Question

Describe the merits and demerits of a capitalist economy.

Answer 1

Merits of a Capitalist Economy

1. 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.
2. 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.
3. Since all resources and factors of production are under private ownership they are used most productively. This results in optimum utilization of resources,
4. Consumers also benefit from 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.
5. Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers
6. 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. The main de-merits or dis-advantages of the capitalist economy are as following

1. Inequality of Distribution of Wealth and Income:
The system of private property acts as a means of increasing inequalities of income among different classes. Money begets money. Those who have wealth can obtain resources and start big enterprises. The propertyless classes have only their labor to offer. Profits and rents fewer classes have only their labor to offer. Profits and rents are high.
Wages are much lower. Thus the property holders obtain a major share of national income. The common masses have their wages to depend upon. Although their number is overwhelming their share of income is relatively much lower.
2. Class Struggle as Inevitable in Capitalist Economy:
Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two main classes into which capitalist society is divided. The ‘haves’ which are the rich propertied class own the means of production. The “have not’s” which constitute the wage-earning people have no property.
The ‘haves’ are few. The ‘have not’s are in the majority. There is a tendency on the part of the capitalist class to exploit the wage-earners. As a result, there is a conflict between the employers and the employees which leads to labor unrest. Strikes, lockouts and other points of tension. All these have a very bad effect on production and employment.
3. Social Costs are Very High:
A capitalist economy industrializes and develops but the social costs of the same are very heavy. Factory owners running after private profit do not care for the people affected by their production. The environment is polluted because factory wastes are not properly disposed of. Housing for factory labor is very rarely provided with the result that slums grow around big cities.
4. Unnecessary Multiplicity and too Much of Competition:
Consumers have to pay a high price for their freedom of choice and provision of variety. There is sometimes too much competition leading to unnecessarily high costs of production because competitors bid the prices of resources too high. There is a wasteful advertisement. Sometimes sub-standard goods are highly advertised and the consumer is deceived.
5. Instability of the Capital Economy:
A capitalist economy is inherently unstable. There is a recurring business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close down, workers are rendered unemployed. At other times the business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating periods of recession and boom lead to a good deal of wastage of resources.
6. Unemployment and Under-employment:
A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions. Business fluctuations also result in a large part of the labor force going unemployed during depressions. Not only this, workers are not able to get full-time employment except under boom conditions.
7. Working Class does not have Adequate Social Security:
In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment. As a result, widows, and children have to undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in overpopulated less developed countries.
8. Slow and Unbalanced Growth:
A free-market economy may work automatically but the rate of growth is rather slow. Moreover, as the economy progresses, there is no all-round development. Some areas develop much faster while others remain backward. In­dustries may expand fast while there may be poverty in agriculture.
9. No Bargaining Capacity of Labourers hence Exploitation:
In a capitalist economy, workers are often paid a wage rate below their productivity. This is because; they do not have the bargaining power to get their due from the rich capitalist. Women and children are often paid a very low wage rate. There is no equal pay for equal work.
10. Growth of Monopolies with their Evils:
A capitalist economy is competitive only in theory. In practice, the few competitors often arrive at an understanding and exploit the consumer. Sometimes the bigger firms buy or eliminate the smaller firms to establish their supremacy in particular lines or production. They charge high prices and do not have any compulsion to improve the efficiency of production. Thus, the much talked about the efficient working of a capitalist economy becomes a myth.