CAPITALIST ECONOMY

Table of Contents:
CAPITALIST ECONOMY
CHARACTERISTICS OF CAPITAL ECONOMY
RIGHT TO PRIVATE PROPERTY
FREEDOM OF ENTERPRISE
FREEDOM OF ECONOMIC CHOICE
PROFIT MOTIVE
CONSUMER SOVEREIGNTY
COMPETITION
ABSENCE OF GOVERNMENT INTERFERENCE
HOW DO CAPITALIST ECONOMIES SOLVE THEIR ECONOMIC PROBLEMS?
DECIDING WHAT TO PRODUCE?
DECIDING HOW TO PRODUCE?
DECIDING FOR WHOM TO PRODUCE?
DECIDING ABOUT SAVINGS, CONSUMPTION AND INVESTMENTS
INTERPRETATION
MERITS OF CAPITALIST ECONOMY
DEMERITS OF CAPITALIST ECONOMY
CONCLUSIVE STATEMENT
  • An economic system in which all means of production are owned and controlled by private individuals for profit.
  • It is a predominant economic system in the modern global economy.
  • Private property is the mainstay of capitalism.
  • Profit motive is the driving force.
  • Decisions of consumers and businesses determine economic activity.
  • Government has a limited role in the management of economic affairs.
  • The United States, United Kingdom, Hong Kong, South Korea, etc. are examples of capitalist economies. However, many of them are not pure forms of capitalism, but show some features of capitalism.
  • Capitalist economy is also called free market economy or laissez-faire economy.

Following are the Characteristics of Capitalist Economy:

Right to private propertyFreedom of enterpriseFreedom of economic choiceProfit motiveConsumer sovereigntyCompetitionAbsence of government interference

Each one of these points are  explained in detail:

  • Right to private property: Means that productive factors such as land, factories, machines, etc. can be under private ownership. The owners are free to use these productive factors in any manner and bequeath it as they desire. The government may however put some restrictions for the benefit of the society in general.
  • Freedom of enterprise: each individual whether consumer, producer or resource owner is free to engage in any type of economic activity. A producer is free to set up a firm and produce goods and services of his choice.
  • Freedom of economic choice: all individuals are free to make their economic choices regarding consumption, work, production, exchange, etc.
  • Profit motive: is a driving force in a free enterprise economy and directs all economic activities. Desire for profits induces entrepreneurs to organize production so as to earn maximum profits.
  • Consumer sovereignty: consumer is the king under capitalism. Consumer sovereignty means buyers ultimately decide which goods and services will be produced and in what quantities. Therefore, producers have to produce goods and services which are preferred  by the consumers. Thus, consumers decide how the allocation of limited resources needs to be done in an economy.
  • Competition: is the most important feature of the capitalist economy. Competition brings the best among buyers and sellers resulting in efficient use of resources.
  • Absence of government interference: A purely Capitalist Economy is not centrally planned, controlled or regulated by the government. All economic decisions and activities are guided by self-interest and price mechanisms which operate automatically without any direction and control by the governmental authorities.

How do Capitalist Economies Solve Their Economic Problems? 

 A  capitalist economy has no central planning authority to decide what, how and for whom to produce. In the absence of central planning authority it’s like a miracle as to how such an economy functions? The important point to be noted is that it is consumer and profit driven. I.e, say if there is demand for clothes in a country then more clothes will be produced. Such an economy uses impersonal forces of market demand and supply and price mechanism to solve its problems.

Deciding What to Produce? : there is great competition among the producers as profit is the main motive. Businessmen compete with one another to produce those goods which give more profits. If consumers want more cars then producers will produce more cars and cause a rise in price of cars. Other costs remaining the same, a price rise in the cars would lead to profits, thus inducing producers to produce more cars . If the demand for clothes decreases, consumers buy less clothes then the  other costs remain the same, the demand for clothes will decrease and subsequently the profit would decline thus, producers would not get any incentive in producing cloth and resulting in less production of cloth. Thus, in a capitalist economy the question regarding what is to be produced is ultimately decided by the consumers who show their preferences by spending on the goods which they want.

Deciding How to Produce? : an entrepreneur would choose that technique in which the cost of production is minimum. If the labor is cheap he would employ labor-intensive techniques. On the other hand, if the labor is expensive, then the entrepreneur would go for capital-intensive techniques.

