Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, competitive markets. In a capitalist market economy, decision-making and investment are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are determined by competition in goods and services markets. Economists, political economists and historians have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice; these include welfare capitalism and state capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition and state-sanctioned social policies; the degree of competition in markets, the role of intervention and regulation, the scope of state ownership vary across different models of capitalism.
The extent to which different markets are free as well as the rules defining private property are matters of politics and policy. Most existing capitalist economies are mixed economies, which combine elements of free markets with state intervention and in some cases economic planning. Market economies have existed under many forms of government and in many different times and cultures. Modern capitalist societies—marked by a universalization of money-based social relations, a large and system-wide class of workers who must work for wages, a capitalist class which owns the means of production—developed in Western Europe in a process that led to the Industrial Revolution. Capitalist systems with varying degrees of direct government intervention have since become dominant in the Western world and continue to spread. Over time, capitalist countries have experienced consistent economic growth and an increase in the standard of living. Critics of capitalism argue that it establishes power in the hands of a minority capitalist class that exists through the exploitation of the majority working class and their labor.
Supporters argue that it provides better products and innovation through competition, disperses wealth to all productive people, promotes pluralism and decentralization of power, creates strong economic growth, yields productivity and prosperity that benefit society. The term "capitalist", meaning an owner of capital, appears earlier than the term "capitalism" and it dates back to the mid-17th century. "Capitalism" is derived from capital, which evolved from capitale, a late Latin word based on caput, meaning "head"—also the origin of "chattel" and "cattle" in the sense of movable property. Capitale emerged in the 12th to 13th centuries in the sense of referring to funds, stock of merchandise, sum of money or money carrying interest. By 1283, it was used in the sense of the capital assets of a trading firm and it was interchanged with a number of other words—wealth, funds, assets, property and so on; the Hollandische Mercurius uses "capitalists" in 1654 to refer to owners of capital. In French, Étienne Clavier referred to capitalistes in 1788, six years before its first recorded English usage by Arthur Young in his work Travels in France.
In his Principles of Political Economy and Taxation, David Ricardo referred to "the capitalist" many times. Samuel Taylor Coleridge, an English poet, used "capitalist" in his work Table Talk. Pierre-Joseph Proudhon used the term "capitalist" in his first work, What is Property?, to refer to the owners of capital. Benjamin Disraeli used the term "capitalist" in his 1845 work Sybil; the initial usage of the term "capitalism" in its modern sense has been attributed to Louis Blanc in 1850 and Pierre-Joseph Proudhon in 1861. Karl Marx and Friedrich Engels referred to the "capitalistic system" and to the "capitalist mode of production" in Capital; the use of the word "capitalism" in reference to an economic system appears twice in Volume I of Capital, p. 124 and in Theories of Surplus Value, tome II, p. 493. Marx did not extensively use the form capitalism, but instead those of capitalist and capitalist mode of production, which appear more than 2,600 times in the trilogy The Capital. According to the Oxford English Dictionary, the term "capitalism" first appeared in English in 1854 in the novel The Newcomes by novelist William Makepeace Thackeray, where he meant "having ownership of capital".
According to the OED, Carl Adolph Douai, a German American socialist and abolitionist, used the phrase "private capitalism" in 1863. Capitalism in its modern form can be traced to the emergence of agrarian capitalism and mercantilism in the early Renaissance, in city states like Florence. Capital has existed incipiently on a small scale for centuries in the form of merchant and lending activities and as small-scale industry with some wage labour. Simple commodity exchange and simple commodity production, which are the initial basis for the growth of capital from trade, have a long history. Classical Islam promulgated capitalist economic policies such as free banking, their use of Indo-Arabic
Keynesian economics are a group of various macroeconomic theories about how in the short run – and during recessions – economic output is influenced by aggregate demand. In the Keynesian view, aggregate demand does not equal the productive capacity of the economy. Keynesian economics served as the standard economic model in the developed nations during the part of the Great Depression, World War II, the post-war economic expansion, though it lost some influence following the oil shock and resulting stagflation of the 1970s; the advent of the financial crisis of 2007–08 caused a resurgence in Keynesian thought, which continues as new Keynesian economics. Keynesian economics developed during and after the Great Depression from the ideas presented by John Maynard Keynes in his 1936 book, The General Theory of Employment and Money. Keynes contrasted his approach to the aggregate supply-focused classical economics that preceded his book; the interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy.
