Trading goods and services in exchange for money or products are among the earliest form of conducting business. Humans have relied on this exchange for ages. In all of humanity’s history, most businesses have been owned privately, and for very good reason, as interference by the authorities only makes it complicated for both seller and buyer. This is a widely accepted idea, therefore, the capitalist economy is the dominant economy in the world.
What is a Capitalist Economy?
An economy in which individuals and private businesses both control and regulate important factors of production like goods, labor, resources, and entrepreneurship is known as a capitalist economy. In a truly capitalist economy, the market is governed by the demand and supply of products or services. Unsurprisingly, earning profit is the driving force in a capitalist economy. Moreover, the government rarely interferes in the free market. The history of the capitalist economy can be traced back to the 15th century when agrarian capitalism and mercantilism were introduced. The presently accepted definition of the capitalist economy was developed by two Scottish economists, David Hume and Adam Smith, in the 18th century. For an economy to be considered a capitalist economy, these features must be followed:
- Any individual is legally allowed to establish their business and provide goods and services.
- Consumer sovereignty, i.e., consumers are free to choose one product or service over the other.
- Government is not to interfere in private business matters, except to protect private property.
- The financial system of a nation (including banks) must be developed to cater to private business and individual needs in the form of loans.
- As mentioned previously, increasing profits must be the ruling factor in businesses.
- The distribution of goods and services should depend on demand.
- The process of hiring and firing employees must be easy.
- Tariffs should be minimal to encourage international trade.
- Any individual can own private property and possessions. Upon the death of the owner, these are to be passed on to their successor.
Examples of Capitalist Economies
While capitalism is the dominant economic choice for the majority of the world, each year countries are ranked based on the economic freedom index. It is a measure of opportunities provided to businesses for a free market by a nation. These are the top ten capitalist economies of 2021.
One of the smallest island countries on the list also happens to be top ranking in terms of economic freedom. The economic freedom index of Singapore is 89.7, and an average population of 5.6 million people. A huge part of this economic success was introducing public housing, especially for labor, as in the 1960s strikes by workers were a common scene. By eliminating the need to buy a house, it resolved most of the conflicts between the workers and employers. Moreover, it is one of the most expensive countries in the world. The British decided to colonize Singapore in 1819, solely because of its location, i.e., it connects Asia to Europe. During the British rule in Singapore, Britishers introduced new manufacturing processes along with better infrastructure. In 1965, Singapore became independent; however, unlike other nations that largely cut ties with the former ruling nation, Singapore decided to maintain good relations with Britain. This allowed Singapore to conduct international business. Interestingly, this step propelled Singapore into becoming one of the most successful economic countries in the world. As multinational companies were established in Singapore, employment boomed. By sticking to conventional capitalism, Singapore privatized telecommunications. All of these efforts allowed Singapore to rise from an $80 billion economy to a country with over $300 billion GDP within two decades.
GDP: USD 340 Billion
2. New Zealand
Presently, New Zealand is considered one of the most successful nations in the world. It consistently ranks in the top ten countries when it comes to economic freedom, and it is always used as an example by economists of how business should be conducted within a country. Interestingly, it wasn’t always the case. While New Zealand has always been a wealthy nation because of the colonization, it was seeing a rapid downfall after its legal independence in 1947. The government decided to intervene in the production factors, as a result, everything from manufacturing firms to the hotel industry was controlled by the government. In addition to that, a maximum wage limit was set in place, along with taxes that ranged anywhere from 40 to 70 percent. Operating business in New Zealand was equally stressful, as there was a 48% profit tax, and if a foreign company wanted to conduct business in New Zealand, it needed to pass various regulations. All of this combined resulted in businesses fleeing New Zealand, enraged youth, and the economy falling down rapidly. All of this turned around with Rogernomics. When Jim Bolger was elected as the president of New Zealand in 1984, the finance minister, Roger Douglas, took control of the regulations. As soon as he stepped into power, strict regulations were removed right away from each sector of the market. Moreover, public sectors that were contributing minimally were replaced by the private sector. This freedom of business made New Zealand an example of a perfect business model.
GDP: USD 210 Billion
Australia is another country that is considered one of the best nations to conduct business in because of its economic freedom. With a score of 82.4, it sits in third place in the economic freedom index. Unlike New Zealand, it was not a prosperous nation because it was used as a prison by the United Kingdom. The turning point in Australian history came in the 18th century when John Macarthur, an English soldier, arrived in Sydney. He saw the opportunity to cultivate wool from sheep in Australia and sell it to other countries. This resulted in a dispute between Macarthur and Governor Philip. The wool business carried on in Australia, and ironically, the United Kingdom became their largest buyer of wool during the second world war. Although Australia is still the largest producer of wool, its economic success is based on mining technology. During the mid-1900s, Australia started investing in mining technology. This made Australia the top-ranking country in terms of advancements in mining, resulting in other nations giving mining contracts to Australia. Additionally, it is also one of the largest suppliers of liquid petroleum gas to Asian countries, making it a prosperous capitalist economy.
