Theory of Capitalism
Capitalism is an economic system which encourages private ownership and the distribution of goods produced. The system is typified by operating a competitive free market motivated by profit making.
The theory of capitalism emerged in the 18th century resulting from the thinking of Adam Smith who suggested that within any stable commercial system enterprising individuals would benefit increasingly by specializing their products.
The point being that without the intervention of the state individual enterprise would have the following overall benefits –
- Free enterprise would ensure that each specific industry was directed in such a way as to provide goods of maximum value.
- The industries of the nation would so be encouraged to produce more, and subsequently the national wealth would increase.
- Introduce a systematic approach to freely exchanging goods with other countries, and break away from the earlier mercantilist type of thinking thus creating a political economy.
Within such a free trade environment the produce or goods where referred to as stock or capital and the profits were seen as the justifiable reward brought about by improvements to the capital. The improvement of capital became the major goal within the political economy.
In essence this is the same as saying that in a free enterprise a sum of money is been provided to produce the product. The value of the product (selling price) will reflect all costs of production, the amortization of the initial money put at risk, plus a percentage on top which we will call profit. Portions of such profits will then be used to help finance new products.
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