Economic Systems
Any society, whether it is rural without any advancements or it is specialized, must somehow confront three fundamental and inter-dependent economic problems.
1. What and how much to produce? 2. How to produce? 3. For whom to produce?
These three questions are fundamental and common to all economic but different economic systems differ in the fact that they try to solve these differently. Over the past two hundred years, differentphilosophies have developed in regard to the accomplishment of the economic function. The basic nature of all economic systems is the same. It is the role of the individuals and the governments that are quite different.
Capitalism
Definition
Under Capitalism, all means of production are the property of private individuals and firms. They are free to use them with a view of making profit or not to use them, if it so suits them. The desire for profit is the sole consideration with the property-owners in the use of their property. Besides free and unfettered use of their property, everybody is free to enter into any contract with other fellow-citizens for his profit.
What to produce, how to produce and for whom to produce-all these central problems of economics are settled by the free working of the forces of demand and supply.
Salient Features of Capitalism
1. Right of Private Property
Everybody has a right to acquire private property, to keep it, and after his death, to pass it on to his heirs. The result of this system is that inequalities of wealth distribution are perpetuated.
2. Freedom of Enterprise
This freedom implies three things: a) freedom of enterprise b) freedom of contract and c) freedom to use one’s property. Everybody is free to take up any occupation that he likes and to enter into contracts or agreements with his fellow-citizens in a manner most profitable to him. Every citizen has the freedom to form any firm or company and set up a factory anywhere hi likes.
3. Freedom of Choice by the Consumers
Every consumer enjoys a freedom of choice of the commodities and services that he wishes to consume. It is the consumers likes and dislikes which determine the magnitude and pattern of production.
4. Profit Motive
The profit motive of individuals governs business enterprise. Those commodities and services are produced under capitalism, which are expected to yield maximum profit rather than social benefit.
5. Class Conflict
The society has been divided into two classes the “Haves” and “Have-Nots” which are constantly at war with each other class conflicts is inherent in capitalism.
6. Un-Coordinated Nature
There is no conscious regulation or central direction of economic activity. Every thing seems to go on automatically. Somehow the demand and supply adjust themselves to each other. Price serves as the signpost or the signal.
7. Entrepreneurs Role
The entire productive machinery of the country is under the direction of the entrepreneur. It is he who hires the other factors of production and undertakes to pay them. Everything hinges on him.
8. Control With Risks
This has been called the Golden Rule of Capitalism. He who risks his money must also control the business.
9. Competition
The producers compete with one another is selling the commodity as much as they can through advertisement. On the other hand, there is also competition among the buyers to obtain the commodity who did against one another and offer higher prices for the purpose. Similarly, there is competition among workers for jobs.
10. Importance of Price System
Capitalism is said to be governed by price. It is the price which equates the demand and supply of commodities and factors of production. Price is a signal which guides the producers as to what to produce and what not to produce. A higher price is also warning to the consumers to cut down their consumption.
11. Economic Inequalities
A few are very rich indulging in all sorts of conceivable luxuries, whereas the masses are not able to get even two square meals a day. The gulf between the rich and poor is ever widening.
Merits of Capitalism
1. Automatic Working
Capitalism does not require any central directing authority for its functioning. It functions automatically through the price-mechanism. It at any time, there is some disturbance in the economy, it is rectified through price change.
2. Higher Efficiency and Incentive of Hard Working
Under capitalism workers and entrepreneurs are encouraged to work hard to earn higher profits and higher wages. Hence the entire manpower resources of the country work the hardest (In this way the national output increases and economic development is accelerated).
3. Higher Rate of Capitalism Formation
People under capitalism have the right to hold property and pass it on to then heirs and successors. Owing to this people save a part of their income so that it can be invested to earn more income and leave larger property for their heirs. This accelerates economic growth.
4. Economic Development and Prosperity
The lure of profit compels the entrepreneurs to take risks and to conquer new fields in production. Capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation and technological progress. It is thus conductive to economic growth and prosperity.
5. Optimum Utilization of Resources
Every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit. In this way, capitalism encourages the most efficient use of the resources of the country.
6. Just System
The richest reward under capitalism goes to the ablest, the most daring as well as the most prudent entrepreneur. A man who shows extraordinary resourcefulness and pluck makes the highest profits.
7. Democratic
In the capitalistic economy an attempt is made to adjust production to the consumer wishes. They consume that they like and not what is supplied to them. The consumers constitute the general public. Hence, the system is democratic.
8. Encouragement to Enterprise
Capitalism discourages the entrepreneurs to take risks and adopt bold policies. Higher the risk greater is the profit. They also make innovations in order to cut their costs and maximize their profits. Hence, capitalism brings about a great technological progress in the country.
9. Flexibility
One of the principal advantages of capitalism is its flexibility and adaptability, which has enabled it to function from time to time according to changing circumstances and emerge victorious.
Demerits of Capitalism
1. Wasteful Competition
Competition is a sheer waste. Colossal expenditure is incurred on advertisement and salesmanship simply to defeat a rival. Resources employed by those who are defeated go to waste.
Competition results in the production of too many varieties. But too much variety is wasteful, because a small variety, but each large in quantity, can be more economically produced.
2. Human Welfare Ignored
The economic decisions made by individual entrepreneurs and producers under capitalism are based on their self-interest and not from the point of view of good of the society. However, necessary and useful the commodity may be, the producers will produced it if price does not exceed the cost, because it is only the profit motive which drives them. Social welfare is ignored altogether.
3. Economic Instability and Unemployment
Production is unplanned and is being augmented by ever increasing accumulation of capital, while the bulk of the consumers are being impoverished more and more. The result is economic instability. The workers have to live under a perpetual dread of losing their job. They have no sense of security.
4. Property Rights take Precedence Over Human Rights
Capitalism lays under emphasis on property rights as against human rights. Money, not man, rules the world and debases humanity.
5. Class-Conflict
Capitalism divides the society into two hostile camps of capital and labour, the “haves” and “have nots”. The labour wants higher wages and short working hours, which is against the interests of capitalists. Strikes and lockouts are inevitable.
6. Economic Inequalities
A feature of capitalistic countries is the glaring inequalities of wealth and income. A few are very rich indulging in all sorts of luxuries, whereas the masses are not able to get even two square meals a day. The gulf between the rich and poor is ever widening.
7. Mis-Allocation of Resources
Capitalism is also criticized on the ground that the productive resources are utilized for the production of luxuries for the rich without producing sufficient quantity of goods for mass consummating.
The market prices are not a correct index of the wishes and needs of the general public because the rich people are able to influence the market prices by their higher income.
8. Emergence of Monopolies
I also happens under capitalism that perfect and free competition ceases to prevail and instead of big combinations of powerful producers and monopolies emerge against whom it becomes difficult for an ordinary entrepreneur to compete. The monopolists produce small quantity but charge high prices and thus exploit the consumers. There is lot of concentration of economic power in a few hands.
9. Malpractices
In recent years, the image of capitalism has been tarnished by malpractices indulged in by high industrialists and businessmen. Such practices include payment of handsome salaries to influential directors, the large-scale evasion of fiscal laws, luxurious living at nation’s cost and persistent generation of black money.
10. Lack of Coordination
The in-coordinated nature of such an economic order sometimes becomes a disadvantage. Production is conducted as a result of the decisions of numerous isolated entrepreneurs and consumers, which is liable to create confusion in the system.
