Which economic system allows competition

Why do you go to work? Why do you go to school? There may be many reasons, but at their core you probably go to work and school because you are self-interested.

To be self-interested simply means that you seek your own personal gain. You go to work because you want to get paid so you can buy the things you want. You go to school so you can get a better job someday and earn more money to buy the things you want.

In fact, most of the economic activity we see around us is the result of self-interested behavior. Adam Smith described it this way in his book, The Wealth of Nations:. So why does the baker choose to bake? The answer is self-interest. The baker wants to earn enough money to feed his family and buy the things he wants and the most effective way he has found to do that is to bake bread for you.

In fact his bread has to be good enough and the service friendly enough that you are willing to give up your money freely in exchange for his bread. The baker while serving his self-interest has produced a good that is very valuable to you.

The miracle of a market system is that self-interest produces behavior that benefits others. Is being self-interested greedy? While the ability of some people may be more than twice the ability of average people in some regards, abilities do not deviate much more than that.

While a professional baseball pitcher may be able to pitch a baseball more than twice as fast as most people, no baseball pitcher can pitch more than 3 times faster than most people. Certainly, no one is times better than the average person. That CEOs are paying themselves much more than what they are worth can easily be seen in companies going bankrupt, because even those CEOs still receive millions of dollars in compensation. Even when the board of directors decides to get rid of a bad CEO, many of those CEOs walk away with millions of dollars of severance pay.

How do CEOs accomplish this? They decide or significantly influence how the business revenue is distributed. And when they distribute more to themselves, that leaves less for everyone else in the company. When a company is going bankrupt, the CEO chooses the bankruptcy firm, so naturally they will choose a firm that will allow them to walk away with significant compensation — often millions of dollars — even when they were largely responsible for bankrupting the firm.

Moreover, CEOs are often compensated with employee stock options , which further saves them taxes, because the money earned from these options are exempt from employment taxes and are subject to the lower long-term capital gains rate rather than the hefty marginal rate that applies to most income earned from work. The unfair distribution of wealth can also be seen in some countries with rich natural resources, such as Iran, Nigeria, and Venezuela. These countries have natural-resource wealth great enough to make everyone there rich, and even though no person was responsible for those resources, political leaders keep most of the money and wealth to themselves, which is why many political leaders and their cronies are willing to kill so many people or commit other atrocities to maximize their wealth.

Greed has been the main cause of wars and slavery throughout the ages and across all cultures sophisticated enough to have a hierarchy. The wealthy also benefit from the tax code. The tax code in most countries favors the wealthy by taxing income earned from work the most, while taxing investment income and gratuitous transfers less , money that accrues mostly to the wealthy.

The wealthy have significant influence over the writing of the tax code, so it is no surprise why so many parts of the tax code favor the wealthy.

Many people consider government handouts to be a form of socialism, but tax breaks and tax loopholes are, likewise, government handouts. Because the wealthy receive most of the tax breaks, it could be said that the wealthy receive most of the socialism. For instance, in the United States, the wealthy receive a unified tax credi t worth more than 4. But because the government is not collecting this money from the wealthy, then it must collect the money from someone else, usually from the lower classes, for which money has a much higher utility, since they need the money to live.

Or the government borrows the money, to be paid later, with interest. But if the wealthy have so little need for more money, then why do they want more money?

Because wealth is how the wealthy measure themselves among themselves. Thus, the wealthy want more money to increase their status, the middle class want more money so that they can live better, and the poor want more money simply to live. So, not only do the wealthy benefit by keeping more of the created wealth to themselves while sharing it less, but they also benefit from an unfair tax code that places the heaviest tax burden on income earned from work, taking money from people who need it the most so that more can be given, or less taken away, from those who need it the least.

When the wealthy award themselves most of the wealth and do not pay their fair share of taxes, then the lower classes will have less money. Conservatives want to keep wages low, worker benefits few or nonexistent, and they want to reduce regulations so that they do not have to spend money protecting the environment or public health. As Karl Marx noted, capitalists want to exploit workers by transferring as much of the wealth created by those workers to themselves as possible while sharing as little as possible with their workers.

This is why slave owners became rich. They reaped the wealth created by their slaves by keeping most of the wealth while paying the slaves as little as possible, barely enough for most of them to survive. Another way to show that the wealthy are receiving most of the socialism is to see how the wealth is distributed in communist countries, supposedly the ultimate socialist societies, if socialism is considered the unfair distribution of wealth.

In communist countries, it is the poor who should be benefiting from the system, but instead, they are toiling to enrich communist leaders. It has been reported periodically that Vladimir Putin is the richest man in the world, so, in Russia at least, it is Putin and his cronies who are benefiting from communism while it is the poor who are creating the wealth that the leaders transfer to themselves. Serfdom disguised! Communist leaders are benefiting so much from this arrangement that they suppress free speech and threaten the world with nuclear destruction to maintain their status quo.

Karl Marx said that capitalists exploit their workers for their own benefit; in communist countries, it is the communist leaders who exploit the people. Karl Marx was correct when he said that capitalists exploit their workers for their own benefit, but what Marx did not understand, I think, is that the capitalists were exploiting their workers, not because they were capitalists, but because they were people, and people have been doing this since the beginning of history, when writing and records were starting to be used by the elites to organize society.

That the elite has always exploited the people has been prevalent throughout history and across all cultures, whether the economic system was serfdom, feudalism, slaveholding societies, communism, socialism, and yes, even capitalism.

