A:

The most important aspects of a capitalist system are private property, private control of the factors of production, accumulation of capital and competition. The starkest counterpoint to capitalism is communism; in a communist system, there is no private property, a central government controls the means of production, capital is not accumulated by individuals or private businesses, and competition is nonexistent. Put simply, a capitalist system is controlled by market forces, while a communist system is controlled by the government.

Private Property

The right to private property is a central tenet of capitalism. Citizens cannot accumulate capital if they are not allowed to own anything, nor can they buy or sell things. As long as the owner stays within the parameters of the law, which generally are broad in capitalist systems, he may do what he wants with the property he owns.

A private citizen may purchase property from another private citizen at a price that is mutually agreed upon and not dictated by a government. In a capitalist system, the free market forces of supply and demand, rather than a central governing body, set the prices at which property is bought and sold.

Factors of Production

In capitalism, private enterprise controls the factors of production, which include land, labor and capital. In contrast to a communist system where the government owns and controls these factors and thereby sets production levels and prices, private companies control them in a capitalist system and set prices and production at levels that maximize profit and efficiency.

A common indicator of whether the factors of production are privately or publicly controlled is what happens to surplus product. In a communist system, surplus product is distributed to society at large, while in a capitalist system, it is held by the producer and used to achieve additional profit.

Accumulation of Capital

The centerpiece of a capitalist system is the accumulation of capital. In a capitalist system, the driving force behind economic activity is to make a profit. Devotees of communist and socialist systems consider this greedy and selfish. Capitalists, however, see amassing profits as a way to provide a powerful incentive to work harder, innovate more and produce things more efficiently than if the government had sole control over citizens' net worth. This financial incentive is the reason capitalist economies see innovation as going hand-in-hand with their market system.

Competition

Competition is the other vital attribute of a capitalist system. Private businesses compete to provide consumers with goods and services that are better, faster and cheaper. The principle of competition forces businesses to maximize efficiency and offer their products at the lowest prices the market will bear, lest they get put out of business by more efficient and better priced competitors.

While doing business with a particular company in a capitalist system is voluntary, in contrast, the central government in a communist system has effective monopolies in all industries. This means it has no incentive to operate efficiently or provide low prices because its customers do not have the option of looking elsewhere.

RELATED FAQS
  1. The differences between capitalism and socialism

    One promotes free market conditions, the other incorporates elements of centralized economic planning. Read more to learn ... Read Answer >>
  2. What is 'capital' in relation to the factors of production?

    Find out what economists mean by physical capital, how it contributes to the productivity of labor and why it is a crucial ... Read Answer >>
  3. What are the main differences between a mixed economic system and pure capitalism?

    Read about the primary differences between a mixed economic system and a laissez-faire, free market economic system with ... Read Answer >>
  4. What is the history of the market economy?

    Take a quick tour through the history of the market economy -- the system of voluntary economic exchanges guided by private ... Read Answer >>
  5. What inputs are considered to be factors of production?

    Learn what the four categories of factors of production are and how different schools of economic thought view them. Read Answer >>
Related Articles
  1. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  2. Insights

    Pros and Cons of Capitalist vs Socialist Economies

    Capitalism relies on the markets. Socialism, on government planning. Each system has its pros and cons.
  3. Small Business

    Startups Destroyed By Venture Capitalists

    While the title may sound counter-intuitive, venture capitalists have been responsible for causing or accelerating the downfall of their startups. Here are a couple of examples.
  4. Insights

    The Difference Between Communism and Socialism

    Communism and socialism are economic and political structures that promote equality and seek to eliminate social classes.
  5. Trading

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  6. Investing

    Should Water Be Privatized?

    Could water privatization mean lower costs, greater efficiency and higher quality compared to public sector providers? A look at the evidence so far.
  7. Small Business

    Public Vs. Private Tech Valuations: What's Driving the Divide?

    The gross valuations over the past five years are more indicative of the market than the true value of the company itself.
  8. Investing

    Bill Gross: The Time Is Now for Rate Normalization (BRK-A, BRK-B)

    Whether it's the sun in its death throes or a British absurdist comedy's portrayal of gluttony, the $58 trillion in credit in the U.S. is for Bill Gross a giant, ravenous thing that threatens ...
  9. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
RELATED TERMS
  1. Adventure Capitalist

    An adventure capitalist is an investor who backs higher-risk ...
  2. Vulture Capitalist

    A vulture capitalist is an investor who purchases troubled firms ...
  3. Centrally Planned Economy

    A centrally planned economy is an economic system in which decisions ...
  4. Socialism

    Socialism is an economic and political system based on public ...
  5. Seasons

    Seasons refers to the current stage of a proposed business idea ...
  6. Marxism

    Marxism is a social, political and economic philosophy that examines ...
Trading Center