GDP: USD 1.3 Trillion
One of the main reasons why Switzerland is one of the most economically free countries is because of its neutrality toward global affairs. Switzerland was among the few countries that didn’t participate in the Second World War. This meant Switzerland didn’t have to fix the damages caused by such events like other European countries. By not engaging in wars, it represented itself as a trustworthy nation. By not having to exhaust resources on warfare, Switzerland was able to invest these resources into building a better political system. It is the only country in the world that doesn’t have a ruling figure like a prime minister or president because it is a decentralized country. Instead, decisions are made by a team of seven people. Moreover, it continues to change its constitution every six months to better help its people. Conducting business is also hassle-free in Switzerland, thanks to the low tax rate. Interestingly, it is among the leading countries with 13 top-ranking biotechnology and engineering companies. Tourism is another important aspect of Switzerland’s economy, as the country’s reputation for being a luxury escape, along with its delightful chocolates, made it the go-to choice for vacation. Both tourism and chocolate production is privately owned industries in Switzerland. It ranks number 4 on the economic freedom scale, with an index of 81.9.
GDP: USD 752 Billion
For a long time, Ireland was under British rule; however, it became independent in 1921. As Britain left the country, the government decided to cut the ties of the trading bridge not only with Britain but with the entire world as well. While this meant Ireland was not participating in the Second World War, it was also not conducting international business. A huge downside to this decision was that Ireland was not able to purchase the material required to build factories or infrastructure in general. Seeing the dire situation, the government decided to conduct international business. While the idea of low corporate tax attracted multinational corporations, the income tax was raised up to 60 percent. This meant the companies that did establish their offices in Ireland were not producing anything, and local businesses were disappearing. However, the worst part was that youth with the necessary skills for the advancement of the country were migrating to the United States. Shockingly, nearly half of the Irish population left the country in a span of 40 years. To overcome this crisis, the government modernized itself during the 1990s. Taxes were lowered and establishing a business in Ireland was made easier. This resulted in significant growth in Ireland’s economy, so much so that it has been persistently ranking among the top wealthy nations despite its financial crisis in the early 2000s.
GDP: USD 425 Billion
Despite its convoluted history and bizarre trade recognition laws of China to state Taiwan as its part, Taiwan is a booming capitalist economy. Taiwan was able to build itself as a strong capitalist economy because of its huge foreign currency reserves. As the republic group left communist China in the early 1900s, intellectual people decided to pack gold, along with huge sums of foreign currency, to help them in the future. This allowed the nation to keep prices down, even during inflation in the entire world. Additionally, Taiwan also became the second technological hub after Japan. With an index of 78.6 economic freedom, Taiwan ranks 6th among the top capitalist economies in the world.
GDP: USD 660 Billion
7. The United Kingdom
It doesn’t come as a surprise to see that capitalism is booming in the United Kingdom, as it was the beginning point of the industrial revolution and the largest ruling power in the 19th century. The United Kingdom had colonized many nations, which allowed it to become prosperous, as most of the wealth was stolen from colonized nations. Finally, after the Second World War, its rule over the colonies was lost, resulting in a plummeting economy. As importing of resources from its colonies suddenly stopped. Additionally, the nationalization of the businesses meant the country was forced to remain in the economic pits until the 1980s. This is when the strict regulations for private businesses were lifted and the economy started rising. The capitalist approach enabled the United Kingdom to achieve an economic freedom index of 78.4.
GDP: USD 2.7 Trillion
Estonia can be summed up with one word, digitization. It is among the few nations that provide a majority of public services online, which means that privatized internet providers and cellular networks are an essential part of its economic growth. This digital capitalist economy was once a part of the Soviet Union, i.e., it was a communist nation. It became a capitalist nation in the 1990s; however, the economy was declining at the time. Toomas Hendrik Ilves became the Estonian Minister of Foreign Affairs in 1996, and it was his idea to introduce computers to the Estonian youth. Many campaigns were run to motivate the public to use computers, and by privatizing technology, computers became a part of every household by the early 2000s. Digitization, along with clever taxes, made Estonia achieve a 78.2 score on the economic freedom scale.
GDP: USD 30 Billion
Canada’s capitalist economy functions on two fundamental criteria; trade with the United States and luring immigrants. While international business is essential for any country’s economic development, Canada heavily relies on the United States for raw materials. Immigrant workers and international students are the true economic growers of Canada. The workers from other nations make up over 70% of the production workforce. As for the students, they have to pay three times the tuition fees for a similar course compared to a Canadian citizen. Another important business model for Canada is to export, particularly exporting oil and maple syrup.
GDP: USD 1.65 Trillion
In 2021, this Scandinavian country ranked tenth place with a 77.8 index in economic freedom, which is surprising, seeing that Denmark was experiencing an economic crisis in the early 20th century. Part of the reason why Denmark could achieve such exponential growth in a short duration was because of its implementation of clean energy. Relying on technology to produce energy means reaching the private sector for the production of required devices. Another reason is that Denmark follows a Nordic model for the economy, which unionizes the workforce and limits the population to be employed by the public sector to 30 percent. Interestingly, this model was introduced in 1930 in nordic countries; however, the rest of the world was unaware of this concept until the Second World War. The first step taken by the government of Denmark was to introduce social welfare as a means of saving its economy. Finally, in 1970, Denmark became a part of the European Union. Denmark also makes it easy for businesses to hire and fire employees while paying employees in-between jobs to maintain a balanced workforce. Work-life balance is also a strong aspect of Denmark’s economy. The usual sign-off time in workplaces is 4 PM and each employee enjoys a summer vacation in Denmark. This approach encourages mental peace, resulting in boosted productivity.
GDP: USD 356 Billion