established through violent revolution and the eventual disappearance of social and economic class and state. As a form of government, communism is equivalent in principle to the dictatorship of the proletariat and in practice to a dictatorship of communists. In contrast, socialism is not tied to any specific ideology. It presupposes the existence of the state and is compatible with democracy and allows for peaceful political change.

Capitalism 

While no single person can be said to have invented capitalism, capitalist-like systems existed as far back as ancient times. The ideology of modern capitalism is usually attributed to Scottish political economist Adam Smith in his classic 1776 economic treatise The Wealth of Nations. The origins of capitalism as a functional economic system can be traced to 16th to 18th century England, where the early Industrial Revolution gave rise to mass enterprises, such as the textile industry, iron, and steam power . These industrial advancements led to a system in which accumulated profit was invested to increase productivity—the essence of capitalism.

Despite its modern status as the world’s predominant economic system, capitalism has been criticized for several reasons throughout history. These include the unpredictable and unstable nature of capitalist growth, social harms, such as pollution and abusive treatment of workers, and forms of economic disparity, such as income inequality . Some historians connect profit-driven economic models such as capitalism to the rise of oppressive institutions such as human enslavement , colonialism , and imperialism .

Sources and Further Reference

• “Back to Basics: What is Capitalism?” International Monetary Fund , June 2015, https://www.imf.org/external/pubs/ft/fandd/2015/06/basics.htm.
• Fulcher, James. “Capitalism A Very Short Introduction.” Oxford, 2004, ISBN 978-0-19-280218-7.
• de Soto, Hernando. The Mystery of Capital.” International Monetary Fund , March, 2001, https://www.imf.org/external/pubs/ft/fandd/2001/03/desoto.htm.
• Busky, Donald F. “Democratic Socialism: A Global Survey.” Praeger, 2000, ISBN 978-0-275-96886-1.
• Nove, Alec. “The Economics of Feasible Socialism Revisited.” Routledge, 1992, ISBN-10: 0044460155.
• Newport, Frank. “The Meaning of ‘Socialism’ to Americans Today.” Gallup , October 2018), https://news.gallup.com/opinion/polling-matters/243362/meaning-socialism-americans-today.aspx.
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What Is Capitalism?

Understanding capitalism, capitalism and the profit motive, precursors to capitalism: feudalism and mercantilism.

• Pros and Cons

Capitalism vs. Socialism

• Frequently Asked Questions

The Bottom Line

• Government & Policy

What Is Capitalism: Varieties, History, Pros & Cons, Socialism

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Capitalism is an economic system in which private individuals or businesses own capital goods. At the same time, business owners (capitalists) employ workers (labor) who receive only wages; labor doesn't own the means of production but instead uses them on behalf of the owners of capital.

The production of goods and services under capitalism is based on supply and demand in the general market—known as a market economy —rather than through central planning—which is known as a planned economy or command economy .

The purest form of capitalism is free-market or laissez-faire capitalism. Here, private individuals are unrestrained. They may determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls. Today, most countries practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries.

Key Takeaways

• Capitalism is an economic system characterized by private ownership of the means of production, with labor solely paid wages.
• Capitalism depends on the enforcement of private property rights, which provide incentives for investment in and productive use of capital.
• Capitalism developed out of feudalism and mercantilism in Europe and dramatically expanded industrialization and the large-scale availability of mass-market consumer goods.
• Pure capitalism can be contrasted with pure socialism (where all means of production are collective or state-owned).

Functionally, capitalism is one system of economic production and resource distribution. Instead of planning economic decisions through centralized political methods, as with socialism or feudalism, economic planning under capitalism occurs via decentralized, competitive, and voluntary decisions.

Capitalism is essentially an economic system in which the means of production (i.e., factories, tools, machines, raw materials, etc.) are organized by one or more business owners (capitalists). Capitalists then hire workers to operate the means of production in return for wages. Workers have no claim on the means of production or on the profits generated from their labor—these belong to the capitalists.

As such, private property rights are fundamental to capitalism. Most modern concepts of private property stem from John Locke's theory of homesteading, in which human beings claim ownership by mixing their labor with unclaimed resources. Once owned, the only legitimate means of transferring property are through voluntary exchange, gifts, inheritance , or the re-homesteading of abandoned property.

Private property promotes efficiency by giving the owner of resources an incentive to maximize the value of their property. So the more valuable the resource is, the more trading power it provides the owner. In a capitalist system, the person who owns the property is entitled to any value associated with that property.

Why Private Property Rights Matter for Capitalism

For individuals or businesses to deploy their capital goods confidently, a system must exist that protects their legal right to own or transfer private property. A capitalist society relies on the use of contracts, fair dealing, and tort law to facilitate and enforce these private property rights.

When property isn't privately owned but rather is shared by the public, a problem known as the tragedy of the commons can emerge. With a common pool resource, which all people can use and none can limit access to, all individuals have an incentive to extract as much use-value as they can and no incentive to conserve or reinvest in the resource. Privatizing the resource is one possible solution to this problem, along with various voluntary or involuntary collective action approaches.  

Under capitalist production, the business owners (capitalists) retain ownership of the goods being produced. If a worker in a shoe factory were to take home a pair of shoes that they made, it would be theft. This concept is known as the alienation of workers from their labor.

Profits are closely associated with the concept of private property. By definition, an individual only enters into a voluntary exchange of private property when they believe the exchange benefits them in some psychic or material way. In such trades, each party gains extra subjective value, or profit, from the transaction.

The profit motive , or the desire to earn profits from business activity, is the driving force of capitalism. It creates a competitive environment in which businesses compete to be the low-cost producer of a certain good in order to gain market share. If it is more profitable to produce a different type of good, then a business is incentivized to switch.

Voluntary trade is another, related mechanism that drives activity in a capitalist system. The owners of resources compete with one another over consumers, who, in turn, compete with other consumers over goods and services. All this activity is built into the price system, which balances supply and demand to coordinate the distribution of resources.

