If you want a sack of potatoes, you might go to a farmer and buy one. The price you pay for the potatoes depends on two things. The first is “supply”. How many potatoes has the farmer got to sell? The second is “demand”. How much do you and other potato buyers want the potatoes? If your demand for the potatoes is high (you really must have them), then you would be willing to pay more for the potatoes. If there is a limited number of potatoes, you might have to pay more than another person to get them. However, if the farmer has a lot of potatoes to sell, he may have to sell them at a lower price, especially if no one else is interested in them.



There are a number of things that could affect the supply of and the demand for potatoes. The poor weather might destroy crops of potatoes. A famous chef might sing the praises of fish and chips on television causing a surge in demand for potatoes. A new plough might make it easier to harvest potatoes, reducing how much it costs to produce them. Potatoes might be linked with a health scare, causing a fall (or “slump”) in demand. It is impossible to predict these changes, but as the balance of supply and demand changes, so the price of the goods will change. This balance of supply and demand is called a market.

There are other important factors that affect the market. One of these is competition. Is there a farmer nearby who also sells potatoes? If so, one of the farmers might decide to sell his potatoes at a cheaper price, so that the customers come to him. Another important factor is a profit motive. If the farmer wants to make a profit, he needs to sell the potatoes for more than it cost him to grow them. If he thinks he is not making enough profit from growing potatoes, he might change his mind and grow wheat instead—this will affect both the potato and the wheat markets!

This is how markets work—and it is at the heart of the economic system called capitalism. In a capitalist economy, private individuals and privately owned businesses produce and exchange goods and services, taking into account changing circumstances. Supporters of capitalism believe that all people can gain from a free run market.


The father of capitalism is the Scottish philosopher Adam Smith. In 1776 he published An Inquiry into the Nature and Causes of the Wealth of Nations. In the book, Smith said that society’s interests are best met by the maximum production of the things that people want. Smith believed that the combination of self-interest, private property, and competition among sellers in markets produces the well-being of society. In his book, Smith wrote about people being guided by an “an invisible hand”. By this, he meant that the result of everybody looking after themselves was that everybody benefits. If society wants potatoes, individuals will buy more potatoes, increasing demand. This will put up the price of potatoes and attract more farmers to grow potatoes. The supply of potatoes will increase and the price will drop. Society has what it wants—more potatoes.

Capitalism existed long before Adam Smith. It developed over a long period of time in Western Europe. Its history begins with the impact of the Black Death. Before the Black Death, European society was feudal. The feudal system meant that the nobility provided military service to the monarch in return for land. Serfs, or peasants, were forced to work on the nobles’ land to provide food for themselves. After the Black Death, which killed nearly a third of the population, there were not enough serfs left to run villages successfully. Many of them began to hire out their services, especially skilled craftsmen such as blacksmiths or carpenters, across villages. It meant that the market system began to replace the feudal system and that people were now free to concentrate on producing and selling their own particular goods and services rather than sharing in the tasks of the village.


During the 19th century, some problems with capitalism could be seen. A German philosopher called Karl Marx wrote a pamphlet called The Communist Manifesto in 1848. He saw the terrible living conditions of many of the working people. Men, women, and children worked long hours in dangerous factories, for which they were poorly paid. By contrast, the factory owners (or “capitalists”), who employed the workers, made vast profits. Marx thought that the workers would unite to overthrow the capitalists and establish a communist society.


In the 1930s the Great Depression was another problem of capitalism. The Great Depression was an economic crisis that caused high unemployment throughout capitalist countries. Marx predicted that capitalist countries would eventually collapse in the revolution. However, most governments made reforms to prevent this.

A British economist called John Maynard Keynes wrote The General Theory of Employment, Interest, and Money in 1936. He said that Adam Smith’s “invisible hand” was not enough to create a stable economy and a happy society. According to Keynes, governments should get involved and spend money when private individuals and companies are unable to.


No country in the world has a purely capitalist economy—that is, an economy where all businesses are owned privately. In every country, the government owns some businesses. All governments in the world own their armed forces, as well as security services. In some countries, airlines are owned by governments. Some health care is provided by governments. Education is another product provided by many countries. These services are funded by raising taxes from people. They are generally not run to make a profit. On the other hand, privately owned businesses always try to make a profit.


According to capitalists, anything that expands the size of a market will improve the benefits to society. Since the end of World War II, the world’s governments have been attempting to reduce taxes (called tariffs) on trade between countries. In 1994 the World Trade Organization was created to ensure this happens. However, there are problems caused by the “opening up” of trade to everyone.

For instance, farmers in some countries cannot compete and produce their goods at the same low prices as others. Previously, when there was a tax on produce coming from other countries, it increased the price of that product. In this way, local farmers made a profit. Once the tax is removed it is difficult for local farmers to make a living.

Today, many businesses have their products made in other countries. They pay lower prices to employ labour in poorer countries. Some people believe this is exploitation of the poorer nation by the large business. The spread of globalization has caused enormous protests around the world.