Deciding For Whom to Produce? : goods and services in a capitalist economy are produced for those who have buying capacity. The buying capacity of an individual is the summation of his individual income, spending capacity and the amount of property he owns. In short , higher the income, higher will be the buying capacity and higher will be the demand for goods in general.

Deciding About Consumption, Savings and Investment: as we know consumption and savings are done by consumers. Higher the income, higher would be the savings but savings also depend upon the prevailing interest rates, if the interest rates are higher people would be motivated to save more. Investments are done by entrepreneurs. Higher the return on capital, the greater will be the profit expectation and thus leading to greater investments in a capitalist economy. 

Interpretation: what goods are produced, by which methods they are produced, for whom they are to be produced and what provisions should be made for economic growth are decided by price mechanism or market mechanism.

Merits of Capitalist Economy:

  • Capitalism is self-regulating and works automatically through a price mechanism. There is no need of incurring costs for collecting and processing of information and for  formulating, implementing and monitoring policies.
  • The existence of private property and the driving force of profit motive result in greater efficiency and incentive to work.
  • The process of economic growth is likely to be faster under capitalism. Because the investors try to invest in only those projects which are economically feasible.
  • Resources are used in activities in which they are most productive. This results in optimum allocation of the available productive resources of the economy.
  • There is usually a high degree of operating efficiency under capitalist economies.
  • Cost of production is minimized as every producer tries to maximize his profit by employing methods of production which are cost-effective.
  • Capitalist systems offer incentives for efficient economic decisions and their implementation.
  • Consumers are benefited as competition forces producers to bring in a large variety of quality products at reasonable prices. This, along with freedom of choice, ensures maximum satisfaction to consumers.this also results in higher standard of living.
  • Capitalism offers incentives for innovation and technological progress. The country as a whole benefits through growth of business talents, development of research, etc.
  • Capitalism preserves fundamental rights such as the right to freedom and right to private property. Therefore, the participants enjoy maximum freedom and autonomy.
  • Capitalism rewards men of initiative and enterprise and punishes the imprudent and inefficient.
  • Capitalism usually functions in a democratic framework.
  • Capitalist setup encourages enterprise and risk taking and emergence of an entrepreneurial class willing to take risks.

Demerits of Capitalist Economy:

  • There is vast economic inequality and social injustice under capitalism. Inequalities reduce the aggregate economic welfare of the society as a whole and split the society into two classes namely the haves and the have nots, sowing the seeds of social unrest and class conflict.
  • Under capitalism, there is predominance of property rights over human rights.
  • Economic inequalities lead to wide differences in economic opportunities and perpetuate unfairness in the society.
  • The capitalist system ignores human welfare because the aim of capitalist economy is profit and not social welfare of the people.
  • Due to economic inequality, the pattern of demand does not represent the real needs of the society.
  • Exploitation of labor is common under capitalism. This leads to strikes and lock-outs. There is no security of employment which makes workers  more vulnerable.
  • Consumer sovereignty is a myth as consumers often become victims of exploitation. Excessive competition and profit motive work against consumer welfare.
  • There is misallocation of resources as resources will move into the production of luxury goods. Less wage goods will be produced because of lower profitability.
  • Goods will be produced on a profitable basis and not merit. For eg. less health care and education will be produced because of low profitability as compared to goods which are positively harmful to the society but have huge profits.
  • Due to unplanned production, economic instability in terms of overproduction, economic depression, unemployment, etc. is very common under capitalism. This results in lots of human misery.
  • There is enormous waste of productive resources as firms spend huge amounts of money on advertisements and sales promotion activities.
  • Capitalism leads to formation of monopolies as large firms may be able to drive out small firms by fair or foul means.
  • Excessive materialism as well as conspicuous and unethical consumption leads to environmental degradation.



Conclusive Statement:

Capitalism, often known as the capitalist economy, is an economic system in which private firms control and govern the factors of production such as capital goods, labor, natural resources, and entrepreneurship. Having understood the characteristics, merits and demerits of Capitalist Economy we can conclude that Capitalist Economy in spite of not being a centrally planned economy uses the demand and supply mechanism to solve the economic problems and though profit oriented but since consumer is the king , ultimately the goods and services are produced by a capitalist economy are the one in which the community as a whole would be benefited.

Thanks for reading this blog, hope you found this  informative. Please feel free to comment below.

Leave a Reply

Your email address will not be published. Required fields are marked *