View FREE Lessons!

Definition of Capitalism:

Capitalism is an economic system rooted in the private ownership of the means of production and distribution of goods and services. Capitalism is normally associated with a market economy and relies on the profit motive.

Detailed Explanation:

Capitalism, socialism, and communism delineate a government’s stance on business ownership, reflecting differences in control over what an economy produces, who provides the goods and services, and how the goods and services are distributed. In a capitalist system, all businesses, even those critical to a nation’s well-being, are typically privately owned, and the laws of supply and demand govern the distribution of goods and services.

Capitalists pursue profits accrued by private company owners, who autonomously make economic decisions in the marketplace. Capitalist economies are often described as “laissez-faire,” signifying minimal government intervention.

Consumer and producer interaction occurs in the market, encompassing various trade venues such as open-air markets, stores, the internet, and exchanges. Here, consumers and producers engage in a dynamic exchange through the buying and selling of products or services. This interaction serves as a form of communication, with consumers expressing approval through purchases. Competition acts as a regulator, ensuring that producers and consumers align on various aspects, including product approval, pricing, production quantity, and distribution methods. If Producer A charges too high a price for a shirt, the consumer will choose to purchase a shirt manufactured by Producer B. Eventually, Producer A will reduce its price to meet its competition. Ultimately consumers and sellers reach an agreement not only on the shirt's price, but also, how many shirts should be produced, who produces the shirts, and how the shirts are distributed.

In addition, businesses strive to produce efficiently because doing so minimizes costs. Each privately owned company strives to have the optimum allocation of resources to deliver the good or service it sells. Adam Smith referred to this as the “invisible hand” since each individual seeking to better themselves looks to provide something they can sell, and buyers are only willing to purchase goods or services that benefit them. Society benefits because efficient production minimizes waste. In other words, individuals acting in their self-interest make the best decisions for society as a whole. Capitalists believe the government should not interfere in economic matters.

However, critics of capitalism contend that wealth concentration is a significant issue. They advocate for government intervention to mitigate the power wielded by capitalists. In reality, most so-called “capitalist” economies are mixed economies, wherein the government may subsidize, tax, or regulate certain sectors in the broader interest of society.

Dig Deeper With These Free Lessons:

Economic Systems
Fundamental Economic Assumptions
Production Possibility Frontier
Understand A Stock’s Performance Using Supply and Demand

Search the Glossary

Investment Calculator:

Market Overview:

Market quotes are powered by

Single Quote:

© Higher Rock Education and Learning, Inc. All rights reserved. No portion of this site may be copied or distributed by any means, including electronic distribution without the express written consent of Higher Rock Education and Learning, Inc.