Advantages of Capitalist Economy - Essay Example

Capitalist Economy: If market systems are seen by many economists as the best way of resolving the economic problem why do such eminent critics such as the South Korean economist, Ha Joon Chang question the efficiency of market capitalism? Introduction Market economy is a free economic system based on which the price of goods and services is determined by the supply and demand of the same. (Jain & Ohri, 2011, pp.317-318). In a capitalist economy, the production of goods and services remains under private ownership and as such profit making is the principle goal. Therefore, it is the goal of profit making that determines the level of production. In a capitalist economy, there are four institutional and behavioral aspects – goods are produced for making profit, production of goods is done by private ownership, existence of labor class in the society, and most individuals are inclined to maximize profits (Hunt, 2002, p.4-5). Two examples of capitalist countries are USA and Singapore. Capitalism is an economic system that encourages private ownership of both production processes and the capital goods. The ultimate goal of production of goods and services is making profit in a free market. In a capitalistic economy, the consumption and allocation of national resources are dictated by price and profits with virtually no control from the government. In a capitalist economy there are mainly seven traits. First, people need to have sufficient money power to be able to buy the goods and services that they require, which brings in the second characteristic which is that money becomes the basic necessity of life in a capitalist economy. Third, people are able to sell anything they want in order to make profits. Fourth, in a capitalist economy the main objective is to maximize profits which means that social needs become secondary. Fifth, it is money and conditions of work that determine how much goods will be produced, who will produce them and for whom they will be produced. Sixth, distribution of scarce goods is based on monetary power of people, i.e. people who have more money will receive these goods instead of those people who are in greater need of the goods. Seventh, in a capitalist society each person is free to earn money in whatever way they like and so it is assumed that every individual earns according to what he deserves (Ollman, 1999). Advantages of capitalist economy Irrespective of whether a country is developed or undeveloped, there are certain advantages and disadvantages attached to a capitalist economy. The advantages are mentioned below :- Increased efficiency – In a capitalist economy, since production is in private hands that have financial power therefore efficiency for long run can be achieved with high investments by the firms. In a capitalist economy, there is severe competition between firms and this leads to increased efficiency motivated by higher profits and more market shares (Mukhopadhyay, 2011, p.4). Private ownership – This gives any individual or corporate the freedom to sell anything from land, medicals services, natural resources, and so on. A corporate has to pay lower taxes than individuals, and while corporate is legally liable for any damage done to consumer its owner are not legally liable for the same (Furze et al., 2011, p.144). Low price of goods and services – In a capitalist economy, all producers pursue maximum profits and hence due to competition every producer tends to provide goods and services at lowest possible price. (Furze et al., 2011, p.144). Due to absence of taxes (no government intervention), and other related costs like fees and paperwork, it is easier for people to start and run a business. More choice more innovations – Intense competition in a capitalist economy leads to more innovations as every firm strives to make maximum profit by implementing new techniques of production to reduce the cost (Hall & Williams, 2008, p.31). On the other hand, innovations can also impede competition since constant development of technology can increase entry cost for new firms in an industry. (Hall & Williams, 2008, p.31). Better customer service – Due to intense competition in a capitalist economy, stress remains on better customer service since good quality service can garner huge profits while low customer service can lead to economic degradation (Dunn & Kelly, 1992, p.244). Invisible hand theory – In a free market, this theory indicates that people pursuing self-interests unintentionally serve the interests of the society as a whole. Since producers make goods and services with a view to maximize profits, therefore they generate demand that allows others to distribute the same in the most efficient manner thus garnering income. Thus, with this theory resources are allocated in the most efficient manner (Vogli, 2013, p.95). Disadvantages of capitalist economy Capitalist economy also has its disadvantages which are mentioned as below :- Fluctuations in economic activity – Since capitalism is essentially accumulation of wealth by a certain section of the society, i.e. people who make investments. This causes economic fluctuation as investments can be low in certain periods while high in other periods. Even an upswing or downswing in businesses is related