Advantages and Disadvantages of Capitalism

Advantages and Disadvantages of Capitalism: Capitalism is one of the most practiced economic and political systems in the world today. It is practiced in the United States of America, Canada, Chile, Germany and even South Korea. This clearly shows that the system encourages political and economic development because the above countries are doing exceptionally well when compared with some other countries in the world.

But in as much as a capitalist system is advantageous, it can also be disadvantageous in some way. This is so because: every thing that has an advantage will definitely have some disadvantages too. Consequent upon that, I will be explaining the advantages and disadvantages of capitalism as a political and economic system in this article.

I strongly recommend that you read this work till the end to get a clearer picture of what a capitalist economy is, the features of capitalism, advantages of capitalism and disadvantages of capitalism as well.

I recommend you to watch the video below for a brief explanation of capitalism before we continue.

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What is capitalism?

Capitalism is an economic/socio-political system which allows the means of production to be owned and managed by distinct individuals with little or no interference from the government.
The driving force in a capitalist economy is the quest for profit. Here, individual owners tend to do everything possible to maximize profit and because of this, the market is being controlled/determined by the forces of demand and supply.

advantages and disadvantages of capitalism
advantages and disadvantages of capitalism

Adam smith, an 18th century philosopher and political economist from Scotland is regarded as the father of modern capitalism. This is because of his book “the wealth of nations” which has played a major role in guiding nations in choosing their economic policies.

Many countries of the world have adopted the capitalist system as their economic policy. Some of these countries include: The USA, Canada, Chile, Germany, Japan, South Korea, Bangladesh, Nigeria etc. However, these countries practice capitalism in their varying forms such as:

Responsible capitalism: this is essentially a free market economy with a degree of government regulation, to avoid the excesses and inequalities of capitalism. These regulations can be seen by the creation of an extensive welfare state to protect those who are unemployed or on low incomes, a progressive tax system with higher earners paying more than others, the urge to regulate monopolies and protect rights of workers.

Crony capitalism: This is a term that is used to refer to situations where people or businesses that have close relationship with politicians or government official are given unfair advantages. Thus, business successes are relative to strategic influences with civil servants or those in authority. The power of mafia in Italy is an example of this.

Turbo capitalism: This refers to the form of capitalism where private enterprises are unchecked. Here, there is an unregulated form of capitalism with financial deregulation, lower task on high income earners, less regulation on abuse of monopoly power, an unregulated labor market, where it is easy to hire and fire workers, and very limited regulation about working conditions. This form was formed by Edward lattwak in 1989.

State capitalism: This is a form of capitalism where governments establish business. These established businesses are funded by the government and they play key roles in the economy by competing with private enterprises. The difference between state capitalism and socialism is that, in socialism there is no room for private enterprises & competition.

Features of a Capitalism

There are numerous characteristics of capitalism which are:

Right to private property and freedom of ownership.

In capitalism, individuals have the right/legal backing to own property and to use their property the way they want. This is one of the major features of capitalism.

Price determination:

In this system, prices are determined by the forces of demand and supply. Here, there is no central authority that fixes prizes of goods rather than the interaction between sellers and buyers. Producers are helped by the price mechanism in deciding what to produce, quantity to produce, when and where to produce.

Quest/desire to make profit:

Here, there is the desire to make profit. This is usually the sole aim of entrepreneurs. They intend to invest in those businesses that have high potentials of bringing big returns.

Lots of competition:

Capitalism encourages lots of competitions. This is because of the high need to make profit thus, producers tend to produce the best qualities of goods in order to attract much consumer to make profit thus leading to high competition.

High respect for consumers:

In a capitalist economy, the consumers are highly revered because the more they like your product, the higher the gain that you make.

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Advantage of capitalism

There are many benefits of capitalism and some of they include:

Innovation:

Because capitalism encourages competition, and is owned by individual persons, there are usually innovative inclusions by the entrepreneurs in order to stay ahead of their competitors; and this in turn gives room for the manufacture of qualitative products.

Efficient allocation of resources:

Capitalism ensures that resources are distributed according to consumer preferences because, companies do not progress or are not rewarded for producing goods that people don’t want.

Rise in living standard:

Capitalism increases standard of living because, there are usually the multiplicity of goods as a result of the competition thus, leading to a reasonable reduction in price thereby making the products affordable to the people.

Rise in the numbers of industry:

It is argued that since capitalism thrives as a result of the profit factor, this profit motive serves as the incentive to many people thus encouraging them to establish their own businesses thus, leading to increased production and a buoyant economy.

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Disadvantages of a capitalist system

Monopoly:

Individuals owning property and means of production give them the power to monopolize which could lead to the exploitation of the masses through charging of higher prices for less qualitative products.

Inequality:

Capitalism creates inequality in the social structure because the rich get richer while the poor get poorer thus creating room for oppression and resentment.

Pollution:

In a country that practices capitalism, where private ownership of means of production is allowed, and where there is usually a strong desire to make profit. There is the tendency that firms will ignore their negative practices such as air, water or land pollution in relation to the general public since there major interest is on their gains.

Wastage of resources:

In a capitalist economy, there is usually a high wastage of resources due to the unnecessary competition among producers.

Lack of coordination:

In capitalism, there is usually no coordination in the activities of manufacturers and consumers. It is left in the hands of the market/price mechanisms which in turn gives rise to inflation and deflation.

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So far, we have looked into the meaning of capitalism, features, advantages and disadvantages of a capitalist system. I strongly believe this article did justice to everything that concerns this topic, but you can still send your questions if there is any part of this article you do not understand. Meanwhile, if your enjoyed reading this work, don’t hesitate to drop a comment in the comment box below.

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