Capitalism stands for an economic order in which the instruments of production (Land, Labour, Capital and Organization) are owned and controlled privately and production takes place for profit. In a capitalistic economy, the means of production are owned by private individuals or organizations and they are free to make use of them in any manner with a view to making profit.
Pigou defined capitalism in the following manner:
A capitalist economy, or capitalist system is one of the main parts of whose productive resources are engaged in capitalist industries in which the material instruments of production are owned or hired by private persons and are operated at their orders with a view to selling at a profit the goods or services that they help to produce.
Free Enterprise is supposed to be the keel of capitalistic system of the pure type. Hence pure capitalism is also called ‘free enterprise economy‘ or laissez faire economy. The Government is not supposed to interfere or control such an economy and profit is the driving force behind all economic activities.
The capitalism, like other economic systems, is an evolving one and the process is still going. The capitalism of the present day is entirely different from what it was or expected to be during the days of Adam Smith. The features of capitalism have changed a lot and in spite of these changes within, there arc certain basic characteristic features which distinguish it from other economic systems.
Features of Capitalistic economy
1. System of Private Property
Capitalistic system allows and recognizes the institution of private property. Material means of production or capital assets are allowed to be owned and managed by private individuals, groups, associations and companies. The right of ownership carries with the right to determine its use also; of course subject to the prevailing laws of the land. A farmer can make use of his land in any manner he likes for growing paddy or sugarcane or for grazing cattle. He may use the land himself or hire out getting rent or construct a building. The state can place some minimum restrictions on the use of the property.
Private property under capitalism may take various shapes such as consumption goods, production materials and even intangible things like ‘trademark‘ and ‘goodwill’. However, it is only the private ownership of ‘factors of production‘ which plays a dominant role in capitalism distinguishing it from other economic systems. The ownership of means of production in capitalism combined with free enterprise by private individuals enable them to channelize the flow of economic resources in such manner as they like.
The system of private property encourages savings and accumulation of capital for the future. “The magic of private property turns sand into gold” is a dictum more appropriate in capitalistic economies. within the laws of the land, everyone will try to accumulate property and build up his fortune by working hard, by turning even a desert into a bower. Related to the institution of private property is the right of inheritance of property. This right in capitalistic system adds greater significance to private property. The desire to build up a fortune for the family becomes an added incentive to his work and accumulation of wealth.
2. Profit Motive
The important characteristic feature of capitalism is the profit motive behind all economic activities. Earning more than what is spent is the impelling force and everyone is guided by the same consideration. As profit becomes the driving force for individuals, partnership and joint-stock companies, under capitalism, more productive activity, larger enterprise and greater risks are undertaken. This is the reason for tremendous increase in production and capitalism has the capacity to cope with any amount of increase in production. This profit motive channelizes the resources, determines the character of business and also leads to variations in production with improved and increased technology.
The entrepreneur is always on the alert, takes up large risks in the hope of amassing huge ‘pure profits’. Strictly speaking ‘pure profits’ act as a driving force in a capitalistic system. Profit motive, private property, and personal initiative under capitalism are inter-related and inter-dependent, as one will have no meaning and significance without the other.
3. Economic freedom
The capitalistic system is based on the structure of free enterprise giving economic freedom in all economic activities. Consumers are free to buy what they like and producers arc free to produce to get maximum profit; workers are free to take employment wherever they get higher wages and investors are free to invest wherever they get higher money returns. The state is not expected to interfere and curtail the economic freedom of the interacting units in the economy.
Of course profit motive and private property can have full meaning only if everyone has the freedom to make use of his property and to take such economic activities that bring him maximum return or profit. But in practice, however, even in the so called ‘free economies‘, there is interference by the State reducing the freedom of the individual. This is done in the interest of public health, public morality and social justice.
4. Perfect Competition
This is a natural corollary from the aforesaid features. If every one is free to take up any activity of his choice in the economic front, many people would compete with each other in the performance of the same or alternative activities. Producers would compete with each other in producing the same or different products to get profits. Workers would compete with each other to get employment and better remuneration. There will be competition among sellers, buyers, and investors. This form of striving by all groups without any restriction or hindrance would manifest into what may be called ‘Perfect Competition‘.
Because of free and perfect competition, production tends to conform to the demands of the Consumer. Further it leads to maximum efficiency. Perfect competition, theoretically, is the essence of free capitalism and competition has a special role to perform in capitalistic society. The larger the competition the lesser will be the profits and all excess profits, will be wiped off when competition is keener. Only normal profits which are considered as remuneration for managerial labour would exist. From the consumers’ point of view that serves as a regulator in prices keeping the prices at the lowest possible level. From the economic point of view, it drives every one to be efficient and economic, avoiding wastage.
Perfect competition is indispensable for the efficient working of the free economy which is unplanned and uncontrolled.
According to George Halm, perfect competition
guarantees the constant supply of those energies without which the unplanned economy could not work properly. Without the protection through competition, the capitalist economy would become stagnant, unproductive and exploitative.
But in practice, free and perfect competition may not exist. It will be mostly imperfect competition, if not complete monopoly in many spheres of economic activities.
5. Consumer’s Sovereignty
Utilization of resources, technique of production, output in a capitalistic economy depend on the impersonal force of consumer’s demand. Hence a consumer is considered a King under capitalism. This sovereign extends his survey in all economic activities by exercising his choice. Though a consumer is a sovereign he has many limitations and consumer’s sovereignty has become a controversial topic.
6. Role of Price Mechanism
Under capitalism the price mechanism makes an automatic adjustment and it directs consumption, production and distribution and investing, saving, etc., without any central planning and control. All activities revolve round price mechanism. It is the pricing process which controls and directs the economy solving all of its problems.
7. The Role of the Government
In the capitalism of the pure or classical type, the role of the government is not only minimum, but also neutral. The Government is not expected to interfere with the market mechanism nor take any steps to curb the economic freedom.
The Government is expected to confine to its minimum legislative, executive and judicial functions, maintaining law and order in the country and protecting it from internal rebellion and external aggression. The Government will have to protect the interest of the individual and create a framework in which the individual could function efficiently with the system of uniform coinage, currency, weights and measures.
The State operates only in the field where private enterprise will not be forthcoming or inadequate as in the case of educational facilities, medical facilities and public health. The state should resolve conflicts by protecting the weak from the strong.
8. Prevalence of two classes
In capitalism the society is divided into two classes, viz., the capitalists and the working class. The former owns the factors of production while the latter earns a living through their labour. The capitalists not only, utilize their capital but also hire labour. Hence in addition to commodity market there is ‘labour market’ in capitalism. Labour becomes a commodity and is sold just like any other commodity.
Thus capitalism has many characteristic features. But capitalism of the pure type does not exist anywhere in the world. There are many variations with imposed limitations and the concept of the 20th century capitalism is entirely different.