A capitalist earns the highest profit by using capital goods (such as machinery, tools, etc.) most efficiently while producing the highest-value good or service. By contrast, the capitalist suffers losses when capital resources aren't used efficiently and instead create less-valuable outputs.

Capitalism vs. Markets

Capitalism is a system of economic production. Markets are systems of distribution and allocation of goods already produced. While they often go hand-in-hand, capitalism and free markets refer to two distinct systems.

Capitalism is a relatively new type of social arrangement for producing goods in an economy. It arose largely along with the advent of the Industrial Revolution , some time in the late 17th century. Before capitalism, other systems of production and social organization were prevalent.

Feudalism and the Roots of Capitalism

Capitalism grew out of European feudalism. Up until the 12th century, a very small percentage of the population of Europe lived in towns. Skilled workers lived in the city but received their keep from feudal lords rather than a real wage, and most workers were serfs for landed nobles. However, by the late Middle Ages, rising urbanism, with cities as centers of industry and trade, became more and more economically important.

Under feudalism, society was segmented into social classes based on birth or family lineage. Lords (nobility) were the landowners, while serfs (peasants and laborers) didn't own land but were under the employ of the landed nobility.

The advent of industrialization revolutionized the trades and encouraged more people to move into towns where they could earn more money working in a factory than existing at a subsistence level in exchange for labor.

Mercantilism

Mercantilism gradually replaced the feudal economic system in Western Europe and became the primary economic system of commerce during the 16th to 18th centuries. Mercantilism started as trade between towns, but it wasn't necessarily competitive trade. Initially, each town had vastly different products and services that were slowly homogenized over time by demand.

After the homogenization of goods, trade was carried out in broader and broader circles: town to town, county to county, province to province, and, finally, nation to nation. When too many nations were offering similar goods for trade, the trade took on a competitive edge that was sharpened by strong feelings of nationalism on a continent that was constantly embroiled in wars.

Colonialism flourished alongside mercantilism, but the nations seeding the world with settlements weren't trying to increase trade. Most colonies were set up with an economic system that smacked of feudalism, with their raw goods going back to the motherland and, in the case of the British colonies in North America, being forced to repurchase the finished product with a pseudo- currency that prevented them from trading with other nations.

It was economist Adam Smith who noticed that mercantilism was a regressive system that was creating trade imbalances between nations and keeping them from advancing. His ideas for a free market opened the world to capitalism.

The Growth of Industry

Adam Smith's ideas were well-timed, as the Industrial Revolution was starting to cause tremors that would soon shake the Western world. The (often-literal) gold mine of colonialism had brought new wealth and new demand for the products of domestic industries, which drove the expansion and mechanization of production.

As technology leaped ahead and factories no longer had to be built near waterways or windmills to function, industrialists began building in the cities where there were now thousands of people to supply labor.

Capitalism involved reorganizing society into social classes based not on ownership of land, but ownership of capital (in other words, businesses). Capitalists were able to earn profits from the surplus labor of the working class, who earned only wages. Thus, the two social classes defined by capitalism are the capitalists and the laboring classes.

Industrial tycoons were the first people to amass wealth, often outstripping both the landed nobles and many of the money-lending/banking families. For the first time in history, common people could have hopes of becoming wealthy. The new money crowd built more factories that required more labor, while also producing more goods for people to purchase.

During this period, the term "capitalism"—originating from the Latin word " capitalis ," which means "head of cattle"—rose to prominence. In 1850, French socialist Louis Blanc used the term to signify a system of exclusive ownership of industrial means of production by private individuals rather than shared ownership.

Pros and Cons of Capitalism

More efficient allocation of capital resources

Competition leads to lower consumer prices

Wages and general standards of living rise overall

Spurs innovation and invention

Creates inherent class conflict between capital and labor

Generates enormous wealth disparities and social inequalities

Can incentivize corruption and crony capitalism in the pursuit of profit

Produces negative effects such as pollution

Pros Explained

More efficient allocation of capital resources : Labor and means of production follow capital in this system because supply follows demand.

Competition leads to lower consumer prices : Capitalists are in competition against one another, and so will seek to increase their profits by cutting costs, including labor and materials costs. Mass production also usually benefits consumers.

Wages and general standards of living rise overall : Wages under capitalism increased, helped by the formation of unions. More and better goods became cheaply accessible to wide populations, raising standards of living in previously unthinkable ways.

Spurs innovation and invention : In capitalism, inequality is the driving force that encourages innovation, which then pushes economic development.

Cons Explained

Creates inherent class conflict between capital and labor : While capitalists enjoy the potential for high profits, workers may be exploited for their labor, with wages always kept lower than the true value of the work being done.

Generates enormous wealth disparities and social inequalities : Capitalism has created an immense gap between the wealthy and the poor, as well as social inequalities.

Can incentivize corruption and crony capitalism in the pursuit of profit : Capitalism can provide incentives for corruption emerging from favoritism and close relationships between business people and the state.

Produces negative effects such as pollution : Capitalism often leads to a host of negative externalities , such as air and noise pollution, and these costs paid for by society, rather than the producer of the effect.

In terms of political economy , capitalism is often contrasted with socialism . The fundamental difference between the two is the ownership and control of the means of production.

In a capitalist economy, property and businesses are owned and controlled by individuals. In a socialist economy, the state owns and manages the vital means of production. However, other differences also exist in the form of equity, efficiency, and employment.

The capitalist economy is unconcerned about equitable arrangements. The primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor, out of fairness, and to ensure equality in opportunity and equality of outcome. Equality is valued above high achievement, and the collective good is viewed above the opportunity for individuals to advance.

The capitalist argument is that the profit incentive drives corporations to develop innovative new products desired by the consumer and in demand in the marketplace. It is argued that the state ownership of the means of production leads to inefficiency because, without the motivation to earn more money, management, workers, and developers are less likely to put forth the extra effort to push new ideas or products.

