Tag: Capitalism

What does mean Capitalism? Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labor. So, what is the topic we are going to discuss; Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits…Read in Hindi.

Here are explained What is Capitalism? First Meaning, Definition, Characteristics, Features, Merits, and finally their Demerits.

The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. Capitalism is ‘A system of economic enterprise based on market exchange’. The Concise Oxford Dictionary of Sociology (1994) defines it as ‘a system of wage-labor and commodity production for sale, exchange, and profit, rather than for the immediate need of the producers’.

‘Capital refers to wealth or money used to invest in a market with the hope of achieving a profit’. It is an economic system in which the means of production are largely in private hands and the main incentive for economic activity is the accumu­lation of profits. From the perspective developed by Karl Marx, capitalism organizes around the concept of CAPITOL implying the ownership and control of the means of production by those who employ workers to produce goods and services in exchange for wages.

Max Weber, on the other hand, considered market exchange as the defining characteristic of capitalism. In practice, capitalist systems vary in the degree to which private ownership and economic activity are regulated by the government. It has assumed various forms in indus­trial societies. In common parlance, these days, capitalism knows as a market economy. The goods sold and the prices they are sold at determines by the people who buy them and the people who sell them.

In such a system, all people are free to buy, sell and make a profit if they can. This is why capitalism often calls a free market system. It gives freedom to entrepreneurs (of the opening industry), to the worker (of selling labor), to the trader (of buying and selling goods), and to the individual (of buying and consuming).

Meaning of Capitalism:

Under capitalism, all farms, factories and other means of production are the property of private individuals and firms. They are free to use them to make a profit. The desire to earn a profit is the sole consideration with the property owners in the use of their property. Under capitalism, everybody is free to take up any line of production he wishes and is free to enter into any contract to earn the profit.

Definition of Capitalism:

In the words of Prof. LOUCKS,

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

Ferguson and Kreps have written that,

“In its own pure form, free enterprise capitalism is a system in which privately owned and economic decision are privately made”.

Prof. R. T. Bye has defined capitalism as,

“That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.”

Capitalism from Mc Connell view is,

“A free market or capitalist economy may be characterized as an automatic self-regulating system motivated by the self-interest of individuals and regulated by competition.”

A capitalist economy works through the Price System.

Prices perform two functions:

• A rationing function,
• An incentive function.

Prices ration out the available goods and services among buyers according to the amounts each buyer wants and can pay for others whose desire is less urgent or whose income is smaller will receive smaller qualities. Prices also provide an incentive for firms to produce more. Where demand is high prices will rise encouraging firms already in the industry to produce more and drawing new firms into the industry. Where demand is falling, prices will normally fall too. Firms will reduce their production, releasing resources for use in other industries where there is a demand for them. Firms are buyers as well as sellers.

They buy materials and supplies from other firms behaving exactly as private individuals do in deciding what to buy and how much to buy. If a new machine promises to reduce production costs or if a certain material can substitute for another at saving, the firm will buy low-cost resources to compete with other firms. The economy is tied together by millions of those interactions linking producers with one another and with consumers, linking one product with other products and linking every market with other markets. The point is that all the economic units in an economy inter-relates.

The Characteristics of Capitalism:

Capitalism involves new attitudes and institutions—entrepreneurs engaged in the sustained, systematic pursuit of profit, the market acted as the key mechanism of productive life, and goods, services, and labor become commodities whose use was determined by rational calculation.

The main characteristics of the capitalistic organization in its ‘pure’ form may briefly describe as under:

• Private ownership and control of the economic instruments of production, i.e., CAPITOL.
• The gearing of economic activity to making profits—maximization of profits.
• Free market economy—a market framework that regulates this activity.
• The appropriation of profits by the owners of capital. It is the income derived by the capitalist from selling in the market.
• The provision of wage labor, which creates by converting labor-power into a commodity. It is this process that produces the working class and inherently hostile relationships in capitalist society workers (proletariat) versus capitalist, employee versus the employer.
• Business firms privately own and compete with each other to sell their goods to consumers.
• Commercialization of agricultural and industrial production.
• Development of new economic groups and expanding across the globe.
• Capital accumulation by the capitalists as an obligatory activity, for unless there is capital to invest, the system will fail. Profits produce capital when they are re-invested.
• Investment and growth are accomplished by using accumulated capital to expand an enterprise or create a new one. Capitalism, thus, is an economic system that requires constant investment and constant economic growth.

What has impressed students of modernity is the huge and largely unreg­ulated dominance of capitalist enterprise across political and religious control with it’s related monetary and market networks.

The Features of Capitalism:

What a capitalistic economy is a can knows through its main features. These derive from the way certain functions perform and the main decisions of the economy execute.

These may be stated as under:

Private Property and Freedom of ownership:

A capitalist economy is always having the institution of private property. An individual can accumulate property and use it according to his will. The government protects the right to property. After the death of every person, his property goes to his successors.

The right of Private Property:

The most important feature of capitalism is the existence of private property and the system of inheritance. Everybody has a right to acquire private property to keep it and after his death, to pass it on to his heirs.

Price Mechanism:

This type of economy has a freely working price mechanism to guide consumers. Price mechanism means the free working of the supply and demand forces without any intervention. Producers are also helped by the price mechanism in deciding what to produce, how much to produce, when to produce and where to produce.

This mechanism brings about the adjustment of supply to demand. All economic processes of consumption, production, exchange, distribution, saving and investment work according to its directions. Therefore, Adam Smith has called the price mechanism as the “Invisible Hand” which operates the capitalist.

