CAPITALISM

Capitalism is a system of economic organization in which individual persons or group privately own
productive resources including land and they enjoy the right to use resources in whatever manner they
choose.

Capitalism is that economic system in which all or most of the means of production and distribution such
as land, factories. Rail roads etc are privately owned and operated for profit under fully competitive
conditions.

CAPITALISM

 Economic freedom of the mankind

 People are allowed freedom regarding economic activities i.e production, exchange, distribution
and consumption.
 People are allowed to indulge in their economic activities in accordance with their choice and
aptitude.
 Government does not interfere with the economic activities of the people.
 Self interest ie drive for profit dominates the capitalist system.
 Entrepreneurs misuse the economic freedom and labourers are exploited

There are two kinds of capitalism i.e

1. Laissez-faire or free enterprise system.

2. Controlled enterprise system.

1. LAISSEZ FAIRE OR FREE ENTERPRISE SYSTEM

Under laissez faire capitalism, the forces of demand and supply are perfectly free to operate and
entrepreneurs together with consumers freely compete with each other in the market to determine the
prices of goods and services. The entrepreneurs hire the services of factors of production and produce
goods and services for the sake of their profit and consumers thereby attempt to maximize their total
utility through the consumption of the goods and services. For this matter the govt does not interfere
with the economic activities of the people at all and confines it's role and duty to defence matters,
foreign affairs and internal administration. This particular system provided opportunites for exploitation,
so it was reshaped in other form of capitalism which is as follows

2.CONTROLLED ENTERPRISE SYSTEM

Under this system forces of demand and supply are free to operate in their respective spheres. Under
the watchful eye of the government through monetary, fiscal and commercial policies the economic
activities of production and producers are regulated. Under this system and regulations private
entrepreneurs have the right to own private property and to produce goods and services by combining
the services of factors of production under laws made by the government. Thus, the govt's role in the
interest of the welfare state is to have monopoly in some sectors of the economy eg water, and fuel
Thus, this system may technically be defined as "Capitalism is a system of economic organisations in
which individual persons or groups privately own productive resources, including land and persons have
the right to use these resources in whatever manner they choose

CHARACTERISTICS OF THE CAPITALIST SYSTEM:

a. RIGHT OF PRIVATE PROPERTY

A basic characteristic of a capitalist system is for each individual to acquire the right of private property
Ie. material assets and non material assets. Material assets are eg factories, land and building and non
material assets are eg bonds, shares and other securities. The individual may consume, manage,
incharge or even inherit his/her property to any persons desired However, for the purpose of
maximizing efficiency of resources govt, may nationalize certain industries and for resources in which
demand for goods and services is high. The only limitation imposed by the govt. regarding this first
characteristic is that use of private property should not harm the interest of other people and the state
as a whole.

b. FREEDOM OF ENTERPRISE

This right enables the individual to run any business activity. So he may change from one business or
industry to another according to the marginal efficiency of capital used. Thus, the individual is at liberty
to form a partnership, joint-stock company etc. Through this right the individual is also at liberty to hire
the services of factors of production according to his capacity and needs and thereby determine the
reward of the factors through forces of demand and supply and of course all this is not done under
government supervision.

c. COMPETITION

This is an essential feature of a capitalist system. There exists competition among the producers as well
as competition between the producers and consumers, not to forget competition between factors of
production. As a result of a healthy competition cheaper and better quality products are produced and
we also obtain the optimum use of resources, available in a country. A steady competition promotes
economic growth.

d. SELF INTEREST

Self interest or profit motive is the incentive which generates the capitalist system and induces the
people to indulge in various economic activities so that for this matter entrepreneurs are very careful in
ensuring that there is a minimization of cost and maximization of profit. In other words, the
entrepreneur is able to attain a least cost combination of factors of production. However, this is only self
interest from the entrepreneur’s point of view. From the point of view of the workers their self interest
is exclusively to ensure that they get highest possible level of wages. Looking at it from the lender's
point of view ie the financial institutions, interest on loans is their interest. As for the consumers there is
nothing more that interests them having the lowest possible price level on goods and services. Hence, in
a capitalist society everybody is motivated by self interest.

