What is Capitalism? 5 Key Characteristics of Capitalism – Explained

Capitalism very simply, is an economic system. A system where, private entities or individuals control the means of production as well as determine prices in the market, for the sole purpose of profit. Of the many different types of economic systems that can be seen in countries across the world, capitalism and socialism are the most common ones. Furthermore, capitalist economies follow the laissez-faire economic theory which advocates for governments staying away and not influencing the market. The government’s role is to protect the free market and stay out of the way. This is especially useful if the government in question is highly oligarchic in nature. As the protector of the aforementioned free market, the government has to provide national security as well as maintain infrastructure in the country.

Capitalism is usually regarded as originating in the late medieval era when, through the transformation of the serfdom and trading economy to the monetary economy, the generation of broad labour and goods markets begins. The greater part of the economy in such times was predominantly that of the barter system. So, most of the payments, such as taxes were paid in kind. The shift towards capitalism from this feudal economic system occurred with a shift from manorial serfdom to becoming free holding tenants. This is a general idea that has some credibility in the field of economics as to the origins of the capitalistic economic system. The key point here is that there was a huge transformation from serfdom and bartering into labour-for-wage relationships. This was not a sudden change, rather it was a slow and gradual one.

5 Characteristics of Capitalism

  • The first big change that capitalism bought about in most communities was the classification of individuals into two classes. Those classes being the capitalist class and the working class. As the name indicates, the capitalist class is the elite class, having ownership over corporations and the means for producing and distributing goods. The working class, acts as the consumers as well as playing a key role by offering their labour to the capitalist class in exchange for wages. These wages would then be utilized by the working class to consume various goods made available to them. In short, a major share of power and money falls into the hands of the capitalist class. Meanwhile, the working class has a tendency to be taken for granted and sometimes their lives become quite miserable. This is not always the case, but it is a possibility in any capitalistic economy. In addition to this, sub-classes emerge as a result of specialization in labour.
  • Building on the first aspect of capitalism, the second aspect is that of private ownership. Since there is a huge emphasis on laissez-faire, it is only natural that a very important and influential private sector comes about in a capitalist economy. This private sector owns various property, plants and equipment all geared towards production of certain goods. Furthermore, the owners of these establishments are given full independence for all sorts of decision-making related to their business. It can be basic factors such as how much production should take place or how many people they should hire. This is in contrast to socialist economies, where the government controls all means of production and distribution. The important observation to be made here is that the private sector in capitalistic economies are generally geared solely towards making profit. Whereas, the socialist economies need not always be profit driven. A good example that we can consider is the rising monopoly of technological corporations such as Google and Apple in the United States, which is predominantly capitalistic. These companies are privately owned and exercise enormous power over determining every dimension of the business process.
  • A third and very quintessential characteristic of capitalism is its core purpose of making a profit. That is, any company that exists within a capitalistic economy does not provide its services or goods for the welfare of the people. The people must be capable of having their own funds to be able to pay for the good and services offered by these entities. This characteristic has a positive and negative side to it. The positive side is that, accumulation of wealth provides the ultimate motivating factor that forces individuals to work and innovate. As a result of this, society experiences advancement through development of newer tech and cheaper goods and services. But this motivation for profits might also lead to oppression of the working class and overpriced goods. In today’s world we get to see a mix of both of these sides play out.
  • Competition is the fourth aspect of capitalism. A competitive nature is something that is needed for a capitalistic economy to survive and develop. In the absence of competition between corporations, monopolies start to develop and prices increase because of said monopoly of the seller. This violates the core idea of capitalism. With companies competing, it forces them to offer more at lesser prices while retaining their own profits.
  • Lastly, for capitalistic economies to succeed there needs to be little to no government intervention. A free market is one of the most important ingredients in setting up a capitalistic economy. It accentuates a steady supply of goods and services that meet demand within reasonable price ranges. It is important to note here that a capitalist economy with absolutely no government intervention is a utopian dream. Even in the United States, one of the countries in the world that are predominantly capitalistic, there are regulations placed on industries such as the Dodd-Frank Act that acts as a safety checking mechanism.


Capitalism has its positive outcomes as well as negative setbacks too. A purely capitalist society is also not ideal as it might lead to a saturation of power with an elite group of people, who might just end up wielding more power than world governments. This is not ideal and can be highly dangerous in the long run. Certain aspects of capitalism can be adopted and implemented to boost the economy in general. Capital economies, if done correctly can bolster economies and uplift countries across the world.

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I am Abhiram T.S, a 2nd year undergraduate student currently pursuing a Liberal Arts degree at Symbiosis School for Liberal Arts. I major in International Relations with a minor in Anthropology with additional elective courses. I have a deep interest in current affairs, history, and writing. I intend to pursue a Masters's in International Relations. I am also an avid cyclist and runner.