Capitalist Economic System

Group 5

Member Group :

1. Sania Nadarista 1707511051 (05)

2. Tesa Amalia 1707511141 (12)

PROGRAM OF ECONOMIC STUDIES OF DEVELOPMENT

ECONOMIC AND BUSSINESS FACULTY
UDAYANA UNIVERSITY
2019

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 CONTENT LIST

COVER................................................................................................................................
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CONTENT LIST.................................................................................................................
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INTRODUCTION...............................................................................................................
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TOPICS ...............................................................................................................................
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I Understanding The Capitalist Economic System ...................................................
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II Charateristic of Capitalist Economic System ........................................................
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III The Advantages and Weakness of Capitalist Economic System ..........................
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REFERENCES ...................................................................................................................
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 INTRODUCTION

A market economic system or a capitalist economic system is an economic

system when the economic sector is left entirely to the demand and supply in
society (market mechanism). This system is in accordance with the doctrine of
laissez faire 'let things go their own way' which was conceived by Adam Smith. In
a market economy system it is stated that full freedom to individuals will bring
prosperity to society.This system was developed by the classics, Adam Smith.
Adam Smith in his book The Wealth of Nations (1896) said that for the success of
an economy, the factors of production must be left to each individual and for
prosperity, free trade and very high competition must be applied in the economy
without any regulating party. So it is clear here that the capitalist economic system
does not want government interference.

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 TOPICS

I. Understanding The Capitalist Economic System

The economic system was born in the 1960s with two extreme types of
economic systems namely capitalist and socialist. These two systems are very
different in terms of the three criteria of the peculiarities of the economic system,
namely the role of government, the freedom to have factors of production, and the
freedom to compete.

A market economic system or a capitalist economic system is an economic

system when the economic sector is left entirely to the demand and supply in
society (market mechanism). This system is in accordance with the doctrine of
laissez faire 'let things go their own way' which was conceived by Adam Smith. In
a market economy system it is stated that full freedom to individuals will bring
prosperity to society.

In Sanusi, the capitalist economic system is an economic system in which

productive wealth is mainly privately owned and production is mainly carried out
for sale. The purpose of private ownership is to obtain a profit / profit large
enough from the results of using productive wealth. It is very clear and the motive
for seeking profit, together with inheritance institutions and fostered by the law of
agreement as a great engine of capitalism.

The capitalist economic system, or better known as the free market economic
system, is an economic system in which the role of the government in the
economy is very small, even non-existent. This system was developed by the
classics, Adam Smith. Adam Smith in his book The Wealth of Nations (1896) said
that for the success of an economy, the factors of production must be left to each
individual and for prosperity, free trade and very high competition must be applied
in the economy without any regulating party . So it is clear here that the capitalist
economic system does not want government interference. This economic system
focuses on the freedom of individual ownership of capital by citizens. Because in
reality not all citizens are able to participate in the ownership of capital, the
capitalist economic system is characterized by the division of society into two
groups, namely capital owners (employers) and owners of labor (workers). If the
employer lives from the accumulation of capital, then the group of laborers lives
from selling their labor. In this case it appears that the role of government in the
economy is relatively small, the government only functions as a protector of its
citizens from war, injustice, and providers of infrastructure.

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 Speaking of government intervention, basically divided into two parts,
namely:

a) Government intervention to strengthen the market economy, and

b) Government intervention as a supplement to a competitive market

economy

Of the two types of interventions, their application in developing countries is

government intervention as Agent of Development, while Western countries are to
strengthen the market economy.

The basic principle of the capitalist economic system is the operation of

unseen hands moved by self-love expressed by Adam Smith. The core thoughts
that were sparked by Adam Smith include the following:

A. Invisible hand "will move economic activity, that is, by the desire of a
person or group of people to provide goods and services to obtain another.
For example: clothes makers produce clothes not out of love for others but
for profit, but the clothes maker will avoid profits that are too high which
will result in the buyer buying clothes elsewhere which is cheaper. So the
clothes maker must consider the price correctly in order to compete with
others.
B. Prices in the market can be shaken because the law of supply and demand
and the desire of entrepreneurs to use their capital as well as possible.
C. The government of a country has three very important tasks, namely
protecting the country from violence and other free state attacks,
protecting the community from injustice or oppression by other
communities or establishing reliable legal entities, establishing and
maintaining several institutions or facilities for the public that are cannot
be made by individuals.