In a capitalist economy, the state doesn't directly employ the workforce. This lack of government-run employment can lead to unemployment during economic recessions and depressions .

In a socialist economy, the state is the primary employer. During times of economic hardship, the socialist state can order hiring, so there is full employment. Also, there tends to be a stronger "safety net" in socialist systems for workers who are injured or permanently disabled. Those who can no longer work have fewer options available to help them in capitalist societies.

Karl Marx, Capitalism, and Socialism

Philosopher Karl Marx was famously critical of the capitalist system of production because he saw it as an engine for creating social ills, massive inequalities, and self-destructive tendencies. Marx argued that , over time, capitalist businesses would drive one another out of business through fierce competition, while, at the same time, the laboring class would swell and begin to resent their unfair conditions. His solution was socialism, through which the means of production would be handed over to the laboring class in an egalitarian fashion.

Varieties of Capitalism

Today, many countries operate with capitalist production, but this also exists along a spectrum . In reality, there are elements of pure capitalism that operate alongside otherwise-socialist institutions.

The standard spectrum of economic systems places laissez-faire capitalism at one extreme and a complete planned economy—such as communism —at the other. Everything in the middle could be said to be a mixed economy. The mixed economy has elements of both central planning and unplanned private business. By this definition, nearly every country in the world has a mixed economy.

Mixed Capitalism

When the government owns some but not all the means of production and may legally circumvent, replace, limit, or otherwise regulate private economic interests, it is said to be a mixed economy or mixed economic system . A mixed economy respects property rights, but places limits on them.

Property owners are restricted as to how they exchange with one another. These restrictions come in many forms, such as minimum wage laws, tariffs, quotas, windfall taxes, license restrictions, prohibited products or contracts, direct public expropriation , antitrust legislation, legal tender laws, subsidies, and eminent domain . Governments in mixed economies also fully or partly own and operate certain industries, especially those considered public goods .

Anarcho-Capitalism

In contrast, with pure capitalism, also known as laissez-faire capitalism or anarcho-capitalism , all industries are left up to private ownership and operation, including public goods, and no central government authority provides regulation or supervision of economic activity in general.

What Is an Example of Capitalism?

An example of capitalist production would be if an entrepreneur starts a new widget company and opens a factory. This individual uses available capital that they own (or from outside investors) and buys the land, builds the factory, orders the machinery, and sources the raw materials. Workers are then hired by the entrepreneur to operate the machines and produce widgets. Note that the workers don't own the machines they use or the widgets that they produce. Instead, they receive only wages in exchange for their labor. These wages represent a small fraction of what the entrepreneur earns from the venture.

Who Benefits From Capitalism?

Capitalism tends to benefit capitalists the most. These include business owners, investors, and other owners of capital. While capitalism has been praised for improving the standard of living for many people across the board, it has by far benefited those at the top.

Why Is Capitalism Harmful?

Because of how it is structured, capitalism will always pit business owners and investors (i.e., capitalists) against the working class. Capitalists are in competition against one another, and so will seek to increase their profits by cutting costs, including labor costs. At the same time, workers seek higher wages, fairer treatment, and better working conditions. These two incentives are fundamentally at odds, which creates class conflict.

Is Capitalism the Same as Free Enterprise?

Capitalism and free enterprise are often seen as synonymous. In truth, they are closely related yet distinct terms with overlapping features. It is possible to have a capitalist economy without complete free enterprise, and a free market without capitalism. Any economy is capitalist as long as private individuals control the factors of production . However, a capitalist system can still be regulated by government laws, and the profits of capitalist endeavors can still be taxed heavily. "Free enterprise" can roughly be understood to mean economic exchanges free of coercive government influence.

Capitalism is an economic and political system where trade and industry are controlled by private owners for profit. Its core principles are: accumulation, ownership, and profiting from capital. In its purest form, capitalism works best when these private owners have assurances that the wealth they generate will be kept in their own pocket. But giving the wealthy free rein to become even wealthier is controversial. Endorsing such behavior without some concessions is unlikely to get many politicians elected.

Capitalism is the dominant world economic system, although it often isn’t pure in form. In many countries, interventions from the state, a core trait of socialism, are frequent. Businesses are able to chase profit but within the boundaries set by the government. Most political theorists and nearly all economists argue that capitalism is the most efficient and productive system of exchange.

International Monetary Fund. " What Is Capitalism ?"

Nelson, Peter Lothian. " To Homestead a Nature Preserve: A Response to Block and Edelstein, 'Popsicle Sticks and Homesteading Land for Nature Preserves '. "  Review of Social and Economic Issues , vol. 2, no. 1, Spring 2019, pp. 71+. (Subscription required.)

Psychology Today. " Is Capitalism Fair ?"

Harvard Business School. " Tragedy of the Commons: What It Is and 5 Examples ."

Lester C. Thurow. " Profits ."

Michael Sonenscher. " Capitalism: The Word and the Thing ."

Carson-Newman University. " Feudalism ."

Laura LaHaye. " Mercantilism ."

Trinity University. " Adam Smith on Money, Mercantilism, and the System of Natural Liberty ."

Milios, John. " Social Classes in Classical and Marxist Political Economy ," The American Journal of Economics and Sociology, vol. 59, no. 2 (April 2000), pp. 283-302. (Subscription required.)

Cambridge University Press. " Cries of Pain: The Word 'Capitalism' ."

Columbia College. " Karl Marx ."

New World Encyclopedia. " Anarcho-Capitalism ."

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Pros and Cons of Capitalism

What is capitalism.

Capitalism refers to an economic system characterised by private ownership of resources,  profit motive, and price mechanisms with no or little government intervention in resource allocation. It is also called a free-market economy or free enterprise economic system.

Capitalism, like any other economic system , also answers the following three fundamental economic questions about resource allocation:

• What to produce?
• How to produce
• For whom to produce?

In capitalism, these questions are answered by households and firms through freedom of choice and the price mechanism, with minimum government intervention.

Capitalism is supported by economists Adam Smith and Milton Friedman in their writings.

