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Home Articles What is Capitalism? Features of Capitalism

What is Capitalism? Features of Capitalism

IndianMoney.com Research Team | Updated On Monday, September 16,2019, 06:05 PM

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What is Capitalism? Features of Capitalism

 

 

Capitalism: A quick walkthrough of profit based economic model

Capitalism came into prominence in the 18th century at the time of industrial revolution. Adam Smith, a Scottish radical thinker was the first to devise theories on capitalist economy. He fought for a free market and believed that people should build their wealth freely. His ideas remained relevant and with time, capitalism became an independent economic structure that transformed the financial course of nations like the U.S, China, Switzerland, UAE, Singapore, etc.

What is Capitalism?

Capitalism refers to an economic system where the government does not play an active part in controlling the market. In a capitalist economy, the means of production are mainly owned by private individuals and are sold for a profit. Capitalism provides an opportunity for individuals to manage their profit and income.

In the pursuit of economic development, each country is trying to adopt democracy and capitalism to implement the right mix of market competition, political pluralism and welfare and economic stability. India has a capitalist market where the individuals and companies can compete with each other in a free market to offer the customers the best services and best prices for goods. It also has some features of socialism where the government runs programs for healthcare and insurance. India can be considered a mixed economy having elements of both capitalism and socialism.

See Also: Fall of Capitalism

In the next section let’s look into how capitalism differs from socialism:

Capitalism vs Socialism: The Key differences

Capitalism and socialism are two major economic and social systems implemented by countries around the world. However, the main difference between socialism and capitalism lies in the extent of government intervention.

A capitalist economy is characterised by private ownership of business and assets whereas socialism refers to an economy where the means of production are owned by the state or public in a more egalitarian way.

Capitalism is primarily about profit-making and focuses less on equality whereas socialism is concerned with the distribution of resources and providing equal outcomes to all.

It is argued that the profit motive in a capitalist economy drives the enterprises to cut cost and innovating new products to lure customers. On the other hand, the state ownership in a socialist economy leads to inefficiency as there is no motivation to cut costs.

Features of capitalism:

Often we hear criticism about extreme capitalism. But how exactly capitalism affects the market and what are the features and advantages of a capitalist economy? Let explore these concepts:

Let’s look into some of the important features of capitalism:

Private property:in the capitalist economy you are entitled to own the property. All means of production like equipment, land, machines, and factories can be owned by private individuals.

Price mechanism: the firms in a capitalist economy determine the prices of the products based on market demand and supply. The price mechanism is independent of any kind of external interference like government intervention or any other external factors.

Freedom of enterprise:no matter your social background, you can choose the occupation and can enter and compete in a free market. In a capitalist market, you can manage your profit and income without any restrictions.

The Sovereignty of the customer: the customer has a vital role to play in a capitalist market. The price patterns in a capitalist market are determined based on the demands and desires of the customer. Also, due to the competitive nature of the capitalist market, the customer can get the best products and services at the best prices.

Profit motive: the main motive of the producers is to maximize the profits in a capitalist economy. The producers are encouraged to produce the best goods and services due to the feature of the profit motive.

Zero Government interference: under this system, the government does not interfere in day-to-day economic activities. There is no direct government interventionand enterprises are free to make their own economic choices.

Democratic: the capitalist economy is democratic where you are free to buy whatever you wish or operate businesses and produce goods without any intervention. So a capitalist economy promotes fundamental rights of freedom.

See Also: A Brief Note On The Indian Economy

Capitalism pros and cons:

A capitalist economy is a liberal economy which means the prices of the goods will be determined based on the demand and supply of the goods. The government does not intervene in the market directly other than controlling the monopolistic practices in the economy and implementing the management and control measures. Though capitalism is the most predominant economic systems adopted by most of the countries it has its share of advantages and disadvantages. Let’s discuss some of them:

Pros of capitalism:

Competition: the common characteristic of capitalism is that the customers can get the best products at the best market rates. The nature of the capitalist market is to pit competing companies against each other. The market competition pushes the companies and businesses to work harder and come up with innovative products and schemes to survive. The market competition forces the businesses to cut cost and avoid waste thus benefitting the customer. Businesses often provide special discounts, coupons and rewards to entice the customer to buy from them. Due to the competitive nature of the capitalist market, the customer emerges as the winner.

Innovation: in a capitalist market the entrepreneurs can make changes in the goods and services to keep the interest of the customer. In short, the capitalist economy allows and encourages businesses to innovate their products by using creative tactics. It encourages innovation and efficiency which are important factors for the growth of an economy.

Political freedom:in a capitalist economy the government generally takes a back-seat. The capitalist market is not influenced by the government and thus it allows the enterprises to grow and further the economic growth. It allows individuals to make individual choices and liberty. In a capitalist economy, governments generally do not intervene in the market unless some individuals or companies are getting into unfair trade practices. Often the government plays the role of providing public goods such as healthcare and education to the poor, who may not otherwise receive the same benefits.

Cons of capitalism:

Marginalisation:the highly competitive market in a capitalist economy sometimes rules out the possibility of engaging the disabled or the elderly who presumably do not have skills. There will be the marginalisation of some categories of people due to lack of skills.

Externalities: the capitalist economy often ignores the negative impacts of environmental pollution and damage to health. While enterprises can provide cheaper products, in the long-run the people will have to bear the cost. For example, a chemical factory will severely pollute the environment and dump the toxic wastes in the water bodies. There are no rules to undo such damages as that may include a huge cost. So, in the long term, these activities will impact the local ecology, its inhabitants and inevitably the environment.

Monopoly power: sometimes the private ownership of certain commodities enables the enterprises to gain monopoly power. In such scenarios, these companies can exploit the customers and charge higher prices thus defeating the purpose of the capitalist economy.

See Also: What is Crony Capitalism? How Crony Capitalism Affects India?

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