Definition of Capitalism
What is capitalism? According to Adam Smith, both parties in a capitalist system, the buyer and the seller, act in a voluntary transaction to achieve the outcome that serves their self-interest. However, both parties cannot obtain what they want without delivering the needs of the other. In definition, capitalism is an economic system where properties can be controlled and owned by private sectors to suit their interest, which is to gain profits, while the demand and supply of goods and services set the market prices to serve the interest of the society.
Foundations of Capitalism
Most economies in the world today follow a capitalistic form. A capitalist economy is formed by six important pillars. The level or
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This is a system where government and markets play a role in the economy. Mostly, the government plays a limited role. The government passes regulations and laws to correct market failures and promote social welfare.
Socialism and Capitalism
While a capitalist economy allows private sectors to own the means of production, socialism goes the opposite way. In a socialist economy, all business properties are state owned. The focus of a socialist economy is to maximize social welfare instead of profit.
Scholars theorize that socialism developed from capitalism. It rose to prominence to improve the flaws found in a capitalist economic system. Socialism provides a direct line between citizens and goods. Instead of capitalists or private sectors owning the factories of production, the government owns them. This in turn results in the government collecting the profit instead of just businesses taxes.
Pros and Cons
Proponents of both systems have continually argued which economic system is better. Both have their advantages and disadvantages. Capitalism makes sure that an economy will produce the best products and that these are priced reasonably. As sellers in this system aim to maximize profit, they will find ways to make production efficient and cost low. And because the buyers are willing to pay for the services and products that they