Wednesday, December 2

Advantages and Disadvantages of Capitalism

Throughout the history of civil society, various empires have existed. All of these empires have had different economic histories. A major reason why they have had different economic histories is that they had different economic systems. One of the types of economic systems is capitalism. Because of its advantages and disadvantages, it has had wildly different impacts on economies.

WHAT IS CAPITALISM?

In simple terms, capitalism is an economic system wherein private ownership is a concept. It means that private entities, such as individuals or corporations own the 4 factors of production. They are entrepreneurship, capital, land, and labour.

WHAT IS ENTREPRENEURSHIP?

Entrepreneurship is the act of individuals or corporations manufacturing goods and services to earn profit. An entrepreneur takes a risk and brings the other 3 factors together. They play a vital role in the economic growth of a country.

Know More – Advantages and Disadvantages of Mutual Funds

WHAT IS CAPITAL?

Capital is commonly understood to be referring to money. However, as a factor of production, capital refers to the ownership of man-made goods used in the production of other goods. Money, by itself, does not directly impact production. Equipment purchased by a factory owner or printers purchased by a printing company counts as capital. They can also be called “capital goods”. Losses or economic contractions cause firms to reduce capital expenditure. This is done in order to ensure profits. Firms invest in new machinery and equipment when aiming for an economic expansion.

Advantages and Disadvantages of Capitalism

WHAT IS LAND?

As a factor of production, land can mean several different things. It can be commercial real estate or agricultural land. It can also be the resources obtained from a certain geographical area. All natural resources come under this factor. These include water, oil, copper, natural gas, coal, et cetera. This factor includes raw property and anything that is obtained from the ground.  Land is considered to be a passive factor of production. This is because land cannot, by itself, produce sellable goods or services. It needs help of labour, capital, and entrepreneur to become a viable commodity.

Components of land are classified into 3 parts:

On the surface: soil, agricultural land, et cetera

Below the surface: minerals, groundwater, rocks, et cetera

Above the surface: air, rain, sunlight, et cetera

WHAT IS LABOUR?

Labour refers to the human efforts involved in the production of goods or services. This includes any type of physical or mental exertion. The combined efforts of the labour involved in production are referred to as workforce. The value of the workforce depends on workers’ education, skills, and motivation. An important feature of labour is that it includes physical or mental exertion done in exchange for monetary compensation. The exact image of what labour looks like isn’t static. It can mean different things for different industries and companies. For a construction company, labour involves physical exertion to construct a building. However, for a school, labour refers to the act of teaching.

Advantages of Capitalism

More Choices

Capitalism gives the consumers more choice as it fosters competition. Since it is based on the “survival of the fittest” principle, businesses compete to acquire the largest share of consumers. This can only be done if the goods and services that they offer are the best in the market. Consumers are willing to pay for the best products and businesses will want to maximize their profits. This increases competition and forces businesses to be efficient and innovative. These incentives create pressures to cut costs and avoid waste. Goods and services that are more affordable and are of better quality are more common in a capitalistic society than a socialist one.

Chance at Success

One unique feature of capitalism is that gives everyone a shot at success. All of them get an opportunity to improve their socio-economic standards and standard of life. People may or may not be able to achieve that success or be able to improve their situations to the level that they want to. This is can occur because of various reasons. However, this does not take away from the fact that they all have the option of pursuing their goals if they wish to. Everyone gets the same starting point, where they go from there is completely up to them. If individuals are willing to work hard consistently, they can reach wherever they wish to.

Know More – Advantages and Disadvantages of Partnership

Self-Regulation

Self-regulation in this context means that the market keeps on changing itself according to the prevailing conditions of the market. Because of this, goods and service providers have to put their best foot forward. This means that they cannot, at any point in time, mislead customers or offer unsafe/inefficient/faulty goods or services for sale. If they do so, consumers will stop purchasing their goods or services and they will be forced to go out of business. Hence, they must always be focused on meeting the exact needs of their future customers.

Advantages and Disadvantages of Capitalism

Disadvantages of Capitalism

Forced Inequality

Just because capitalism gives everyone a chance at success doesn’t mean that it gives everyone the ability to achieve that success. This is because the idea of chance in itself implies a risk. It means that that it might work out or it might not. In this context, this chance carries high stakes for some people. Someone who belongs to an already rich family would be fine whether or not they are able to achieve individual success. This means that they can afford (quite literally) to fail. Thus, they have infinite chances at trying to find success.

On the other hand, people from poor background do not have infinite chances. In most cases, they only have one. If one of many siblings from a poor family wants to emancipate their family by becoming a professor, they would have to invest money into their education. Once their already limited resources have been channelled into their education, they cannot back out or fail. They cannot say “Oh, this didn’t work out, I can try something else.” Over time, this disadvantage causes the rich to get richer, while the poor continue to struggle to make ends meet.

Just because capitalism offers everyone the same first chance doesn’t mean that it is a fair system.

Productivity Is The Measure Of Worth

Since the sole purpose of a capitalistic economy is to earn and maximize profits, productivity becomes the only measure of worth. Productivity refers to an individual’s ability to create goods and services that have an economic value. It does not take into account other skills or talents that people might have. If it does not have an economic value, it is deemed valueless. It expects people to remain competitive to stay valuable in the economy. If an individual’s skills are not contributing to the economy, that individual does not have a place in society.

What this also does is that it devalues the idea of leisure in society. People can, at no point in time, do things just for the sake of doing them. They cannot sing, dance, draw, or do anything without adding economic value to it. As a result, people are disincentivised from doing things just because they are not good enough for them. This might not have a direct economic impact on society. However, it can have severe adverse effects on the economy by deteriorating people’s mental health.

Pros and Cons of Capitalism

PROS

CONS
More choices

Forced inequality

Chance at success

Productivity is the measure of worth
Self-regulation