Capitalism

Capitalism is an economic system where individuals and businesses control production resources like capital goods, labor, and natural resources. The goal of this free-market system is profit, driven by minimal government interference, consumer demands, and competitive dynamics. Capitalism is an important topic for GS Paper-3 Economy Subject of UPSC IAS Exam. To explore other interesting Economics and Sociology concepts similar to Capitalism, check out other articles of IASToppers.   

Table of Content

• Overview of Capitalism
• What is Capitalism?
• Key features of Capitalism
• Types of capitalism
• Other types of Capitalism
• Advantages of Capitalism
• Disadvantages of Capitalism
• Difference between Capitalism and Free Market Economy
• Difference between Capitalism, Socialism and Communism
• Karl Marx theory and critique of capitalism
• FAQs on Capitalism

Overview of Capitalism

Section	Key Points
What is Capitalism?	Free-market & profit-driven economy
Key features of Capitalism	Private property, profit motive, personal freedom, consumer-driven, competition, price mechanism, international trade, flexible labour market
Merits of Capitalism	Consumer-driven production, incentivized efficiency, economic & political liberty, capital growth, technological advancements, cheaper & diverse goods
Demerits of Capitalism	Wealth & income inequality, limited access for poor, unnecessary multiplicity, monopolistic outcomes, neglected social benefits, inadequate social security, labor exploitation, diminishing utility of wealth, environmental concerns
Examples of Capitalist Economies	United Kingdom, United States, Switzerland, United Arab Emirates, Ireland, Hong Kong, Singapore, Australia, Canada, New Zealand

What is Capitalism?

• Capitalism, also known as a capitalist economy, is a free-market economy where individuals and businesses control the factors of production, including capital goods, labour, natural resources, and entrepreneurship.
• The primary goal of a capitalist economy is to earn profits.
• In this, resources are owned by a few rich and private people.
• It is characterized by free markets, minimal government intervention, and the pursuit of innovation.

Key features of Capitalism

Below are the characteristics of capitalism:

• Allows and recognizes the institution of private property. Anyone can earn, acquire or sell factories, machines, and equipment as private property.
  • Individuals can accumulate and utilize property as they wish, with the right of inheritance passing the property to successors after death.
• Motive of every economic activity is profit.
• People enjoy personal freedom in economic activities including Freedom of enterprise; Freedom of contract; Freedom in production etc.
• A consumer is compared to a sovereign king. Consumer’s tastes govern the whole production line.
  • In other words, market is governed by consumer demands, which regulate the production levels of companies and the purchasing decisions of consumers.
• Sellers and producers freely compete among themselves.
• Price mechanism makes an automatic adjustment based on forces of supply and demand in production, distribution and consumption.
• It promotes international trade through low tariff barriers and minimal government interference.
• It allows for the flexible hiring and firing of workers.

Types of capitalism

Based on how production is organized:

• Liberal market economies:Bulk of the production process takes place in a decentralized manner akin to the free-market capitalism seen in US and UK.
• Coordinated market economies: Itexchanges private information through non–market institutions such as unions—as seen in Germany and Japan.

Based on role of entrepreneurship (process of starting businesses):

State-guided capitalism:  

• Government decides which sectors will grow.
• Cons: Excessive investment, picking the wrong winners, susceptibility to corruption etc.

Oligarchic capitalism:

• Oriented toward protecting and enriching a very narrow fraction of the population.
• Cons: Prevalence of inequality and corruption.

Big-firm capitalism:

• It is important for mass production of products.

Entrepreneurial capitalism:

• It produces breakthroughs like the automobile, telephone, and computer. These innovations are usually the product of individuals and new firms.

