Capitalist Economy Definition
A Capitalist Economy or a free market economy is characterized by private ownership, private production, and profit orientation wherein the role of Government is limited to regulating and monitoring. An alternate form of economic system is the Socialist/Command economy which operates on a welfare motive and all decisions relating to production, investments and price determination rests with the Government.
Features of a Capitalist Economy
#1 – Private Ownership
In a capitalist form of economy, there is no restriction on private individuals to own properties, enterprises, machinery, and others. An individual is free to own/purchase, use and sell any number of properties or equipment based on his/her capabilities.
#2 – Price Determination
The forces of demand and supply determine the prices in a capitalist economy. The economy is consumer-oriented, and therefore, the price fluctuates based on the demand for a product and the available supply. The Government has no role in the determination of prices such an economy.
#3 – Profit Orientation
The capitalist economy is profit-oriented. The main motive of every producer/manufacturer is to maximize profit, and all decisions relating to production and selling are determined accordingly.
#4 – Minimal Government Intervention
Government intervention in a capitalist economy is minimal. All major decisions regarding production, price determination, and selling strategies are determined based on the forces of the market. However, a certain level of Government intervention is present in all economies. No country can function independently of the Government.
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#5 – Competition
Independent buyers or sellers cannot influence market forces in a capitalist economy. Therefore there exists a healthy competition between the buyers. The focus is on product differentiation and brand loyalty to have an edge in the market.
Types of Capitalism
Various forms of capitalism exist across countries. Capitalism, at its truest form, exists only in theory. Some forms of Capitalism with distinctive features are discussed below –
#1 – Turbo Capitalism
Edward Lattwak coined the term ‘Turbo Capitalism’ in 1989. In this form of society, there exist no proper regulatory measures or authority. It leads to an increased level of privatization, lower level of taxes, as well as financial deregulation. Also called unrestrained capitalism or free-market capitalism, this form of society lacks measures to sustain its growth if any.
#2 – Crony Capitalism
In this type of economy, although free market exists to a certain degree, a majority of decisions relating to any new regulation or legislation, tax incentives, government grants, permits, subsidies, etc. are made by the influence of a select few over the Government. These influencers are usually trading unions, wealthy businessmen or politicians whose aim is to protect their interests. This form of capitalism is more prevalent in developing countries, also leading to a high level of corruption and the existence of bribery.
#3 – State Capitalism
As the name suggests, in a state capitalist economy, the state undertakes commercial, economic activities in a capitalistic manner. Essentially it is a monopolistic market controlled by the state. The state controls the market forces to maximize its returns. Singapore is a popular example of a state capitalist society wherein the state owns and controls the major corporations and also has favourable legislation to encourage production and trade.
Advantages of a Capitalist Economy
- Freedom of Choice – People have the freedom to pursue any career they wish to, customers have the freedom to choose any product in the market and manufacturers have the freedom to produce any commodity and device any strategy per their wishes.
- Competition – Given that it is a free market economy with no monopolistic practices, the customer has a variety of options to choose from. This ensures a healthy competition within the producers wherein the best qualities of products are produced at the most efficient rate.
- Economic Growth – Capitalistic economies function on a profit motive. Profitable ventures are undertaken, and non-profitable ventures are neglected. This leads to countries achieving a higher level of economic growth as opposed to other forms of economies.
- Innovation – In a capitalist economy, producers retain customers using product differentiation. Producers invest heavily in technology and R&D measures to ensure that their product stands out in the market. This leads to a higher level of innovation and development across the economy.
- Economies of Scale – As market forces determine the prices, cost becomes the only variable that can be controlled by the producers. Producers scale up their production levels to take advantages of the economies of scale, thereby producing larger quantities at lower costs.
Disadvantages of Capitalist Economy
- Rising Inequality – A capitalist economy functions on a profit motive. This leads to the concentration of wealth among a select percentage of the population, ultimately leading to an increasing gap between the rich and the poor.
- Lack of Social Benefits – There is no incentive on the part of the employers in a capitalist economy to provide social benefits such as healthcare, housing, retirement benefits, etc. to their employees.
- Scope for Monopolism – Capitalism advocates private ownership and control. There exists a possibility wherein most of the industries in a particular sector are owned by a particular individual, thereby leading to a monopolistic market.
This has been a guide to what is the Capitalist Economy and its Definition. Here we discuss its features along with types, advantages, and disadvantages. You can learn more about economics from the following articles –