Foundation course in Humanities- Bachelor of

technology in computer science & Engineering.-3rd sem.

Unit -3

Characteristics of Capitalism:
The following are the basic characteristics of a ‘pure’ capitalism
system:
1. Private Property:
Every individual has a right to hold property. This means that every
individual is free to consume his private property and every individual has a
right to transfer his property to his successors after death. Individuals have
their property rights protected and are usually free to use their property as
they like as long as they do not infringe on the legal property rights of
others.
Private property, however, is protected, controlled and enforced by law.
Private property is necessary because it supplies the motive underlying
economic activity. In a capitalist economy, the factors of production—land,
labour and capital—are privately owned, and production occurs at private
initiative.
2. Free Enterprise:
Free enterprise, an essential feature of the capitalist system, is merely an
extension of the concept of property rights. The term free enterprise implies
that private firms are allowed to obtain resources, to organise production
and to sell the resultant product in any way they choose. In other words,
there will not be any government or other artificial restrictions on the
freedom and ability of the private individuals to carry out any business.

3. Price Mechanism:

The price mechanism plays an important role in the production of goods and
services. Under capitalism, the price is determined by the demand and
supply.

4. The Market System:

The market mechanism is the key factor that regulates the capitalist
economy. A market economy is one in which buyers and sellers express
their opinions about how much they are willing to pay for or how much they
demand of goods and services. Prices guide the purchase decisions of the
consumers.

At the same time, while they decide to buy or not to buy a product,
consumers vote for or against the product by using their money. Thus,
market prices, which reflect the desires of millions of consumers, provide
guidance to investors and other business persons. The market system, also
called the price system, may, therefore, be regarded as the organising force
in a capitalist economy.
5. Economic Freedom:

Another feature of capitalism is economic freedom.

This freedom implies three things:

(1) Freedom of enterprise,

(2) Freedom of contrast,

(3) Freedom to use one’s property.

Under the capitalism, everybody is free to take up any occupation that he likes,
and to enter into agreements with fellow citizens in a manner most profitable to
him.

In a capitalist economy, the individual is free to choose any occupation he is

qualified for. This freedom of choice enables the worker to make the best possible
bargain for his labour. This implies that the employers have to competitively bid for
labour. Freedom of occupational choice, however, does not mean guarantee of the
job a worker opts for; the choice is practically limited by the extent of availability of
the jobs.

6. Consumers’ Sovereignty:

Consumers’ sovereignty is at its best in the capitalist system where consumers

have complete freedom of choice of consumption. Under capitalism, the consumer
is the king. Consumers’ sovereignty means freedom of choice on the part of every
consumer. The consumer buys whatever he likes and as much as he likes.

The money price which the consumer offers expresses his wish. The production
decisions in the free market economy are based on the consumer desires which are
reflected in the demand pattern. Frederic Benham remarks- “Under capitalism, the
consumer is the king.”

7. Unplanned Economy:

As is clear from the features mentioned above, the capitalist system is essentially
characterised by the absence of a central plan. No central economic planning is
done in a capitalist economy.

There are no rules and regulations framed by the central agency. The productive
function is the result of decision taken by a large number of entrepreneurs.
Freedom of enterprise, occupation and property rights rule out the possibility of a
central plan. Resource allocation and investment decisions in a free market
economy are influenced by market forces rather than by the State.

8. Freedom to Save and Invest:

The freedom to save is implied in the freedom of consumption, for savings depend
on income and consumption. The term saving implies the sacrifice of consumption.
As George Halm observes- “The right to save is supported by the right to transmit
wealth, so that the choice between present and future consumption is not limited
to the adult life of one person. The freedom to save, inherit, and accumulate wealth
is, therefore, a right which is perhaps more typical for the private enterprise system
than is free choice of consumption and occupation.”

9. Economic Inequalities:

Another feature of capitalism is the existence of glaring inequalities in income,

wealth and economic power. The existence of big monopolies results in the
concentration of not only income and wealth but also of economic power in the
hands of a few people.

10. Motive of Profit:

Profit is an important element of capitalism Investment tends to take the direction

in which there is more possibility of profit. If the producers feel that they can obtain
greater profit by the production of comfortable goods they will be inclined to do so
without caring what people actually need.

11. Competition:

Competition among sellers and buyers is an essential feature of an ideal capitalist

system. Competition reduces market imperfections and associated problems.
Therefore, in a free market economy, a sufficient amount of competition is
considered necessary if the whole production and distribution process is to be
regulated by market forces.

