Capitalism is an economic system in which private people, not the government, own and run companies. These companies compete with other companies for business. They decide what products they want to produce, how much they should cost and where to sell them. Companies do all these things in order to make profits for their owners. People who use their money to start companies or run companies are called capitalists.
Even though a pure form of capitalism does not exist and governments control the economy in some ways it remains the world’s most popular economic system. In the United States the government keeps itself out of the economy as far as possible but in some European countries economic control is much larger. Other names for capitalism are free-market economy or free enterprise.
In a capitalist system private households need goods. They buy these goods from the income that they have. Some households have more income than others. Sometimes only one member of a household has a job, at other times both husband and wife go to work. Then they have more money to buy goods. This is the demand side of the economy.
On the other side companies and businesses offer private households goods and services. They produce the goods that they think consumers will want to buy. To do this they need workers to produce these goods and services. This is the supply side of the economy.
Companies and households get together at markets. Here they exchange goods, services and jobs (labour). A market is a place where people buy and sell things. In a capitalist society the prices of goods, services and labour are determined by supply and demand. If a lot of people want to buy a certain product its price will go up. Products that are mass produced usually have low prices.
Another important feature of capitalism is competition. Many companies may sell the same type of product. Companies will try to sell better products at a cheaper price so that they can get consumers to buy their products. Firms that cannot compete are very often driven out of business.
The same can be said about wages. In some cases businesses have to pay workers more money to get them to work. In other cases low paid work often exists in areas where there are more workers than are needed.
In today's world governments get involved in the economy in certain ways and leaders must often make economic decisions.
A government must make sure that there is enough competition to keep prices low the quality products high. If only a few companies produce products they may agree to keep prices high. In a monopoly, only one company produces goods and services that everybody needs, so it can set the price.
In the second half of the 19th century companies started to get bigger and bigger by taking over smaller ones. Soon these so-called trusts had a lot of power and controlled the market and the prices. At the beginning of the 20th century the United States passed a law which helped smaller companies survive.
Business leaders often do not care about what their decisions may do to our society. For example, a factory may pollute a river by pouring dirty water into it. It is the job of government organizations to make sure that this does not happen.
The state of economy is not the same all the time. Normally, there are always ups and downs. Sometimes the economy of a country is in good condition, everybody has enough money and lots of goods are produced. On the other side there may be years in which there are a lot of unemployed people and factories cannot sell their products. The business cycle shows the economy in four phases.
Some experts believe that the government must stabilize and help the economy in bad times. It should lower taxes and interest rates so that people can borrow money more easily.
In capitalist countries some are very rich and can afford to buy everything. Others have little money and need clothing, food and a place to live. Many European countries have systems in which poor people are helped by the government and richer people have to pay more taxes etc. This system is called social market economy.
Capitalism has existed since ancient times. But it became important in the 15th and 16th centuries with the growth of trade, industry and banking. Until the 1700s governments encouraged their population to make more money by selling goods to other countries. Imported goods were made more expensive so that countries could sell their own products. This became known as mercantilism.
The Industrial Revolution brought changes to the economies of many countries. Factory owners did not want governments to control trade any more. They wanted to run their companies by themselves. This idea became known as laissez-faire, which means "allow to do" in French. In his book, The Wealth of Nations, British economist Adam Smith described how laissez faire should. Great Britain became the first country to change its laws and allow free trade.
During this period countries produced more and more products and goods and many capitalists became rich. However, normal workers did not earn very much and had to work up to 16 hours a day, sometimes in dangerous places. These problems led to the creation of trade unions, which protected workers.
In the middle of the 19th century socialism became popular. The German Karl Marx suggested that the government should take over and control the economy. It should own all the land, the factories and companies. In a socialist economy the government tries to spread money evenly among the workers. Many countries followed these socialist ideas, which later on led to Communism.
Capitalism almost collapsed during the Great Depression of the 1930s. Many banks, factories and stores had to close and millions of people lost their jobs. Many did not believe in capitalism any more. As a result the British economist John Maynard Keynes argued that the government had to do something to fight depression. In America Franklin D. Roosevelt introduced a program called New Deal in which he gave Americans help that they needed in bad times.
Today Keynes' theory is widely accepted and modern countries combine capitalism with some kind of government control. The state may own industries that are important to the country's economy, like oil wells, banks or airlines. Most people feel that free market economy should remain but the government should still be around to see that economic rules are kept.