Category: Economic Problems

  • Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    What does mean Capitalist Economy? Meaning; It is one of the oldest economic systems and its origin is at the time of mid-eighteenth century in England in the wake of the Industrial Revolution. It is that system, where means of production are owned by private individuals, profit is the main motive and there is no interference by the government in the economic activities of the economy. They are free to use them with a view of making the profit. Everybody is free to take up one line of production he likes and is free to enter into any contract with others for his profit. Hence, it is known as the free market economy. So, what is the topic we are going to discuss; Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits.

    Here are explained; What is the Capitalist Economy? with Meaning, Definition, Features, Merits, and finally Demerits.

    What is the Capitalist Economic System of India? Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures. So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products.

    Definition of Capitalist Economy:

    According to Wright,

    “Capitalism is a system in which, on average, much of the greater portion of economic life and particularly of net new investment is carried on by private (i.e. non-government) units under conditions of active and substantially free competition and avowedly at the least, under the incentive of hope for profit.”

    In the words of Loucks,

    “Capitalism is a system of economic organization featured by private ownership and use for private profit of man-made and nature-made capital.”

    According to Ferguson,

    “Capitalism is a free-market form or capitalistic economy may be characterized as an automatic self-regulating system motivated by self-interest of individuals and regulated by competitions.”

    Features of Capitalist Economy:

    Capitalist economy has the following main features:

    • Private Property: In this economy, private property is allowed. All means of production like machines, implements, mines, and factories etc. come under private property.
    • Price Mechanism: The Capitalist economy is gained by the price mechanism. Here prices are determined by the interaction of demand and supply without the interference of any kind by the government or any other external forces.
    • Freedom of Enterprise: In this system, every individual is independent to his means of production in any occupation that one likes.
    • The sovereignty of that consumer: Under this system, the consumer plays the most vital role. The entire production pattern is based on the desires, wishes and the demand of the consumer.
    • Profit Motive: The maximization of profit is the main motive of the producer. Profit guides the production in this type of economy.
    • No Government Interference: Under a capitalistic system, the government does not interfere in day-to-day economic activities. This means producers and consumers are free to make decisions.
    • Democratic: The capitalistic system is more democratic in comparison to other economic systems as there are more changes to chancel according to new environments of the economy.
    • Self-Interest: The inspiring force in this system is self-interest. It leads to hard work and to earn maximum income by satisfying their consumers.
    Capitalist Economy Meaning Definition Features Merits and Demerits
    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits. Image credit from #Pixabay.

    Merits of the Capitalist System:

    The following advantages or merits below are:

    • Individual Motivation: The capitalist economic system motivates the businessmen to develop new items, produce in good quality and undertakes innovative activities because of the initiative of larger profits.
    • Flexible and Dynamic Economy: Motivated by profits, individual initiatives and competition among the traders and businessmen, there is dynamism in the capitalist economy continuously goes ahead with changes and innovative activities.
    • The benefit of Perfect Competition: There exist perfect competition between different traders and creditors who benefit from the capitalist economy. There is no change of monopolistic profits because of perfect competition. The existence of competition initiates more economic welfare. According to George Steiner, from the point of view of public welfare, competition serves as a regulator and reducer of prices as an incentive to improved production efficiency. Without competition, the capitalist economy would become stagnant, unproductive and exploitative.
    • Capital Formation: The capitalist economy encourages for the formation of capital, wealth and assets in the society. New industrial and commercial institutions are set up with the objectives of profits and also encourages the creation of additional employment, income, and savings. 
    • 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.
    • Consumers also benefit in 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.
    • Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers.

    Demerits of Capitalist System:

    The countries which have become independent after the 1950s adopted mostly the socialistic economic system because of the demerits of the capitalist economic system. Human welfare aspect has completely disappeared in the capitalist system and it has created disparity in income and wealth. H.D. Dickinson writes, “Capitalism. …is fundamentally blind, purposeless, and irrational and is incapable of satisfying many of the urgent human needs.

    Some of the important disadvantages or demerits of capitalism are:

    • Increase Inequalities: It increases inequalities in wealth, income and opportunities. Increase in economic inequalities creates economic and social problems.
    • Economic Instability: It is difficult to establish a balance between the demand and supply. There will be a trade boom or recession or the frequent fluctuations in prices. All the decisions relating to production are taken by the capitalist and due to wrong estimates of future requirements; imbalance in production is generally found. Due to fluctuations in prices industrial and other economic activities become unstable and this will have an adverse impact on economic development and expansion.
    • Inefficient Production: The capitalist always produces with the motive of profit only. He always produces goods for use by the higher income class of the community so that maximum profits can be obtained. There is no place in the mind of the capitalist to produce for consumption by common people. Goods and service are not produced by keeping in view the interest and wants of the common man, but with the motive of capitalist’s profits.
    • Class Conflicts: The capitalist economy divides the community into two parts; on the first side the top capitalists and on the other side labor class which depends on the capitalists to fill their stomach. Since the production resources are controlled by the capitalists they exploit the labor from their reasonable reward.
    • Unemployment: In a capitalist economy, full employment situation cannot be brought due to lack of central economic planning. With the result, optimum use of resources cannot be possible. This brings the situation of unemployment.
    • Monopoly and Exploitation: The establishment of large-scale business, improvement in technology, the motive of maximization of profits, formation of combinations and acute competition are the reasons for the creation of monopoly and exploitation of customers.
    • Neglect of National Interest: They are mainly oriented towards self-interest of maximization of profits for which they compete with each other. They neglect the social interests. They do not undertake their activities keeping in view the national interest.
  • Economic Laws: Meaning Definition Features Nature