Competition is necessary in a private enterprise economy to keep initiative

constantly on alert, to protect the consumer, and to maintain a sufficiently flexible
price system.

12. Limited Role of Government:

The absence of a central plan does not mean that the government does not play any
role in a private enterprise economy. Indeed, government intervention is necessary
to ensure some of the essential features and smooth functioning of the capitalist
system. For example- government interference is necessary to define and protect
property rights, ensure freedom of entry and exit, enforce contractual agreements
among private entrepreneurs, ensure the satisfaction of certain community wants,
etc. However, government interference in the system is comparatively very limited.

The pure capitalist system described above is highly idealised system. There is
hardly any pure capitalist or free enterprise system in the real world today. The
capitalist economies of today are characterised by state regulation in varying
degrees. As a matter of fact, the modern capitalist economies are mixed or
regulated systems.
Such regulated capitalist or market economies include the United States, Canada,
Australia, the United Kingdom, France, Italy, the Federal Republic of Germany,
Japan, Spain, New Zealand, the Netherlands, Belgium, Denmark, Sweden,
Switzerland, Norway, etc.

Merits of Capitalism:

The merits of capitalism are as follows:

1. Automatic Working- Capitalism is controlled by the profit motive and price

mechanism. Thus, there is coordination under capitalism. The whole activity is
automatic in capitalism.

2. Capital Formation- Capitalist economy encourages formations of capital in the

society. New industrial and commercial institutions are set up with the objective of
profits and also encourage income and savings.

3. Maximum Satisfaction- In capitalism, production is carried on, keeping in view

the needs and tastes of the consumer. This provides maximum satisfaction to the
consumer who is a king in a capitalist economy.

4. Reward according to Capacity- In capitalism people are rewarded according to

their capacity, to work and labour. The more people have the spirit of daring
adventure, the more they are rewarded.

5. Efficiency- Under capitalism there is wide competition among the producers. In

the competitive race it is the able producer who wins the race. An efficient producer
produces the best goods at cost of production. Thus, capitalism encourages
efficiency.

Demerits of Capitalism:

The demerits of capitalism may be discussed as below:

1. Economic Inequality- Capitalism gives complete freedom of private property,

occupation and profession and is controlled by price mechanism. This leads to
economic inequalities. The rich become richer and the poor become poorer.

2. Inefficiency in Working- The efficiency of the capitalistic system depends on

the existence of free competition and the mobility of factors of production. But the
existence of social, economic and legal issues hampers free competition with the
result that the factors of production often lie idle.

3. Neglect of National Interest- The capitalists are mainly oriented towards self-
interest of maximisation of profits and for this purpose they complete each of the
formalities. They neglect the social interest. They do not complete their activities,
keeping in view the national interest.

4. Lack of Coordination- Under capitalism the central government has no control

over the activities of the businessmen and producers. The decisions pertaining to
production mostly depend on the producers. The leads to irregularities, excess
production and trade cycles. Thus there is a lack of coordination under capitalism.

5. Unemployment- Some of the economists are of the view that under a capitalist
system full employment situation cannot be brought due to the lack of central
economic planning. As a result, optimum use of resources cannot be possible. This
brings up the situation of unemployment.

Evaluation of Capitalism:

Pure capitalism is an idealised system. It is very difficult to realise the avowed

virtues of a free enterprise economy in the real world. There is no invisible hand
that ensures the smooth functioning of the capitalist system.

Unregulated capitalism suffers from the following drawback:

1. In capitalism investment allocation is guided by only profitability criterion,

sufficient investment may not take place in areas where profitability is low, however
essential they may be. Profitability would be generally high in sectors which cater
to the needs of the upper income strata.

A large part of the resources of the nation may, therefore, be utilised for the
satisfaction of the needs of the well-to-do. Resource allocation under pure
capitalism will not, therefore, be optimal.

2. The right to property and freedom of enterprise are likely to lead to concentration
of income and wealth and the widening of inter-personal income disparities.

3. Though, according to the theory, there will be free competition, in the real world
the large firms are likely to gain an advantageous position which would eventually
lead to monopolies.

4. The operation of free market mechanism in the long run is detrimental to the
lower and middle level of society. It creates imbalances in the standard of living
also.

On the basis of the demerits of capitalism H.D. Dickinson writes, “Capitalism … is

fundamentally blind, purposeless, irrational and is incapable of satisfying many of
the urgent human needs.