Capitalism is an economic system in which each individual in his capacity as a consumer, producer, and resource owner is engaged in economic activity with a large measure of economic freedom.
It is an economic system in which the means of production and distribution is in the hands of private individuals in conformity with the laws of the country.
All factors of production are privately owned and managed by individuals. Individuals have the freedom to choose any occupation, buy and sell any number of goods and services. Examples of capitalist economy are US, UK, NIGERIA, and SOUTH AFRICA etc.
FEATURES OF CAPITALISM
1) Private Property: This means that the owner of a firm or factory may use it in any manner he likes. He may hire it to anybody, sell it, or lease it at will in accordance with the prevalent Laws of the country. Capitalism thus thrives on the institution of private property.
2) Profit Motive: Profit motive is the main drive behind the working of capitalism. The decisions of businessmen, farmers, producers including that of wage-earners are based on profit motive.
3) Price Mechanism: Price mechanism operates automatically by the forces of demand and supply to determine prices. The larger the difference between prices and costs, the higher is the profit. The higher the price, the greater are the efforts of the producers to produce varieties of products.
4) Role of the State/Government: The role of the state is confined to the maintenance of Law and Order, this policy is known as Laissez-Faire; meaning non intervention in economic affairs by the state. This policy of non-intervention was dropped after Second World War. The state now takes care of monetary and fiscal measures to maintain aggregate demand, anti-monopoly and nationalized monopoly corporations.
5) Consumers’ Sovereignty: Under capitalism, ‘the consumer is the King’. This implies that the tastes and desires of consumers decide what producers will produce. Producers or capitalist will direct productions towards those goods that are demanded by consumers.
6) Freedom of Enterprise: Freedom of enterprise means there is free choice of occupation for an entrepreneur, a capitalist and a labourer. This freedom is subject to their ability and training, legal restrictions and existing market conditions. With these limitations, an entrepreneur is free to set up any industry, and a person is free to choose any occupation he prefers.
7) Competition: Competition implies the existence of large number of buyers and sellers in the market who are motivated by self-interest but cannot influence market decisions by their individual actions. Competition among buyers and sellers determines production, consumption and distribution of goods and services.
ADVANTAGES OF CAPITALISM
1) Increase in Production: As a result of large presence of many producers, and freedom of enterprise, there is increase in production.
2) Quality Products at Low Costs: The twin freedoms of consumers and producers lead to the production of quality products, and lowering of costs and prices.
3) Progress and Prosperity: The presence of competition under capitalism leads to increase in efficiency. Competition encourages producers to innovate thereby bring progress and prosperity in the country.
4) Maximizes Welfare: The automatic working of the price mechanism under capitalism brings efficiency in the production and distribution of goods and services without any central plan.
5) Optimum Use of Resources: Under capitalism, producers undertake the production of only those goods which appear to yield maximum profits in anticipation of demand. This brings about optimum use of resources.
6) Flexible System: A capitalist economy operates automatically through the price mechanism. If there are shortages or surpluses in the economy, they are corrected. Flexibility enables it to survive many depressions, recessions and booms.
DISADVANTAGES OF CAPITALISM
1) Leads to Monopoly: Competition which is regarded as the very basis of capitalism contains within itself the tendency to destroy capitalism and lead to monopoly. Profit motive leads to cut-throat competition, and ultimately to the formation of trusts, cartels through merger and acquisitions bringing about reduction in the number of firms engaged in production.
2) Inequalities: The right of private property creates inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profit to big producers, the landlords, the entrepreneurs and the traders who accumulate vast amount f wealth. This is evident in Gini Index of Capitalist Economy.
3) Consumers’ Sovereignty is a Myth: Consumers’ sovereignty is a myth under capitalism. Consumers have to buy only those commodities which are manufactured and supplied by the producers in the market. Consumers are misled by advertisement and propaganda about the usefulness of the products.
4) Depression and Unemployment: Capitalism is characterized by business fluctuations and unemployment. Excessive competition and unplanned production lead to overproduction and glut of commodities in the market and ultimately depression and unemployment. Like it was witnessed in 1930s and the financial crisis witnessed in 2007.
5) Inefficient Production: Capitalism fails to produce goods keeping with the society’s requirements. Frivolous luxury goods and obnoxious articles are produced to satisfy the wants of the few rich at the expense of necessities needed by the poor.
6) Class Conflict: A capitalist society is characterized by class conflict. The poor are exploited by the rich. This leads to mutual distrust between workers and employers.
The defects highlighted above prompted economies around the world to moderate and regulate the institutions of private property and freedom of enterprise to serve the best interests of the community.