    Economic Laws: Meaning Definition Features Nature

    What does mean Economic Laws? The Generalization or Law is the establishment of a general truth based on particular observations or experiments. Which trace a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena. So, what is the question we going to study?

    The Concept of Economic Laws: first study their Meaning, Definition, Features, Nature, and finally Limitations.

    Meaning and definition of Economic Laws: Economic laws are nothing more than careful conclusions and inferences drawn with the help of reasoning or by the aid of observation of human and physical nature. In everyday life, we see that man is always busy satisfying his unlimited wants with limited means. In doing so, it acts upon certain principles.

    Marshall defined economic laws in these words,

    “Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

    On the other hand, according to Robbins,

    “Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.”

    These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behavior.

    Features of Economic Law:

    The following six points highlight the features of economic laws.

    Are not Commands:

    Economic laws are not orders of the state (government) and do not command. They formulate based on people’s behavior in the real world.

    Are not Exact:

    Since economic laws deal with the actions of human beings having free will. They are not as exact as the laws of the natural sciences. They are statements that are true only in general. For example, the statement that men will buy goods at the cheapest available market is true generally but not universally. A man inten­tionally pays a higher price to help a relative or a friend. But such cases form a small fraction of the total transactions of human beings.

    Economists tacitly ignore these excep­tional cases and frame them. Their laws on the expectation that men’s actions will, in the great majority of cases, follow a uniform pattern. This makes economic laws generally true, but less exact than physical laws. “Economic laws are probability laws, not exact relationships.” “Abnormal as well as normal patterns of probabilities occur in economics”, as Samuelson has commented.

    Statements of Cause and Effect: 

    Economic laws, like scientific laws, are statements of cause and effect. They attempt to state the effects that will follow from particular causes. Unfortunately, in economic affairs, many factors operate simul­taneously. And it is impossible to isolate each factor to find out its effects separately. The qualifying clause “other things remaining the same” (ceteris paribus), uses to get over this difficulty. But in economic life, other things generally do not remain the same. Hence, economic laws are never exact enough to enable accurate predictions or prophecies existing made.

    Hypothetical: 

    Economic laws are hypothetical Economic laws are also hypothetical, i.e. They are conclusions drawn from certain assumptions or hypotheses. But in this, economic laws do not differ from other scientific laws. The laws of science also start from certain hypotheses and deduce certain consequences.

    Predictions are Difficult: 

    As regards making predictions the following example may note. The simple and exact laws of gravitation enable astronomers to make accurate forecasts. But in the case of tides, the level of water depends on so many factors (e.g., the strength of the attracting force, geo­graphical features of the country, etc.) that it is impossible to forecast the level accurately. Marshall, therefore, says, “The laws of econo­mics are to compare with the laws of tides rather than with the simple and exact laws of gravitation”.

    There are the Same Physical Laws: 

    Some laws dealt with in books of economics deal with inanimate nature, e.g., the Law of Dimini­shing Returns. These laws borrow from other sciences.

    Nature of Economic Laws:

    The following Nature of Economic Laws below are;

    The nature of economic laws is that they are less exact as compared to the laws of natural sciences like Physics, Chemistry, Astronomy, etc. An economist cannot predict with surety what will happen in the future in the economic domain. He can only say what is likely to happen shortly. The reasons why economic laws are not as exact as that of natural sciences are as follows:

    First

    Natural sciences deal with the lifeless matter. While economics, we are concerned with the man who endows with the freedom of or may act in whatever manner he likes. Nobody can predict with certainty his future actions. This element of uncertainty in human behavior results in making the laws of economics less exact than the laws of natural sciences.

    Secondly

    In economics, it is very difficult to collect factual data on which economic laws are to be based. Even if the data stands collected it may change at any moment due to sudden changes in the tastes of the people or their attitudes.

    Thirdly

    Many unknown factors affect the expected course of action and thus can easily falsify economic predictions. Dr. Marshall has devoted one chapter in his famous book “Principles of Economies” to discussing the nature of economic laws. He writes, that laws of economics are to compare with the laws of tides rather than with the simple and exact law of gravitation.

    The reason for comparing the laws of economics with the laws of tides by Marshall is that the laws of tides are also not exact. The rise of tides cannot be accurately predicted. It can only say that the tide expects to rise at a certain time. It may or may not rise. Strong wind may change its direction to the opposite side. Instead of rising may fall. So is the case with the laws of economics.

