[Commerce Class Notes] on Capitalist Economy Pdf for Exam

This article discusses “what is a Capitalist Economy with an example” in detail. First of all, let us have a brief of what is meant by capitalism. All the farms, factories and other sources of production fall under the territory of private individuals and firms in capitalism. Those private individuals and firms are free to use them with the intent to make a profit. The desire to gain profit is the only consideration with the property owners in the use of their property. Various economists gave the capitalist economy definition. Under capitalism, everybody’s free to take up any line of products as per their wish and is entitled to enter into any contract with the intent to gain profit.

 

What is the Capitalist Economy?

The capitalist economy is related to a type of economic environment where competition, ownership of property and free enterprise systems prevail. The definition depicts the features of capitalism. Prof. Loucks highlighted the capitalist economy definition as a system characterized by private ownership and the use of profit of artificial and nature-made capital. The capitalist economy is said to be a liberal economy because the free market determines the demand, supply and price of the market. There is no direct interference of the government in this economy. Some classic examples of capitalist economies are the U.S.A., U.K., Germany, and Singapore.

 

Capitalism is also called a free market economy and has become a very dominant form of economic system post-breakup of feudalistic society. Most of the western countries follow this kind of economic system which is dominated by the free market, private property and production, distribution controlled by free and open markets. Another very important motive of capitalism is profit-making. According to the economist and thinker, Adam Smith, this form of economic system is dependent on buying and selling goods out of mutual interest. In this economic system, capital is invested by the people with surplus resources, factories, transport etc, are controlled by them and the profit accrued out of the business goes to the capitalists and the people who were involved in the production process gets either wages or salaries depending upon their work. 

 

Pillars of the Capitalist Economy:

• People have ownership over tangible items like land, buildings, cars, houses and also own intangible items like bonds and shares, hence, private property is one of the pillars of capitalism

• Every individual acts according to their self-interest and considers their profit. The overall benefit for the society as a whole happens only with the help of the “invisible hand”.

• The market has many people selling the same goods. There is tough competition in the market to retain the customers and the customers will also get many options to choose from. 

 

Capitalism is crucial for a developing country like India. An example of a capitalist economy regarding its importance is as follows:

1. Equality- the main principle of the capitalist economy is that everyone has equal rights, and the harder you work, the more profit you will get.

2. Freedom- The essence of classic capitalism is the freedom to choose things to do.

3. Innovation- Research and development of new ways to gain profit is the motive of a market capitalist economy.

4. Efficiency- In capitalism, an incentive is given for out of box thinking and for efficient production of goods.

 

Reliance Jio is a classic example of a capitalist economy done right. Before the introduction of Jio, internet packs used to be expensive. Now healthy competition in the market capitalist economy brought a change that can be seen post the Jio was introduced.

 

The capitalist economy definition depends on practical application, not a mere theory.

 

Features of the Capitalist Economy

The main features of the capitalist economy are as follows-

1. Existence of private property

2. Freedom of ownership

3. Working on the price mechanism

4. Desire to earn profit

5. Free competition and cooperation go together (Refer capitalist economy definition)

6. Sovereignty of consumer

7. Gives birth to class-conflicts

8. The role of an entrepreneur- Entrepreneurs are the pillars of the market capitalist economy.

To give another example of the capitalist economy and its importance is that it has become a dominant economic system in all countries around the globe after the disintegration of the Soviet Union.

 

There are various merits and demerits of the capitalist economy. 

 

Merits of the Capitalist Economy

The merits of the capitalist economy are as follows:

1. If the production of goods is as per the taste and preferences of the consumer, it leads to maximum satisfaction.

2. In the market capitalist economy, people possess the right to own property and to pass it on to their successors. It leads to a higher rate of the economy and more economic growth.

3. There is absolute economic freedom that means freedom to choose occupation and enterprise.

4. As per the availability of resources, the optimum utilization of goods is to be done.

5. The customer tends to find the products at the minimum cost available. Hence, the object of a market capitalist economy is the efficient production of goods and services.

6. A free-market economy provides a variety of goods to consumers.

7. The merit of a capitalist economy is that it provides flexibility in the market.

8. It motivates the entrepreneurs to take risks and to adopt bold schemes.

Different perspectives have been adopted by economists, political economists and historians in their analysis of capitalism and recognized practice of various forms. Examples of the capitalist economy are laissez-faire (free-market capitalism), welfare capitalism and state capitalism. 

 

The Demerits of the Capitalist Economy

The demerits of the capitalist economy are as follows:

1. Unequal distribution of income

2. Poor get poorer and the rich get richer- class struggle

3. High social costs

4. Unwanted multiplicity and way too much competition

5. Unsteadiness of capitalist economy

6. The situation of unemployment and under-employment

7. Slow development

8. Causes exploitation of workers in a lack of right to bargaining 

 

Did you know?

The policy of LAISSEZ-FAIRE (no interference by the state in economic matters), brought by the Great Depression of the 1930s, ended in most countries, and for a time, created sympathy for socialism among intellectuals, writers, artists, and, especially in western Europe, workers and middle-class professionals.