Key Characteristics of Capitalism

Private ownership of resources.

The private ownership of means of production and private property are major features of capitalism. It means that individuals have the right to own, control, and dispose of land, buildings, machinery, and other natural and man-made resources.

The government provides property rights through the legal system. Private ownership of factors of production not only refers to the right to own and dispose of real assets; it also gives the owners of resources the right to earn income (rewards) from the resources they own.

Self Interest

Since capitalism is based on the principle that individuals should be free to do as they wish, the motive for economic activity is self-interest. Each economic agent in capitalism will make decisions purely based on self-interest. Firms will try to maximise profit. Consumers will spend money to maximise their satisfaction.

Price Mechanism

It means that resource allocation decisions are taken by producers and consumers with no government intervention. In a free market, the interaction of demand (consumers) and supply (producers) determines the price and quantity. A change in price is used as a mean to allocate resources.

The decisions of producers determine the supply of a product; the decisions of buyers determine the demand. The interactions of demand and supply bring about a change in the price, which leads to resource allocation decisions.

The above figure shows the effect of demand for bananas increasing while demand for apples decreases.

• If consumers are willing to pay a higher price for a product, producers will allocate more resources to produce that product.
• If consumers are willing to pay a low price for a product, producers will allocate fewer resources to produce that product.
• Resource Allocation is changing all the time in response to changes in consumer demand and the costs of production.
• Resources move towards those products for which demand is rising.
• Resources move away from those products for which demand is falling.

Let’s illustrate this with diagrams.

The above graph shows how resources are moved from sea travel to air travel through price mechanism.

Freedom of Enterprise and Choice

Freedom of enterprise means that individuals are free to buy and hire economic resources, to organise these resources for production, and to sell their products in markets of their own choice.

The consumer is regarded as being sovereign since the way in which he or she chooses to spend his income determines the ways in which society uses its economic resources. In capitalism, producers respond to consumers' preferences; they produce what consumers demand.

Competition

Economic rivalry, or competition, is another essential feature of capitalism. It means there are many sellers of a product who compete for the consumers spending. Competition, whether actual or potential, should also result in low prices and better quality. Actual Competition means the number of existing rival firms in the industry. Potential Competition means the number of firms that might enter the market in the future in case of higher profits. This means it is easy for firms to enter or leave the industry. Efficient firms (with low cost) will stay in the market. Inefficient firms (with high cost) will go out of the market. Firms, who respond to changes in consumer demand, will earn high profits. Profit will be an incentive to innovate and expand.

Role of Government

The government has no direct role in the workings of capitalist societies and it does not interfere in the operation of the price mechanism.  It ensures law and order through the police and judiciary. It also ensures property rights. It prints and circulates money. In pure capitalism, the government's role is to watch what is happening and make no intervention. In real life, governments intervene when the price mechanism does not provide the best allocation of resources (market failure). Governments provide Public Goods like defence and street lights. Governments also provide merit goods like healthcare and education.

Pros of Capitalism

One benefit of capitalism is choice. If there are a large number of firms producing a product, consumers will have a choice of producers. This means many firms are trying to meet the demand from customers.  This means that consumers have economic freedom and sovereignty. Hence, consumers determine what is produced in capitalism.

In capitalism, costs and prices may be low. The profit motive and competition promote efficiency. Firms have the freedom to produce the most desirable goods (allocative efficiency) with least cost methods (productive efficiency). Competition also leads firms to charge lower prices due to lower costs and to attract more customers.

In capitalism, quality of the goods and services may be high. Market forces can promote the improvement of methods of production and a rise in the quality of products made. It does this by putting competitive pressure on firms, and by providing them with the profit incentive to try to gain more sales by making their products more attractive to consumers.

Capitalism provides an incentive for innovation and entrepreneurship. In a capitalist economy, individuals have the opportunity to pursue their own business ideas and take calculated risks. The chance of earning profits motivates entrepreneurs to develop new products, technologies, and services that meet consumers' needs and preferences. This drive for innovation fosters economic development and improves living standards.

Wealth Creation

In a capitalist system, people can create their own wealth, leading to prosperity. By allowing individuals and businesses to pursue profit opportunities, capitalism creates the conditions for economic growth. As businesses expand and succeed, they generate jobs, increase wages, and contribute to overall prosperity. The accumulation of wealth in the hands of individuals and businesses can be reinvested into the economy, leading to further economic expansion and the potential for greater prosperity for society as a whole.

Adaptability

Capitalism has the ability to adjust to changing market conditions, technological advancements, and consumer demands. Capitalist economies can respond quickly to disruptions, such as economic recessions, by reallocating resources and adjusting prices. The competitive nature of capitalism encourages businesses to be agile and innovative, enabling them to survive and thrive in dynamic environments. This adaptability ensures that capitalism remains a robust and flexible economic system.

Economic Growth

The pursuit of profit and the freedom to engage in market transactions incentivise individuals and businesses to invest, expand production, and create wealth. As a result, capitalist economies often experience higher rates of economic growth compared to other economic systems. Economic growth leads to increased employment opportunities, higher incomes, and improved living standards for individuals and communities.

Moreover, through choice, competition and innovation, capitalism drives technological advancements, increases productivity, and lowers production costs. This leads to the availability of a wider range of goods and services at more affordable prices, allowing individuals to enjoy a higher standard of living.

Cons of Capitalism

Wealth inequality.

Under capitalism, there is a significant risk of wealth inequality through its concentration in the hands of a few individuals, firms or groups. There may be unequal distribution of wealth, with some people being very rich, and others being very poor. This leads to a substantial gap between the rich and the poor.

Differences in income will increase over time. Those earning high incomes can afford to save and buy shares. Their savings and shares will earn them interest and dividends (a share of profits). In contrast, the poor cannot afford to save. Critics argue that capitalism fails to provide equal opportunities for all individuals to succeed.

