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Capitalism is a term to define the system of economic individualism, based on the assumption that people\'s pursuit of self-interest and the right to own private property are legally legitimate and morally defensible. In this case the state exists to protect individual rights. Restricted by law and custom to a certain extend, people as individuals are free to decide where to invest, what to produce or sell, and what prices to charge. Their efforts in terms of assets, sales and profits, or the number of customers, employees, and investors, or whether they operate in local, regional, national, or international markets, are not limited in any natural way.

In the nineteenth century even capitalism\'s defenders did not understand its nature. It was believed that the perfect economic system was that of «pure» competition, where all firms are small scale, products in each industry are homogeneous, buyers are perfectly informed about what is for sale and at what price, and all sellers have to «take» the market price, being unable to charge a higher one for their goods.

In practice, though, there is no such thing as pure competition. Under real competition within capitalism companies are rivals for sales and profits. This leads them to introduce cost-cutting technologies, to innovate in product design and performance, and to use packaging to make products more attractive for customers. Companies also offer assurances of security to imperfectly informed consumers, such as money-back guarantees or product warranties. They also build customer loyalty through investing in their brand names and reputations.

If a company is successful in adopting these techniques of rivalry, it is growing, and eventually may come to dominate its industry, though usually only for a few years until other firms find better ways of satisfying consumer demands. Neither rivalry nor product differentiation occurs under perfect competition, but they happen constantly under real flesh-and-blood capitalism.

These rivalry and product differentiation account for the major benefits of capitalism, where luxuries are quickly transformed into necessities. Quite recently, microwave ovens, videocassette recorders, answering machines, personal computers, sophisticated cameras, and compact disc players were available to only a few. Now lots of people can afford those.