What is Capitalism?
Capitalism is an economic order in which the resources are owned by a few rich and private people, and production will be done for profit. There will be complete free trade and competition. There will be no restriction or interference by the government. Everything is left to private enterprise.
Capitalistic system is also called free and private enterprise. In this system, the factors of production (resources) are owned by a few rich people called capitalists. The rest will sell their services for wages. Capitalism emerged as a result of Industrial Revolution and the factory system.
This type of pure capitalistic system prevailed only in the 18th and 19th centuries. Now-a-days, with the increasing role of the government, the State regulates the working of the capitalistic system.
Features of Capitalism
1. Private property
Capitalistic system allows and recognizes the institution of private property. Anyone can earn, acquire or sell property. The property can be passed on to the heirs in inheritance. Thus private individuals come to have lands, houses, buildings, sites, factories and business establishments.
2. Profit motive
This is the essence of capitalism. The motive of every economic activity will be profit. Profit motive is the driving force in an individual, partnership and joint-stock companies. Utilization of resources d production will be done for profit. Business people will take huge risks to earn large profits.
3. Personal freedom
People enjoy personal freedom in economic activities. This implies:
- Freedom of enterprise;
- Freedom of contract;
- Freedom in production and
- Freedom in consumption.
4. Perfect competition:
This is the corollary from the above three features. Since everyone is free in economic field, many people would compete in production and distribution. Sellers and producers freely compete among themselves. Buyers will compete to buy their goods. Workers will compete for getting employment. Due to competition, the fittest will survive.
5. Price mechanism
Under capitalism, the price mechanism makes an automatic adjustment in production, distribution and consumption. All activities revolve round price mechanism.
How does Capitalistic system solve the three fundamental problems of the economy?
The three basic problems of an economy are.,
- What to produce?
- How to produce?
- For whom to produce?
In Capitalism, nobody decides these three problems and these questions are solved automatically by means of competition and price system. There is no authority to coordinate the activities of the producers and yet there will be constant flow of goods and services and the consumers are satisfied.
We shall see how the price system or the price mechanism solves the three basic problems of the economy.
1. What to produce?
Producers do not produce goods and services as they like. They produce for profit. To make profit they have to produce those goods which are in demand. Producers study the market conditions and produce those goods which are demanded by consumers. The prices of goods serve as guide for the producer and consumer.
Whenever the price of the commodity exceeds its cost, the producer can make profit by increasing production. When more of a particular commodity is demanded, new orders will be received by producers. This will make the price to rise. More is therefore produced for profit.
If more of a commodity is available than demanded by the people, the price will come down. At lower prices, the producers will not produce that much. Thus, the price mechanism equates the demand and supply of goods automatically.
2. How to produce?
This is determined by competition of different producers. They will try to produce at the cheapest possible rate with the available technology. By reducing the cost of production, they can maximize profit.
3. For whom to produce?
In Capitalism, goods will be produced for those who pay the market price. This is determined by supply and demand factors. In order to pay the market price, the consumers should have enough income. Consumers’ income is determined by rents, wages and salaries, interest and profit.
Those who cannot pay the market price cannot have the commodity. Thus, the price mechanism will decide everything in a capitalistic economy and the object of the system is to satisfy people’ s wants.
Merits of Capitalism
The following merits or advantages are attributed to capitalism.
1. Encourages production
Capitalism enables the economy to reach a high level of production, as production is guided by profit. The wealth of the community would increase. It is said that the standard of living of people had increased remarkably in western countries due to capitalistic system.
2. Best resource utilization
Best utilization of resources is possible only in capitalism. There will be no wastage of scarce resources. This is because of the working of the system on profit and loss basis. Due to self interest, the producers will use minimum resource for producing maximum goods in order to get good profit.
3. Availability of goods at cheaper price
Due to free competition, the consumers will get the goods at the cheapest price. They also get the goods they want. Goods will be produced according to the wishes of the consumer. The consumer will be a king in capitalism.
4. Stimulates invention
Competition in production stimulates invention. This promotes development and progress in the economy.
5. Simple and Automatic
This system is simple and automatic in its working. The price mechanism adjusts production and consumption. The utilization of resources is done without any external direction.
Demerits or Defects of Capitalism
The following are some of the major disadvantage or defects of capitalism
1. Inequality in the Society
The main defect of capitalism is its gross inequality in the society. Private property, profit motive and inheritance of property have created a separate class of people called capitalists who are wealthy and rich. As they own the factors of production, they become richer and richer and they exploit the poorer classes.
Though the capitalistic system affords equal opportunity for all, this will be only in theory. In practice, only the richer class will have more opportunities. Further, to become rich only by means of hard work is very rare.
Capitalistic system will make a big gap between the rich and the poor. The inequalities of income and wealth is the worst feature of capitalism.
2. Nonavailability of essential commodity for poor
Because of inequalities, only the rich can demand the commodities and services and that too luxury commodities. Hence, the producers will produce only for the richer class for profit and essential commodities needed for the poorer classes will not be produced. The consumer will not be a king. Only a rich man will be a king in capitalism.
3. Waste of resources
The competition in the economy will lead to wastage of resources. Advertisement by competing firms will be a wastage of resource. Different firms will be producing. the same basic commodity with product differentiation. This will result in unnecessary transport of goods from one place to another (Example: Toilet soaps, Toothpastes, Silk sarees, etc.).
4. Monopoly in competition
Competition in the long run will eliminate inefficient producers and finally only a few producers will be producing. These producers (firms) will combine and production will be done as monopoly. In capitalism, there will be many monopolistic firms exploiting the consumers and making huge profit. The benefits of competition will be lost. When there is monopoly, there is no freedom of choice.
5. Economic Instability
Another bad feature of capitalism is its economic instability. The competitive system will result in periodic cycles of depression and prosperity called Trade Cycles. During the period of depression, there will be mass unemployment and the poorer classes and the working classes will be suffering.
The root-cause for this trade cycle is the unplanned nature of the system and the failure of price mechanism. In the period of depression, the governments have to come to the rescue of the economy.
6. Frequent labour unrest
In capitalism, there will be poverty in the midst of plenty. There will be no security for labour and the poorer classes. There will be frequent labour unrest. In this economy, only the fittest will survive.
The features, merits and defects studied above are related to pure capitalism. In modern days, particularly after the second world war, no country has adopted the free capitalism. Considering some of the defects of capitalism, the governments of modern days have controlled to some extent the working of the capitalistic system.
In order to reduce the inequalities of income, unemployment, monopolistic tendencies and labour unrest, the governments of modern capitalism have introduced many measures and laws to work the system smoothly.
These measures are:
1. Anti-monopoly legislation;
2. Ceiling on private property;
3. Regulation of production of essential commodities;
4. Minimum Wages Act;
5. Social security Acts to protect the interest of labour;
6. Payment of compulsory bonus;
7. Laws relating to trade and commerce and
8. Credit control operations, etc.
Modern capitalism may be called controlled capitalism.