Capitalist Economy

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Capitalist Economy Definition

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.

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What is the Capitalist Economy?

The capitalist economy is related to a type of an 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 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 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 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. The example of the capitalist economy is 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.

FAQ (Frequently Asked Questions)

Q1. What is the government's role in a Capitalist Economy?

Ans: A capitalist economy is an economy that works on the mechanism of the free market. It is a laissez-faire system. The role of government in a capitalist economy is limited. According to Adam Smith, the main functions of government are:

  • To sustain law and order in a country

  • To make national defence stronger

  • To regulate the money supply

The market system administers various economic functions. Over a while, the functions of government in an economy have increased, enhancing the effectiveness of a free competitive market system, removing restrictions on working of the market and developing and maintaining a free market.

Q2. What is Marxism?

Ans: In the 1848 pamphlet, Marxism was put publicly for the first time. The book of Karl Marx, The Communist Manifesto, lays out the angle of class struggle and inevitability of revolution. The criticism of capitalism was brought forth by Karl Marx in his book, Das Kapital (1867). Karl Marx originated a social, political, and economic theory of Marxism that emphasizes the class struggle between capitalists and workers. According to Marx, the power of capitalists over workers gives birth to the exploitation of the latter and created class conflict. Marxism says that this class conflict is capable of leading a revolt where the capitalists would overthrow.