What Is Capitalism?

Bright neon signs in Hong Kong
Starcevic / Getty Images

Capitalism is an economic system that emerged in Europe during the 16th and 17th centuries in which private companies, rather than the state, control trade and industry. Capitalism is organized around the concept of capital (the ownership and control of the means of production by those who employ workers to produce goods and services). In practical terms, this creates an economy built on the competition between private businesses that seek to make a profit and grow.

Private property and ownership of resources are key aspects of a capitalist economy. Within this system, private persons or corporations (known as capitalists) own and control the mechanisms of trade and the means of production (the factories, machines, materials, etc., required for production). In "pure" capitalism, businesses compete to produce increasingly better products, and their competition for the greatest share of the market serves to keep prices from climbing.

At the other end of the system are workers, who sell their labor to capitalists in exchange for wages. Within capitalism, labor is bought and sold like a commodity, making workers interchangeable. Also fundamental to this system is the exploitation of labor. This means, in the most basic sense, that those who own the means of production extract more value from those who labor than what they pay for that labor (this is the essence of profit in capitalism).

Capitalism Versus Free Enterprise

While many people use the term "capitalism" to refer to free enterprise, the word has a more nuanced definition within the field of sociology. Social scientists view capitalism not as a distinct or detached entity but as a part of the greater social system, one that directly influences culture, ideology (how people see the world and understand their position in it), values, beliefs, norms, relationships between people, social institutions, and political and legal structures.

The most important theorist to analyze capitalism remains Karl Marx (1818–1883), the 19th-century German philosopher whose economic theories were expounded in the multivolume "Das Kapital" and in "The Communist Manifesto" (co-written with Friedrich Engels, 1820–1895). Marx developed the theoretical concepts of base and superstructure, which describe the reciprocal relationship between the means of production (tools, machines, factories, and land), the relations of production (private property, capital, and commodities), and the cultural forces that work to maintain capitalism (politics, law, culture, and religion). In Marx's view, these various elements are inextricable from each other. In other words, it is impossible to examine any single element—culture, for example—without considering its context within the larger capitalist structure.

Components of Capitalism

The capitalist system has several core components:

  1. Private property. Capitalism is built on the free exchange of labor and goods, which would be impossible in a society that did not guarantee the right of anyone to own private property. Property rights also encourage capitalists to maximize the use of their resources, which in turn promotes competition in the marketplace.
  2. Profit motive. One of the central ideas of capitalism is that businesses exist to make money or turn a profit that increases the wealth of the owners. To do this, businesses work to minimize capital and production costs and maximize the sale of their goods. Free-market advocates believe that the profit motive leads to the best allocation of resources.
  3. Market competition. In a purely capitalist economy (as opposed to a command economy or a mixed economy), private businesses compete with each other to provide goods and services. This competition is believed to encourage business owners to create innovative products and to sell them at competitive prices.
  4. Wage labor. Under capitalism, the means of production are controlled by a relatively small group of people. Those without these resources have nothing to offer but their own time and labor. As a result, capitalist societies are defined by having a significantly higher percentage of wage laborers compared to owners.

Socialism vs. Capitalism

Capitalism has been the dominant economic system in the world for several hundred years. A competing economic system is socialism, in which the means of production are controlled by the community as a whole, usually through a democratic process. Advocates of socialism believe that this model, by replacing private ownership with cooperative ownership, promotes a more equitable distribution of resources and wealth. One way such distribution is accomplished is through mechanisms such as a social dividend, a return on capital investment that is paid out to all members of society rather than a select group of shareholders.

Sources and Further Reading

  • Esping-Andersen, Gosta. "The Three Worlds of Welfare Capitalism." Princeton NJ: Princeton University Press, 1990.
  • Friedman, Milton. "Capitalism and Freedom," Fortieth Anniversary Edition. Chicago: University of Chicago Press, 2002 (1962). 
  • Marx, Karl. "Capital: A Critique of Political Economy." Trans. Moore, Samuel, Edward Aveling and Friedrich Engels. Marxists.org, 2015 (1867).
  • Marx, Karl, and Friedrich Engels. "The Communist Manifesto." Trans. Moore, Samuel and Friedrich Engels. Marxists.org, 2000 (1848). 
  • Schumpeter, Joseph A. "Capitalism, Socialism and Democracy." London: Routledge, 2010 (1942). 
mla apa chicago
Your Citation
Crossman, Ashley. "What Is Capitalism?" ThoughtCo, Aug. 28, 2020, thoughtco.com/capitalism-definition-p2-3026124. Crossman, Ashley. (2020, August 28). What Is Capitalism? Retrieved from https://www.thoughtco.com/capitalism-definition-p2-3026124 Crossman, Ashley. "What Is Capitalism?" ThoughtCo. https://www.thoughtco.com/capitalism-definition-p2-3026124 (accessed June 2, 2023).