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Understanding Capitalist Economy

A capitalist economy is an economic system in which the production and distribution of commodities take place through the mechanism of free markets. Hence it is also called as market economy or free trade economy. Each individual be it a producer, consumer or resource owner has considerable economic freedom. An individual has the freedom to buy and sell any number of goods and services and to choose any occupation. Thus a market economy has no central coordinator guiding its operation. But self-organization emerges amidst the functioning of market forces namely supply, demand and price. The salient features of capitalism are -

  • Right to Private Property: Individuals have the right to buy and own property. There is no limit and they can own any amount of property. They also have legal rights to use their property in any way they like.
  • Profit-Motive: Profit is the only motive for the functioning of capitalism. Production decisions involving high risks are taken by individual only to earn large profits. Hence, profit-motive is the basic force that drives the capitalist economy.
  • Freedom of Choice: The question ‘what to produce?’ will be determined by the producers. They have the freedom to decide. The factors of production can also be employed anywhere freely to get due prices for their services. Similarly consumers have the freedom to buy anything they want.
  • Market Forces: Market forces like demand, supply and price are the signals to direct the system. Most of the economic activities are centered on price mechanism. Production, consumption and distribution questions are expected to be solved by market forces.
  • Minimal role of Government: As most of the basic economic problems are expected to be solved by market forces, the government has minimal role in the economy. Their role will be limited to some important functions. They include regulation of market, defence, foreign policy, currency, etc.

Merits/Benefits of Capitalist Economy

  • Increase in productivity: In a capitalist economy every farmer, trader or industrialist can hold property and use it in any way he likes. He increases the productivity to meet his own self-interest. This in turn leads to increase in income, saving and investment.
  • Maximizes the Welfare: It is claimed that there is efficiency in production and resource use without any plan. The self-interest of individual also promotes society’s welfare.
  • Flexible System: The shortages and surpluses in the economy are generally adjusted by the forces of demand and supply. Thus it operates automatically through the price mechanism.
  • Non-interference of the State: The State has a minimum role to play. There is no conflict between the individual interest and the society. The economic institutions function automatically preventing the interference of the government. Low cost and qualitative products: The consumers and producers have full freedom and therefore it leads to production of quality products at low costs and prices.
  • Technological improvement: The element of competition under capitalism drives the producers to innovate something new to boost the sales and thereby bring about progress.

Disadvantages of Capitalist Economy

  • Inequalities: Capitalism creates extreme inequalities in income and wealth. The producers, landlords, traders reap huge profits and accumulate wealth. Thus the rich become richer and the poor poorer. The poor with limited means are unable to compete with the rich. Thus capitalism widens the gap between the rich and the poor creating inequality.
  • Leads to Monopoly: Inequality leads to monopoly. Mega corporate units replace smaller units of production. Firms combine to form cartels, trusts and in this process bring about reduction in number of firms engaged in production. They ultimately emerge as multinational corporations (MNCs) or transnational corporations (TNCs). They often hike prices against the welfare of consumer.
  • Depression: There is over-production of goods due to heavy competition. The rich exploit the poor. The poor are not able to take advantage of the production and hence are exploited. At another level, over-production leads to glut in the market and hence depression. This leads to economic instabilities.
  • Mechanization and Automation: Capitalism encourages mechanization and automation. This will result in unemployment particularly in labour surplus economies.
  • Welfare ignored: Under capitalism, private enterprises produce luxury goods which give higher profits and ignore the basic goods required which give less profit. Thus the welfare of public is ignored.
  • Exploitation of Labour: Stringent labour laws are enacted for the exclusive profit-motive of capitalists. Fire and hire policy will become the order of the day. Such laws also help to exploit the labour by keeping their wage rate at its lowest minimum.
  • Basic social needs are ignored: There are many basic social sectors like literacy, public health, poverty, drinking water, social welfare, and social security. As the profit margin in these sectors is low, capitalists will not invest. Hence most of these vital human issues will be ignored in a capitalist system.

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