Capitalism as an Economic System

In Business under Various Economic Systems, some salient issues such as

(1) Who will own the means of production?

(2) What will be produced and how will they be produced?

(3) How will the products be distributed?

were highlighted.  Now, we're taking an in depth examination. We 're looking at the concepts of Capitalism, Socialism, Communism, and Mixed Economy/Free market Economy

Here we go.....

Capitalism

Capitalism is an economic system in which private individuals with comparative freedom from external restraints are allowed to own all or most of the means of production and distribution (e.g. land, factories, railroads, and shops).  Capitalism as an economic system or theory of wealth creation and distribution owes its philosophical origins to 18th century philosophers such as Adam Smith. This Scottish economist is considered the father of capitalism.

In this type of economic system, producers operate under conditions of competition and the forces of demand and supply determine market prices, hence, capitalism is sometimes called the market economy or private enterprise system.  Capitalism in its purest form is referred to as "free market capitalism" or "laissez faire", this means a system without government interference in the conduct of businesses.

However, today, no country is purely capitalistic.  Often the government sets the regulatory frameworks. For example, in Nigeria, we have such regulatory agencies as Standard Organisation of Nigerian (SON), National Food and Drug Administration Control (NAFDAC), Nigerian Deposit Insurance Company (NDIC), National Universities Commission (NUC), Federal Environmental Protection Agency (FEPA), and Directorate of Petroleum Resources (DPR), among others. 

This way, capitalism in which there are increased restraints by government upon business is often called “modified capitalism.”  It is also referred to as a mixed economy.

Fundamentally, private property, private enterprise, and freedom of choice characterize capitalism.  These three factors, collectively, are frequently called the rights in a free enterprise system or basic freedom of capitalism.  By private property, we mean individuals and firms have the right to purchase, own, use, sell, or give away property of all kinds, such as land, buildings, machinery, and equipment.  It also implies that business people have the right to the ownership of the profit they hope to realize in the course of providing goods and services.

Private enterprise, as another basic right of a private enterprise system, or as another basic freedom of capitalism pertains to ownership, and shows that business is own by private individuals as opposed to local, state or federal governments.  Here, the business owners or management make the judgments and decisions that determine the path the business follows.  Under this right, business dealings, if not illegal in nature, are not of public concern.

The third outstanding characteristic of capitalism is freedom of choice.  This pertains to the freedom of the individual as a consumer, a worker, and an owner of resources.  As business owner, one is free to choose the field of business one will invest, and to manipulate the factors of production to one’s best advantage in the light of the highest measure of profit.  As a worker, the individual is at liberty to choose whatever career choice that offers one the best returns for one’s efforts.  As a consumer, one is free to make whatever purchase choice, as long as the product is legal.

Capitalism, like any other economic systems, relies on certain inputs to operate effectively.  Collectively, these inputs are called the factors of production.  They are the resources businesses use to create wealth.

A corollary of capitalism (as a form of economic systems) is communism.

Karl Marx saw the inequality in wealth between the capitalists and the labourers in the 1800s, and advocated for a system of government whereby ownership of all economic resources of a country will be among a community of people (or government), hence the term communism.

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Contemporary Business and Its Environment

To fully appreciate contemporary or modern business and its environment, it is germane to conceive the enterprise as a subsystem operating in a macrosystem or suprasystem.  Contemporary business and its environment describes the concept of a system.  It examines the business enterprise as an adaptive and open system within a suprasystem.  Further, it highlights the three basic components of all organisational systems.  Contemporary business and its environment also considers the micro and macro environment of a business.  The actors, forces, players or events inherent in these two classifications are discussed, among others. 

Business does not operate in a vacuum.  It has roots in a larger society or environment.  The business enterprise interacts with the environment through the input and output interfaces – the enterprise accepts (from the environment) resource inputs such as men, materials, machinery, money, and even information, among others, and transforms (processes) them into desired outputs (to the society).  For example, the managers of a rubber manufacturing concern, through the useful and effective combination of the disorganised resources of men, materials, money, machinery, minutes and methods, as well as information, produce desired goods such as tyres, rain boots, tubes, and others.  Similarly, a University accepts new entrants, as inputs and transform them into educated individuals.

The nature of this interaction between the business organisation and its environment presents the managers with opportunities and threats.  It has the potentials of success and failure.  Consequently, when we talk of contemporary business and its environment, we are concerned about the complex set of interacting forces in the environment (within and outside of the enterprise) that sustain this mutual relationship or interdependence, in terms of the business survival, prosperity and growth.  This way, a meaningful inquiry into the environment in which business operates is crucial.

Here are some tips to help you understand what a system is?

What is a System?

The system concept is an interesting and insightful one.  It has been conceptualized in varied ways by many writers, scholars, and even managers.  While some viewed a system as “an orderly arrangement according to some common principles or rules,” others defined it as “a plan or method of doing something.”  The term system is also conceived as a group of interacting and interdependent components working towards the attainment of a common goal.  This means that each component or part has a unique role or function towards the realization of the common goal or aim, and without this common goal, there is no interaction and interdependence.  Hence, no goal; no system.  To understand a system requires synthesis – “an aggregate understanding of the whole, that is, the concept of seeing both the woods, and the trees or big picture.”

Accordingly, we find examples of a system in the business enterprise, in the biological and physical sciences, among others.  In the physical science, we have the solar system – the sun and its planets.  In the same vein, in the biological science, we find the circulatory, digestive, central nervous, and respiratory systems.  The respiratory system, for example, comprises the nostrils, the pharynx, the larynx, the trachea, the left and right bronchi and the lungs.  All these interdependent parts form a unified whole (subsystem) within the human body (a larger system or macrosystem).  These unique parts collectively bring about respiration (a common goal).  Without respiration, there is no respiratory system.

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