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.
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:
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.
Freedom- The essence of classic capitalism is the freedom to choose things to do.
Innovation- Research and development of new ways to gain profit is the motive of a market capitalist economy.
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-
Existence of private property
Freedom of ownership
Working on the price mechanism
Desire to earn profit
Free competition and cooperation go together (Refer capitalist economy definition)
Sovereignty of consumer
Gives birth to class-conflicts
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:
If the production of goods is as per the taste and preferences of the consumer, it leads to maximum satisfaction.
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.
There is absolute economic freedom that means freedom to choose occupation and enterprise.
As per the availability of resources, the optimum utilization of goods is to be done.
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.
A free-market economy provides a variety of goods to consumers.
The merit of a capitalist economy is that it provides flexibility in the market.
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:
Unequal distribution of income
Poor get poorer and the rich get richer- class struggle
High social costs
Unwanted multiplicity and way too much competition
Unsteadiness of capitalist economy
The situation of unemployment and under-employment
Slow development
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.
FAQs on Capitalist Economy
1. What is the government's role in a Capitalist Economy?
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.
2. What is Marxism?
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 the 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.
3. What are the pillars on which a capitalistic economy stands?
Capitalism is an economic system where the main motive of a businessman is to make a profit and the market is free from any form of control. It stands on the following important pillars:
Every individual has private property, it could be intangible goods like bonds and shares or tangible goods like buildings, land etc,
Every businessman or a manufacturer produces or sells goods in the interest of earning profit. In a production process, the profit gained is taken by the capitalists and the labour gets wages but not a share in the profit
The market has many competitors selling the same goods. The customer has the option to buy from different sources
The government’s role is confined to providing a suitable environment and protecting individual’s rights
Everyone has the freedom to choose, workers can leave the job for better opportunities, customers get multiple sources to buy, manufacturers have many items to produce.
4. What is the difference between capitalism and communism?
Both the ideologies emerged in the last centuries, capitalism as an ideology was formulated by the economist Adam Smith through his work “The Wealth of Nations”. On the other hand, communism as an ideology was formulated by Karl Marx through his work “Communist Manifesto” which is a response to capitalistic ideology. Both are opposite to each other as the first one promotes private ownership and the latter one promotes community ownership of resources. Capitalism follows the principle of individual rights. It practises the class distinction between the haves and has not. Government interference in the economy is either negligible or completely absent and the government is democratic. All the factors of production in this economic system are privately owned by an individual. On the other hand, communism is a form of economy where community rights are upheld. We can see a totalitarian government and an egalitarian society. There is high government interference in the economy and market and the wealth is distributed according to the need. All the factors of production are owned by the state in this form of an economic system.
Society is given preference compared to individual freedom. In a communist economy, the state determines who is an employer and who is an employee.
5. What does the “invisible hand” in a capitalistic economy mean?
capitalism is an economic system where all the factors of production are owned by private individuals and the main motto of a manufacturer is to make a profit. The concept of the “invisible hand” is related to the capitalistic economy. It tells us that the profit accrued by capitalists will trickle down to the people who are at the bottom. It states that when an individual acts on his self-interest, he automatically and unknowingly causes good and benefit to everyone. In a capitalistic economy, profits earned after the production process and selling goods are gained completely by the manufacturers or capitalists. But the labour who work in producing the goods is alienated from the goods and just earn a minimum subsistence wage.