e. FREEDOM OF CHOICE

In a capitalist society producers and consumers are at liberty to make choices. Producers are freely
allowed (generally speaking) to choose the factors of production as regards to their quantity and need.
This ensures a lowest possible cost of production. On the other hand, consumers have a discretion when
buying the goods and services in the market. They may like one product in place of another and so on
and so forth. Combination of producers and consumers as regards freedom of choice leads to optimum
allocation of resources in a country and creates rationality in decision making by both parties.

f. CONSUMERS SOVEREIGNTY

The orthodox view is that the consumer is like a king and the producers, his humble This was said
because the consumers have the purchasing power and may use it as they like. Thus the producer in
order to serve the consumers but primarily to maximise his profit would thereby produce goods and
services in accordance with liking and desires of the consumer. However, nowadays the producers are
becoming more shrewd and control the consumer through their propaganda e.g advertising.

g. IMPORTANCE OF PROFIT

This system as mentioned earlier inter alia operates under the incentive of profit maximization. The
government helps entrepreneurs achieve their dream by initiating policies and economic progress in
their favour to patronise them into producing more and thereby increasing their profit. Hence, as a
whole in the economy the level of exports goes up and the economic situation in a country becomes
favourable, other things are assumed to remain constant.

h. PRICE MECHANISM

The capitalist system is automatically governed by price mechanism. In this system of economy, prices of
commodities are determined at a point where the forces of demand and supply for the commodity
intersect each other. What and how to produce is determined by the price mechanism. This is so
because entrepreneurs will only produce goods whose demand is sufficiently high and the method of
production is such that it enables the entrepreneurs to put the lowest possible price on the good in the
market. Also under this feature of a capitalist society, exchange, distribution, and consumption of
wealth is uniformed.

i. ROLE OF GOVT.

Generally speaking the government intervention is minimal under this system of economy. The only
main function of the government is to regulate economic activities through laying down policies. Under
this system too the government arguably discourages monopolies and discourages production of goods
and services which are injurious to health.
 j. ECONOMIC FLUCTUATIONS

This system of economy grows or expands under instability which is due to the over fluctuating forces of
demand and supply of which at times when investments go up so does everything else thereby an
expansion in the economy is attained. However, there are internal as well as external factors which if
uncontrolled may lead to contraction of the economy. Thus, world inflation, fluctuating forces of
demand and supply are typical phenomena of a capitalist system.

MERITS OF CAPITALISM

1. OPTIMUM USE OF RESOURCES

Due to the competition of the various sectors of the economy eventually entrepreneurs find a way to
produce goods and services at the lowest cost possible and highest profit making attainable. Also due to
the forces of demand and supply for factors of production such resources are used in a way which
eliminates wastage of it.

2 INVENTIONS AND INNOVATIONS

Since under this system of economy, economic freedom is the terword Inventions and innovations may
take place actively. As a e better competition prevails in the market Entrepreneurs trying to umers trying
to macimise total utility leads to

3. ENCOURAGEMENT OF SAVING AND INVESTMENT

Also there is no limit as to ownership of private property Hengs, in der in in the race, the people in
general must hav stressed through more salgs which leads in more investments. Hence, the society
develops and the economy as a whole prospers

REWARDS ARE IN ACCORDANCE WITH CAPABILITY AND

COMPETENCE Rewards to each factor of production are determined or rather depend upon one's ability
and competence to stay in the competition and thus rewards are not limited Thus, producers are
motivated work harder to gain more profits and thereby, the remy prospers Rewards would be l factors
are lethargic and

inefficient or mited.
AVAILABILITY OF CHEAPER AND STANDARDISED PRODUCTS

Due to competition, products are generally similar to each other eg toothpaste, soop cle and thus better
quality and cheaper goods are sold. This benelits consumers outside/inside the country. BETTER
SATISFACTION OF THE CONSUMER

The fact consumers being sovereign results in producers producing goods which are only wanted by the
consumers. Thus táste, fashion etc, of consumers determines the supply of the product in the market
and thus entrepreneurs in this way maximise profits and at the same time help consumers to maximise
their total utility.