Keynesian economists argue that as aggregate demand is volatile and unstable, a market economy experiences inefficient macroeconomic outcomes in the form of economic recessions and inflation, that these can be mitigated by economic policy responses, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, which can help stabilize output over the business cycle. Keynesian economists advocate a managed market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions. Keynes set forward the ideas that became the basis for Keynesian economics in his main work, The General Theory of Employment and Money, it was written during the Great Depression, when unemployment rose to 25% in the United States and as high as 33% in some countries. It is wholly theoretical, enlivened by occasional passages of satire and social commentary; the book had a profound impact on economic thought, since it was published there has been debate over its meaning.
Keynes begins the General theory with a summary of the classical theory of employment, which he encapsulates in his formulation of Say's Law as the dictum "Supply creates its own demand". Under the classical theory, the wage rate is determined by the marginal productivity of labour, as many people are employed as are willing to work at that rate. Unemployment may arise through friction or may be "voluntary" in the sense that it arises from a refusal to accept employment owing to "legislation or social practices... or mere human obstinacy", but "...the classical postulates do not admit of the possibility of the third category," which Keynes defines as involuntary unemployment. Keynes raises two objections to the classical theory's assumption that "wage bargains... determine the real wage". The first lies in the fact that "labour stipulates for a money-wage rather than a real wage"; the second is that classical theory assumes that, "The real wages of labour depend on the wage bargains which labour makes with the entrepreneurs," whereas, "If money wages change, one would have expected the classical school to argue that prices would change in the same proportion, leaving the real wage and the level of unemployment the same as before."
Keynes considers the second objection more fundamental, but his expectation concerning the classical school contradicts the quantity theory of money, most commentators concentrate on his first objection. Saving is that part of income not devoted to consumption, consumption is that part of expenditure not allocated to investment, i.e. to durable goods. Hence saving encompasses hoarding and the purchase of durable goods; the existence of net hoarding, or of a demand to hoard, is not admitted by the simplified liquidity preference model of the General Theory. Once he rejects the classical theory that unemployment is due to excessive wages, Keynes proposes an alternative based on the relationship between saving and investment. In his view, unemployment arises whenever entrepreneurs' incentive to invest fails to keep pace with society's propensity to save; the levels of saving and investment are equal, income is therefore held down to a level where the desire to save is no greater than the incentive to invest.
The incentive to invest arises from the interplay between the physical circumstances of production and psychological anticipations of future profitability. Keynes designates its value as a function of r as the "schedule of the marginal efficiency of capital"; the propensity to save behaves quite differently. Saving is that part of income not devoted to consumption, and:... the prevailing psychological law seems to be that when aggregate income increases, consumption expenditure will increase but to a somewhat lesser extent. Keynes adds that "this psychological law was of the utmost importance in the development of my own thought". Keynes viewed the money supply as one of the main determinants of the state of the real economy; the significance he attributed to it is one of the innovative features of his work, was influential on the politically hostile monetarist school. Money supply comes into play through the liquidity p
In economics, competition is a condition where different economic firms seek to obtain a share of a limited good by varying the elements of the marketing mix: price, product and place. In classical economic thought, competition causes commercial firms to develop new products and technologies, which would give consumers greater selection and better products; the greater selection causes lower prices for the products, compared to what the price would be if there was no competition or little competition. Early economic research focused on the difference between price- and non-price-based competition, while economic theory has focused on the many-seller limit of general equilibrium. Competition is accepted as an essential component of markets, results from scarcity—there is never enough to satisfy all conceivable human wants—and occurs "when people strive to meet the criteria that are being used to determine who gets what." In offering goods for exchange, buyers competitively bid to purchase specific quantities of specific goods which are available, or might be available if sellers were to choose to offer such goods.
