Understand Capitalism; Capitalism is an economic system in which each individual in his capacity as a consumer, producer, and resource owner is engaged in economic activity with a large measure of economic freedom. Individual economic actions conform to the existing legal and institutional framework of the society which is governed by the institution of private property, the profit motive, freedom of enterprise, and consumer’s sovereignty. So, what is the topic we are going to discuss; 5 Advantages and disadvantages of Capitalism.

Here are explained; 5 Advantages and disadvantages of Capitalism.

Definition: Prof. R. T. Bye has defined capitalism as, “That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.” Thus, the definition hints at the major features of capitalism. Also, understand Capitalism in India.

Advantages of Capitalism:

The protagonists of capitalism advance the following arguments in favor of capitalism.

  • Quality Products at Low Costs.
  • Increase in Production.
  • Flexible System.
  • Progress and Prosperity.
  • Maximizes Welfare, and.
  • Optimum use of Resources.

Now, explain;

Quality Products at Low Costs:

The twin freedoms of consumers and producers lead to the production of quality products and lowering of costs and prices. Thus the society as a whole stands to gain under capitalism.

Increase in Production:

Arthur Young wrote, “The magic of property turns sand into gold.” This observation of Young holds good in a free enterprise economy where every farmer, trader or industrialist can hold property and use it in any way he likes. He brings improvement in production and increases productivity because the property belongs to him. This leads to an increase in income, saving, and investment, and to progress.

Flexible System:

A capitalist economy operates automatically through the price mechanism. If there are shortages or surpluses in the economy, they are corrected automatically by the forces of demand and supply. As such, capitalism is a highly flexible system which can adapt itself to changing economic conditions. That is why it has survived many depressions, recessions, and booms.

Progress and Prosperity:

The presence of competition under capitalism leads to an increase in efficiency, encourages producers to innovate and thereby brings progress and prosperity in the country. As pointed out by Seligman. “If competition in biology leads only indirectly to progress, competition in economics is the very secret of progress”.

Maximizes Welfare:

The automatic working of the price mechanism under capitalism brings efficiency in the production and distribution of goods and services without any central plan and promotes the maximum welfare of the community.

Optimum use of Resources:

Under capitalism, producers undertake the production of only those goods which appear to yield maximum profits in anticipation of demand. This leads to optimum use of resources.

5 Advantages and disadvantages of Capitalism
5 Advantages and disadvantages of Capitalism.

Disadvantages of Capitalism:

The following arguments are advanced against capitalism.

  • Inequalities.
  • Consumer’s Sovereignty a Myth.
  • Inefficient Production.
  • Leads to Monopoly.
  • Depression and Unemployment, and.
  • Non-utilisation of Resources.

Now, explain;


The institution of private property creates inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profits to big producers, the landlords, the entrepreneurs, and the traders who accumulate the vast amount of wealth. While the rich roll in wealth and luxury, the poor live in poverty and squalor.

Consumer’s Sovereignty a Myth:

Consumer’s sovereignty is a myth under capitalism. Consumers have to buy only those commodities which are manufactured and supplied by the producers in the market. The majorities of consumers are not rational buyers and are often ignorant about the utility and quality of the products available at the stores or shops. They are also misled by advertisement and propaganda about the usefulness of the products. Products which are produced by monopoly concerns are often of inferior quality and are priced high. Thus there is no consumers’ sovereignty in a seller’s market.

Inefficient Production:

Capitalism fails to produce goods in keeping with the society’s requirements. Frivolous luxury goods and obnoxious articles are produced to satisfy the wants of the few rich at the expense of the necessities needed by the poor. Thus there is social wastage of the economy’s resources.

Leads to Monopoly:

The competition which is regarded as the very basis of capitalism contains within itself the tendency to destroy competition and leads to monopoly. It is the profit motive under capitalism which leads to cut-throat competition, and ultimately to the formation of trusts, cartels, and combinations. This brings about a reduction in the number of firms actually engaged in production. As a result, small firms are eliminated in this process.

Depression and Unemployment:

Capitalism is characterized by business fluctuations and unemployment. Excessive competition and unplanned production lead to overproduction and glut of commodities in the market and ultimately depression and unemployment.

Non-utilisation of Resources:

The price mechanism under capitalism fails to employ the country’s resources fully. Free and unfettered competition, inequalities of income distribution, overproduction, and consequent depression lead to wastage of productive resources. Besides, there is mass unemployment and freedom of occupation has little meaning under capitalism.


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