Other types of Capitalism

• Industrial capitalism means an economic system where trade and industry are fuelled by industrial production.
• Surveillance capitalism represents a market-driven process where personal data is commodified and exploited for profit.
• Anarcho capitalism is a political philosophy advocating for the elimination of the state in favour of individual sovereignty within a free market. Key features of Anarcho capitalism are voluntary exchange, private property rights, and non-aggression principles.
• Mercantile capitalism refers to a historical economic system where trade and commerce, primarily between nations, is conducted for profit. It paved the way for the modern capitalist system, focusing on wealth accumulation through buying and selling goods.
• Conscious capitalism is a modern approach to business that integrates the interests of all major stakeholders in a company. It focuses on creating social and economic value, embodying ethical leadership, and promoting a culture of trust and cooperation.
• Stakeholder capitalism refers to economic system where corporations are oriented to serve the interests of all their stakeholders such as employees, customers, communities, shareholders, and the environment.
• Financial capitalism is a subset of capitalism where the financial sector plays a dominant role, focusing on financial markets, monetary systems, and wealth accumulation. It’s pivotal in economies that prioritize investment, speculation, and the creation of capital.
• Late capitalism isoften referred to as advanced capitalism, end-stage capitalism or post-industrial capitalism. It was first used in print by German economist Werner Sombart around the turn of the 20^th century to describe the exploitative and inequitable economic conditions arising from the powerful influence of multinational corporations in the modern global economy.
• Monopoly capitalism, also known as corporate capitalism, is a stage of capitalism where dominant corporations exert a monopoly or oligopoly control over various markets, leading to reduced competition and potential economic inequality.
• Rainbow Capitalism refers to the commercialization of LGBTQ+ symbols and themes by businesses, primarily during Pride Month, as a marketing strategy to attract consumers.
• Democratic capitalism is an economic model where democratic governance coexists with a free-market system, ensuring political freedom and economic opportunity for all.
• Naked capitalism refers to an economic system where markets are left to operate without restrictions, often leading to an imbalance of power and wealth.
• Neoliberal capitalism is an economic philosophy that advocates for minimal government intervention, free trade, and open markets to promote competition and economic growth.
• Anglo Saxon capitalism is a form of market economy characterized by flexible labour markets and liberalized financial services, prevalent in English-speaking countries.
• Neo-capitalism refers to a renewed and modern form of capitalism that emerged post World War II. It focuses on the importance of technology, managerial expertise, and the welfare state. It’s marked by increased intervention of the state in economy, and a balance between market power and state power.
• Print capitalism refers to the use of mass print products, like newspapers and novels, to spread capitalist ideas and promote the economy.
• Compassionate Capitalism is a philosophy that merges the economic principles of capitalism with social responsibility. It promotes the idea of businesses striving for profits while also working towards the welfare and betterment of society.
• Casino capitalism describes a highly speculative, risky financial system where high-stakes investment and trading are similar to gambling more than traditional investing.

Advantages of Capitalism

• Consumer-Driven Production: Production as per the needs and wishes of consumers, leading to a more efficient allocation of resources.
• Incentivized Efficiency: Provides incentives to firms to be efficient and produce goods which are in demand
• Risk-Taking and Bold Policies: Encourages entrepreneurs to take risks and adopt bold policies.
• Economic and political liberty: Minimal bureaucratic interference, promoting innovation and economic growth.
• Capital Formation & Growth: Higher rate of capital formation and more economic growth leading to higher real GDP and living standards.
• Technological Advancements: Prompts Companies to strive for a competitive edge, leading to advancements in technology.
• Cheaper & Diverse Goods: Availability of goods at cheaper price as well as varieties of consumer goods.

Disadvantages of Capitalism

• Inequality of distribution of wealth and income: Richer class has more opportunities to become richer)
• Nonavailability of essential commodity for poor: Producers will produce only for the richer class for more profit)
• Unnecessary Multiplicity: Too much competition leading to unnecessary high costs of production resulting in high product cost for consumers.
• Monopoly in competition: Competition in the long run will eliminate inefficient producers and firms will combine and production will be done as monopoly. 
• Economic Instability: This system results in periodic cycles of depression and prosperity. During depression, there is mass unemployment.
• Ignorance of social benefit: A profit maximising system might ignore negative externalities, such as pollution from production.
• Inadequate Social Security: Absence ofadequate social security for working class
• Labour Exploitation: No bargaining capacity of labourers leading to their exploitation
• Diminishing Utility of Wealth: As per capitalism, it is good if people can earn more. However, this ignores the diminishing marginal utility of wealth.
  • Example: A millionaire who gets an extra million sees little increase in economic welfare, but that 1 million spent on health care would provide a much bigger increase in social welfare.
• Environmental concerns: Due to high-profit motive, such economy uses natural resources in irresponsible way, leading to environmental concerns.