    Scientific or Natural or Physical Laws: 

    Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result expects to follow from a particular cause in economics. The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will reduce and the law will not work properly.

    As pointed out by Marshall, “The law of gravitation is, therefore, a statement of tendencies”. Similarly, economic laws are statements of tendencies. For instance, the law of demand states that other things remain the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws. Such as the Law of Diminishing Returns which deals with inanimate nature.

    Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

    Non-Precise like the Laws of Natural Sciences:

    Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as scientific laws. For instance, the law of gravitation must operate whatever the conditions may be. Any object coming from above must fall to the ground. But demand will not increase with the fall in price. If there is a depression in the economy because consumers lack purchasing power.

    Therefore, according to Marshall, “There are no economic tendencies. Which act as steadily and can measure as exactly as gravitation can, and consequently. There are no laws of economics. Which can compare for precision with the law of gravitation”. Their control of experimentation in the natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in their experiments in the laboratory.

    But in economics

    Controlled experiments are not possible because an economic situation is never repeated exactly at another time. Moreover, the economist has to deal with the man who acts by his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory. As a result, predictions concerning human behavior are liable to error.

    For instance, a price rise may not lead to a contraction in demand rather it may expand it. If people fear the shortage of goods in anticipation of war. Even if demand contracts as a result of the price rise. It is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case. They may not be reliable in the ever-changing environment of the real economy. And they are in no sense, of course, inviolable.”

    Non-predictable like the Law of Tide:

    But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at the full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise. But this may not happen. It may rise earlier or later than the predicted time due to some unforeseen circumstances.

    Marshall, therefore, compared the laws of economics with the laws of tides “rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must need be inexact and faulty.”

    Behaviorist:

    Most economic laws are behaviorist, such as the law of diminishing marginal utility, the law of Equimarginal utility, the law of demand, etc., which depend upon human behavior. But the behaviorist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform. This is because all men are not rational beings.

    Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”

    Indicative:

    Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

    Hypothetical:

    Prof. Seligman characterized economic laws as “essentially hypothetical” because they assume ‘other things being equal and draw conclusions from certain hypotheses. In this sense, all scientific laws are also hypothetical as they too assume the ceteris paribus clause. For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water. If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed.

    Still, there is a difference between hypothetical elements present in economic laws and against scientific laws. It is more pronounced in the former because economics deals with human behavior and natural sciences with the matter. But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise, and accurate.

    This is because economies possess the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact. Despite this, economic laws are less certain than the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

    Truisms or Axioms:

    Certain generalizations in economics may state as a truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally valid.

    Historico-Relative:

    On the other hand, economists of the Historical School regarded economic laws as abstractions that are historical-relative, that is economic laws have only a limited application to a given time, place, and environment.

    They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historical-relative. They are simply relative to the existence of certain conditions which assume to give. If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid.

    But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”

    Economic Laws Meaning Definition Features Nature and Limitations
    Economic Laws: Meaning, Definition, Features, Nature, and Limitations. Image credit from #Pixabay.

    Limitation of Economic Laws:

    One major drawback of economic laws is they lack generality. For example, the laws developed to explain the nature and functioning of capitalist economies do not have any relevance to socialist countries. For example, Alfred Marshall developed the laws of demand and supply which apply in a free market in the absence of government intervention. Such laws do not apply in erstwhile countries like the former Soviet Union where the price (market) system yielded place to the planning system.

    In a planned economy, the market mechanism replaces by government allocation or ra­tioning. So, the question of applying the laws of demand and supply does not arise. Thus, economic laws lack generality and are not universally applicable. Furthermore, some laws of economics which have been developed in the context of advanced industrial countries may not find application in devel­oping countries like India.

    As V. K. R. V. Rao has pointed out, the multiplier principle, as enunciated by Keynes in the context of the advanced countries of the world, does not work in developing countries like India. This is attributable to the structure of such economies. Similarly, the Quantity Theory of Money has been developed in the context of industrially advanced countries. It seeks to establish an exact, proportional relationship between money and prices.

    But, it cannot explain’ the present price situation in India.

    Here, inflation is not a purely monetary phenomenon as predicted by the Quantity Theory. These two examples make one thing clear at least — the laws and theories of economics devel­oped in the context of advanced countries cannot be applied in developing countries like India. There is a feeling among some groups of economists that, people in developing countries like India behave and respond differently from those in advanced countries.

    For example, greater self-consumption of farmers in India explains why the supply response of agricultural commodi­ties is not always favorable in the event of a rise in the price of agricultural products. It is often observed that, if the price of a particular commodity rises, farmers produce less of it to maintain the same level of income. Thus,’ they not only produce less at a higher price but generate less marketable surplus when the price rises. Thus, the marketable surplus of, say, wheat varies inversely with its price.

    But, in developed countries, it is observed that, as usual, the supply curve of agricultural output slopes upward from left to right, and the marketable surplus increases when the price rises. All these examples make it abundantly clear that most of the laws and principles of economics which have been developed in the context of advanced countries cannot be applied in developing countries like India.