Short-term Focus

Critics argue that capitalism often encourages a short-term focus on financial gains rather than long-term sustainability. The profit motive may lead businesses to prioritise immediate profits over broader societal concerns, such as environmental sustainability for future generations or social well-being.

Moreover, rich people can have more influence over what is produced due to their higher purchasing power. As a result, more resources will be allocated for luxuries and fewer resources will be allocated for necessities.

Market Imperfections

One of the disadvantages of capitalism is the possibility of market imperfections. A market may become dominated by one firm (a monopoly) or a few firms (an oligopoly). For instance, due to its monopoly power, a firm can exploit consumers by charging higher prices. These powerful firms can increase prices and limit the choice of customers. Moreover, in monopolies and oligopolies, resources are not efficiently allocated.

Exploitation of Labour

Capitalism's profit-driven nature can encourage the exploitation of labour in the form of lower wages. In the pursuit of maximising profits, some businesses may prioritise cost-cutting measures, such as low wages, poor working conditions, and limited benefits. This can lead to the exploitation and mistreatment of workers in labor markets, particularly in industries where labour rights are not adequately protected. Capitalism fails to provide not only equality of outcome but also equality of opportunity.

Externalities

Capitalism may neglect the negative externalities associated with certain economic activities. Consumers and private firms may only consider private costs and benefits when making consumption or production decisions. External costs and external benefits will be ignored. For instance, pollution caused by industrial production may harm the environment and public health, but the costs associated with these damages are often not factored into the market price. This failure to internalise external costs can result in environmental degradation, resource depletion, and negative societal impacts that are not adequately addressed within the capitalist framework.

Economic Instability

One of the inherent risks of capitalism is economic instability. The pursuit of profit and the fluctuations of supply and demand can lead to boom and bust cycles, causing recessions and economic crises.

Public Goods

In the absence of government interventions, public goods and public services will not be produced by firms in capitalism. Private firms cannot charge a price for public goods because of their non-excludability and non-rivalry features. Moreover, in capitalism, merit goods (goods with positive externalities) are underproduced, and de-merit goods (goods with negative externalities) are overproduced. This means that the resources are not properly allocated for merit, de-merit, and public goods.

In conclusion, capitalist countries have an economic system characterised by private ownership, profit motive and price mechanism with almost no government intervention. There are many advantages of capitalism, yet, in the absence of government intervention, there may be many disadvantages as well, including wealth inequality, market imperfections, under-provision of merit goods, externalities, and many more. In real life, governments intervene in markets when they fail to allocate resources efficiently.

Horizontal Integration

GDP Deflator - Formula, Calculation and Importance

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1 What’s Wrong with Capitalism?

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Capitalism as a system for economic organization and resource allocation is suffering a worldwide crisis of confidence, with growing inequality, financial crises, and a structural unemployment that affects youth disproportionally. Since the Cold War western capitalism has been treated as the only acceptable form of economic system, andthe public or political realm has itself come to be dominated by the money of special-interest groups. This has in turn led to mass protest movements across the developed and developing worlds, and a weakening of the political center in favor of more extreme political currents. Fissures have been widening between the investor class enjoying growing returns on capital and the wage-earning class suffering declining returns from their labor. And increased financialization of the economy means the traditional economic theories based on production in a classical sense are increasingly irrelevant to the modern economy. Above all a sense of unfairness and decades of growing inequality risk the stability and sustainability of the system and its acceptance, and an erosion in societal trust and the very institutions needed to sustain the system.

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Pros and Cons of Capitalism and Socialism - Essay Example

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Extract of sample "Pros and Cons of Capitalism and Socialism"

Capitalism is the idea whereby the possession of capital i.e. the means of production are usually owned and determined by private individuals with little or almost no interception from the government. The entire world can be considered to be operating under the capitalist system. According to the Capitalist system, a small proportion of the entire world’s population controls the resources of the world. This leads them to dictate their terms and accumulate and increase their respective wealth and fortune.

Many commentators consider this to be a major flaw of Capitalism. Commentators are of the view that the working classes within the economy are negatively exploited as a result of this undue power. Exercising such undue power usually results in Monopolies within the economy and these monopolies lead to an increased benefit being gained by charging higher prices for different goods and services. Except for this, there are other negative aspects of Capitalism which include discriminative distribution of wealth amongst the economy whereby some people are favored over others.

Proponents supporting the Capitalism system consider the economic system to increase the economic growth of society (Hyman, 2010). Socialism on the other hand is a system that has increased government interception with respect to the use of capital/ resources and the income is distributed amongst the people as desired by the government. Advocates favoring socialism consider the system to be a proper distributor of wealth and income amongst the public/economy. People favoring Socialism are of the view that the system has always led to an equal allocation of responsibilities.

The negative aspect of Socialism is the fact that government intervention may lead to many different factors such as decreased growth, reduced flexibility, and unclear price signals. These unclear price signals may not be good enough to perform economic calculations and predict the uncertain market trends. Socialism has always been pointed out for its budget-constrained attribute. This lack of budgets leads to reduced innovation and growth because of the reduced incentives for the people (Hyman, 2010).

Economies around the World have always been found to operate under the Socialist economic system. Those economies with a view that they are following the Capitalist economy are merely facing a delusion as there is not a single country in the current era that operates without government intervention. Karl Marx’s idea of socialism was to hand the power to the working class and by means of such power; the working class would be able to derive their respective pay scale. According to Karl Marx, the consciousness of the working class would only be altered by a change in their working conditions such as pay scales and for a successful implementation of a proper socialism system; the capitalist system should be over-thrown i.e. possession of resources should not be confined to a limited minority (Hyman, 2010).

Proponents around the world are of the view that the socialism view has not been properly implemented to gain proper advantages from it. On the contrary, the existing system has led to chaos within the global economy resulting in different financial and economic issues around the globe. A documentary released by some Greek theorists suggests that the economic system wrongfully portrayed as a socialist system has led to the Greek Financial Crisis.

