Tiffany Cranston, age 16, of Nashua, N.H., for her question:
HOW DOES CAPITALISM WORK?
Capitalism is the economic system in which private individuals and business companies carry on the production and exchange of goods and services through a complex network of prices and markets. Although it is rooted in antiquity, capitalism is primarily European in origin.
During its development in the 19th century, capitalism has had certain key characteristics:
Basic production facilities are privately owned. This includes land and capital. Capital in this sense means the buildings, machinery and other equipment used to produce goods and services that are ultimately consumed.
Economic activity is organized and coordinated through the interaction of buyers and sellers (or producers) in markets.
Owners of land and capital as well as the workers they employ are free to pursue their own self interests in seeking maximum gain from the use of their resources and labor in production.
Under this system a minimum of government supervision is required. If competition is present, economic activity will be self regulating. This 19th century view of government's role in the capitalist system has been significantly modified by ideas and events of the 20th century.
Adam Smith, a Scottish philosopher, is considered by many to be the originator of contemporary capitalism. He outlined the essential economic principles in 1776 with his "Wealth of Nations." He sought to show how it was possible to pursue private gain in ways that would further not dust the interests of the individual but those of society as a whole.
Smith said that the combination of self interest, private property and competition among sellers in markets will lead producers "as by an invisible hand" to an end that they did not intend, namely, the well being of society.
The modern corporation with its immense financial power began to emerge as the dominant form of business organization in the late 19th century. Then there developed a tendency toward combines, monopolies or trusts that could control entire industries. Eventually, the public outcry against such practices was great enough in the United States to lead Congress to pass anti trust legislation.
Legislation attempted to make the pursuit of monopoly by business illegal, using the power of the state to force at least a bare minimum of competition in industry and commerce. The anti trust laws never succeeded in restoring industry the competition of many small businesses that Adam Smith had envisaged, but it did impede the worst tendencies toward creating monopolies and restraining trade.
Despite difficulties, capitalism continued to expand and prosper almost without limit throughout the 19th century. It was successful, the economists say, because it demonstrated an enormous ability to create new wealth and to raise the real standard of living for nearly everyone touched by it. As the 19th century closed, capitalism was the world's dominant economic and social system.