Competition,through firms’ freedom to enter and exit markets, maximizes social welfare, that is, the joint welfare of both producers and consumers.Nonetheless, these uncoordinated individuals end up benefiting society as if, in the words of Smith’s 1776 Wealth of Nations, they were guided by an invisible hand Self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure.Private property, which allows people to own tangible assets such as land and houses and intangible assets such as stocks and bonds.In the other, socialism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.Ĭapitalism is founded on the following pillars: Īlthough some form of capitalism is the basis for nearly all economies today, for much of the past century it was but one of two major approaches to economic organization. In a capitalist economy, capital assets-such as factories, mines, and railroads-can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses. It is this rational self-interest that can lead to economic prosperity. As Adam Smith, the 18th century philosopher and father of modern economics, said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Both parties to a voluntary exchange transaction have their own interest in the outcome, but neither can obtain what he or she wants without addressing what the other wants. The essential feature of capitalism is the motive to make a profit. Capitalism( free market economy) is an economic system, dominant in the Western world since the breakup of feudalism, in which most means of production are privately owned and production is guided and income distributed largely through the operation of markets.Ĭapitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.

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