Capitalist Economy

Updated on April 5, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

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 the Government is limited to regulating and monitoring. An alternate form of economic system is the socialist/command economy which operates on a welfare motive. All decisions relating to production, investments, and price determination rests with the Government.

Capitalist Economy

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In this type of economy the socioeconomic pressure is completely lifted off the shoulders of the citizens by promoting ways to hold tangible assets like buildings, land, bonds or stocks in their name which would allow them to find their own way of being self-dependent. It is also a way to limit the government intervention in daily lives of citizens.

Key Takeaways

  1. A capitalist economy is an economic system that proposes private ownership and businesses above all else. 
  2. Some key features of a capitalist economy are minimal government intervention, price determination is controlled, private ownership by individuals, and competition is maintained religiously.
  3. Capitalism has certain advantages, such as unlimited productivity, freedom of choice, balanced competition, economic growth, etc.
  4. On the same note, it also comes with certain disadvantages, such as a lack of social benefits, rich-poor disparity, and major scope for monopolism. 

Capitalist Economy Explained

Capitalist economy or a market economy is a system under which privatization of production and the usage of the profits is highly prevalent. The production of goods is purely based on the demand and supply of the economy.

The exact opposite concept is socialism where a significant part of properties and means of productions are owned by the government or party-owned by private parties. Most countries in the modern world follow a mixed economy where both socialistic and a capitalist economy system is followed in different proportions.

Means of production such as machinery, raw materials, factories, and tools are owned by one or multiple owners who are referred to as capitalists. These capitalists hire workers in return for wages or salaries and give no share in the profit or overall growth of the business.

An interesting concept within this concept is alienation of workers from their own work. For instance, if a worker takes home a bag that they produced by themselves, it would be considered theft.

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Features

Different capitalist economy countries have differences in the features of their systems. However, there are a few common traits amidst their ways of operation. Let us understand them through the discussion below.

#1 – Private Ownership

There is no restriction on private individuals to own properties, enterprises, machinery, and others in a capitalist economy. An individual is free to own/purchase, use and sell any number of properties or equipment based on their 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 determining prices in 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 production, price, and selling strategies are determined based on the market forces. However, a certain level of Government intervention is present in all economies. This is because no country can function independently of the Government.

#5 – Competition

Independent buyers or sellers cannot influence market forces in a capitalist economy. Therefore there exists healthy competition between the buyers. The focus is on product differentiationProduct DifferentiationProduct differentiation refers to making a product look attractive and different from other products in the same class. Marketers highlight the distinguishing features in the product commonly through packaging or a good design, which helps communicate the benefitting factors to the shoppers.read more and brand loyalty to have an edge.

Types

As we discussed above, there can be differences in their operations. Let us understand different types followed by capitalist economy countries through the discussion below.

Types of Capitalism

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Various forms of capitalism exist across countries. Capitalism, at its purest 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. There are no proper regulatory measures or authority in this form of society. Instead, it leads to increased privatization, lower taxes, and 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 the free market exists to a certain degree, most 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 business people, or politicians who aim at protecting their interests. This form of capitalism is more prevalent in developing countries, leading to high corruption and bribery.

#3 – State Capitalism

As the name suggests, the state undertakes commercial economic activities in a state capitalist economy. Essentially it is a monopolistic market controlled by the state. It also controls the market forces to maximize its returns. Singapore is a popular example of a state capitalist society wherein the state owns and manages the major corporations and has favorable legislation to encourage production and trade.

Advantages

Apart from giving private parties the power to produce and utilize the profits from their produces, the capitalist economy system has a number of advantages. Let us understand them through the explanation below.

  1. Freedom of Choice – People have the freedom to pursue any career they wish to. Customers can choose any product in the market, and manufacturers have the freedom to produce any commodity and devise any strategy per their wishes.
  2. Competition – Given that it is a free market economy with no monopolistic practices, the customer has various options to choose from. This ensures healthy competition within the producers, creating the best products at the most efficient rate.
  3. Economic Growth – Capitalistic economies function on a profit motiveProfit MotiveProfit motive refers to an entity’s intention that drives the entity to indulge in profit-making activities to achieve financial gain and profit.read more. Profitable ventures are undertaken, and non-profitable ventures are neglected. This leads to countries achieving a higher level of economic growth than other forms of economies.
  4. 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.
  5. Economies of Scale – As market forces determine the prices, cost becomes the only variable that the producers can control. Producers scale up their production levels to take advantage of the economies of scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. read more, producing larger quantities at lower costs.

Disadvantages

Despite having significant advantages as discussed above, there are a few factors that act as a hurdle or hassle in the process. Let us understand the disadvantages of a capitalist economy countries following this system through the points below.

  1. 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.
  2. Lack of Social Benefits – There is no incentive for employers in a capitalist economy to provide social benefits such as healthcare, housing, retirement benefits, etc., to their employees.
  3. Scope for Monopolism – Capitalism advocates private ownership and control. There is a possibility wherein most industries in a particular sector are owned by one specific individual, leading to a monopolistic market.

Frequently Asked Questions (FAQs)

Which country was the first to adopt a capitalist economy?

In the 19th century, Great Britain was the first country to become a powerhouse of industrialization, causing tons of revolution, industry-oriented manufacturing technology, and superior communications.

How to classify an economy as a capitalist economy or not?

A capitalist economy is driven by the concept of free enterprises, an economic structure where private corporations determine the production of goods and services, prices, and competition. There is a heavy emphasis on freedom of choice and withdrawal of government interference.

Are there any countries/economies that don’t work on a capitalist economy basis?

China, Cuba, Vietnam, Laos, and Scandinavian countries such as Sweden, Norway, Finland, and Ireland work on the socialist model.

This has been a guide to the Capitalist Economy definition. Here we explain its features along with types, advantages, and disadvantages. You can learn more about economics from the following articles –

Reader Interactions

Comments

  1. Priyanka says

    thank you

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