Capitalism is an economic system in which most of the industries and businesses in a country are owned privately, rather than by the government. Capitalists are people who use their own wealth (or other people's money) to make more wealth. The extra money they make is their profit. Some capitalists manufacture things to sell at a profit. Some are store owners who sell goods at a profit. Others are financiers or investors who lend their money in the hope of getting more back.
No matter what their business, the aim of capitalists is to make a profit. But this does not mean that they can charge very high prices or sell bad goods. If they do, they will probably lose business to others who sell better goods or have lower prices. Competition forces capitalists to sell the best possible goods at the lowest possible price. Competition is an important feature of capitalism. The profits made by individual capitalists in free competition benefit the economy of a whole country. As capitalists make profits they can expand their businesses and put more people to work.
In the Middle Ages, Europe had a feudal agricultural system. Land belonged to the church and to the nobles and was worked mainly by serfs. Few people were free to own and control their own businesses except in the cities.
As early as the 13th century, guilds of craftsmen, merchants, and traders slowly began to gain economic and political power. By the 16th century, merchants were investing large sums of money at home and abroad. Great trading companies, such as the East India Company in England, sent ships to India. They financed expeditions to open up colonies in the New World. In Europe the new middle class of tradesmen and craftsmen as well as the noble families bought spices, silks, and other luxuries that merchants brought back from the East. The merchants competed fiercely for this market.
By the 18th century, capitalists had large amounts of money (capital) ready to invest. The invention of the steam engine gave them their opportunity. Factories sprang up like mushrooms, first in England, then in other western European countries, and later in the United States. A great change took place, from home manufacture to mass production in factories using machinery. This change is known as the Industrial Revolution. It is only since the Industrial Revolution that capitalism has become the great force it is today.
The Need for Reform
In the early stages of the Industrial Revolution, many people believed that capitalism would work best if capitalists were left free to do as they pleased. They believed that governments should follow a hands-off policy toward business. But factory owners often abused their power, and workers suffered. The working day was long, 10 or 12 hours being common. Women and children worked for very low pay. Factories were badly lighted, poorly ventilated, and dirty. Workers were not protected from dangerous machinery.
Reformers cried out against these conditions. The political economist Karl Marx, one of the founders of Communism, wrote books claiming that capitalism must die of its own cruelty and greed.
Even before Marx's attack on the capitalist system, trade unions had begun to develop. The early founders of unions criticized the brutal side of capitalism. But most believed that bad working conditions could be improved without destroying the system. Although at one time unions were illegal, they slowly grew stronger and gained acceptance.
Laws have also modified the capitalist system. In the late 19th century some capitalists built monopolies and trusts. These companies were so huge and powerful that they did away with almost all competition. The Sherman Antitrust Act (1890) outlawed monopolies, and President Theodore Roosevelt, while in office (190l-09), enforced the law so strongly that he was called "the Trust Buster." Still later, during the great depression of the 1930's, President Franklin Delano Roosevelt introduced a broad social welfare program as part of his New Deal. Today social security and unemployment insurance give people in the United States protection they did not have before.
Government plays an important role in the modem capitalist, or free enterprise, system. Many nations now combine capitalism with some government control of the economy. The government may own and operate such vital industries as steel, petroleum, banking, railroads, and airlines, while allowing private ownership of most others. In the United States the government runs the space program and the postal service. It regulates companies that supply services needed for public health or convenience, such as the utilities that provide water, electricity, and natural gas.
Most people in democratic capitalist countries today fee that the free enterprise system should be maintained. But they also look to government to protect them from the excesses that marked capitalism in the past.
(The Book of Knowledge encyclopedia)