The economic system called capitalism is practiced in various forms in many countries of the world, including the United States, Great Britain, Japan, and Germany. Other names for this system are free market economy and free enterprise. Under capitalism, businesses are owned and controlled by individuals rather than by the government. For economists, “capital” refers to the “means of production.” These include the money, land, buildings, machinery, or hardware that it takes to operate a business, such as a factory, farm, or computer company. A capitalist is an individual—or group of individuals—who supplies the money to get a business going.

Early capitalism

Capitalism has existed for as long as people have bought and sold goods in the market. Ancient Rome, for instance, had many privately run businesses. The fall of the Roman Empire and the development in Europe of feudalism led to the decline of capitalism. In the 15th century, however, the growth of trade, industry, and banking helped capitalism to develop.

During this time governments encouraged capitalism through a policy called mercantilism. The goal of mercantilism was to increase a country's wealth and power through trade. Each country hoped to grow richer by selling more goods to its neighbors than it bought from them. The government supported its country's own capitalist businesses by taxing foreign goods coming into the country. These taxes generally made foreign goods more expensive than those produced within the country.

“Laissez-faire” capitalism

In the 18th and 19th centuries the Industrial Revolution brought about a great expansion of manufacturing. Machine power began to replace human and animal power. Inventions such as the steam engine and the cotton gin improved methods of producing goods. By the 19th century mercantilism was disappearing as businesspeople came to believe that government interference in trade and industry was harmful. They wanted to run their own affairs. This policy of little or no government control was called laissez-faire, a French phrase meaning “leave alone.” Adam Smith, a Scottish economist, promoted the idea of laissez-faire capitalism.

The main features of laissez-faire capitalism included competition, the desire for profits, and individual freedom to make business decisions. Individual capitalists decided what to produce and how much, according to what they thought customers wanted. Their goal was to attract more customers than their rivals did. At the same time, individual workers sold their labor to whoever paid the highest wages.

Consumers also competed. Those with the most wealth could buy the best products and services. When a desired product was in short supply, demand for it pushed the price up. When there was a large supply of a product or only a few consumers wanted to buy it, competition forced the price of the product down. This is called the law of supply and demand.

Problems and critics of capitalism

Laissez-faire capitalism led to great advances in trade and industry. Some people made huge fortunes. In hard economic times, however, many workers suffered poverty and unemployment. In addition, competition and the desire for profits sometimes led business owners to cut costs in ways that harmed their workers. Some factory owners, for example, neglected safety measures in an effort to save money.

Such problems led to the formation of labor unions and to the growth of socialist ideas. Labor unions are groups of workers who unite to seek a common goal, such as better working conditions and wages (see labor movements). Socialists believed that capitalism was harmful and put forth a system of their own. Under socialism, the government owns a country's capital (such as land, money, and buildings) and therefore controls much of the economy. The goal was to eliminate the economic inequalities of capitalism, with its emphasis on private property. Some people, such as the 19th-century German philosopher Karl Marx, took the idea of socialism a step further. They believed that all capital should be jointly owned by everyone. This is a basic teaching of Communism.

Mixed economy

In the 20th century the role of governments in economic affairs grew again. Laissez-faire capitalism came to an end in most countries during the Great Depression, a worldwide economic slump during the 1930s. More and more people started to believe that governments had to take action to fix economic problems and prevent them from happening again. Today most governments regulate business, passing laws to prevent unfair practices and ensure safe working conditions. They also give support to people who are old, poor, or out of work.

During the 20th century the governments of some countries rejected capitalism and chose Communism instead. The largest of these countries were the Soviet Union and China. Most businesses in these places were run by the government. By the early 1990s, however, the Soviet Union had broken up and most other Communist countries had moved toward a mixed capitalist system. In such a system, individuals own some businesses while the government owns others. The government also provides services such as education and public transportation.