Why Understanding Capitalism Is Essential for Anyone

When you hear the word capitalism, the first thing that might come to mind is the United States. It has stood as a champion of the ‘free world’. But, what this means is the country is a champion for free-market economics, i.e. capitalism.

America isn’t the only country that embraces capitalism though. All of Western Europe and many countries in the Indo-Pacific embrace these free-market ideals. 

But understanding capitalism takes a little more than just knowing the countries that accept it. Here is a guide to capitalism for dummies.

What Is Capitalism Anyway?

Capitalism definition, according to the International Monetary Fund, is the economic system where private actors own and control businesses and/or properties according to their interests, and through supply and demand, prices are freely set in the market that is in the best interest of society. 

Many countries have this system to some degree including the US, the UK, the European Union, and even China.

How Does Capitalism Work?

So capitalism is essentially guided by self-interest. The private actors what to make the most money while producing the best products at the cheapest cost. The market is primarily self-regulated with limited government regulation by consumers’ freedom of choice.

Consumers will act in their self-interest. They will buy the best products for the cheapest prices, and this regulates the market through laissez-faire supply and demand.

This is the basic premise for the liberal market system that the United States has. However, there are several other capitalist systems like state-guided capitalism and coordinated market systems. Know more about economics concepts.

What Are Some Problems With Capitalism?

Capitalism isn’t a perfect system. It has several flaws. Certain aspects of capitalism lend to complete privatization. This can lead to monopolies that end up regulating the market to maximize their profits. This will happen unless government regulations prohibit this from happening.

Private actors can influence regulations to protect their interests and not the consumers. This causes situations like Thomas Piketty‘s explanation of how economic growth in a country is directly linked to inequality in the country and also because of free markets. 

Also, capitalism can suffer from recessions and depressions far longer than other systems because the driving force in the system is investment and purchasing power. But if employment is high and no money is in circulation, it takes time for the investment to ramp up again.

Understanding Capitalism 

If you grew up in a Western country and/or economy, then you probably didn’t realize to what level capitalism permeates all around you. However, understanding capitalism as an important market system and how it allows you to have all the things you want and need is important.

Indeed, capitalism might have its fair share of problems, but in the end, it pushes companies to give the consumers what they want to the best of their ability. As a consumer, take advantage of this and get all that you need today.

For other articles on other types of market systems and how to understand them, be sure to look at the rest of our blog for more.

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