The capitalist economy works on the profit motive. Non-interference by the government in the economic life of the economy made the capitalist economic system an unplanned economy.
It is the oldest form of economic organization: The Industrial Revolution of England led to took place during the industrial revolution in England the birth of the capitalist economy to produce and where the distribution should be done for.
With the passage of time, many changes took place for sustainable growth and pure capitalism is not present in the world.
Today with the changed scenario, a capitalist economy is present in leading countries like America, Canada, England, France, Japan and western countries of the world.
Now, in the world economy, different nations have different economic systems. Russia and China have socialist economic systems and America, France, and England have capitalist Economic systems whereas India is a Mixed economy.
The Economic upsurge in the USA provoked by war needs served to accelerate the process of concentration production and capital which is generally typical of capitalism.
Means of production are privately owned and utilization is done for profit Motive.
Advantages of a Capitalist Economy
In a capitalist economy, all-around growth is possible where free enterprise, competition and private ownership of property take place.
Some common benefits of a capitalist economy are as follows:
1. Efficient Production
The tough competition among producers to increase profit, market shift and maximum ownership of private property compel them to do maximum production at minimum cost.
They also require:
- The best possible combination of resources
- Minimization of wastage
- Freedom for using the best mechanisms for increasing production.
2. Personality Development
In a capitalist economy, only the survival of the fittest is possible due to the presence of competition.
So, every employee working in the capitalist economy tries to increase his/her qualification for future benefits.
3. Efficient Utilisation of Resources
Every producer tries to use the different factors of production to the best possible level so that maximum production at the minimum cost is done to stand in the competition.
4. Automatic Balancing in the System
The price mechanism acts as the Invisible force for running the economy.
With the increase in demand for the product the price rises which in turn attracts new producers for entering the market and hence increasing the supply.
Both the demand and supply in-balances can be reduced by the price mechanism.
5. Technological Progress
Capitalisation and technological progress are linked together.
Research and development should be carried out continuously so that new development and technological change may take place at a faster rate.
6. Capacity for Progressive Changes
The existence of capitalism is dependent on the capacity for progressive changes that are needed by the capitalist economies of the world.
7. High Living standard with Maximum Satisfaction
The capitalist countries have become wealthy and so the people of those countries enjoy higher living standards.
This is due to the presence of competition.
Manufacturers want more profits and so they increase production leading to economic prosperity.
8. Efficiency is Rewarded Properly
Producers and labourers work hard and gain efficiency in production.
The ultimate goal of the producers is to get maximum profit and the labourers are to earn more wages and both are satisfied by efficient production.
9. Expansion in State Control
Business is connected to society in various forms and Thus they should fulfil the obligation towards social responsibility.
The economic system in the economy means the lawful organizational structure where economic activities like production, consumption, selling and exchange transactions are carried out” Limited interference of the state is done in the social activities carried out by them.
Thus, the economic system is the collection of economic activities done in the country.
Disadvantages of a Capitalist Economy
After looking at the advantages just of the capitalist economy we now should be taken into the defects present in it.
Socialism was born only due to the defects of the capitalist economy.
The following are the key cons of a capitalist economy:
1. Lack of coordination of Economic Activities
Under capitalism, there are large numbers of independent producers, distributions and consumers and all try to maximize their own profit.
There is no Centre plan to coordinate the efforts of all.
Capitalism economy is compared with the bus without steering and each passenger tries to take the bus according to his direction.
2. Class Struggle
The capitalist economy is divided into two classes: first rich and poor or owners and labours or have and have-nots.
There are clashes in the interests as labours demand high wages while owners do not want to pay them leading to strikes and lockouts.
3. Economic Instability
Unequal distribution of wealth, fewer opportunities, and an unequal division of income lead to economic instability in the country.
The business cycle takes place in capitalism.
Consumers suffer both in periods of inflation and deflation.
4. Unemployment and Social Insecurity
A vicious circle present in the business leads to unemployment.
Labour is always dependent on the factors of production and entrepreneurs.
Unequal distribution of wealth has compelled them to live an unsecured life even the old age, accident, death and illness condition.
5. Competition Leads to Wastage
Wastage of resources takes place in the cut-throat competition.
6. Monopolistic Nature
Tough competition is present among the producers but due to the nature of cut-throat competition either they give up or leave the market.
The monopoly concerns try to capture the whole market which leads to the path of hoarding and explanations.
7. Misutilisation and Misallocation of Resources
In the capitalist economic system, the present is more valuable rather than the future.
Long-term planning is not given due attention in a capitalist economy.
For example, lack of education, health, road, and irrigation facilities may act as the biggest hurdles to economic growth.
8. Inequality of Wealth
An unplanned capitalist economy leads to unequal distribution of wealth and ownership in the economy.
So some people get income without doing me any work.
For example, revenue to landlords, interest to money lenders and rent to the owner is given.
9. Utilization of Factors of Production
Socialism help in increasing production, consumption and income pattern whereas in capitalism importance is given to luxury.
10. Equal Opportunities
In socialism, No class struggle is present, Thus people enjoy economic, social, and political opportunities freely.
Whereas in capitalism only the rich class enjoys leaving the poor class
11. Quick Economic Stability
Rapid economic development takes place in socialism where economic stability and the best utilization of resources as possible.
Whereas in capitalism, individual centralization leads to miss utilization of resources and factors of production resulting in the deceleration of the economy.
12. Economic Prosperity
In the socialist economy economic equality, full employment, and rapid economic development lead to an increase in the living standard of the people whereas in capitalism speculative practices become a part of the system.
13. Minimum Social Benefit
In the socialist economy means of production are owned by the government which is used to derive maximum benefits to the society.
While in the capitalist economy, private ownership and maximum profits lead to exploitation.
Examples of Capitalism Countries
- United Arab Emirates
- New Zealand
- Hong Kong
The history of the developed countries of the world states that the growth rate of capitalist countries has always been higher.
As it is based on the motive of profit, The rate of investment and capital formation is also higher in this capitalist system.
The producer class bears risks and develops new techniques.
Thereby the rate of development becomes high. To project the social and economic interests in the modern capitalist economy, state control and ownership should be present.
Thus, now you know the major pros and cons of the capitalist economy.