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Essay: The World’s Biggest Crisis Is the End of Scarcity

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The World’s Biggest Crisis Is the End of Scarcity

How our era of plenty has created the global problems that plague us today..

• United States

Imagine an alien observer, sent undercover to Earth every half-century, to account for the status of human life on the planet. What would she convey to her extraterrestrial colleagues about 2024?

This article is adapted from The Taming of Scarcity and the Problems of Plenty: Rethinking International Relations and American Grand Strategy in a New Era , Francis J. Gavin, Routledge, 106 pp., $16.95, March 2024.

Before taking her trip, she would peruse her previous reports, noting a few things. In 1974, the world’s leading democratic power, the United States, was in geopolitical retreat and domestic disarray, while the authoritarian Soviet Union appeared increasingly powerful. The most populated state in the world, a Mao Zedong-led China, possessed an economy barely above subsistence level, while the second most populous nation, India, was scarcely better. The global economy suffered from both inflation and slow growth, marked by a chaotic international monetary and financial system. Wars or the threat of wars, both civil and interstate, were ever present in every part of the globe. Nuclear Armageddon hung like a sword of Damocles over the planet.

1974’s report, however, was absolutely Pollyannaish compared to 1924’s. One horrific world war had concluded while laying the seeds for another even more murderous. Imperialism shaped the international order, as a significant percentage of the world’s population was ruled or exploited by European capitals thousands of miles away. A steep economic depression had just ended but was only a precursor to a far deeper, more devastating financial collapse a few years later. Racism, misogyny, and intolerance were the norm. This, however, was paradise compared to the previous chronicle. 1874’s report pointed out that global life expectancy was only 30 and that few living people had not, at some point in their life, been visited by personal and communal violence, deadly disease, misrule and misgovernance, and the threat of famine and disaster. Each preceding half-century report was, in fact, more dire than the last.

The soup line in New York City, circa 1929. Bettman Archives/via Getty Images

Seen from this historical perspective, the alien could send a positively glowing report back home. In 2024, famine and illiteracy have been dramatically reduced, and life expectancy has more than doubled over the past century. Unimaginable volumes of wealth are generated; staggering amounts of information are available to ordinary people, instantaneously; and transformative new labor and lifesaving technologies are created every day. Genocide is rare; tolerance, not prejudice, is increasingly a shared norm; formal colonialism has been thrown on the dustbin of history; and economic recessions are unlikely to turn into crippling depressions.

Most importantly, the incentives for states to fully mobilize their societies to pursue total wars of conquest—perhaps the most pervasive and frightening aspect of world politics in her past chronicles—have all but disappeared. Indeed, states are now expected to protect and provide benefits to their citizens, instead of simply using them as military fodder to vanquish foes and seize land. Ideas and innovation, not territory, are the sources of power in this new world.

In short, the world has made unimaginable progress in taming the steep challenges of scarcity that had plagued humanity for millennia and had been one of the core drivers of total wars for plunder, empire, and conquest. But the success in creating a more prosperous, informed, and secure world for humanity has, unexpectedly, generated a whole new set of planetary challenges that, if not resolved, threatens disaster, if not human extinction.

The remarkable progress in generating unimaginable levels of wealth, information, and security has created the new, more vexing, and arguably more dangerous problems of plenty—unexpected and potentially catastrophic challenges that were created, ironically, by humanity’s impressive efforts to tame scarcity.

Drone to Yacht, an exclusive delivery service, drops a bag of food to boats near Ibiza on Aug. 24, 2021. Jaime Reina/AFP via Getty Images

Five revolutionary shifts were key in creating our present era of plenty. First, an unexpected and voluntary demographic compression unfolded in the developed world, with birth rates falling precipitously while life expectancy markedly expanded; as median ages increased and population growth slowed, the need to conquer additional territory abated. Second, an economic-technological revolution emerged that massively improved agricultural yields and the availability of food, dramatically boosted industrial productivity, and transformed finance capitalism, while improving transportation, housing, and health, and making accessible, affordable fuel bountiful. Third, an information revolution took place, whereby increased literacy and technological change significantly expanded the amount of access to knowledge about the world. Fourth, leaders of the developed world created domestic and international governing institutions and practices, which, among other benefits, generated far greater domestic stability and socio-economic well-being, eliminated great depressions, and provided increased personal as well as collective security, creating a political order that prized order, sovereignty, and, in time, human rights. Finally, ground-breaking new military capabilities, especially thermonuclear weapons, prohibitively increased the costs and risks of great-power wars of conquest.

These revolutions combined to reduce the shadow of famine, disease, and misery that had long fallen upon the human experience, massively increasing total wealth and information while weakening core drivers of territorial expansion, immeasurably improving the quality of life in the developed world. Populations stabilized and aged; food, resources, and markets became more abundant; and disintermediated flows of information exploded.

So what exactly are the problems of plenty? The current world order produces great material output, generated by increasing global exchange, but distributing it fairly among and between populations is contentious. This enormous prosperity generated by the burgeoning trade and industrial prowess has spawned grave risks of climate, ecological, migratory, and public-health catastrophes. The emergence of new technologies, developed largely in the private sector, has solved innumerable problems, while also creating frightening new ones. Surprisingly, an unlimited amount of data and information, no longer intermediated by legacy institutions, generates different though equally fraught dangers as scarce information controlled by religious institutions or the state.

The Relentless Growth of Degrowth Economics

Europe’s push to abandon capitalism is motivated by optimism about politics—and pessimism about everything else.

The Hidden History of the World’s Top Offshore Cryptocurrency Tax Haven

The Bahamas represents how global capitalism can go very right, and very wrong, at exactly the same time.

The 1970s Weren’t What You Think

Yes, fiscal and monetary policy seemed stuck for too long in expansionary mode. But the era also saw the rebalancing of the world economy.