to changes in investment demand and this makes the economy vulnerable. Fall in investment during a crisis leads to fall in consumption and unemployment and through the multiplier effect has a cascading impact on the economy. Unemployment – Wide scale unemployment is a key feature of a capitalistic economy. Since market condition influences wages, therefore if market condition is down then there will be less demand of working class who has nothing but their skills to sell. Such high level of unemployment means producer of goods and services can buy workers at lower wage thus leading to low standard of living. Therefore there is a negative impact on the society. Unequal distribution of income and wealth – Every society which has production under private ownership, there is unequal distribution of income and wealth. Wealth is accumulated in the hands of those who own the production processes, and the working class is bought by the producers at wage rate determined by demand in the market. This creates high level of economic disparity causing people with more income and wealth to view the poor class with contempt. This causes feelings of discontent between the rich and the poor. In fact the rich cannot survive without the poor. Negative effects like pollution and corruption – There are external negative elements in a capitalist economy like pollution of air, water and land. With minimum government intervention, producers of goods and services make unrestricted use of resources and this causes pollution. Accumulation of wealth in the hands of few leads to corruption as people with more money can bribe officials for their own advantage. Also, the rich people manipulate the political power so as to use political influence to make more money. Development of monopolies and oligopolies – In a capitalist economy, capital accumulates in the hands of certain section of the society. This enhances certain techniques of production more capital-intensive leading of taking over of weaker companies by the stronger companies. This condition can lead to monopoly and oligopoly in the society (Ghosh, 2012, p.53). Less focus on public services – Since people are motivated by high profits, therefore investments are made in ventures which garner maximum profits. Thus public services like public health or education are generally neglected in a capitalist society. Wastage and starvation: With excess resources such as food in hands of the rich, often they are not redistributed among the poor and this leads to lot of wastage and simultaneous starvation of the young people. Anti-social activities: in a capitalist economy people need to focus only on themselves instead of helping others much and hence become selfish. Such selfish motives might often turn them into criminals especially when there is no hope for help during their crisis periods. Conclusion Once we weigh the benefits of capitalism against its disadvantages we can discuss the Ha Joon Chang’s critical view of this economic system. He has stated that capitalism can impede rapid growth of economy and increase economic disparity between different sections of the society. In rich countries like the US, such problems are shrouded by huge credit expansion. According to Chang, companies are generally run based on short term views. Long term development of business is often neglected by fewer investments in technology and training. Merging with smaller companies or taking them over by bigger companies are key features in a capitalist economy, and such actions do not necessarily turn yield positive results. Paying high dividends weakens the company in long run which is critical for labor force, suppliers and other stakeholders (Stafford, 2012, p.48). Government understanding of economies can be flawed leading to overproduction of goods and services. Moreover, there is less innovations leads to declining efficiency as companies remain busy following state regulations. In a mixed economy, there is combination of both capitalism and command economies. The best economic system is where there is free market with certain amount of government regulation so that there is control over resource allocation. Since there is both private and public control over business, therefore there is more scope for businesses. References Dunn, W.N. & Kelly, R.M. (1992) Advances in Policy Studies Since 1950, Transaction Publishers Furze, B. et al. (2011) Sociology in today’s world, Cengage Learning Ghosh, B.N. (2012) Business Ethics & Corporate Governance, Tata McGraw-Hill Education Hall, C.M. & Williams, A.M. (2008) Tourism and Innovation, Routledge Hunt, E.K. (2002) History of Economic Thought: A Critical Perspective, M.E. Sharpe Jain, T.R. & Ohri, V.K. (2011) Principles of Economics, FK Publications Mukhopadhyay, J.P. (2011) Competition in Markets promotes Economic Efficiency, CCI, retrieved on January 4, 2015 from: http://www.cci.gov.in/May2011/Advocacy/essay2012/ jyoti.pdf Ollman, B. (1999) Market Economy: Advantages and Disadvantages, NYU, retrieved on January 4, 2015 from: http://www.nyu.edu/projects/ollman/docs/china_speech2.php Stafford, J. (2012) What they don’t tell you about capitalism. Renewal: a journal of labour politics, Vol.20, No.1, pp.48-55 Vogli, R. (2013) Progress or Collapse: The Crises of Market Greed, Routledge Read More