What is Capitalism? Its Meaning, Features, Pros, and Cons (Explained)

What is Capitalism?

Capitalism is a type of economic system where means of production are owned and managed by private individuals and institutions in which individuals are free to accumulate and invest capital.

In a capitalist economy, the state only plays a minor role in the marketplace, mainly controlling monopoly and exploitation. So, capitalism is a ‘free-market system’ with no government interference; also called a laissez-faire economy.

In capitalism, economic activities are carried out for private gains or benefits. They private individuals and firms are free to use any technique of production and produce anything they like. In this economic system, a private enterprise economy is characterized by the existence of and considerable unemployment. In capitalism, there may be business fluctuations and this has impacts on the people.

For e.g. the economies of Hong Kong and the USA are examples of capitalism (i.e. capitalist economy).

Basic Features:

Capitalism is characterized in the following ways:

  • It is a market-based economy made up of buyers and sellers.
  • Private ownership of property is allowed.
  • Personal profit.
  • Free competition.
  • Provision of right of private property.
  • Rapidity in production: where goods are produced thinking entire world as a market.
  • Development of economic monopolies, materialistic life styles and individualism.
  • Development of two classes globally and development of social life as per these classes.
  • Market mechanism balances the demand and supply.
  • Profit motive: The goods and services that are produce are the intended to make a profit, and this profit is reinvested into economy.
  • There is consumers’ sovereignty as customers have infinite choices of goods and services.
  • There is no government interference and government interference is only allowed when making and enforcing rules or policies and in controlling monopoly and exploitation.
  • The market itself is regulated through the demand and supplies phenomena.
  • There is a need for continual production and consumption for capitalism to operate efficiently.

Strengths or Advantages of Capitalism

The advantages of capitalism include,

  • Priority to consumers: As there is competition in a free market, the individuals have huge choices on goods and services they consume.
  • Improved quality of goods: The choices of products and services lead to more competition and better products and services.
  • The efficiency of economics: Goods and services produced based on demand create incentives to cut costs and avoid waste.
  • Economic growth and expansion: This increases the gross national product and leads to improved living standards.
  • Here efficient procwdures are rewarded with profit and consumers get quality products at competitive price.
  • Through competition proceduers who are inefficient or who change excessive prices will be put out of the business.
  • There is minimum interference of government in economic life.
  • Division of labor and expertise in work.

Weaknesses or Disadvantages of Capitalism

The disadvantages of capitalism include:

  • Chance of monopoly: Firms with monopoly power (when a specific person or enterprise is the only supplier of a particular commodity) can abuse their position by charging higher prices.
  • Economic Inequality: A capitalist society is based on the right to pass wealth down to future generations. If a small group of people hold all the wealth and that wealth continues to be passed down to the same groups of people, inequality and social division occur.
  • Recession and unemployment: An economy based on the market of consumers and producers is invariably going to experience growth and decline.
  • Price hiking: Heavy expenses on publicity result into increase in cost and price of the commodity.
  • It over emphasis on profits and neglects group intereests and social functions.
  • Gap between poor and rich become very wide.
  • Due to ownership of private property social evils like economic inequilities, misdeeds, corruption, robbery, treachery, etc. increases.
  • Problems of unemployment are likely to appear due to the use of large machines.

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