What is a Capitalist Economy?
A capitalist economy is cumulative production and consumption of goods and services when private companies own the production factors and hire workers to perform the core operations of the businesses.
Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures.
So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products. There is no direct government intervention other than to control monopolistic practices in the economy.
As we said earlier a capitalist economy is the most predominant in the current global economy. USA, UK, Germany, Japan, Singapore all are classic examples of capitalist economies.
What Does Capitalist Economy Mean?
What is the definition of capitalist economy? A key element of a capitalist system is the liberal economy. The driving force in a liberal economy is the free market determines the product prices by the mechanisms of demand and supply. Therefore, there is no state control or intervention in the economy, but the role of the government is to prevent monopolistic advantages with the proper regulations and maintain order with national defense and infrastructure.
Theoretically, private companies have both the incentive and the ability to run their business effectively so as to realize a profit. In larger corporations, the profits are distributed to the business owners and the shareholders in the form of a dividend payment.
How Does Capitalism Impact People?
The kind of impact that capitalism has on your life depends on whether you’re a worker or a boss. For someone who owns a company and employs other workers, capitalism may make sense: The more profits your company brings in, the more resources you have to share with your workers, which theoretically improves everyone’s standard of living. It’s all based on the principle of supply and demand, and in capitalism, consumption is king. The problem is that many capitalist bosses aren’t great at sharing the wealth, which is why one of the major critiques of capitalism is that it is a huge driver of inequality, both social and economic.
Features of a Capitalist Economy
- Right to Private Property: This is the essence of capitalism. This right means that private property such as property, factories, machines, plants etc. can be owned under private individuals and companies. The three things covered under this right are:
Every individual can acquire any amount of property, He can use these properties as he wishes, He also has the right of inheritance. So he can inherit the property from his forefathers. And he can also pass it on to his successors on his death.
- Price Mechanism: Price mechanism is like an invisible hand that controls the workings of a capitalist economy. The forces of supply and demand will determine the prices and the level of productions in the economy. The government will not have any interference in this matter.
- Profit Motive: The driving force behind any capitalist economy is the profit motive. All companies wish to produce and sell their products to maximize their profits. This also induces healthy competition in the economy.
- Freedom of Enterprise: In capitalism, every individual is free to make his own economic choices without any intervention. This includes both the consumer and the producers. So a producer is free to produce any goods or services. And the consumer is free to buy whatever he desires and from whomever, he wants without restrictions.
Merits of a Capitalist Economy
- The producers are more incentivized to produce their best goods and services due to the feature of the profit motive and the ability to hold private property.
- The economic growth of an economy is also faster and higher in a capitalist economy. This is because the investors will also invest in projects that are profitable for them. There is no pressure to produce any goods or services if they do not wish to do so for the sake of the public.
- Since all resources and factors of production are under private ownership they are used in the most productive manner. This results in optimum utilization of resources,
- Consumers also benefit in a capitalist economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
- Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers
- In a capitalist economy, there is an incentive for technological and R&D development.
- We can expect a higher degree of efficiency and innovation in a capitalist economy than any other economy.
Advantages of a Capitalist Economic System
- More efficient
- Less bureaucratic
- More innovation
- Discourages discrimination and forces people to trade with each other – breaking down barriers.
Problems of a Capitalist Economic System
- Inequality. Capitalist economic systems invariably lead to inequalities of wealth and income. However, it is argued that this inequality provides an incentive for wealth generation and economic growth.
- Monopoly. In a capitalist society, firms could gain monopoly power over consumers and workers.
- Environmental problems. A capitalist society driven by the profit motive may take decisions to maximize economic income in the short term but at a cost of environmental problems in the long-term.