There are several different types of economic systems employed by nations. Two such types, socialism and capitalism are the most common. Capitalism is often referred to as a free market economy in its purest form; a common type of socialism is communism. Embedded in these economic systems are political and social elements that influence the degree of purity of each system. In other words, many capitalist nations have elements of socialism interwoven. So even though there are different degrees or levels of commitment to the ideals of capitalism, there are several traits that are common among all capitalists.
1. A Two-Class System
Historically, a capitalist society was characterized by the split between two classes of individuals—the capitalist class, which owns the means for producing and distributing goods (the owners) and the working class, who sell their labor to the capitalist class in exchange for wages. The economy is run by the individuals (or corporations) who own and operate companies and make decisions as to the use of resources. But there exists a “division of labor” which allows for specialization, typically occurring through education and training, further breaking down the two class system into sub-classes (e.g., the middle class).
2. Profit Motive
Companies exist to make a profit. The motive for all companies is to make and sell goods and services only for profits. Companies do not exist solely to satisfy people's needs. Even though some goods or services may satisfy needs, they will only be available if the people have the resources to pay for them.
Understanding Capitalist Economy Traits
3. Minimal Government Intervention
Capitalist societies believe markets should be left alone to operate without government intervention. However, a completely government-free capitalist society exists in theory, only. Even in the United States, the poster child for capitalism, the government regulates certain industries, such as the Dodd-Frank Act for financial institutions. By contrast, a purely capitalist society would allow the markets to set prices based on demand and supply for the purpose of making profits.
True capitalism needs a competitive market. Without competition, monopolies exist, and instead of the market setting the prices, the seller is the price setter, which is against the conditions of capitalism.
5. Willingness to Change
The last characteristic of capitalism is the ability to adapt and change. Technology has been a game changer in every society, and the willingness to allow change and adaptability of societies to improve inefficiencies within economic structures is a true characteristic of capitalism.
The Bottom Line
Capitalism in its purest form is a society in which the market sets prices for the sole purpose of profits and any inefficiency or intervention that reduces profit making will be eliminated by the market.