Chamber’s dictionary defines capitalism as:
“The economic system which generates and gives power to capitalists”.
In a capitalist economy there is private ownership of the means of production, non-interference by the government in decision making process. Market mechanism process or Adam Smith’s invisible hand mechanism determines the price system. In this system entire production decision rests on capitalists.
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The production is done mainly by labours in exchange of wages. Marx recognised in a capitalist system labour power, is to be regarded as a commodity whose exchange value, wage rate, determined in same manner as any other factor of production. Profit is the keyword which is nothing but the surplus earned from the revenue over cost. Thus profit is the difference between revenue and cost.
Various economists have defined capitalism in various ways. The nature and process of capitalism varies from country to country. Marxian literature describes capitalism as the full of internal contradictions and exploitation of labour is supreme.
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Though there is obviously some element of truth in Marxism analysis but capitalism has changed its colour and character significantly in last 150 years. At present capitalist countries gave a high level of social security to its people and opportunity to growth.
Most of the countries are under the control of government machinery. After the great depression of thirties in last decade and Second World War Capitalist system has seen the process of government intervention to a large extent. However, reliance on market mechanism and freedom of individuals making decision are still an important element of capitalism.
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From all its broad features one may identify two types of capitalism;
(i) One type of capitalism is described by Marx, Schumpeter, GDH Cole where lassez faire system prevails (Nature of capitalism up to the thirties in last century),
(ii) The regulated capitalism where government intervention is rampant particularly after Second World War.
Now let us discuss basic features of capitalism.
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Despite larger variations in their features capitalist economy has certain common characteristics those made capitalist system a distinct identity.