Capitalism: The Motive to Make a Profit

Following up on Commodities Trading 101: Investing in Silver, Gold or Water, this week we’ll discuss capitalism which relies on the forces of supply and demand in the market economy to distribute goods and services and set prices.

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Modern capitalism is said to have risen largely along with the advent of the Industrial Revolution, some time in the late 17th century. Yet, the basics of capitalism have existed since ancient times as goods and services were given and performed in exchange for each other and for currency.

For more than 1,500 years, the network of routes known as the Silk Road contributed to the exchange of goods and ideas among diverse cultures.

Neither an actual road nor a single route, the silk road instead refers to a network of routes used by traders from when the Han dynasty of China opened trade in 130 B.C.E. until 1453 C.E., when the Ottoman Empire closed off trade with the West. One of the most famous travelers of the Silk Road was Marco Polo.

Modern capitalism is founded on the following pillars:

• private property, which allows people to own tangible assets such as land and houses and intangible assets such as stocks and bonds;
• self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure.
• competition, through firms’ freedom to enter and exit markets, maximizes the joint welfare of both producers and consumers;
• a market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers—prices, in return, allocate resources, which naturally seek the highest reward, not only for goods and services but for wages as well;
• freedom to choose with respect to consumption, production, and investment—dissatisfied customers can buy different products, investors can pursue more lucrative ventures, workers can leave their jobs for better pay; and
• limited role of government, to protect the rights of private citizens and maintain an orderly environment that facilitates proper functioning of markets.

Depending on how production is organized, capitalism can be categorized into:

• Liberal market economies, where businesses interact with other businesses, their suppliers, customers, and employees in whatever way they prefer but within the confines of the broad regulations implemented by the government, such as the US.
• Coordinated market economies which rely on formal institutions to regulate the market and coordinate relations between companies and their suppliers, financiers, employees, and customers as well as the interactions between companies.

More recently, economists have identified four types of capitalism distinguished according to the role of entrepreneurship in driving innovation and the institutional setting in which new ideas are put into place to spur economic growth; oligarchic capitalism, state-guided capitalism, big-firm capitalism, and entrepreneurial capitalism.

• Oligarchic capitalism is oriented toward protecting and enriching a very narrow fraction of the population. Economic growth is not a central objective.
• State-guided capitalism, where he government decides which sectors will grow.
• Big-firm capitalism takes advantage of economies of scale. This type is important for mass production of products.
• Entrepreneurial capitalism produces breakthroughs like the automobile, telephone, and computer.

Economic growth under capitalism may have far surpassed that of other economic systems, but inequality remains one of its most controversial attributes.

Wealth held by owners of capital will increase far more rapidly than other kinds of earnings (wages, for example), eventually outstripping them by a wide margin.

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