Greed is simply a biological characteristic of human beings. It is the reason why people work in their own interest. Greed is the invisible hand! We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics.

Table of Contents Expand. What is Capitalism? Private Property. Factors of Production. Accumulation of Capital. Problems With Capitalism. The Bottom Line. Key Takeaways Capitalism is a system of economic production whereby business owners capitalists acquire the means of production capital and hire workers who get paid for their labor. Capitalism is defined by private property rights, capital accumulation and re-investment, free markets, and competition. While capitalism has certainly helped propel innovation and prosperity in modern society, it can also create inequalities and contribute to market failures.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Economics What are the main differences between a mixed economic system and pure capitalism?

Socialist Economies: What's The Difference? Economics Main Characteristics of Capitalist Economies. Partner Links. Related Terms Marxism: Theory, Effects, and Examples Marxism is a set of social, political, and economic theories created and espoused by Karl Marx that became a prominent school of socialist thought.

Capitalism Capitalism is an economic system whereby monetary goods are owned by individuals or companies. Here, private individuals are unrestrained in determining where to invest, what to produce, and at which prices to exchange goods and services.

What Is an Administered Price? An administered price is the price of a good or service as dictated by a government, as opposed to market forces. The ability to pay would then become a key determinant in who received these services, an outcome that few in American society would consider to be acceptable. In comparing economic systems, it can be helpful to think of a continuum with communism at one end and pure capitalism at the other, as in the following Economic Systems Figure.

As you move from left to right, the amount of government control over business diminishes. So, too, does the level of social services, such as health care, child-care services, social security, and unemployment benefits.

Moving from left to right, taxes are correspondingly lower as well. A mixed market economy relies on both markets and the government to allocate resources. In practice, most economies are mixed, with a leaning towards either free market or socialistic principles, rather than being purely one or the other. Some previously communist economies, such as those of Eastern Europe and China, are becoming more mixed as they adopt more capitalistic characteristics and convert businesses previously owned by the government to private ownership through a process called privatization.

By contrast, Venezuela is a country that has moved increasingly towards socialism, taking control of industries such as oil and media through a process called nationalization. Like most countries, Canada features a mixed market system much like its neighbor to the south: though the Canadian and U.

The Canadian economy also has some characteristics of a socialist system, such as providing social security retirement benefits to retired workers or free health care to its population. The free market system was espoused by Adam Smith in his book The Wealth of Nations , published in According to Smith, competition alone would ensure that consumers received the best products at the best prices.

In the kind of competition he assumed, a seller who tries to charge more for his product than other sellers would not be able to find any buyers. Almost immediately, however, a tension developed among free market theorists between the principle of laissez-faire —leaving things alone—and government intervention. To appreciate how businesses operate, we must first get an idea of how prices are set in competitive markets. Under a mixed economy, such as we have in Canada, businesses make decisions about which goods to produce or services to offer and how they are priced.

Because there are many businesses making goods or providing services, customers can choose among a wide array of products. The competition for sales among businesses is a vital part of our economic system. Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition exists when there are many consumers buying a standardized product from numerous small businesses.

Because no seller is big enough or influential enough to affect price, sellers and buyers accept the going price. For example, when a commercial fisher brings his fish to the local market, he has little control over the price he gets and must accept the going market price. To appreciate how perfect competition works, we need to understand how buyers and sellers interact in a market to set prices.

In a market characterized by perfect competition, price is determined through the mechanisms of supply and demand. Prices are influenced both by the supply of products from sellers and by the demand for products by buyers. Demand is the quantity of a product that buyers are willing to purchase at various prices. The quantity of a product that people are willing to buy depends on its price. Generally speaking, we find products more attractive at lower prices, and we buy more at lower prices because our income goes further.

Using this logic, we can construct a demand curve that shows the quantity of a product that will be demanded at different prices. Supply is the quantity of a product that sellers are willing to sell at various prices. The quantity of a product that a business is willing to sell depends on its price.

Businesses are more willing to sell a product when the price rises and less willing to sell it when prices fall. Again, this fact makes sense: businesses are set up to make profits, and there are larger profits to be made when prices are high. Now we can construct a supply curve that shows the quantity of apples that farmers would be willing to sell at different prices, regardless of demand. We can now see how the market mechanism works under perfect competition.

The point at which the two curves intersect is the equilibrium price. As a result, his profits will go down. With profit being the motive, there is no incentive to drop the price.

What have you learned in this discussion? Without outside influences, markets in an environment of perfect competition will arrive at an equilibrium point at which both buyers and sellers are satisfied. But you must be aware that this is a very simplistic example. Things are much more complex in the real world.

For one thing, markets rarely operate without outside influences. Circumstances also have a habit of changing. What would happen, for example, if incomes rose and buyers were willing to pay more for apples? The demand curve would change, resulting in an increase in equilibrium price. This outcome makes intuitive sense: as demand increases, prices will go up.

What would happen if apple crops were larger than expected because of favorable weather conditions? Farmers might be willing to sell apples at lower prices rather than letting part of the crop spoil. If so, the supply curve would shift, resulting in another change in equilibrium price: the increase in supply would bring down prices.

As mentioned previously, economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. In monopolistic competition , we still have many sellers as we had under perfect competition. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name.

Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch at least temporarily. How is product differentiation accomplished? At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from an- other—and better than it.

Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor.