What is Capitalism? Capitalism Explained | Pros and Cons of Capitalism? Who is Adam Smith?

Capitalism EXPLAINED – How Capitalism Works ? 

Transcript:

 Do you have any idea how capitalism has completely changed the world?  Then, let’s find out how it’s a part of our everyday life.  Hey guys, welcome back to another informative video by our channel.  Today, we will be showing you how capitalism works.  But before we make you a more knowledgeable person, you know you have to do it.

 So subscribe to our Economics YouTube channel and hit the bell icon, as I’m sure you don’t want to miss out on any of our videos.  Now let’s get to it.  Why not start with the basics?  Let’s start with what the term capitalism actually stands for.  It’s not as complicated as it sounds.  Capitalism can be described as the business system in which a country’s trade, industry,  and profits are managed by private corporations instead of by people whose time and labor powers  those companies. The United States and many other countries around the world are termed

 capitalist countries. But why? Younger Americans particularly are doubting long-held assumptions about the way our economy operates.  With climate change being picturized as a grave threat to our future,  millions living below the poverty line,  the economic and social blows of the coronavirus pandemic,  and unemployment wave still reflecting,  and the richest 1% banking ever more wealth,  Gen Z and millennials say they’ve grown frequently disillusioned with capitalism.

 But it’s necessary to examine what capitalism entails and the arguments for and against it,  so you can make your own decisions about the world you’d like to live in.  To understand how it works, we need to know where capitalism comes from.  The foundations of capitalism stretch back to the 16th century,  when the British systems of authority considerably collapsed after the Black Death.

 This virulent plague killed off up to 60% of Europe’s entire population.  A newly set class of merchants began to trade with international countries.  This newfound demand for exports wrecked local economies and began to control the overall  production and pricing of goods.  It also directed to the extent of colonialism, slavery, and imperialism.

 What added to this was the death of feudalism.  This system is often seen as confining that kept poor people connected to their master’s  land, which they worked in exchange for a place to live and military assurance.  Also it left rural British labourers with no homes and no work, which finally funnelled  them away from the countryside and into urban centers.

 These former farm workers then had to trade their labor in a newly competitive work environment  to sustain.  At the same time, the state worked in concert with the new capitalists to stabilize a maximum  wage and clamp down on beggars.  By the 18th century, England had turned into an industrial nation, and the dawn of the Industrial Revolution saw an explosion of manufacturing overtake the island.

 It is within those grimy factories and combustible textile mills that our modern idea of capitalism and the opposition to it began to thrive fully. In 1776, Scottish economist Adam Smith issued his treatise, An Inquiry into the  Nature and Causes of the Wealth of Nations, which is viewed as the bedrock upon which contemporary  capitalism stands.

 Though some of his definite ideas about the value in labor vary from those  of modern economists, Smith is often called the father of capitalism. What does it mean to be  capitalist? Individual capitalists are typically wealthy persons who have a large amount of capital  funding in the business and serve from capitalism by making elevated profits and thereby adding to  their money.

 The free market controls a capitalist country, an economic system in which both prices and generation are recorded  by corporations and private businesses in competition with one another. It puts a massive  focus on private property, economic extension, freedom of choice, and restricted government  intervention. Generally, those to the right of the political spectrum tend to be pro-capitalist.  Those to the left veer nearer to anti-capitalism.

 But how does capitalism affect ordinary people?  The impact that capitalism has on your life depends on whether you’re a worker or a boss.  For someone who has a company and hires out other workers, capitalism may make sense.  and hires out other workers, capitalism may make sense.

 The more value your company brings in,  the more resources you have to dispense among your men, which improves everyone’s standard of living.  However, it’s all based on the principle of supply and demand. And in capitalism, consumption is the boss in power. The dilemma is that many capitalist bosses aren’t exceptional at sharing the wealth.

 Hence, one of the primary critiques of capitalism is that it is a huge driver of variation, both social and economic.  Capitalism takes the belief that greed is good, which its supporters say is a positive thing.  Greed drives profits.  Profits drive discovery and product development, which means  more opportunities are available for those who can afford them.

 Its antagonists say that capitalism  is, by nature, exploitative and heads toward a fiercely divided society that tramples the  working class in favor of expanding the rich’s wallets. The Occupy Wall Street movement, for example, began as an anti-capitalist protest against  the 1% and asked why they’re permitted to become  fat and happy.  In comparison, 20% of all American kids experience poverty.

 Fact check.  In 1820, 94% of the world’s population was living in extreme poverty. Fact check. In 1820, 94% of the world’s population was living in extreme  poverty. By 2015, only 9.6% of the world’s population was living in extreme poverty.  In the past 250 years, there has been an unprecedented rise in global living standards.

 The capitalist revolution made the escape from poverty possible. It brought  about advances in technology, increasing specialization, and massive increases in productive assets.  Between 1990 and 2015 alone, 1.25 billion people around the world escaped extreme poverty,  50 million per year, and 138,000 every day.

 Why do people support capitalism?  Capitalism’s followers understand several key points that make them stand with capitalism.  The first one is that economic freedom guides political freedom,  and having a state-owned median of production can lead to central overreach and authoritarianism.  Second, they see it as the only reasonable way to organize a society, declaring that alternatives like socialism, communism, or anarchism are only meant for failure.

 As former British Prime Minister Margaret Thatcher, whose pro-capitalism position is  said to have destroyed the British working class, once put it. There is no alternative.  When charged to examine capitalism’s negative impact on the environment and our depleting  natural resources, many say that those sources will only become more relevant and make more  capital as they continue to wane.

 They also consider that the competition between companies  helps consumers by making products more affordable. Capitalism’s  dog-eat-dog atmosphere supports people to work harder to achieve their dreams. They’re likely  to bounce anti-capitalist concerns about biases and oppression by saying that rich people are rich  because they’re more productive than their poorer equivalents.

 Arranging the central point on the  individual rather than the cooperative is a classic symbol of capitalism  and is at the core of the pull-yourself-up-by-your-bootstraps narrative that capitalists find convincing.  Capitalism, meanwhile, is in the best products for commencing prices  because consumers will spend more for what they want the most.

 Companies render what consumers want at the highest prices they’ll pay, and prices  are kept low by competing among businesses. They make their goods as efficiently as possible to  maximize profit. Most important for economic growth is capitalism’s inherent reward for  innovation, consisting of new products and more dynamic production methods.

 However, it does have  some disadvantages too.  To keep society functioning,  capitalism demands management policies that value the family unit.  Notwithstanding the idea of a level playing field,  capitalism does not promote equality of opportunity.  Those away from good nutrition, support, and learning  may never make it to the active field.

 Society will never profit from  their valuable skills. In the brief term, inequality may seem to be in the best concern  of capitalism’s winners. For example, they will distribute to elected officials who promote laws  that benefit their industries.

 They could send their kids to private schools while promoting lower taxes  for public schools.  One of the most notable examples of capitalism is the United States. It absorbs its ranking  on nine variables, including a lack of corruption, moderate debt levels, and security of property  rights.  Well, this is what capitalism is, how it works, and how it impacts people.  I hope you found this video interesting.

 If yes, give it a big thumbs up, smash that red subscribe button, and stay tuned for more videos that will satisfy your hunger for economic knowledge.

Capitalism is good. Let me explain

Transcript:

 Capitalism will kill us all. That is if you trust Greta Thunberg. Which maybe you should not.  Free markets will save us all. If you trust Robert F. Kennedy Jr. Which maybe you should not.  Maybe we should talk about what capitalism and free markets are.  Will they kill us or save us? That’s what we’ll talk about today.

 Before we talk about capitalism and markets and stuff, we need to talk about money. I today.  Before we talk about capitalism and markets and stuff, we need to talk about money.  I don’t mean my money, though while we’re at it, check out my Patreon, I mean money  in general.  What do we even need money for?  Suppose you have an apple, but you’d rather have an egg.

 You ask your friend Sue, the one with the chickens, and trade an egg for an apple.  Okay, but what if Sue doesn’t want an apple, she’d rather have a banana.  No problem, you ask your friend Joe with the bananas if he will trade your apple for a  banana.  Then you trade the banana for Sue’s egg.  Okay, but what if Joe doesn’t want an apple either, he’d rather  have new shoelaces.

 No problem, you ask your friend Mary if she’ll take an apple for shoelaces,  give the shoelaces to Joe, take the banana, give the banana to Sue, and sure enough, you  have your egg. It works, but honestly, that seems a little cumbersome. How about we instead  trade something that everyone would accept, because they can exchange  it for something else later.  Like gold maybe.  I give some gold to Sue and she gives me an egg.

 Then she can take the gold and give it to Joe and get her a banana.  That’s much easier.  Hooray, we just invented commodity money.  Alright, but now imagine you don’t want to buy an egg, but an entire chicken farm. That would be a lot of gold you’d have to wheel around.

 So how about we instead, I don’t know, print the face of  a king onto a piece of gold and say it stands for an entire cart of gold? Come to think of it,  why bother with gold? Let’s just  print it on a piece of paper. The paper itself doesn’t have much of a value, but if we all agree  on what it stands for, we can use it for trade. Hooray, we just invented token money.

 That sounds  great, but the problem is, if a lot of vendors just refuse to accept the money, it stops working.  Problem is, if a lot of vendors just refuse to accept the money, it stops working. So in reality, token money is backed up by a king or a government, which enforces that  vendors accept the money as payment.

 It’s then called fiat money.  Almost all money we use today is fiat money except cryptocurrencies, but that’s another  story.  Fiat money is fascinating because it’s ultimately still based on trust.  If all you guys watching this video freak out, exchange your entire US dollars for Euro,  and tell your friends to do the same, the US dollar would collapse.

 So don’t do it.  Several economists have argued that any community of sufficiently intelligent traders will eventually introduce a type of token money because it’s the most efficient way to distribute resources.  This idea was maybe first clearly formulated by the Scottish economist Adam Smith.  All right, so we have money, but our busy traders still have a problem.

 Suppose you have a lot of apples and not sufficiently many people  to buy them. Your amazing apples rot away. What a shame. You would like to make apple juice from  them, but you can’t afford a juice press, so your breakthrough innovation doesn’t come into being.  That sucks. However, your friend Sue has been getting really rich with all her chickens.

 So rich, in fact, she’s sitting on a big pile of money that she doesn’t know what to do with.  Sue sees your problem and offers you a deal.  She gives you some of her money so that you can buy your juice press.  You just have to agree that if you get rich with your juice press, you give her the money back plus  something on top. That money which Sue gives to you is your capital.

 And such was born the  capitalist. The capitalist is a personal institution who provides capital to those  who want to launch a new business. Someone who’s able and willing to take the risk that this capital will never  have a return on investment.  Today, we grow up with money and banks and all that, and we tend to take them for granted.

 And while money lending and a basic notion of financial debt date back thousands of years,  capitalism and all the elaborate financial instruments that come with it is a surprisingly  recent innovation.  It didn’t really take off until the industrial revolution 150 years ago and it’s dramatically  changed the world.

 Scientists tend to associate the stunning societal progress we’ve seen since then  to science and technology.  But I think that’s having it backwards.  The driver of all this progress was the capitalist system that allowed an efficient allocation  of resources.  By resources, I don’t just mean raw materials, but also goods and human resources.

 Capitalism is a system that distributes these resources without anyone needing to have an  overview, just by interactions between traders.  It’s pure genius if you think about it. And that’s why science took off, not the  other way around.

 Remember that story about how the Scottish physician Alexander Fleming  supposedly accidentally discovered penicillin in 1928 and saved the lives of countless wounded soldiers in World War II?  Yeah, well, that isn’t really what happened. First of all, scientists had discovered that  the fungus penicillin inhibits the growth of bacteria decades earlier.

 It just wasn’t widely  known. The British psychologist Burden Sanderson, for example, observed this in 1870 and wrote a book about it.  There are also several other written documentations from other people around that time who had studied the effects of fungi on bacteria.  Fleming’s contribution was that he realized the fungus was shedding a particular substance, which he called penicillin.

 But he pretty much left it  at naming the stuff. It wasn’t until ten years later that a group at the University of Oxford  set out to find a way to grow the fungus and extract penicillin in large quantities. They  then conducted medical trials and once they were sure penicillin was both safe and effective, their method  was scaled up by the pharmaceutical industry.

 Two members of the Oxford group later shared  the Nobel Prize with Fleming.  So what saved all those many lives wasn’t just Fleming’s observation in a petri dish.  The game changer was producing the stuff in large quantities and bringing it where it was needed.  Innovation and industrialization ultimately going back to capitalism.  That’s what saved all those people.

 Capitalism got a pretty bad rap when Marx claimed that it’s just about grabbing hold of the means of production and exploiting the working class.  means of production and exploiting the working class. Of course there was an element of truth to his fears, because some things went badly  wrong during the industrial revolution.

 But that’s another story.  For today, we just need to know that capitalism, like fiat money, requires a governing institution.  That’s because someone must be there to enforce contracts should the need arise.  That and a few other things as we’ll see in a moment.  There are many different ways to govern a capitalist system and they go by different  names like welfare capitalism or laissez-faire capitalism or state capitalism.

 Now one can debate how well the actions of certain governments reflect  the interests of their electorate if they were elected in the first place, but that’s another  story. Even so, capitalism has been enormously successful in unlocking societal progress,  and the nations who still don’t use it, such as North Korea, Cuba and Laos, are places you don’t want to live.

 We’ve seen that capitalism is a system that combines markets with governing rules to  efficiently distribute resources. This distribution of resources works best if everyone can put  forward their offers freely and customers can pick what they want. This is known as a free market  and it optimizes the distribution of resources by competition.

 Free markets are a beautiful example of decentralized self-organization,  an invisible hand, as Adam Smith put it.  The way it works in a nutshell is that everyone can trade around  until they’ve got what they think is the best combination of  goods, services and financial assets.

 If someone doesn’t use resources as efficiently as possible,  some competitor can do it better and beat them off the market. This idea also goes back to Adam  Smith, but later blossomed into an entire discipline now known as microeconomics.  Microeconomics is all about how agents, that could be people or corporations or institutions,  trade and how that trade distributes resources where they are most needed.

 To be fair, microeconomics has some shortcomings when it comes to explaining how we trade in reality,  but that’s another story.  By and large, microeconomics works fine and several Nobel Prizes have been awarded for it.  One of the most important insights to come out of this research area  is that free markets only work to everyone’s benefit if they’re set up properly.

 Keep in mind that capitalism isn’t just a free market.  It’s a free  market plus the governing framework to run it. Free markets do not, for example, work to everyone’s  favor if some people have insider information, which gives them a trading advantage. This is why  we have laws against that.

 Free markets also work badly if one single company dominates the market sector  and can use their power to force customers to stick with them. This is why we have laws against  that. And free markets also don’t automatically account for externalities, such as environmental  pollution. An externality is generally any consequence of trade that doesn’t  directly affect the trading parties.

 They can be both good and bad, but it’s the bad ones that are  the problem. Suppose there’s a river going by your house that everyone is free to use. One day a  clothing company puts up a factory and dumps their toxic waste into the river. Or the fish die and no one dares  swimming in the river anymore. This is clearly not an optimal use of resources, you might  say.

 Why didn’t Smith’s invisible hand prevent it?  The reason market forces didn’t prevent it is that the water was free to use. The market  didn’t know it had any value, so pollution couldn’t reduce its  value. There are several ways to deal with problems like this. One is to just pass laws that  forbid certain actions and punish those who disobey.

 Or you can put a tax on the pollution so  that at least the government has money to clear up the mess. Or you can put a price on using the  water. There are pros and cons to all of those, but that’s a different story. The story for today  is that we have known that externalities can lead to market failures since the middle of the last  century. Carbon dioxide emissions are such an externality.

 For the market to optimize the use of fossil fuel resources, we should have put a price  on releasing carbon dioxide into the atmosphere.  We did not.  And that’s why we’re now in deep shit.  So yes, our current capitalist systems do have a problem with environmental protection.  But the reason isn’t that there’s something  wrong with capitalism per se. It’s that we didn’t set it up correctly in the first place.

 Basically, the origin of the problem is that no one paid attention to economists.  And unfortunately, we still don’t pay enough attention to economists. The current situation  is that companies who voluntarily produce  environmentally friendly goods put themselves at a competitive disadvantage because other companies  exploit the environment at zero cost. This moves the burden onto the consumer.

 If you want to buy  a climate-friendly product today, you face extra costs, because fossil fuels are cheap and  getting to net zero is not.  This makes no economic sense, and it’ll ultimately not work.  It’s completely upside down.  Products whose production causes damage to the environment, which then requires adaption  and mitigation, should be more expensive, not less expensive.

 This is why economists have  argued for decades that we need to put a price on carbon, and it’s why several countries have now  introduced carbon taxes or use a carbon trade system. To calculate the cost of carbon emissions,  one basically needs to evaluate the damage the emissions would cause in the future and then put a price on them.

 It’s called the social cost of carbon.  There’s a long debate about just exactly how to calculate this, but that’s another story.  At the moment, carbon taxes and trading schemes only apply to about a quarter of all emissions and the price of carbon is  almost certainly still too low, but it’s a step in the right direction.

 In summary, capitalism has been incredibly successful in advancing society. To the extent  that it has caused us problems, it’s because we haven’t properly used it. The solution  is not to abandon it, but to make sure it works to our advantage.  There’s no simple way to do that and everyone who claims that the solution is to either  discard capitalism or blindly trust it didn’t understand the problem in the first place.

 Microeconomics and financial modeling is completely fascinating.  It’s basically the mathematics that rules the world. If you want  to learn more about how it works, our sponsor Brilliant can help you with this. Brilliant is  a fresh and new approach to learning with interactive visualizations and follow-up questions.

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 Thanks for watching, see you next week.