What Is Capitalism?

In the 18th century, after the Industrial Revolution in England and other European countries, the importance of capital as a means of production increased and this resulted into the origin of a new economic system called Capitalism. In Capitalism, all factors of production are privately owned and government of the nation does not interfere in the economic activities of a country. Profit earning is the sole objective for starting a business. Labour like other factors of production, is also a saleable commodity. Capitalism economy is also known as Free Market Economy as all (producers, sellers, buyers, employers, employees, consumers etc.) are free to enter into any occupation or agreement. Countries with this type of economic systems are: England, Japan, America etc.

Evolution of Capitalism:- History offers various types of capitalism over time. In 17th century, capitalism refers to the total freedom of enterprises or we can call it a Free Market Economy. Government only focused on defence and law and order.

Capitalist, with a view to maximize their profits, exploited the laborers. This fact forced the Government to interfere in the business and make labour protection laws and with the growth of monopolies, further forced the government to widen its scope of its interference in economic system of the country. To achieve the aim of social welfare, government undertook the charge to produce strategic commodities. Government controlled and directed the system of price mechanism. Thus, the today’s capitalism is not a pure type of capitalism or a free market economy. It is a controlled or regulated capitalism.

Features of Capitalism:- Main features of Capitalism are as follows:-
1. Private Property:- Under capitalism, people have full right to use their own or private property in any manner they like and this right is protected by government. They can use the means of production like machine, tools, lands etc. in any manner. In case of death of owner of the property, his property passes to his successors.

2. Price Mechanism:- Price mechanism is the guiding principle of capitalism. In Capitalism, price is determined by the forces of demand and supply. Government does not interfere in the fixation of price. Equilibrium between price and demand is brought through the process of price mechanism.

3. Freedom of Enterprise:- In capitalism, every enterprise is free to choose any kind of business. He can take independent decisions with regard to what, where, how and when to produce.

4. Competition:- In capitalism, freedom of enterprises leads to more and more competition, which ultimately results in efficiency of industrial units and production of goods at low costs.

5. Profit Motive:- The only aim to start the business is to earn and maximize the profit in capitalism.

6. Sovereignty of the Consumer:- Under this economic system, consumer is sovereign. Consumer buys only those things which give maximum satisfaction to them.

7. Labour as a commodity:- In capitalism, labour acts as a commodity and can be bought and sold like any other commodity in the labour market. In some cases, exploitation of labour also takes place.

Merits of Capitalism:-
1. Rich Variety of Goods and Services:- In Capitalism, different demands of the consumers are met through diversifying production. Different types of goods and services are produced in order to meet the demands of the consumers.

2. Proper use of Resources:- The only aim is to earn profit and it is achieved through the optimum and proper use of resources.

3. Inducement to Work:- Private ownership and law of succession induces the people to work more, under the capitalism so as to earn more income.

4. Efficient Production:- In Capitalism, every firm tries to compete with one another by producing better quality products and lower prices. Modern and advanced techniques of production are adopted to achieve this aim. It results in efficient production.

5. Increase in the Standard of Living:- More and more quality goods are produced at lower prices through different techniques of production. So this enables the poor people to purchase them at lower prices and consequently they can improve their standard of living.

6. Automatic:- In capitalism, the balance between demand and supply is maintained automatically. If in any case, demand increases the supply, the new producers will enter the market and start producing that product and existing producers will increase its production.

7. Growth of Entrepreneurship:- Various features of capitalism economy like private ownership, competition, profit motive induces the entrepreneurs to become more efficient, competent, hard working and dynamic.

8. Economic Freedom:- In capitalism, everyone enjoys complete economic freedom. Everyone is free to use his property in any manner he likes and there is no restriction on sale and purchase of goods and services.

Demerits of Capitalism:-
1. Unequal Distribution of Wealth:- The greatest demerit of the system is unequal distribution of wealth and income. This inequality is due to private property, less government interference, freedom of enterprise etc. These features of capitalism render rich more rich and poor more poor.

2. Class Struggle:- On account of inequality of wealth and income, society under capitalism is divided into two classes. One the one hand, the rich and capitalist class leads a luxurious life and on the other hand, the labour class struggles hard to get even two square meals.

3. Exploitation of Labour:- Another bane of capitalism is the exploitation of labour. Under capitalism labourers get wages which are less than their marginal productivity.

4. Wasteful Competition:- Competition that is one of the distinctive features of capitalism is in reality quite wasteful. A producer spends thousands of rupees on advertisement to push the sale of his products.

5. Business Fluctuations and Unemployment:- Automatic character of capitalistic economy is responsible for causing business fluctuations in it. The economy is afflicted with alternative cycles of boom and depression. In the boom phase there is considerable fall in production, income, employment and prices.

6. Disregard of Public Welfare:- National resources are used by the entrepreneurs for the sake of personal profits. While fixing prices, private entrepreneurs ignore public welfare and consider only their personal profit.

7. Lack of Coordination:- Due to lack of central planning, there is very little coordination in total production. Thus, some goods are produced in more than the required quantity while other goods fall short of the total requirement.

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