A Brief Explanation of Capitalism

By Cordelia L Rochie | Ochie | 30 Mar 2021

Wealth, property, stocks, consumerism, maybe this is what comes to the mind of people when talking about capitalism. But what is Capitalism?

Capitalism, an economic system in which individuals control the means of production such as capital, machinery, factories, and by private ownership. Free to hire workers to get as much profit as possible.

When we talk about economics, there are three main questions we need to answer. First, what will be produced and how much? Second, how should the product be produced? And third, for whom?

According to capitalism, individuals can decide what to produce and how and for whom. Adam Smith is the man who introduced capitalism. In his book The Wealth of Nations, it is said that (everyone is driven by personal interests). And when we try to fulfill those interests, we end up fulfilling others.

I take the example of restaurant owners, restaurant owners have their own capital such as buildings, kitchen sets, spices and much more. When he cooks food, I buy and eat it. Is he doing it to feed us? Of course not!

The restaurant owner cooked the food so I bought the product. And the profits from the sale will be used to support the restaurant owner's family. And I? I don't buy rice food because I want to pay for his living. I buy food to fulfill my appetite.

I can be satisfied because I eat good food and the restaurant owner can prosper. And if there are other restaurant owners who want to be more prosperous, then that owner must make rice dishes that are tastier and cheaper.

When there is competition between the two, the food price will decrease while the quality increases.

Another idea from Adam Smith is that specialization, according to Adam Smith, will increase productivity when each worker focuses on a specific task rather than doing it all.

1913. The Ford company produces half of the cars in the US. The owner, Henry Ford said this was possible because in his factory, workers were divided into different segments. And workers only focus on certain tasks such as assembling windows, tires, doors and others. As a result, production is faster. On an international scale.

Smith believed that the state must specialize. A country that is good at producing food does not need to bother producing machines and vice versa. Eventually trade will take place and consumers all over the world can enjoy high quality products at affordable prices. Because this is happening without direction.

Capitalism emphasizes the importance of minimum government intervention. The government should only focus on things like defense, infrastructure, education and law.

Capitalism occurs throughout history without any planning. However, the theoretical basis of capitalism emerged after economists observed the surrounding economic phenomena. In short, capitalism is an attempt by economists to lay a theoretical foundation for everyday economic phenomena, unlike socialism, socialism arises from the minds of economists who are looking for alternatives to capitalism. Because they regard capitalism as a failed system.

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Cordelia L Rochie
Cordelia L Rochie

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