Sellers bid against other sellers in offering goods on the market, competing for the attention and exchange resources of buyers. The competitive process in a market economy exerts a sort of pressure that tends to move resources to where they are most needed, to where they can be used most efficiently for the economy as a whole. For the competitive process to work however, it is "important that prices signal costs and benefits." Where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced. In any given market, the power structure will either be in favor of buyers; the former case is known as a seller's market. In either case, the disadvantaged group is known as price-takers and the advantaged group known as price-setters. Competition bolsters product differentiation as businesses try to innovate and entice consumers to gain a higher market share, it helps in improving the processes and productivity as businesses strive to perform better than competitors with limited resources.
The Australian economy thrives on competition. In his 1776 The Wealth of Nations, Adam Smith described it as the exercise of allocating productive resources to their most valued uses and encouraging efficiency, an explanation that found support among liberal economists opposing the monopolistic practices of mercantilism, the dominant economic philosophy of the time. Smith and other classical economists before Cournot were referring to price and non-price rivalry among producers to sell their goods on best terms by bidding of buyers, not to a large number of sellers nor to a market in final equilibrium. Microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Conversely, by Edgeworth's limit theorem, the addition of more firms to an imperfect market will cause the market to tend towards Pareto efficiency. Real markets are never perfect. Economists who believe that in perfect competition as a useful approximation to real markets classify markets as ranging from close-to-perfect to imperfect.
Examples of close-to-perfect markets include share and foreign exchange markets while the real estate market is an example of a imperfect market. In such markets, the theory of the second best proves that if one optimality condition in an economic model cannot be satisfied, the next-best solution can be achieved by changing other variables away from otherwise-optimal values. Within competitive markets, markets are defined by their sub-sectors, such as the "short term" / "long term", "seasonal" / "summer", or "broad" / "remainder" market. For example, in otherwise competitive market economies, a large majority of the commercial exchanges may be competitively determined by long-term contracts and therefore long-term clearing prices. In such a scenario, a “remainder market” is one where prices are determined by the small part of the market that deals with the availability of goods not cleared via long term transactions. For example, in the sugar industry, about 94-95% of the market clearing price is determined by long-term supply and purchase contracts.
The balance of the market are determined by the ad hoc demand for the remainder. In the US real estate housing market, appraisal prices can be determined by both short-term or long-term characteristics, depending on short-term supply and demand factors; this can result in large price variations for a property at one location. Competition requires the existing of multiple firms, so it duplicates fixed costs. In a small number of goods and services, the resulting cost structure means that producing enough firms to effect competition may itself be inefficient; these situations are known as natural monopolies and are publicly provided or regulated. International competition differentially affects sectors of national economies. In order to protect political supporters, governments may introduce protectionist measures such as tariffs to reduce competition. A practice is anti-competitive if it unfairly distorts free and effective competition in the marketplace. Examples include evergreening. Paid exclusivity Competition law Self-compet
Supply and demand
In microeconomics and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded will equal the quantity supplied, resulting in an economic equilibrium for price and quantity transacted. Although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the goods, the standard graphical representation attributed to Alfred Marshall, has price on the vertical axis and quantity on the horizontal axis. Since determinants of supply and demand other than the price of the goods in question are not explicitly represented in the supply-demand diagram, changes in the values of these variables are represented by moving the supply and demand curves. By contrast, responses to changes in the price of the good are represented as movements along unchanged supply and demand curves.
A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. Under the assumption of perfect competition, supply is determined by marginal cost; that is, firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive. A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount would increase supply, shifting costs down and hurting producers as producer surplus decreases. By its nature, conceptualizing a supply curve requires the firm to be a perfect competitor; this is true because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to and willing to sell?" If a firm has market power, its decision of how much output to provide to the market influences the market price, therefore the firm is not "faced with" any price, the question becomes less relevant. Economists distinguish between the supply curve of the market supply curve.
The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus, in the graph of the supply curve, individual firms' supply curves are added horizontally to obtain the market supply curve. Economists distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs, the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts; the determinants of supply are: Production costs:. Production costs are the cost of the inputs, they depend on the technology technological advances.
