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Main Characteristics of Capitalist Economy

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  • Last Updated : 29 Oct, 2021

The capitalist economy refers to an economic environment characterized by competition, property ownership, and free enterprise systems. The characteristics of capitalism are depicted in the definition. Prof. Loucks defined capitalism as a system characterized by private ownership and the profit-making utilization of both artificial and natural capital. Because the free market decides demand, supply, and price, the capitalist economy is referred to as a liberal economy. The government has no active involvement in this sector. The United States of America, the United Kingdom, Germany, and Singapore are all typical instances of capitalist economies. The origins of capitalism may be traced back to 18th century England, which was in the midst of the industrial revolution. This form of economy is also known as a free-market economy since there is no government involvement. In the actual world, government expenditure may account for up to 35 percent of GDP in many nations that are considered to have a capitalist economic structure. Because the government is responsible for welfare, health, education, and national defense, this is the case. The economy is still considered capitalist, though, because private businesses are free to choose what to produce and for whom.

In a developing country like India, capitalism is important. The following is an illustration of the significance of a capitalist economy:

  1. Equality: The core tenet of the capitalist system is that everyone has equal rights and that the harder you work, the more money you’ll make.
  2. Freedom: The freedom to choose what to do is at the heart of basic capitalism.
  3. Innovation: A market capitalist economy is driven by the discovery and development of new methods to make money.
  4. Efficiency: In capitalism, out-of-the-box thinking and efficient manufacture of things are rewarded.

Features of capitalist economic system

Private assets

Individuals in a capitalist economy have the right to own property. A person can acquire property and use it for his or her own family’s advantage. There are no restrictions for owning land, machinery, mines, or industries, as well as earning money and accumulating riches. Property or money is transmitted to lawful heirs after a person’s death. As a result, the right of inheritance helps to perpetuate the institution of private property through time.

Entrepreneurial freedom

The government does not coordinate citizens’ production decisions in a capitalist economy. Individuals have the freedom to pursue any vocation they like. Business enterprises are free to acquire resources and utilize them in the production of any products or service, according to the concept of enterprise freedom. Companies are also allowed to offer their products in whichever market they want. A worker has the option of choosing his or her employer. In small company units, the owner is the one who bears the risk of production and reaps the profit or loss. Shareholders, on the other hand, incur risks in contemporary organizations, while hired directors run the company. As a result, individual capital management is no longer necessary to make a profit. Workers are not restricted or prevented from entering or leaving a specific industry by the government or any other body. A worker picks the vocation that pays him the most.

Price mechanism

It means the price is determined freely by the forces of demand and supply. The price so determined guides the producers and the consumers to take their respective decisions. All the economic activities; consumption, production, saving, investment, etc. are governed by this price mechanism.  

Competition and Cooperation

In a capitalist system, there are no constraints on enterprises entering or exiting. Because there are so many producers available to offer a specific commodity or service, no business can make more than a reasonable profit. Competition is a key aspect of the capitalist system, and it is necessary to protect consumers against exploitation. Although monopolistic tendencies have risen in recent years as a result of big-scale and product differentiation, there is still competition among a vast number of enterprises.

Profit motive

In capitalism, self-interest is the governing premise. Entrepreneurs understand that when all other factors of production have been paid, they will own the profit or loss. As a result, they are always encouraged to increase their residual profit by reducing costs and increasing revenue. As a result, the capitalist economy is both efficient and self-regulatory.

The Sovereignty of the Consumer

Consumers are treated like kings in a capitalist system. They have complete discretion over how they spend their money on items and services that bring them the most pleasure. Consumer possibilities govern manufacturing in a capitalist economic system. Consumer sovereignty refers to the liberty of customers.

Competition

In a capitalist system, there are no constraints on enterprises entering or exiting. Because there are so many producers available to offer a specific commodity or service, no business can make more than a reasonable profit. Competition is a key aspect of the capitalist system, and it is necessary to protect consumers against exploitation. Although monopolistic tendencies have risen in recent years as a result of big-scale and product differentiation, there is still competition among a vast number of enterprises.

Government interference is not present

The pricing system serves as a coordinating agent in a free enterprise or capitalist economy. The government doesn’t need to intervene or provide assistance. The government’s job is to assist in the free and efficient operation of markets.

Markets and Pricing are Important

Private property, freedom of choice, profit motivation, and competition are all fundamental elements of capitalism that allow for the free and efficient functioning of the pricing mechanism. Capitalism is primarily a market system in which all goods and services have a price. This price is determined by the dynamics of supply and demand in the industry. Firms that can adapt at a given price make a regular profit, whereas those who cannot do so frequently leave the business. In this type of system, the manufacturer can develop things that will make him more money.

Conclusion

Capitalism creates wealth, but it promotes a divide between the haves and the have-nots. Socialism bridges the gap between rich and poor, but it also eliminates the incentive to work hard, causing the country’s Gross Domestic Product to plummet and everyone to become impoverished. As a result, it’s difficult to say which system is better than the other because each coin has two sides.

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