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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Business Enterprise as a System

A business enterprise is a system where economic resources (inputs) are processed (throughput) into goods and services (outputs).  A business organisation does not exist in a vacuum.  As an integral part of the environment, a meaningful inquiry into the business enterprise as a system must incorporate the environment.

Factors that underline the business enterprise as a system include:    the input, processing, and output factors as well as feedback and control.  Note that the enterprise should be seen as a unified whole.  That is, as a coordinated interaction of several departments (subsystems) such as procurement, production, marketing and sales, finance, personnel, and others, working synergistically towards a common purpose or mission.

Here are tips on the components of a business enterprise as a system:

Environment

The business and its environment are mutually interdependent organs, and as such, the organisation can only exist and grow if it produces goods and services that are desired by the environment, and the business operations and results are acceptable to the society.  In short, the environment limits and impacts on the nature and success of the organisation.  The business environment consists of complex set of forces or actors (some within the enterprise, and some outside of it) that to some degree affect the organisation as it attempts to perform its economic function.  And, in turn, the activities of the business enterprise to some extent shape the attitude and expectations of the actors or forces.  These actors are collectively called the stakeholders.

Stakeholders are groups or individuals who can affect or are affected by a business.  Stakeholders in the business environment are financial institutions, media, customers, labour unions, employees, competitors, and suppliers.  Others  are government agencies, political groups, shareholders, the community, trade associations, activist groups, and consumer advocate groups. 

The enterprise survives and grows when it provides needed goods and services to the environment, and the environment endorses the business’ operations.  Recall that the environment is a source of opportunities and threats.  Changes in the environment that offer opportunities for managers, include the introduction of new technology, favourable economic environment, opening of foreign markets and favourable government policies.  On the other hand, the rise of new competitors, an economic recession, an increase in capital requirement, and shortage of basic raw materials, among others, are considered as threats.  The manager’s understanding and appropriate response to these threats and opportunities largely determine the level of organisational performance.

It is important that the business activities should adapt to changing needs and expectations of societal stakeholders.  The organisation should act in such a manner that would sustain the mutual interdependence between it and the society.  Any unscrupulous act of exploitation of consumers, and adulteration of standard products will usually be opposed by the people.  Reaction by the environment might lead to stringent laws and regulations, nationalization (or denationalisation), or cause the organisation to lose the organisation lose its legitimacy.  The society will also react to unintended or indirect consequences of business operations (these effects are generally termed as externalities), for example, pollution.

Input

Input consists of economic resources that are put into the system.  Examples are men, materials, machinery, land, facilities, energy and information.  These economic resources are captured, assembled and organized for processing.  The business enterprise gets these economic resources from the environment through the input interface.

Processing

Processing or throughput involves the transformation of economic resources (input) into output.  For examples, a university transforms a freshman into an educated individual, a restaurant transforms hungry customers to satisfied customers; a hospital takes patients as inputs and processes them as healthy individuals, and an automobile factory acquires raw materials, tools, equipment, and others, to produce automobile.  The processing component yields a value-added to the work-in-progress.

 Output

Beyond the input and throughput components is the output.  It involves the transfer of elements that are the results of the processing, to their ultimate end-users.  Examples are mentioned above – automobile, a healthy individual (university).  Generally speaking, output includes products, services, payments, and information.  The business enterprise discharges its goods and services (output) through the output interface.

Early on the business enterprise was described as a flow, that is, a continuous process of input - processing - output mechanism.  The business organisation as a dynamic system, achieves this through the feedback and control components.

Feedback

Feedback refers to data or information pertaining to the performance of the business enterprise.  Management receives information about the performance of the organisation through the information system.  Similarly, the feedback loop provides the organisation with the avenue to learn of the environment’s reaction to the output of the enterprise.

Control

Finally, based on the information generated by the feedback component, the managers make necessary adjustments through the control function.  The control function involves the comparison of actual results to expected results (for possible corrections) so that the enterprise would move towards the attainment of its goal.  It is a continual process of correcting and updating activities in the context of events in the business environment.

To better appreciate the threats and opportunities that shape and direct the firm’s direction and action, we distinguish between the micro and macroenvironment of business.

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