Economy Kushay's Matter Bank

[AK] Principles of Capitalism

This note will briefly breakdown the core concepts behind the economic system of capitalism.

Capitalism is the economic system which believes that society will benefit the most by the time there is no government intervention at all in economy.

The basic principle of capitalism is that individuals are inherently good. Thus, the interest of individuals are also inherently good, and it should be achieved. When individual interests are achieved, society’s interest is achieved and everyone benefits.

On the practical level, capitalism works through a combination of self-interest, competition, and supply of demand.

Self-interest is the principle of individualism, that each individual inherently has an incentive to strive and work hard to achieve their goal (money, reputation, etc.) and that any government regulation will harm this incentive. (Ex: A person would rather be a cook than a nuclear engineer in a society where the salary for cooks and nuclear engineer is the same because he will have no incentive to study tedious physics). This self-interest will make people develop themselves and thus increases human quality of society.

Competition principle is derived from self-interest. When you have two person (or group of people) that sells the same product/service, consumers will choose the one that has the best product/service. Thus, these competitors will strive to be the best provider of such things. Capitalists argue that government regulation that specializes certain people is harmful to the competition principle because then this ‘specialized people’ will have no incentive to increase their quality (Ex: Government monopolies on transportation companies means that the companies’ board of directors will have no incentive no increase the transportation’s quality since they know they won’t be out of business).

Supply and demand is pretty much self-explanatory. Capitalists believe that production and price of goods should not be dictated by governments, but rather on the situation of supply and demand of the good itself, something which is dictated by every individual within society and by uncontrollable external factors (nature’s condition, etc.). When supply is high and demand is high, many quality goods will be produced, and economic progress will happen.

Those three elements (dubbed the ‘invisible hand) ensures that the economy will run smoothly, and that any government intervention disrupts the smoothness of the economy.

In reality, there is no such thing as a ‘pure capitalistic’ economy because government regulation in economy exist in all countries (banning child labor, minimum wage, etc.). Pure capitalism used to exist until the industrial revolution when people are suffering because of sweatshops and pushes the government to regulate the economy.

Leave a Reply

Your email address will not be published. Required fields are marked *