Types of Economic Systems: Capitalism
Permitting a high degree of individual freedom, capitalism owes its philosophical origins to eighteenth-century philosophers such as Adam Smith. According to Smith, in the ideal capitalist economy (pure capitalism), the market (an arrangement between buyer and seller to trade goods and services) serves as a self-correcting mechanism—an “invisible hand” to ensure the production of the goods that society wants in the quantities that society wants, without anyone’s ever issuing an order of any kind.
Because the market is its own regulator, Smith was opposed to government intervention. He believed that if anyone’s prices or wages strayed from acceptable levels that were set for everyone, the force of competition would drive them back. In reality, however, the government sometimes intervenes in business to influence prices and wages or to change the way resources are allocated. This type of intervention is called mixed capitalism, and it is the economic system of the United States. Other countries with variations of this economic system include Canada, Germany, and Japan. Under mixed capitalism, private individuals are allowed to determine what is produced, by whom, and for whom. In addition, the pursuit of private grain is regarded as a worthwhile goal that ultimately benefits society as a whole.
Under mixed capitalism, most firms operate to earn a profit—the difference between what it costs to produce something and what customers are willing to pay for it. However, sometimes firms are willing to sacrifice short-term profits for the sake of long-term goals. This strategy is frequently adopted by the Japanese, whose companies are willing (and able) to postpone initial profits in order to keep their prices lower and thereby penetrate global markets to a greater degree. As you can imagine, this is not an easy strategy to implement; you need deep pockets and patient investor.
Of course, not all businesses operate to earn a profit. Some businesses—like museums, schools, public universities, symphonies, libraries, and government agencies—exist to provide a valuable service rather than to make a profit. They are not-for-profit organizations. Even though these businesses do not have a profit motive, the business concepts discussed throughout this textbook—such as competition, marketing, finance, quality, and so on—apply to not-for-profit organizations as well.
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Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
Because the market is its own regulator, Smith was opposed to government intervention. He believed that if anyone’s prices or wages strayed from acceptable levels that were set for everyone, the force of competition would drive them back. In reality, however, the government sometimes intervenes in business to influence prices and wages or to change the way resources are allocated. This type of intervention is called mixed capitalism, and it is the economic system of the United States. Other countries with variations of this economic system include Canada, Germany, and Japan. Under mixed capitalism, private individuals are allowed to determine what is produced, by whom, and for whom. In addition, the pursuit of private grain is regarded as a worthwhile goal that ultimately benefits society as a whole.
Under mixed capitalism, most firms operate to earn a profit—the difference between what it costs to produce something and what customers are willing to pay for it. However, sometimes firms are willing to sacrifice short-term profits for the sake of long-term goals. This strategy is frequently adopted by the Japanese, whose companies are willing (and able) to postpone initial profits in order to keep their prices lower and thereby penetrate global markets to a greater degree. As you can imagine, this is not an easy strategy to implement; you need deep pockets and patient investor.
Of course, not all businesses operate to earn a profit. Some businesses—like museums, schools, public universities, symphonies, libraries, and government agencies—exist to provide a valuable service rather than to make a profit. They are not-for-profit organizations. Even though these businesses do not have a profit motive, the business concepts discussed throughout this textbook—such as competition, marketing, finance, quality, and so on—apply to not-for-profit organizations as well.
..............................
Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
