What does mean Capitalist Economy? Meaning; It is one of the oldest economic systems and its origin is at the time of mid-eighteenth century in England in the wake of the Industrial Revolution. It is that system, where means of production are owned by private individuals, profit is the main motive and there is no interference by the government in the economic activities of the economy. They are free to use them with a view of making the profit. Everybody is free to take up one line of production he likes and is free to enter into any contract with others for his profit. Hence, it is known as the free market economy. So, what is the topic we are going to discuss; Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits.
Here are explained; What is the Capitalist Economy? with Meaning, Definition, Features, Merits, and finally Demerits.
What is the Capitalist Economic System of India? Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures. So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products.
Definition of Capitalist Economy:
According to Wright,
“Capitalism is a system in which, on average, much of the greater portion of economic life and particularly of net new investment is carried on by private (i.e. non-government) units under conditions of active and substantially free competition and avowedly at the least, under the incentive of hope for profit.”
In the words of Loucks,
“Capitalism is a system of economic organization featured by private ownership and use for private profit of man-made and nature-made capital.”
According to Ferguson,
“Capitalism is a free-market form or capitalistic economy may be characterized as an automatic self-regulating system motivated by self-interest of individuals and regulated by competitions.”
Features of Capitalist Economy:
Capitalist economy has the following main features:
- Private Property: In this economy, private property is allowed. All means of production like machines, implements, mines, and factories etc. come under private property.
- Price Mechanism: The Capitalist economy is gained by the price mechanism. Here prices are determined by the interaction of demand and supply without the interference of any kind by the government or any other external forces.
- Freedom of Enterprise: In this system, every individual is independent to his means of production in any occupation that one likes.
- The sovereignty of that consumer: Under this system, the consumer plays the most vital role. The entire production pattern is based on the desires, wishes and the demand of the consumer.
- Profit Motive: The maximization of profit is the main motive of the producer. Profit guides the production in this type of economy.
- No Government Interference: Under a capitalistic system, the government does not interfere in day-to-day economic activities. This means producers and consumers are free to make decisions.
- Democratic: The capitalistic system is more democratic in comparison to other economic systems as there are more changes to chancel according to new environments of the economy.
- Self-Interest: The inspiring force in this system is self-interest. It leads to hard work and to earn maximum income by satisfying their consumers.
Merits of the Capitalist System:
The following advantages or merits below are:
- Individual Motivation: The capitalist economic system motivates the businessmen to develop new items, produce in good quality and undertakes innovative activities because of the initiative of larger profits.
- Flexible and Dynamic Economy: Motivated by profits, individual initiatives and competition among the traders and businessmen, there is dynamism in the capitalist economy continuously goes ahead with changes and innovative activities.
- The benefit of Perfect Competition: There exist perfect competition between different traders and creditors who benefit from the capitalist economy. There is no change of monopolistic profits because of perfect competition. The existence of competition initiates more economic welfare. According to George Steiner, from the point of view of public welfare, competition serves as a regulator and reducer of prices as an incentive to improved production efficiency. Without competition, the capitalist economy would become stagnant, unproductive and exploitative.
- Capital Formation: The capitalist economy encourages for the formation of capital, wealth and assets in the society. New industrial and commercial institutions are set up with the objectives of profits and also encourages the creation of additional employment, income, and savings.
- The economic growth of an economy is also faster and higher in a capitalist economy. This is because the investors will also invest in projects that are profitable for them. There is no pressure to produce any goods or services if they do not wish to do so for the sake of the public.
- Consumers also benefit in a capitalist economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
- Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers.
Demerits of Capitalist System:
The countries which have become independent after the 1950s adopted mostly the socialistic economic system because of the demerits of the capitalist economic system. Human welfare aspect has completely disappeared in the capitalist system and it has created disparity in income and wealth. H.D. Dickinson writes, “Capitalism. …is fundamentally blind, purposeless, and irrational and is incapable of satisfying many of the urgent human needs.
Some of the important disadvantages or demerits of capitalism are:
- Increase Inequalities: It increases inequalities in wealth, income and opportunities. Increase in economic inequalities creates economic and social problems.
- Economic Instability: It is difficult to establish a balance between the demand and supply. There will be a trade boom or recession or the frequent fluctuations in prices. All the decisions relating to production are taken by the capitalist and due to wrong estimates of future requirements; imbalance in production is generally found. Due to fluctuations in prices industrial and other economic activities become unstable and this will have an adverse impact on economic development and expansion.
- Inefficient Production: The capitalist always produces with the motive of profit only. He always produces goods for use by the higher income class of the community so that maximum profits can be obtained. There is no place in the mind of the capitalist to produce for consumption by common people. Goods and service are not produced by keeping in view the interest and wants of the common man, but with the motive of capitalist’s profits.
- Class Conflicts: The capitalist economy divides the community into two parts; on the first side the top capitalists and on the other side labor class which depends on the capitalists to fill their stomach. Since the production resources are controlled by the capitalists they exploit the labor from their reasonable reward.
- Unemployment: In a capitalist economy, full employment situation cannot be brought due to lack of central economic planning. With the result, optimum use of resources cannot be possible. This brings the situation of unemployment.
- Monopoly and Exploitation: The establishment of large-scale business, improvement in technology, the motive of maximization of profits, formation of combinations and acute competition are the reasons for the creation of monopoly and exploitation of customers.
- Neglect of National Interest: They are mainly oriented towards self-interest of maximization of profits for which they compete with each other. They neglect the social interests. They do not undertake their activities keeping in view the national interest.