See: Productivity Firms' expectations about future prices Number of suppliers A demand schedule, depicted graphically as the demand curve, represents the amount of some goods that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good in question, such as income and preferences, the price of substitute goods, the price of complementary goods, remain the same. Following the law of demand, the demand curve is always represented as downward-sloping, meaning that as price decreases, consumers will buy more of the good. Just like the supply curves reflect marginal cost curves, demand curves are determined by marginal utility curves. Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption is equal to the opportunity cost determined by the price, that is, the marginal utility of alternative consumption choices; the demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time.
It is aforementioned that the demand curve is downward-sloping, there may exist rare examples of goods that have upward-sloping demand curves. Two different types of goods with upward-sloping demand curves are Veblen goods. By its nature, conceptualizing a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser has no influence over the market price; this is true because each point on the demand curve is the answer to the question "If this buyer is faced with this potential price, how much of the product will it purchase?" If a buyer has market power, so its decision of how much to buy influences the market price the buyer is not "faced with" any price, a long pickle Income. Tastes and preferences. Prices of related goods and services. Consumers' expectations about future prices and incomes that can be checked. Number of potential consumers. Speaking, an equilibrium is defined to be the price-quantity pair where the quantity demanded is equal to the quantity supplied.
It is represented by the intersection of the supply curves. The analysis of various equilibria is a fundamental aspect of microeconomics: Market equilibrium: A situation in a market when the price
Business is the activity of making one's living or making money by producing or buying and selling products. Put, it is "any activity or enterprise entered into for profit, it does not mean it is a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors."Having a business name does not separate the business entity from the owner, which means that the owner of the business is responsible and liable for debts incurred by the business. If the business acquires debts, the creditors can go after the owner's personal possessions. A business structure does not allow for corporate tax rates; the proprietor is taxed on all income from the business. The term is often used colloquially to refer to a company. A company, on the other hand, is a separate legal entity and provides for limited liability, as well as corporate tax rates. A company structure is more complicated and expensive to set up, but offers more protection and benefits for the owner.
Forms of business ownership vary by jurisdiction, but several common entities exist: Sole proprietorship: A sole proprietorship known as a sole trader, is owned by one person and operates for their benefit. The owner may hire employees. A sole proprietor has unlimited liability for all obligations incurred by the business, whether from operating costs or judgments against the business. All assets of the business belong to a sole proprietor, for example, a computer infrastructure, any inventory, manufacturing equipment, or retail fixtures, as well as any real property owned by the sole proprietor. Partnership: A partnership is a business owned by two or more people. In most forms of partnerships, each partner has unlimited liability for the debts incurred by the business; the three most prevalent types of for-profit partnerships are general partnerships, limited partnerships, limited liability partnerships. Corporation: The owners of a corporation have limited liability and the business has a separate legal personality from its owners.
Corporations can be either government-owned or owned, they can organize either for profit or as nonprofit organizations. A owned, for-profit corporation is owned by its shareholders, who elect a board of directors to direct the corporation and hire its managerial staff. A owned, for-profit corporation can be either held by a small group of individuals, or publicly held, with publicly traded shares listed on a stock exchange. Cooperative: Often referred to as a "co-op", a cooperative is a limited-liability business that can organize as for-profit or not-for-profit. A cooperative differs from a corporation in that it has members, not shareholders, they share decision-making authority. Cooperatives are classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy. Limited liability companies, limited liability partnerships, other specific types of business organization protect their owners or shareholders from business failure by doing business under a separate legal entity with certain legal protections.
In contrast, unincorporated businesses or persons working on their own are not as protected. Franchises: A franchise is a system in which entrepreneurs purchase the rights to open and run a business from a larger corporation. Franchising in the United States is widespread and is a major economic powerhouse. One out of twelve retail businesses in the United States are franchised and 8 million people are employed in a franchised business. A company limited by guarantee: Commonly used where companies are formed for non-commercial purposes, such as clubs or charities; the members guarantee the payment of certain amounts if the company goes into insolvent liquidation, but otherwise, they have no economic rights in relation to the company. This type of company is common in England. A company limited by guarantee may be without having share capital. A company limited by shares: The most common form of the company used for business ventures. A limited company is a "company in which the liability of each shareholder is limited to the amount individually invested" with corporations being "the most common example of a limited company."