DEMERITS OF CAPITALISM

f EXPLOITATION

As we already know the basic philosophy of capitalism is 'economic freedom As a result of this
entrepreneurs take advantage of the freedom by misusing or exploiting this otherwise beneficial
economic activity, Exploitation of labourers as well of consumers takes place disregarding the economy
and to a certain extent religious values. Such is particularly the situation in LDCs where the sole problem
lies in their ever rising growth of population due to which624

demand for goods and services keeps on rising Entrepreneurs knowing that the goods whatever their
price, will be bought take advantage by increasing the prices. On the other hand, if there was the
problem of unemployment, entrepreneurs whould create jobs but only of very low wages Business
collusions L.e. fixing of prices is also a way of exploitation of the consumer.

2 INEQUALITY OF INCOME DISTRIBUTION

In a true capitalist system the entrepreneurs get richer day by day at the expense of the labourers
whose carnings are barely above the subsistence level. This phenomenon if unchecked may well lead to
a revolutionary system which eventually creates instability in the economy.

3. INAPPROPRIATE RESOURCES

USE

OF PRODUCTIVE

Generally in a capitalist society the entrepreneurs inainly produce those goods and services of which
they are certain of consumption by certain classes of society. Moreover, in a capitalist society main
purchasing power is concentrated in the minority and thus to ensure that profits reap in, these
entrepreneurs produce goods which are liked and demanded by those minority groups. So there is a
sharp misallocation of resources and thus in the aggregate sense the society does not achieve
maximisation of total utility.

4. DESTRUCTION OF MORAL VALUES

As a result of the profit motive which operates through self interest entrepreneurs will only produce
those goods which are likely to incur high returns disregarding the ability of the society and in particular
the working class to purchase those goods. Moreover, undesired economic activities such as smuggling,
blackmarketing may occur widely merely because of the profit motive.

5. HELPLESSNESS OF THE CONSUMERS

Although we had previously mentioned that the consumer is sovereign, however such an assumption is
difficult to visualise particularly in LDCs since in these unfortunate countries the growth rate of is quite
high and hence so is demand for the majority of consumers in these countries have only limited
purchasing power and this will have to still purchase goods particularly inelastic ones, even at high price.
Moreover in competition successful entrepreneurs may eliminate small entrepreneurs and thereby
establish monopolies which leads to a 'price setting and eventually leave the consumers helpless. Also
propaganda of the entrepreneur dominates and overpowers consumer sovereignty. 625

UNEMPLOYMENT

From Keynes point of view, in the long run there is always a decline in the MEC. This is the first step to
depression if unchecked eventually unemployment occurs. With the MEC declining in the long run (in
comparison with the given interest rate in the short run), private investment would fall and aggregate
national income, national output, consumption and employment would fall in line too.

SOCIALISM / COMMUNISM

This system is totally different from Fabian socialism as preached by the labour party of U. K Under this
system there is to be no economic freedom. Everything regarding the economy is to be under the
control of one governing body i.e the govt. The main exponent of this economic theory was Karl Marx.
His view was that there are to be only two factors of production practically speaking i.e land and labour.
Since capital comes from the output / expenditure of past/present labour on goods and services and
that organisation is a form of labour, Karl Marx saw no need to create extra factors of production.

Karl Marx was mainly concerned with the benefit of the society or rather labourers as a whole and was
deeply concerned

with their exploitation occurring under a capitalist system. The surplus value which is obtained by the
entrepreneur at the expense of the labourers is also sharply criticised by Marx. According to him, it was
only the labourers right to reap the fruits for their extra hard work put in to create the surplus value.
Karl Marx also criticised the capitalists concept of 'free competition' since this may well lead to big
entrepreneurs eliminating small oncs and this creates an exploitation of the market mechanism and this
affects labourers too (Because unemployment will take place as entrepreneurs have put the small ones
out of business and thus even if the big entrepreneurs decide to employ more labourers, it would be at a
very low wage rate.)

The concept of 'surplus value' arises since the development of science and technology has resulted in
entrepreneur producing more output thus MRP of labourers goes up but their wages remain virtually
the same and so with the growth of capitalism. Karl Marx says that exploitation of labourers increases
too.

Thus defining communism/socialism..........

It refers to any social system on which all means of production eg land, building and imported
companies are owned and managed by the state/government and the people in general make use of the
available resources under an economic plan for their own aggregate welfare. However, pricing,
marketing etc. is retained as in capitalism. Hence, from the definition we may understand that there is
mainly a centralised body planning the economic activity for the whole country and determines the
rewards to the people who obtain the goods and services in accordance with their contribution in the
national income.