Capitalism

What is Capitalism? Definition and Characteristics

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Ideology is an idea, thought, or principle that is owned by an individual or group of people. This time, we will briefly discuss one of the ideologies which was also coined as an economic system, namely capitalism.

Capitalism upholds individual ownership of the means of production and distribution used to gain competitive advantage of the characteristics of capitalism. In the mid-20th century, capitalism was growing, supported by advances in technology and information.

What is Capitalism ?

The theory as well as the economic system of capitalism is estimated to have first appeared in the late 18th and early 19th centuries. Capitalism was present when the economic system at that time was still under the mercantilism economic system, namely an economic system in which there was a lot of government intervention, especially in matters of restrictions on economic activities aimed at increasing export activities and limiting import activities.

Here are some very important meanings in capitalism as follows:

  • Capitalism is an understanding that was first coined by figures including Adam Smith and David Ricardo.
  • The origin of the word Capitalism is “capital” which generally means “profit” or capital, while the suffix -ism is a term that describes a way of life that has become a principle or habit.
  • Therefore, capitalism can be interpreted as an ideology that emphasizes capital in a commercial ownership or in an economic activity. Capitalism is an ideology that supports personal interests.

Characteristics of Capitalism

The economic system of capitalism can indeed provide large profits for the owners of capital or the means of production, but in reality capitalism opens the gap to social inequality that is getting bigger. Sometimes profits are only obtained by the elite who are better able to compete and survive, while the lower middle class still experience difficulties in meeting the capital needs to carry out the production process. So that the capitalist economic system can be said to be not fully in favor of the welfare of the general public. According to one source, in general capitalism has three characteristics, namely:

  • Right to private property,
  • The right to raise capital and obtain maximum profit with minimum capital,
  • The right to compete in any way between the owners of capital.

Meanwhile, in particular, Capitalism is characterized by the following:

  • Recognition of individual property rights over factors of production including natural resources.
  • There is freedom to own private means of production. This causes a lot of production tools and capital such as factories, machines, raw materials which are owned by private parties individually or in groups in the form of companies.
  • Every individual is free to try in any way and compete with each other for maximum personal gain, one example is establishing his own company. In the economic system of capitalism, humans are seen as creatures who always seek profit for themselves or homo-economicus. One of the principles of capitalism is to get maximum results with minimum capital. These characteristics can be a gap for the negative impact of capitalism, because for the sake of pursuing profit, someone can justify all means, including even bad ways.
  • The production process is the full responsibility of private entrepreneurs and they are free to determine what will be produced, how many goods will be produced including the price that will be charged on the production. But in a capitalist economic system, prices are more often determined by market supply and demand.
  • There is a free competitive market, which is where supply and demand play a major role in the market mechanism, for example in determining prices. This is related to the “Invisible Hands” theory proposed by Adam Smith. That supply and demand as a market mechanism seems to be an “invisible hand” that can manage economic problems, such as inflation and unemployment without realizing it.
  • Does not recognize government interference in the country’s economy. In a capitalist state, the government only acts as a ‘night watchman’, that is, it can only regulate the economic process but cannot limit the ownership and economic activities of the owners of capital.
  • The capitalist system encourages the formation of an individualist attitude based on the nature of materialism.
  • The number of individuals who are hedonistic. This is because the owners of capital will take all the attractive ways through various depictions of products or services through advertisements or other mass media that aims to attract market interest, and this is often successful. Consumers are continuously ‘fed’ with various attractive advertisements with various product advantages that will make consumers decide to buy it without thinking.
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Capitalist Economic System

Whereas what is meant by a capitalist economic system is a system that gives economic actors the freedom to do everything possible with the resources or factors of production that they have individually, so that they can compete optimally with these resources or factors. other production. This economic system frees everyone to have resources, work, try and compete with each other to meet the needs of life, without interference from the government. So there is a lot of competition between business entities.

According to Adam Smith, the main elements that must exist in a capitalist economic system are:

1. Private Property Rights Both Individuals and Groups.

Capitalism liberates and gives everyone the right to own the factors of production including resources in a legal way. In addition, the owners of capital are allowed to compete in any way to achieve large profits at small costs.

2. Invisible Hand as Regulator of Economic Activities.

The invisible hand is a theory coined by Adam Smith, who says that there are “hidden forces” that regulate the course of the economy through the mechanism of supply and demand. These forces are also a motivation for the owners of capital.

3. Economic Individualism

Namely, the limitation of government power on economic activities so that individuals can carry out economic activities independently without any government intervention.

4. Free Competitive Market

Capitalism can also give birth to individuals who only pursue profit without paying attention to the quality and benefits of something that is produced because it is only made based on market demand. In addition, capitalism can also give rise to monopolies on the means of production or capital. The mechanism of demand and supply that occurs causes the formation of a free competitive market.

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In conclusion, capitalism is an ideology as well as an economic system that prioritizes individual freedom to own the factors or means of production, forms a free competitive market through the mechanism of supply and demand, and does not recognize government interference in economic activities. A brief explanation of the meaning and characteristics of capitalism. Hope it is useful.


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Engineering Student of Airlangga University in Indonesia. Love to share knowledge