This type of company is common in many English-speaking countries. A company limited by shares may be a publicly traded company or a held company A company limited by guarantee with a share capital: A hybrid entity used where the company is formed for non-commercial purposes, but the activities of the company are funded by investors who expect a return; this type of company may no longer be formed in the UK, although provisions still exist in law for them to exist. A limited liability company: "A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, limitations on ownership transfer", i.e. L. L. C. LLC structure has been called "hybrid" in that it "combines the characteristics of a corporation and of a partnership or sole proprietorship". Like a corporation, it has limited liability for members of the company, like a partnership, it has "flow-through taxation to the members" and must be "dissolved upon the death or bankruptcy of a member".
An unlimited company with or without a share capital: A hybrid entity, a company where the liability of members or shareholders for the debts of the company are not limited. In this case, the doctrine of a veil of incorporation does not apply. Less common types of companies are: Companies formed by letters patent: Most corpor
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators like the Bank of England and the U. S. Securities and Exchange Commission oversee capital markets to protect investors against fraud, among other duties. Modern capital markets are invariably hosted on computer-based electronic trading platforms; as an example, in the United States, any American citizen with an internet connection can create an account with TreasuryDirect and use it to buy bonds in the primary market, though sales to individuals form only a tiny fraction of the total volume of bonds sold. Various private companies provide browser-based platforms that allow individuals to buy shares and sometimes bonds in the secondary markets. There are many thousands of such systems, most serving only small parts of the overall capital markets.
Entities hosting the systems include stock exchanges, investment banks, government departments. Physically, the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, Hong Kong. A capital market can be either a secondary market. In primary market, new stock or bond issues are sold to investors via a mechanism known as underwriting; the main entities seeking to raise long-term funds on the primary capital markets are governments and business enterprises. Governments issue only bonds, whereas companies issue both equity and bonds; the main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, less wealthy individuals and investment banks trading on their own behalf. In the secondary market, existing securities are sold and bought among investors or traders on an exchange, over-the-counter, or elsewhere; the existence of secondary markets increases the willingness of investors in primary markets, as they know they are to be able to swiftly cash out their investments if the need arises.
A second important division falls between the bond markets. The money markets are used for the raising of short-term finance, sometimes for loans that are expected to be paid back as early as overnight. In contrast, the "capital markets" are used for the raising of long-term finance, such as the purchase of shares/equities, or for loans that are not expected to be paid back for at least a year. Funds borrowed from money markets are used for general operating expenses, to provide liquid assets for brief periods. For example, a company may have inbound payments from customers that have not yet cleared, but need immediate cash to pay its employees; when a company borrows from the primary capital markets the purpose is to invest in additional physical capital goods, which will be used to help increase its income. It can take many months or years before the investment generates sufficient return to pay back its cost, hence the finance is long term. Together, money markets and capital markets form the financial markets, as the term is narrowly understood.
The capital market is concerned with long-term finance. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. Regular bank lending is not classed as a capital market transaction when loans are extended for a period longer than a year. First, regular bank loans are not securitized. Second, lending from banks is more regulated than capital market lending. Third, bank depositors tend to be more risk-averse than capital market investors; these three differences all act to limit institutional lending as a source of finance. Two additional differences, this time favoring lending by banks, are that banks are more accessible for small and medium-sized companies, that they have the ability to create money as they lend. In the 20th century, most company finance apart from share issues was raised by bank loans, but since about 1980 there has been an ongoing trend for disintermediation, where large and creditworthy companies have found they have to pay out less interest if they borrow directly from capital markets rather than from banks.
The tendency for companies to borrow from capital markets instead of banks has been strong in the United States. According to the Financial Times, capital markets overtook bank lending as the leading source of long-term finance in 2009, which reflects the risk aversion and bank regulation in the wake of the 2008 financial crisis. Compared to in the United States, companies in the European Union have a greater reliance on bank lending for funding. Efforts to enable companies to raise more funding through capital markets are being coordinated through the EU's Capital Markets Union initiative; when a government wants to raise long-term finance it will sell bonds in the capital markets. In the 20th and early 21st centuries, many governments would use investment banks to organize the sale of their bonds; the leading bank would underwrite the bonds, would head up a syndicate of brokers, some of whom might