Difference between Capitalism and Free Market Economy

Although the term ‘Capitalism’ and ‘Free Market Economy’ are said to be same, there are few differences:

Capitalism	Free Market Economy
Focused on creation of wealth and ownership of productive assets.	Focused on exchange of wealth through production and supply of goods and services.
Has some government regulation but there’s monopoly of private players, which prevents competition.	Solely based on market forces (little/no government regulation), leading to free competition.

Examples of Capitalist Economies

1. United Kingdom
2. United States
3. Switzerland
4. United Arab Emirates
5. Ireland
6. Hong Kong
7. Singapore
8. Australia
9. Canada
10. New Zealand

Difference between Capitalism, Socialism and Communism

Capitalism, socialism, and communism are all examples of distinct economic systems, each presenting their own philosophies on the role of individuals, corporations, and governments in wealth distribution and resource allocation.

Below is the table showing Communism vs Capitalism vs Socialism.

Comparison Criteria	Capitalism	Socialism	Communism
Definition	An economic and political system where private individuals control a country’s trade and industry for profit.	A transitional social state between the overthrow of capitalism and the realization of communism.	A political and socio-economic ideology where all property is publicly owned, and each person works and is paid according to their abilities and needs.
Founded	Took its roots during the early Renaissance period, spanning 15th -16th centuries.	Became particularly apparent towards the end of the 18th century, and its influence further grew post-1848.	Can be traced back to 1848, led by the renowned German philosopher, Karl Marx.
Economic System	Market-based economy where prices are determined by supply and demand.	Mix of private and public ownership with greater government intervention in the economy.	Centrally planned economy where the government makes all decisions about what and how much to produce
Property Rights	Individuals can own and control property.	Both private and public property can coexist, but major industries are typically state-owned.	No private property. All property is communally owned.
Income Equality	Income and wealth disparities due to differences in business success, talent etc.	Aims for reduced income disparities through redistributive policies.	Aims for complete income equality, from each according to his ability, to each according to his needs.
Competition	Encourages competition, leading to innovation and better products/services.	Some competition may exist, but the emphasis is on cooperative effort and mutual aid.	No competition as the central planning authority directs production goals.
Role of Government	Limited role in the economy as the model follows laissez-faire ideology.	Greater role in the economy.	Government controls all aspects of economic life.
Freedom of Choice by Consumers	High	Moderate	Low
Economic Flexibility	Dynamic	Flexible	Static
Freedom of Religion	Generally indifferent to religious affiliations, yet there’s a bias favouring wealthy religious communities.	Fully Allowed	Religion is eliminated

Karl Marx theory and critique of capitalism

• Karl Marx viewed capitalism as an evolving phase in history, and expected to fail due to its inherent inconsistencies and be succeeded by socialism.
• Marx argued that forces of production (technology, work) are used to meet needs by exploiting the environment. These forces give rise to relationships, which Marx refers to as relations of production, including capitalism.
• Marx asserts that the relations of production shape the cultural of society.
• The issues of modern society are seen by Marx as consequences of capitalism, not industrialism.
• Individuals are born into predetermined property relations leading to distinct social classes. The class one is born into shapes their attitudes, beliefs, and behaviours.
• Marx says that the dominant class exerts control over the means of material and mental production, shaping society’s viewpoint and maintaining the status quo.
• Despite the elite’s ideological dominance, oppressed classes can challenge the ruling classes under certain conditions, especially when the existing mode of production faces a crisis, termed as “revolutionary” moments by Marx.
• Marx suggests that every economic system, except socialism, self-generates forces leading to new economic forms.
  • For instance, during feudalism, the rise of the market and factory led to the creation of new social classes, the merchants and the proletariat, which eventually displaced the old ones. This resulted in a revolution, establishing a new ruling class, and capitalism replaced feudalism.
• Marx believed capitalism would also cause its own destruction by creating a protest class that would eventually overthrow the capitalist regime.
• Normative Marxism advocates for a revolution to overthrow capitalism, leading to socialism, which would ultimately evolve into communism when class conflicts and the state become obsolete.

Conclusion

Capitalism is an economic system where private individuals rather than the state own and control property and businesses. The foundation of capitalism is the principle of private property, market freedom, and competition. In capitalism, the production, distribution, and prices of goods and services are determined primarily by competition in a free market.
While capitalism has been the driving force behind industrialization and the economic growth of many nations, it also faces criticism for fostering inequality and leading to economic cycles of boom and bust. Debate continues about the best ways to address these challenges while maintaining the economic freedoms that underpin capitalism.

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