As Jonathan S. Blake and Nils Gilman point out in their forthcoming book, Children of a Modest Star , the list of threats to human welfare, life, and the planet itself generated by plenty is daunting: “climate change, pandemic diseases, stratospheric ozone depletion, atmospheric aerosol loading, space junk, growing antibiotic resistance, biodiversity loss, anthropogenic genetic disruptions, declining soil health, upended nitrogen and phosphorus cycles, freshwater depletion, ocean acidification, oceanic plastics—and maybe even emerging technologies with terraforming potential, like bioengineering and artificial intelligence.”

A key feature of the age of plenty is the extraordinary ability to move massive quantities of ideas, money, goods, and especially people around the world quickly, irrespective of borders and territory. But this revolution in transmission does not simply enable good citizens and products to move around the world: unwanted agents—from pathogens to terrorists to bad ideas—can also move far more quickly and effortlessly, often with devastating consequences. Expectations have also been dramatically raised while left unmet. While the age of abundance has promoted tolerance and radical individuality, it has also undermined social cohesion and weakened the sense of common purpose needed to confront these challenges. Governing norms and institutions developed to successfully tame scarcity have been exposed as ill-suited to confront contemporary challenges, generating a crisis of political legitimacy and stoking polarization.

Families arrive to board a train at Kramatorsk central station as they flee Kramatorsk, in the Donbas region of Ukraine on April 4, 2022. Fadel Senna/AFP via Getty Images

In an era of plenty where empire, plunder, and conquest make little sense, how should we understand the current turmoil in world politics, marked by atrocities in the Middle East, Russia’s brutal invasion of Ukraine, and the deepening tensions between the world’s two most powerful states, China and the United States? Why are the leading powers seemingly focused on issues that resonated in the world of scarcity, particularly great-power rivalry and war, while offering inadequate responses to the pressing issues generated by a world of plenty? There are many reasons, but three stand out.

First, Russia’s 2022 invasion of Ukraine is the exception that proves the rule, revealing the dangers of strategic decisions based on outdated assumptions about conquest. From a narrow national-interest perspective, a desire to control the Donbas made some sense in 1900, when its abundant coal, wheat, defense in depth, and pliant population added to Russia’s power in a world shaped by scarcity and where empire and conquest were the norm. Today, in an age when food and fuel are historically cheap and abundant, land less valuable, conquered territories much more difficult to subdue, alternative grand strategies far more promising, and the world both aghast by and willing to punish Russia for its violations of the norms of sovereignty and human rights, even a successful conquest of Ukraine was unlikely to make Russia much more powerful in the long run. There are many important differences between America’s disastrous post-9/11 wars in the greater Middle East and Russia’s invasion of Ukraine. Both, however, reflect poor grand-strategic decisions based on profound misreadings of the nature of power and the incentives of the contemporary international system, misunderstanding the increased difficulty and decreased payoff for using force to conquer territories or subdue uncooperative populations in the age of plenty.

Second, it is important to recognize that there are many causes of war and conflict beyond plunder and imperial conquest. In particular, we must distinguish between the imperial conquest of the past—or an expansive, often unlimited impulse to add territory and colonies—and irredentism, or the finite desire of a state to reclaim territory it believes it has unfairly lost. The most dangerous places in the world—Kashmir, the Korean Peninsula, the Middle East, and the Taiwan Strait—are often where states are willing to fight, at great cost, to regain territory they believe is naturally and historically their own. While they may seem similar, imperial conquest and irredentism are driven by significantly different factors and forces, are shaped by different cost-benefit calculations, and demand different grand-strategic responses.

Whether China’s ambitions to take Taiwan is an example of irredentism or the desire for global domination is a critical question. Regardless of China’s ultimate goal, however, the changing circumstances wrought by the age of plenty make the return of an imperial, ever-expanding Eurasian empire similar to Napoleonic France, Nazi Germany, imperial Japan, or Stalin’s Soviet Union very unlikely. Unlike states and empires during the age of scarcity, China has no reason to fear being conquered, nor, even if it wanted to, could it easily invade, occupy, and take over neighbors like India, Japan, and Southeast Asian states, especially if a future successful takeover of Taiwan generated widespread military balancing and nuclear proliferation in the region. In the age of plenty, China might soon discover that the cost-benefit ratio of conquest has been completely inverted over the past century. Even if Beijing wished to pursue imperial conquest, it is hard to imagine how it could succeed, and, if it tried, it would risk its own defeat and collapse.

Finally, it often takes some time—sometimes decades—for people, institutions, and states to understand when their environment and circumstances have changed and to update their assumptions, conceptual lenses, and policy practices accordingly. Millenia of conquest, empire, and violent revolutions—and governing institutions built to deal with those crises—have left deep scars and unchallenged assumptions, and states, leaders, and populations have been slow to recognize the profound changes in demographics, technology, economics, and socio-cultural realities that have done much to tame scarcity while abetting the problems of plenty.

This myopia can come at a steep cost. Today’s leaders may share the characteristics of their tragic predecessors on the eve of World War I. Faced with a rapidly changing world and global phenomena they do not understand, they fall back on their long-held, unspoken, and often unexamined beliefs about how the world should work, as opposed to trying to better understand how the world does work. As terrifying as the problems of scarcity and the geopolitical behaviors they unleash can be, at least they are familiar. Leading powers and their leaders and institutions understand how to play the great-power political game that dominated the past. The problems of plenty, and the solutions required, are unfamiliar, disorienting, and vexing. Yet a melting planet, mass migrations, another even more lethal pandemic, destabilizing new technologies, and the cancers of inequality, deep polarization, and sociocultural fragmentation and alienation threaten the United States and the planet far more than the kind of expanding industrial, mobilized Eurasian hegemon that plagued the first half of the 20th century.

An IBM computer center that processes agricultural data to produce projected figures for farming, in Milwaukee, Wisconsin, circa 1973. Alan Band/ Getty Images Archive

How would our alien friend end her report? She would point out that the institutions, practices, theories, and policies that successfully tamed scarcity—and that dominated current debates—were woefully ill-suited to meet the problems of plenty. The costs of failing to update core, often unspoken assumptions about how the world works and what matters would be highlighted, and that by preparing for the last war, Earth might tragically and unnecessarily get it. Her report would chide the thinkers and statesmen of 2024 for obsessing over the return of great-power competition and regurgitating the works of geopolitical thinkers like Mahan and Mackinder in order to control oceans and land that, if the problems of plenty are not confronted, may be dying and uninhabitable before long.

