Capitalist Economy


The capitalist economy is the oldest form of economy.

Earlier economists supported the policy of ‘laissez fair’ meaning leave free.

They advocated minimum government intervention in the economic activities.

The following are the main features of a capitalist economy;

[1] Private property

In a capitalism system all the individuals have the right to own property.

An individual can acquire property and use it for the benefit of his own family.

There is no restriction on the ownership of land, machines, mines, factories and to earn profit and accumulate wealth.

After the death of a person the property or wealth is transferred to the legal heirs.

Thus the institution of private property is sustained over time by the right of inheritance.

[2] Freedom of enterprise

In a capitalist economy the government does not coordinate production decisions of the citizens.

Individuals are free to choose any occupation.

Freedom of enterprise implies that business firms are free to acquire resources and use them in the production of any good or service.

The firms are also free to sell their product in the markets of their choice.

A worker is free to choose his/her employer.

In small business units owner himself takes the risk of production and earns profit or loss for himself.

But in modern corporations the shareholders take risks whereas paid directors manage business.

Thus the individual supervision of one’s own capital is now no longer required to earn profit.

Government or any other agency does not impose restrictions/obstacles in the way of workers to enter or leave a particular industry.

A worker chooses that occupation where his income is maximum.

[3] Consumer’s Sovereignty

In a capitalist economy consumers are like a king.

They have the full freedom to spend their income on goods and services that give them maximum satisfaction.

In capitalist system production is guided by consumer’s choices.

This freedom of consumers is called consumer’s sovereignty.

 [4] Profit Motive

Self-interest is the guiding principle in capitalism.

Entrepreneurs are always motivated to maximize their residual profit by minimizing cost and maximizing revenue.

This makes the capitalist economy an efficient and self-regulated economy.

[5] Competition

There are no restrictions on the entry and exit of firms in a capitalism system.

The large number of producers are available to supply a particular good or service and therefore no firm can earn more than normal profit.

Competition is the fundamental feature of capitalist economy and essential to safeguard against consumer’s exploitation.

Although due to large-size and product distinction monopolistic tendencies have grown these days still the competition can be seen among a large number of firms.

[6] Importance of markets and prices

The important features of capitalism like private property, freedom of choice, profit motive and competition make a room for free and efficient functioning of price mechanism.

Capitalism is essentially a market economy where every commodity has a price.

The forces of demand and supply in an industry determine this price.

Firms which are able to adjust at a given price earn normal profit and those who fail to do so often quit the industry.

A producer will produce those goods, which give him more profit.

[7] Absence of government interference

In a free enterprise or capitalist economy the price system plays an important role of coordinating agent.

Government intervention and support is not required.

The role of government is to help in free and efficient functioning of the markets.

 

Capitalism in today’s world

Pure capitalism is not seen in the world now-a-days.

The economies of USA, UK, France, Netherlands, Spain, Portugal, Australia ect. are known as capitalistic countries with active role of their respective government in economic development.