Under capitalism, private individuals or businesses own capital goods. At the same time, business owners (capitalists) employ workers (labor) who only receive wages; labor does not own the means of production but only uses them on behalf of the owners of the capital.
The production of goods and services is based on supply and demand in the general market—known as a market economy—rather than through central planning—known as a planned economy or command economy.
The purest form of capitalism is free market or laissez-faire capitalism. There, private individuals are unrestrained. They determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls.
In reality, most countries practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries.
Industrial capitalism usually benefited bigger parts of society rather than just the aristocratic class. Wages increased, helped greatly by the formation of unions. The standard of living also rose with the glut of affordable products being mass-produced. All of this led to the formation of a middle class and began to lift more and more people from the lower classes to swell its ranks.
The expansion of the financial sector accompanied the rise of industrial capitalism. Banks had previously served as warehouses for valuables, clearinghouses for long-distance trade, or lenders to nobles and governments. But eventually, they came to serve the needs of everyday commerce and the intermediation of credit for large, long-term investment projects. By the 20th century, as stock exchanges became increasingly public and investment vehicles opened up to more individuals, some economists named a variation on the system: financial capitalism.
By incentivizing entrepreneurs to reallocate away resources from unprofitable channels and into areas where consumers value them more, capitalism has proven a highly effective vehicle for economic growth.
More and better goods became cheaply accessible to wide populations again, raising standards of living in previously unthinkable ways. As a result, many political theorists and economists argue that capitalism is the most efficient and productive system of exchange.
But a downside of capitalism is its ability to corrupt. Crony capitalism (sometimes called cronyism) refers to a capitalist society that is based on the close relationships between business people and the state. Instead of success being determined by a free market and the rule of law, it can depend on favoritism that is shown by the government in the form of tax breaks, grants, and other incentives.
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In practice, this is the dominant form of capitalism worldwide, due to the powerful incentives both faced by governments to extract resources by taxing, regulating, and fostering rent-seeking activity, and capitalist businesses trying to increase profits by obtaining subsidies, limiting competition, and erecting barriers to entry. In effect, these forces represent a kind of supply and demand for government intervention in the economy, which arises from the design of the system.