Features, Merits, Demerits of Capitalistic Economy (Capitalism)

Capitalistic Economy (Capitalism)

Adam Smith is the ‘Father of Capitalism’. Capitalistic economy is also termed as a free economy (Laissez faire, in Latin) or market economy where the role of the government is minimum and market determines the economic activities.

The means of production in a capitalistic economy are privately owned.

Manufacturers produce goods and services with profit motive. The private individual has the freedom to undertake any occupation and develop any skill. The USA, West Germany, Australia and Japan are the best examples for capitalistic economies. However, they do undertake large social welfare measures to safeguard the downtrodden people from the market forces.

Features of Capitalistic Economy

1. Private Ownership of Property and Law of Inheritance: The basic feature of capitalism is that all resources namely, land, capital, machines, mines etc. are owned by private individuals. The owner has the right to own, keep, sell or use these resources according to his will. The property can be transferred to heirs after death.

2. Freedom of Choice and Enterprise: Each individual is free to carry out any occupation or trade at any place and produce any commodity. Similarly, consumers are free to buy any commodity as per their choice.

3. Profit Motive: Profit is the driving force behind all economic activities in a capitalistic economy. Each individual and organization produce only those goods which ensure high profit. Advance technology, division of labour, and specialisation are followed. The golden rule for a producer under capitalism is ‘to maximize profit.’

4. Free Competition: There is free competition in both product and factor market. The government or any authority cannot prevent firms from buying or selling in the market. There is competition between buyers and sellers.

5. Price Mechanism: Price mechanism is the heart of any capitalistic economy. All economic activities are regulated through price mechanism i.e, market forces of demand and supply.

6. Role of Government: As the price mechanism regulates economic activity, the government has a limited role in a capitalistic economy. The government provides basic services such as, defense, public health, education, etc.

7. Inequalities of Income: A capitalist society is divided into two classes – ‘haves’ that is those who own property and ‘have-nots’ who do not own property and work for their living. The outcome of this situation is that the rich become richer and poor become poorer. Here, economic inequality goes on increasing.

Merits of Capitalism

1. Automatic Working: Without any government intervention, the economy works automatically.

2. Efficient Use of Resources: All resources are put into optimum use.

3. Incentives for Hard work: Hard work is encouraged and entrepreneurs get more profit for more efficiency.

4. Economic Progress: Production and productivity levels are very high in capitalistic economies.

5. ConsumersSovereignty:Allproduction activities are aimed at satisfying the consumers.

6. Higher Rates of Capital Formation: Increase in saving and investment leads to higher rates of capital formation.

7. Development of New Technology: As profit is aimed at, producers invest on new technology and produce quality goods.

Demerits of Capitalism

1. Concentration of Wealth and Income: Capitalism causes concentration of wealth and income in a few hands and thereby increases inequalities of income.

2. Wastage of Resources: Large amount of resources are wasted on competitive advertising and duplication of products.

3. Class Struggle: Capitalism leads to class struggle as it divides the society into capitalists and workers.

4. Business Cycle: Free market system leads to frequent violent economic fluctuations and crises.

5. Production of non essential goods: Even the harmful goods are produced if there is possibility to make profit.