Capitalism, before it became the dominant economic system, started around the 16th century with the English cloth industry. Some argue that forms of capitalism existed even in the ancient world, but the worldwide system we know today is more recent. Its distinguishing feature at the time was using capital to improve productivity and profits, rather than spending it on unproductive enterprises, like building cathedrals.
Financialists Sarwat Jahan and Ahmed Saber Mahmud explain that the essential feature of capitalism today is the motive to make a profit. In this system, the private sector owns and controls property, while demand and supply freely set market prices.
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According to the financialists, capitalism stands on a few core pillars. The first is private property. It allows people to own tangible assets (like land or a house) and intangible assets (like bonds or stocks).
Another core pillar is self-interest. In capitalism, people usually act in ways that benefit themselves and usually face little sociopolitical pressure. This lack of broader coordination is seen as something that can damage society, but in most cases, individuals end up benefiting the broader public. Of course, some recent wealthy figures have people feeling otherwise.
The third pillar of capitalism is competition. Firms are free to enter and leave markets, which tends to benefit both producers and consumers. Competition pushes producers toward innovation, which helps consumers get higher-quality goods. In turn, producers receive clear market signals through consumer demand.
In capitalism, buyer and seller interactions determine the prices. This decentralized market mechanism is the fourth pillar. Resources are allocated to maximize reward. In turn, prices for goods and services stay competitive, and wages remain somewhat fair.
The fifth pillar is the freedom of choice. Customers are free to shop for different products, investors can pursue other ventures, and workers can look for other jobs. This keeps the market dynamic and fair.
The final pillar is the government's limited role. It should protect citizens' rights while maintaining a properly functioning market.
The extent to which these pillars shape the system differentiates certain types of capitalism. For example, liberal market economies place greater emphasis on competition in the market. Such economies include the United States and the United Kingdom. Coordinated market economies, by contrast, exchange information through institutions that don’t belong to the market, such as unions and business associations. Such economies include Germany and Japan.
British economist John Maynard Keynes's criticism of capitalism gained momentum during the Great Depression of the 1930s, when unemployment ran rampant. He argued that this kind of economy cannot fix itself and requires government intervention. Lowering taxes and encouraging spending are necessary to help economies recover by boosting demand. He did not argue for replacing capitalism with something else, just stabilizing it when needed.
The system works best when governments set fair rules, protect property, and build infrastructure to facilitate the movement of goods and people. Unfortunately, powerful businesses can sometimes influence rule-setters to benefit themselves rather than the wider public interest. This weakens competition and harms the free market.
Economists Raghuram Rajan and Luigi Zingales argued in their book Saving Capitalism from the Capitalists that powerful groups must be prevented from dominating the system. To serve the public interest, markets should remain competitive, the massive wealth gap should be limited, and those who lose out in the competition should have a safety net to fall back on.