Sarwat Jahan and Ahmed Saber Mahmud
Capitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.
The essential feature of capitalism is the motive to make a profit. As Adam Smith, the 18th century philosopher and father of modern economics, said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Both parties to a voluntary exchange transaction have their own interest in the outcome, but neither can obtain what he or she wants without addressing what the other wants. It is this rational self-interest that can lead to economic prosperity.
In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses (see “Supply and Demand” in the June 2010 F&D).
Although some form of capitalism is the basis for nearly all economies today, for much of the last century it was but one of two major approaches to economic organization. In the other, socialism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.
Baumol, William J., Robert E. Litan, and Carl J. Schramm, 2007, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (New Haven, Connecticut: Yale University Press).
Hall, Peter A., and David Soskice, eds., 2001, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (New York: Oxford University Press).
Rajan, Raghuram, and Luigi Zingales, 2003, Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity (New York: Crown Publishing Group).