The economic principle adopted by the capitalist economic system is that each
person receives compensation based on his work performance (distributive
justice). This capitalist economic system is more widely adopted by Western
countries, such as America, Western Europe, and England.

II. Charateristic of Capitalist Economic System

There are six (6) principles which can be seen as characteristic of the capitalist
economic system, namely as follows:

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 1. Private property rights

In a capitalist economic system the means of production or economic

resources such as natural resources, capital and labor are owned by individuals
and private institutions.

2. Freedom of effort and freedom of choice

In the capitalist economic system which is meant by:

 Freedom of business is that production activities can be freely carried out

by anyone who has the initiative.

 Whereas what is meant by freedom of choice in the capitalist economic

system is concerning the sovereignty of consumers and the freedom of
entrepreneurs to obtain economic resources to produce a product of their
own choosing to sell with the aim of seeking maximum profit. Freedom of
choice also includes the freedom of workers to choose every type of work
they want. Freedom of choice is also included in the freedom to make
various agreements.

3. Motives of self-interest

The main strength of the capitalist economic system is individual motivation

to fulfill one's own interests / benefits.

4. Competition

Capitalist economic system uses the market mechanism with the principle of
laissez faire (free competition). The free competition system is one of the
important institutions of the capitalist economic system. Every individual or
businessman, motivated to seek maximum private profit. private economic actors,
both buyers are free to compete in the market with their respective strengths.
Every private economic actor is free to enter and leave the market.

5. Prices are determined by market mechanisms

All decisions taken by entrepreneurs (sellers) and consumers (buyers) are

made through the market system. In other words, the level of price and the amount
of production sold is determined entirely by the strength of demand and supply.

6. The limited role of the government

In a capitalist economic system, the government still has the role of

regulations which prohibit monopolistic practices that can limit individual

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freedoms, for example issuing regulations that prohibit monopoly practices that
are non-natural in nature and protect consumer rights and the worker.

Dumairy (1996) defines a capitalist economic system seen from the

terminology of microeconomic theory. According to him, the capitalist economic
system is an economic system that relies completely on the market mechanism of
the principle of laissez faire (free competition), believing in the ability of the
invisible hand to achieve economic efficiency. It is the market mechanism (the
power of demand and supply) that will efficiently determine the three issues.

III. The Advantages and Weakness of Capitalist Economic System

The advantages of capitalist economic system are:
1. Individuals are free to manage their respective economic resources. This
will certainly encourage community participation in the economy.
2. Free competition between individuals will realize the stage of "production"
and the level of "price" at a reasonable level and will help maintain a
rational adjustment between the two variables. Competition will maintain
profits and wages at a modest rate.
3. The existence of individual freedom encourages independence of business
and achieve the best results.
4. The spirit of seeking maximum profits will increase work motivation,
innovation, and work productivity.
5. The existence of fair competition based on market mechanisms can
encourage progress in business.
The weakness of capitalist economic system are:
1. Unlimited free competition results in a lot of ugliness in society when it
disrupts work capacity and the economic system and the emergence of a
competitive spirit among individuals. For example, unlimited individual
rights to own property result in an unequal distribution of wealth in society
and ultimately damage the economic system.
2. With a radical difference between the rights of employers and workers,
wage earners do not have the same opportunities as their rivals, so this
injustice deepens the gap between rich and poor.
3. The capitalist economic system, on the one hand, provides all the benefits
of production and distribution under the control of experts, which
overrides the problem of the welfare of many people and limits the flow of
wealth among certain people. On the other hand, guarantee the welfare of
all workers to a number of selfish people.
4. The belief that market mechanisms can solve economic problems is only
right when the economy goes without crisis. If a crisis occurs, the
capitalist economic system is unable to solve it. As happened in the great
depression of 1929.

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 Most of the capitalist economic system are found in countries that embrace
liberal political understanding in the countries of Western Europe, the United
States, and Japan.

REFERENCES

Arifin, Imamul. 2007. Membuka Cakrawala Ekonomi. Bandung: PT Setia Purna

Inves.

Mahmud, Amir. 2016. Perekonomian Indonesia Pasca Orde Reformasi. Jakarta:

Penerbit Erlangga.

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Tambunan, Dr. Tulus T.H. 2015. Perekonomian Indonesia. Bogor: Ghalia
Indonesia.

Itang dan Daenuri, Adib. 2017. “Sistem Ekonomi Kapitalis, Sosialis, dan Islam”.
Banten: UIN Sultan Maulana Hasanuddin Banten.