Understanding capitalism

Capitalism is an economic model that defines how an organisation can be owned, governed and incentivised

Capitalism is an economic model that defines how an organisation can be owned, governed and incentivised.

Economic structures and ideas that don’t require capitalism

Capitalism is often associated with a number of economic structures and ideas that do not require capitalism to function or be widely adopted. Capitalism could be fully replaced by another organisational model and these existing economic structures and ideas could be fully adopted in that economy.

Markets

Capitalism commonly operates through a market mechanism where supply and demand determine prices and the allocation of resources. Capitalism is not required for markets to function. Sole traders, partnerships, cooperatives and other structures for the organisation can provide their goods or services in a free market.

Money

Money is commonly used to exchange goods and services and for investments into capitalist organisations. Capitalist organisations can function with numerous types of money. The economy doesn’t require capitalist organisations for money to be used in other organisations that adopt different structures.

Government

Governments can play a vital role in regulating and stabilising the economy. A capitalist economy is commonly associated with one that has a small and limited government, such as a classic liberal government. However capitalism can also be adopted within economies that adopt a variety of different approaches for government. Governments would continue to function regardless of whether capitalist organisations exist or not.

Business

A business is not to be confused with capitalism. A business is able to decide whether it adopts a capitalist structure or not. A business could be operated as a sole trader, partnership or cooperative structure to name just a few examples. Other models and structures could be created that define how a business could be owned, governed and incentivised.

Private property

In a capitalist system, individuals and businesses have the right to own and use property as they see fit. This includes physical property, intellectual property and the means of production. Ownership rights are legally protected and transferable. Capitalism is not required for private property rights to exist. Other organisation structures such as cooperatives can adopt and benefit from private property rights.

Profit motive

The desire to earn profit can motivate individuals and firms in a capitalist system. Profit serves as a reward for risk-taking and investment and as a signal for resource allocation in the economy. Profit motives can exist within any organisation regardless of whether it is capitalist or not.

Consumer sovereignty

In a capitalist economy, consumers have the freedom to choose from a variety of products and services. Companies must adapt to consumer preferences and demands to succeed. Consumers would also have freedom of choice in many other types of economy that don’t have any capitalist organisations.

Wealth accumulation

Capitalism encourages the accumulation of wealth through savings and investments. Businesses reinvest profits to expand operations, improve technology and increase productivity. Organisations that don’t adopt capitalist structures could also encourage wealth accumulation and reinvest their profits into the organisation.

Individualism

Capitalism emphasises individual rights and the freedom to pursue personal goals. It highlights personal responsibility and the importance of personal initiative in economic activities. Individualism can be widely adopted within economies that don’t have any capitalist organisations.

Self-interest

In a capitalist system, individuals are encouraged to act in their own self-interest, which, according to proponents of capitalism, leads to greater economic efficiencies and benefits for society as a whole. Individuals could choose to act in their own self interest in economies that don’t have any capitalist organisations.

Defining features of a capitalist organisation

The following factors represent some of the most defining features of a capitalist organisation.

Capital share based ownership

Shares represent a form of capital that is used to determine ownership in a capitalist organisation. Shares are commonly received for capital investments or labour contributions. Owners and investors assume any financial risks with the potential for personal gain.

Class distinction

Capitalism commonly leads to a two class structure where there are owners (capitalists) and workers (employees). Employees are not entitled to receive any shares of ownership in a capitalist organisation. It is up to the goodwill of the owners if they are to receive any shares for their contributions. If employees do receive shares, the amount of shares given does not need to reflect the full value of the contributions being made by each employee.

Shareholder rights

Shares often give owners perpetual governance and incentive rights. For governance this means they are entitled to participate in decisions about appointing directors for the board. For incentives this means that whilst they are still holding the shares they will benefit from share value appreciation and any dividend payments. Not every share has governance rights and some shares can be capped in terms of the return on investment they are able to make.

Shareholder governance

Shareholders determine who sits on the board or directors. The board then determines who will fill any executive positions. Executives will then govern the organisation and how it is operated.

Shareholder incentives

Capitalist organisations commonly have the primary goal of maximising shareholder value. Shareholders benefit from the organisation due to any share value appreciation or through dividend payments that are made by the business.

Employee incentives

Employees are paid in salaries and wages. Sometimes employees receive share options or bonuses. Employee labour can be commonly treated as a commodity that is bought and sold in the labour market based on skills, market demand and negotiation.