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Term Paper on Capitalism
Term Paper # 1. Meaning of Capitalism:
Before capitalism there were feudalism and domestic system. These days capitalism system exists in a large number of countries. The United States of America is the top leading capitalist country in the world. America has held the lead in the world in terms of the level of economic development.
Loucks, “Capitalism is a system of economic organisation featured by the private ownership and use for the private profit of man-made and nature made capital.”
“The economic upsurge in the USA provoked by war needs served to accelerate the process of concentration of production and capital which is generally typical of capitalism.”
Free enterprise, competition and private ownership of property play an important role in capitalist system. The capitalist system is also known as ‘Free enterprise economy’. In other words “Laissez Faire” economic policy is followed in capitalist economy. Laissez faire implies a policy of non-interference by the government in the economic life of the country. Here, the state confine its activities to the maintenance of law and order with in the country, defending the country from foreign war and provides fair justice to the people, leaving trade and industry to take their own course.
There is a private ownership of the means of production, individual decision making and use of the market mechanism in the capitalist system. Household and firms are the basic production units.
There are two kinds of capitalist system:
(i) Laissez Faire – In this type of capitalist system, the government intervention in the economy is absent and
(ii) Regulated or mixed capitalism – In this type of capitalist system, there is a substantial amount of government intervention in the economic and industrial development.
Term Paper # 2. Characteristics of Capitalism:
The main characteristics of capitalism are as follows:
i. Freedom of Enterprise:
Individuals and firms have the right to own and use property, and to earn and spend incomes. Here private firms are allowed to obtain resources, to organise production and to sell the product in any manner to anyone. In this type of system, there will not be government or any other restrictions on the freedom and ability of the private individuals to carry out any business.
ii. Private Ownership:
In this type of system the factors of production i. e. land, labour and capital are privately owned i. e. one in which there is freedom of private ownership of property. Here private property is protected, controlled and enforced by law. The right to own property carries with it the right to determine its use also.
iii. Profit Motive:
Under capitalism profit motive acts as a basic barometer. Persons invest capital into business to earn profit. In a capitalist economy, the person is free to select any occupation he is qualified for. This freedom of choice enables the individual to earn profit from his own started business. The owners of means of production enter that field in which property yields maximum profit. More resources flow into those areas where yield is more.
iv. The Market System or Mechanism:
Of all characteristics of capitalism market mechanism is said to be the most important. Profit in a business is related with price mechanism which guides the allocation of resources under capitalist system. The whole economic system moves in and around the price mechanism. There is lack of proper planning for distribution of economic resources and co-ordination between production and consumption, so price mechanism determines the level of consumption, production and distribution.
v. Consumer’s Sovereignty:
Consumers have complete freedom of choice of consumption in a capitalist economy. Consumer is the king of the market under capitalism. Manufacturers take into account consumer’s demand and desire while producing and taking decisions on the nature and techniques of production.
Under capitalism, it is also the feature that consumer has liberty to dispose of his personal income in any way he/she likes. At a particular time, he may spend even more than he earns. He may save his income and can give loan to anyone. Here, we can say that consumer is free to behave in any way under the system of capitalism.
vi. Competition:
There is competition among sellers and buyers in an ideal capitalist system. The tough competition among producers compels them to make best use of factors of production and produce at minimum cost in order to earn maximum profits. Therefore, in a free market economy competition is considered necessary to protect the consumer, and to maintain a flexible price system.
vii. Freedom of Contracts:
People are free to make contracts and settle transactions. So every person is free to sell his goods or services to anyone he feels like.
viii. Limited Role of Government:
In ‘Laissez Faire’ form of capitalist system, the government does not interfere in the working of the economy. Producers and consumers are free to take their decisions. In modern capitalist system (regulated or mixed capitalism) however government provides general directions to the economy through fiscal and monetary policies.
ix. Absence of a Central Plan:
Freedom of enterprise, occupation and property rights rule out the possibility of a central plan. The activities of various economic units in a capitalist system are not guided or controlled by a central plan. Resource allocation and investment decisions in free market economy are influenced by market forces rather than by government.
Term Paper # 3. Merits of Capitalism:
The major merits of capitalist economic system are:
i. Efficient Utilisation of Resources:
Every producer tries to use the different factors of production to the best possible use to minimize cost of production to stand the competition.
ii. Democratic:
Producers, consumers and the workers, all enjoy economic freedom and are free to work as they like. Goods are produced according to liking and demand of consumers.
iii. Automatic Balance in the System:
The capitalism works automatically through price mechanism. The demand and supply i.e., price mechanism balances the imbalances in economy. With increase in demand of product the price raises which in turn attract new producers to enter the market and hence supply increases resulting in decrease in price again.
iv. Efficiency Properly Rewarded:
Both producers and labourers work hard and with more efficiency as producers can make more profits and labourers get better wages.
v. Incentives for Risks and Uncertainties:
Entrepreneurs are induced to invest more money even in the projects involving high risk by providing them incentives. This results in technological progress and new innovations, which involves great risks.
vi. Economic Growth:
The capitalist countries have become rich and affluent and people of that country enjoy higher standard of living. This is because of presence of competition also where producer tries to produce minimum cost and ultimately consumer is benefited.
vii. Encourages Capital Formation:
The existence of capitalism is dependent upon the right to inherit the property and profit motive, because of which people have incentive to save a part of their income which they can further invest to make more profits. Thus, this circle of investment and saving leads to higher rate of capital formation.
Term Paper # 4. Demerits of Capitalism:
i. Wastage and Misallocation of Resources:
Under capitalism most of resources are wasted on advertisement and salesmanship and products are produced to satisfy profit motive only and essential commodities are neglected for production. D. H. Robertson says, “Under capitalism, wants which cannot clothe themselves in money are left undetected and unsatisfied and luxurious fancies of the rich exert a stronger pull on the productive resources of the community than the basic needs of the poor.”
ii. Economic Instability:
Business cycles affect consumer the most. They suffer both in periods of inflation (rising prices) and deflation (falling prices). The greatest depression of 1930 shook the very basis of many capitalist countries.
iii. Consumer’s Sovereignty is a Myth:
At times producers enjoy monopoly in the market and produce substandard product. So it is the producer who influences the market and not consumer. Capitalism is basically a sellers’ market where consumer has no freedom.
iv. Inequality of Wealth:
An unplanned capitalist economy can be compared with a vehicle without a steering wheel. Artificial scarcity of goods is created by greedy entrepreneurs who earn profits to great extent while consumers ultimately suffer. In U.S.A. one third of National wealth belongs to 0.5 percent of population.
v. No Freedom:
In modern capitalist market one can find presence of group rivalries and price wars, price agreements etc. Speculative practices become a part of system.
vi. Class Struggle:
Rich are becoming richer and the poor poorer. The society gets divided in two classes-haves and have-nots. There is clash of interests. Labourers demand high wages while the capitalists want to pay lower wages.
vii. Unemployment and Corruption:
Corruption and unemployment has become a chronic disease in the capitalist system. In U.S.A. over three million young people between 16-24 years cannot find jobs.
viii. Inflation:
Inflation spreads throughout the world because of mutual international relations and trade. Also inflation is because of nature of modern capitalism in non-productive expenditure primary for military purposes by the state. According to OECD (Organisation for Economic Co-operation and Development) prices in 1976-77 went up by 18. 4% in Italy, 17.1% in Britain, 9.3% in Japan, 9.8% in France, 7.6% in Canada, 6.7% in U.S.A. and 3.8% in West Germany. Inflation results in increase in cost of living.