Capitalism is defined as an economic system characterised by private or corporate ownership of capital goods; by investments that are determined by private decision; and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. In this system, individuals and companies own and direct most of the resources used to produce goods and services, including land and other natural resources labour, and capital which includes factories and equipment and sometimes the money used in businesses. Adam Smith is often referred to as the “Father of Capitalism.” According to him, it is a system in which an “invisible hand” would maintain the market without government intervention. The government exists merely to protect individual rights, which also include the establishment of an "army to protect against foreign invaders; a police force to protect against domestic criminals; and a court system to settle disputes that arise, enforce contracts, and punish criminals according to objectively predefined laws."
Main Characteristics of Capitalism
1. Right to own property 2. Profit motive 3. Private ownership of means of production 4. Consumer’s sovereignty 5. Economic freedom 6. Social division of people 7. Price mechanism
PYRAMID OF CAPITALIST SYSTEM
Advantages of capitalism: 1. Decentralized economic system
It is considered as one of the greatest advantages of capitalism. In a decentralized economy, individuals are open to more number of options in business. They are exposed to competition and have to face different challenges and find solutions to stay in competition. It is in a capitalist economy that hard work is rewarded.
2. Reduction in cost of production
Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste due to efficient control of production process.
3. Boost GDP & economy of country
Capitalism promotes economic growth by providing an open competition in the market .With firms and individuals facing incentives to be innovative and work hard, it creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards.
4. Political freedom
Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may lead to problems like corruption, total control, regulations that limit diversity and competition, lack of incentives etc.
5. Varieties of products & services
Capitalism gives rise to an economy where the consumers regulate the market. A competitive market provided by capitalism facilitates the manufacture of a wide variety of products and the formation of a wide range of services. Consumers are happier in a capitalist economy. It encourages people to work towards financial freedom.
6. Exchange of Culture
Capitalism has led to international trade and exchange of know-how. People in different countries have come nearer to each other. The development of the means of transport and communication has facilitated contacts among the peoples of the world thereby leading to exchange of ideas and culture.
7. Progress of Civilization
Capitalism was instrument in inventing new machines and increasing the production of material goods. Man is to day more civilized than his ancestors.
8. Lessening of Racial Differences:
Capitalism has also led to the lessening of differences based on race, creed, caste and nationality. In the factory the workers and officials belonging to different castes co-operate with one another and work shoulder to shoulder. Inter-mixing of castes is the off-shoot of capitalism.
o Majority of countries (almost all liberal democracies and most authoritarian systems) in the world use capitalism as their dominant economic system,...
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