Principal of Economics

Topics: Supply and demand, Capitalism, Elasticity Pages: 5 (1236 words) Published: March 26, 2013
Subject:- principles of economics

1. Defects of capitalism

The market economy or capitalism has a number of defects.  In analysing these defects it is obvious that some form of government rules and regulations are necessary in order to protect the environment and future generations.

1.  Increasing inequality in wealth: As an economic system characterized by the private ownership of the means of production and distribution, there exists the obvious tendency for the increasing inequality in wealth.  Because the entrepreneur has the advantage to manipulate the factors of production, especially labour and capital, as he considers best in order to achieve the highest measure of profit.  By the end of the day, the capitalist receives a considerable portion of the profits that accrue to the business enterprise, while the labourers or working class, gets comparatively less reward for their efforts.  This widens the gulf of economic inequality.  However, with the increased recognition of collectively bargaining, this tendency is gradually being checked.

2.  Goods and services that have high utility to the ordinary citizens are in short supply or non-existent: In a capitalistic economy profit is the motivation behind all productive endeavours.  This way, productive scarce resources could be “wasted” on goods and services that serve no basic purposes, while other goods and services that have high utility to the ordinary citizens are in short supply or non-existent.  For example, basic commodities such as pipe-borne water, regular electricity, effective health care, ands others.

3.  Monopoly:  Another defect of capitalism pertains to monopoly, this is a situation whereby there is only one producer of a commodity in a region or locality. For example, an employer may be the only purchaser in a locality, and if this happens, he would be in a strong position when negotiating rates to pay the individual members of the workforce.  Similarly, a seller may be able to exclude competitions, and this further puts consumers in a weaker position.  Because given the prevailing circumstances, the consumers cannot go elsewhere.

4.  Engenders undue concentration of capitalistic wealth: The market economy engenders undue concentration of capitalistic wealth, which attracts with it a concentration of political power.  As a result, greater concern is shown for property rights than for human rights, which touch on the overall welfare of the people.

5.  The possibility of the emergence of imperialism: This is because business people only seek raw materials, markets and places to invest their acquired surplus capital.  With investments abroad, in the light of threats by their host government, they call on their home government to provide necessary protection and this kind of involvement may lead to war.

6. Distortion of consumer sovereignty: Consumer sovereignty may be distorted by large firms that use heavy or extensive advertising simply to convince consumers that the goods and services that the firms have provided are just what the consumers want.  This could lead to purchase dissonance or buyers’ remorse.

7. Possible under-utilization of productive resources: In a capitalistic economy, individuals decide what to produce, consequently, resources may remain unemployed or under-utilized because firms as a whole consider that profit prospects are poor and discouraging in the given situation.

8.  Possible overproduction leading to unnecessary business cycle:  In a market economy, planning by businesses is on an individual basis.  This could lead to over production in certain sectors or industries thereby causing unnecessary business cycles.  The cycles result is frequent depressions which contribute to the waste of productive scarce resources, and feeling of insecurity among the workers in the concern industries.

9.  Discrimination in employment:  Another defect of capitalism pertains to...
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