Profit Motive:

In this economy, the desire to earn a profit is the most important inducement for economic activity. All entrepreneurs try to start those industries or occupations in which they hope to earn the highest profit. Such industries expect to go under a loss abandoned. Profit is such an inducement that the entrepreneur prepares to undertake high risk. Therefore, it can say that the Profit Motive is the SOUL of the capitalist economy.

Competition and Co-operation Goes Side by Side:

A capitalist economy characterizes by free competition because entrepreneurs compete for getting the highest profit. On the other side buyers also compete for purchasing goods and services. Workers compete among themselves as well as with machines for taking up a particular work. To produce goods of the required type and quality workers and machines are made to co-operate so that the production line runs according to schedule. In this way, competition and co-operation go side by side.

Role of the Entrepreneur:

The entrepreneurial class is the foundation of the capitalist economy. The whole of the economic structure of the capitalist economy base on this class. Entrepreneurs play the role of leaders in different fields of production. The presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main sources of the dynamism of the capitalist economy.

Main Role of Joint Stock Companies:

In a joint-stock company, business carries on by a board of directors which democratically elects by the shareholders of the company at its general body meeting. Because of this, it has said that Joint-stock Companies “Democratic Capitalism”. However, the real functioning of the corporate sector is not democratic because there is a one-share-one vote election. Since big business houses own a majority of the shares of a company, they manage to get re-elected and the company is run as if it were their family business.

Freedom of Enterprise, Occupation, and Control:

Every person is free to start any enterprise of his choice. People can follow the occupations of their ability and taste. Moreover, there is the freedom of entering into the contract. Employers may contract with trade unions, suppliers with a firm and one firm with another.

Consumer’s Sovereignty:

In a capitalist economy, a consumer compares to a sovereign king. The whole production frameworks according to his directions. Consumer’s tastes govern the whole production line because entrepreneurs have to sell their products. If a particular type of production is to the liking of consumers, the producer gets high profits.

It arises Class Conflict:

From this class-conflict arises. The society is normally divided into two classes the “haves” and the “have-not’s”, which are constantly at war with each other. The conflict between labor and capital is found in almost all capitalistic countries and there seems to be no neat solution to this problem. It seems that this class-conflict is inherent in capitalism.

Historical Development of Capitalism:

Historically, modem capitalism has mainly developed and expanded in Great Britain and the United States. Early industrial capitalism in Great Britain and the United States in the 19th century is regarded as the classical model that approximates the pure form most closely. Modern (industrial) capitalism differs fundamentally from pre-existing production systems because it involves the constant expansion of production and ever-increasing accumu­lation of wealth.

In traditional production systems, levels of production were fairly static since they were geared to habitual, customary needs. Capitalism promotes the constant revision of the technology of production. The impact of science and technology stretches beyond the economic sphere. Scientific and technological development, such as radio, television, computers and other electronic media, have also come to shape how we live, how we think and feel about the world. In the face of these developments, traditional debates between the advocates of free-market capitalism, and state socialism have become more or less outdated or are becoming outdated.

As we have moved into a ‘postmodern’ world (information society) from the 18th and 19th-century modern society, some philosophers like Francis Fukuyama predicated about the ‘end of history’—meaning that there are no future alternatives to capitalism and liberal democracy. Capitalism has won in its long struggle with socialism, contrary to Marx’s prediction and liberal democracy now stands unchallenged.

The advantages or Merits of Capitalism:

The main merits and advantages of capitalism are as follows:

Production According to the Needs and Wishes of Consumers: 

In a free-market economy, consumer needs and wishes are the uppermost in the minds of the producers. They try to produce goods according to the tastes and liking of the consumers. This leads to the maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.

Higher Rate of Capital Formation and More Economic Growth: 

People under capitalism have the right to hold property and pass it on an inheritance to their heirs and successors. Owing to this right, people save a part of their income so that it can invest to earn more income and leave the larger property for their heirs. The rate of Capital formation increases when savings invest. This accelerates economic growth.

Efficient Production of Goods and Services: 

Due to the competition, every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.

Varieties of Consumer Goods: 

Competition is not only in price but also in the shape design, colors, and packing of products. Consumers, therefore, get a good deal of variety of the same product. They need not give limited choices. It says that variety is the spice of life. The free market economy offers a variety of consumer goods.

In Capitalism there is no Need for Inducement or Punishment for Good and Bad Production:

A capitalist economy encourages efficient producers. The able an entrepreneur is, the higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism punishes the inefficient and rewards the efficient on its own.

It Encourages Entrepreneurs to Take Risks and Adopt Bold Policies: 

Because taking the risk they can make higher profits. Higher the risk, the greater the profit. They also make innovations to cut their costs and maximize their profits. Hence capitalism brings about great technological progress in the country.

The disadvantages or Demerits of Capitalism:

The capitalist economy has been showing signs of stress and strain at different times. Some have called for a radical reform of the free-market economy. Others like Marx have considered the capitalist economy to be contradictory in itself. They have predicted the ultimate doom of the capitalist economy after a series of deepening crisis.

The main demerits or disadvantages of the capitalist economy are as follows:

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.

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 the capitalist society divide. The ‘haves’ in which the rich property class owns 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.

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 pollutes because factory wastes not properly dispose of. Housing for factory labor very rarely provides the result that slums grow around big cities.

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 render un-employe. 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.

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.

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.