Visiting the planet every half-century has made her, unlike her Earth friends, an optimist. Humankind never goes the easy way around, and given the stakes, they could easily mess up—by starting World War III or being unprepared for a more lethal pandemic than COVID-19, unrestrained artificial intelligence, or the deadly consequences of the climate crisis. She reminds herself, and wishes the citizens of the planet could remember, that few living in 1974, 1924, or 1874 could have imagined the extraordinary progress earthlings have made since. Which, perhaps against her better judgment, gives her hope that she will get to visit in 2074 and be impressed once again.

Francis J. Gavin is the Giovanni Agnelli distinguished professor and the director of the Henry A. Kissinger Center for Global Affairs at SAIS-Johns Hopkins University. This essay is adapted from his most recent book, The Taming of Scarcity and the Problems of Plenty: Rethinking International Relations and American Grand Strategy in a New Era .

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Home — Essay Samples — Law, Crime & Punishment — Criminal Justice — Pros and Cons of Executive Orders

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California’s Ballot Measure on Mental Health Care Still Isn’t Decided. Why?

Proposition 1 was expected to be widely approved, but the vote is close. Here’s what the measure is and what’s at stake.

By Shawn Hubler

California has about 12 percent of the nation’s population but more than a quarter of America’s homeless people — 181,000-plus at last count .

There are many reasons for this outsize problem, including generations-old state laws that deinstitutionalized mentally ill people as well as high housing costs that have since priced tens of thousands out of shelter. But since the pandemic turned fentanyl abuse and tent camps into inescapable symptoms of a public health crisis, state policymakers have been under intense pressure to rethink California’s approach to behavioral health.

Last week, Californians voted on a key piece of that rethinking — a deeper focus on treatment and housing for homeless people with severe mental illnesses and substance use disorders. The ballot measure, called Proposition 1, was the product of months of work by Gov. Gavin Newsom to gather statewide support.

Polls suggested that Proposition 1 would be a slam-dunk. But so far, it is barely passing. Entering the week, the measure is hanging on with 50.5 percent of the vote and an estimated 2.5 million ballots left to count. So what happened?

Here’s what to know about Proposition 1 in California.

What is Proposition 1?

Placed on the ballot last year by state lawmakers and Mr. Newsom, Proposition 1 asks voters to dramatically expand treatment centers and supportive housing for people struggling with mental illness and addiction. The measure would authorize $6.38 billion in bonds to pay for facilities and housing and would amend the Mental Health Services Act, a 20-year-old state tax on millionaires, to shift about $140 million annually from counties to the state. The measure also would set aside about $1 billion to house homeless, mentally ill or addicted veterans.

What are the arguments for and against Proposition 1?

Proponents of Proposition 1 say it is key to restructuring California’s behavioral health system. One reason so many addicts and mentally ill people are on the street, they say, is that the state has an acute shortage of adult treatment beds. Proposition 1 would help house and treat more than 11,000 sick people and help underwrite CARE Court , a new state program that would require people to enter treatment for certain psychotic disorders. The measure would explicitly extend a huge source of treatment dollars to homeless substance abusers . And, proponents say, Proposition 1 would lessen taxpayer spending on a population that is now largely being treated in jails.

Some civil libertarians fear Proposition 1 heralds a return to the days when involuntary treatment was the norm for mentally ill people. But most opponents cite fiscal concerns. Critics say that California has already thrown tens of billions of dollars at homelessness only to see it worsen. Critics note that although Proposition 1 would not add new taxes, it would limit the amount the state could borrow for other issues and commit taxpayers to new debt amid high interest rates. Also, counties rely on the Mental Health Services Act to pay for programs that are not covered by California’s version of Medicaid or by other less flexible funding sources, and Proposition 1 would shift some of that money to the state.

Why is the vote so close?

Newsom administration officials say that their internal polling had always forecast a close vote. Turnout in California is usually lower in primaries than in general elections and is less heavily dominated by like-minded Democrats.

The bond measure is long and confusing and comes as the state is grappling with a budget shortfall. Mental health policy is a fraught issue in California, and proposed shifts tend to draw passionate pushback from civil liberties groups. And many voters are frustrated and fatigued by the sheer scale of California homelessness — and skeptical that any ballot measure could solve the problem.

But turnout was low, even for a primary. Without a close race for the presidential nomination in either party, as few as 26 percent of the state’s 22 million or so registered voters may have cast a ballot, according to the most recent statistics — the lowest participation rate in a presidential primary in at least 20 years.

The surprising proportion of Republicans also has affected the results. They make up less than a quarter of registered voters but were on track as of this weekend to make up nearly 30 percent of the turnout. Some Democratic analysts have pointed to the state’s Senate race, in which the front-runner, Adam Schiff , ran tens of millions of dollars on ads that elevated the profile of his preferred opponent, Steve Garvey, a political novice and Republican.

When will the final results be known?

Because California relies heavily on mail-in ballots, the vote count typically consumes weeks, but most observers expect a clearer picture within days.

Each of California’s more than 22 million registered voters was sent a ballot, but only about a third of them voted. According to the most recent state figures, about 2 million ballots have yet to be processed. Elections officials have until April 5.

But the sources of those remaining ballots hint at Proposition 1’s prospects. Campaign officials said late last week that though some large conservative precincts still needed to be counted, many more outstanding ballots were in major urban areas. Those parts of the state — Los Angeles and Alameda Counties, for instance — are heavily Democratic and more likely to vote “yes.”

Shawn Hubler is based in Sacramento and covers California news, policy trends and personalities. She has been a journalist for more than four decades. More about Shawn Hubler