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The Advantages and

Disadvantages of Capitalism;
Economics Essay
Published: 23, March 2015
In the mid-1900s, sociologist Karl Marx coined the term "capitalism" which he implies to be any
private ownership of property or enterprise. Today economists define capitalism as an economic
system based on private ownership of the means of production and distribution of goods,
characterized by free competitive market and motivation by profit. It is next to impossible to
locate a pure capitalist country today. Like any other system capitalism cannot be described as
the ultimate system, due to its disadvantages, it is not a cure for every defect in human affairs or
for eradicating all inequalities. However, it is still in our society because of its ability to change
and further develop countries.

Capitalism dates back as early as the primitive society. During this period, life was said to be
simple and organized, "the good old days". Subsistence farming, hunting and fishing formed the
basis of a primitive society. In this society all decisions were made by a tribal leader and his
counselors. As a result of this decision-making process the barter system was developed. With
the barter system it was possible to exchange one commodity for another. This system had its
disadvantages, which were later recognized, since not all commodities could have been equally
valued for the commodities in exchange.
Following the expansion of the primitive society was the slavery system. In this environment
masters and slaves exist. Factors of production were owned by the masters and wealth was
accumulated for the masters by the slaves through cultivation. Attempting to alleviate revolts a
negotiation was made, slaves would be entitled to a portion of the produce if they continue to
cultivate the land. This system now became known as Feudalism and the masters became known
as Lords while the slaves became Serfs.
The earliest forms of capitalism - which we call "mercantilism" - originate in Rome, the Middle
East, and the early middle Ages Mercantilism is an early modern European economic theory and
system that actively supported the establishment of colonies that would supply materials and
markets and relieve home nations of dependence of other nations. As the Roman Empire
expanded so did mercantilism. As time went on in Europe, mercantilism gradually evolved into

economic practices that would eventually be called capitalism. These economic practices are
termed commercialism, industrialism and monopolism.

Property Rights: Capitalism is characterized by private ownership of all non-labor factors of
production. The owners of these private properties have the power to control these factors of
production as well as the goods and services produced from such inputs. The owners have the
freedom to decide what to produce, how to produce and for whom to produce. The benefits
owners are rewarded with from ownership of these resources are rent from the use of their land,
wages for the use of their labor, interest as a return on their capital and profits from their
entrepreneurial skills.
Co-ordination Structure: Co-ordination under capitalist economies has a market mechanism in
which market forces of demand and supply are allowed to work in order to determine prices and
output in the economy. The forces of supply and demand push prices upward or downward in
response to the decisions of individual buyers and sellers. This mechanism is commonly referred
to as Adam Smith's "Invisible Hand". Within this economic system there is no state intervention
to ensure that economic activities are carried out properly and that economic goals are fulfilled.
Motivational Structure: As a result of the self-interest of many economic agents, within this
economic system, the market is propelled by material incentives. Suppliers have an incentive to
offer only those goods on which they expect to make a profit.
Decision-making Structure: There is no central decision-making mechanism. Market prices
direct the actions of decentralized decision makers. The various private parties that possess
property rights to products and resources decide by/among themselves what to produce, how to
produce and for whom to produce.
Information Structure: The capitalist's information structure is decentralized because horizontal
channels of information exists where information and decision-making is spread across the
various agents in the economy who are on the same level.


According to Adam Smith, a capitalist economy works by means of the "Invisible Hand". The
theory of the "Invisible Hand" states that within a free market enterprise, products are exchanged
at a price solely determined by the mutual consent of buyers and sellers. Demands by consumers
for products direct the allocation of resources to achieve consumers' utility maximization. Profit
is financial (material) incentive to produce goods. This economic system ensures that shortages
and surpluses do not last for long. When there is excess demand (shortage) prices in the market
are likely to rise, as each buyer would now be willing to outbid the other for the scarce good
demanded by many. At higher prices, suppliers are likely to increase their supply and thus
equilibrium will be achieved in the market. Situations may also exist in the market where there is
excess supply (surplus). The tendency here is for prices to fall as each supplier will attempt to

win over customers from their rival firms. At these lower prices, consumers are likely to demand
more. Therefore, equilibrium in the market is restored.
In Adam Smith's model he identifies the following:
There is an owner class: The means of production are owned only by the few people (capitalists)
who can pay for them. Marx refers to this group as the bourgeois (upper class).
There is a working class: The people (laborers) who generate wealth for the owner class by
producing goods and services and, in return, are paid wages by the Capitalists. This group has no
ownership of the factors of production and Marx refers to this group as the proletarians (lower
Firms rationally aim to maximize profit and this is an incentive for production of these goods and
services: The capitalists try to judge the market and adjust production accordingly in order to
realize the greatest possible profit.
In a pure capitalist economy, there is no state intervention which often means that the economy is
free to make all economic decisions and adjust itself when necessary to remain in equilibrium.


In looking at the Performance under capitalism we evaluate the economy under the following
performance criteria;

Economic Efficiency
Economic Stability
Income Distribution
Economic Growth

Being efficient is being able to accomplish a task with minimum expenditure on as many levels
as possible. This performance criterion looks at how well the economy is able to allocate its
resources to best maximize its production on goods and services while taking the welfare of
individuals into consideration. A capitalist economy is efficient as it yields high levels of GDP,
innovation is encouraged, and one is allowed to exercise freedom of choice.

Unemployment rate, inflation rate and real economic growth are some of the economic indicators
used to determine economic stability within the economy. Economic stability in a capitalist
market is unstable due to fluctuations in inflation, unemployment as well as real economic

Capitalism renders unequal distribution of income in the economy. Income is distributed in
accordance to the skills and qualifications an individual possesses. Those possessing the skills,
qualifications as well as capital resources valued by the market will receive high incomes,
whereas lower incomes will be allocated to persons without such skills and resources.

Economic growth can be measured as the increase in real GDP. Productivity is the key
component, i.e. producing more at a lesser operational cost. Economic growth is said to be slow
in a capitalist economy. With a steady rise in real GDP the economy is assumedly growing well.
However, where there are fluctuations in the business cycle this may cause economic growth to
be unstable suggesting that the economy maybe in or going through a recession.


Capitalism, as we are aware, is an economy where resources and firms are privately owned in
free markets. Normally, this usually involves some government intervention to regulate certain
aspects of the economy and protect private property. Several advantages are included within a
capitalist economy.
Foremost as Government intervention is kept at a limited level several issues that generally arise
with government intervention including corruption, lack of a self-interest push force and poor
circulation of information within the market is prevented allowing individual incentives to work
as hard as possible to achieve as much as possible.
As the capitalist economy is dependent on the push factor of individuals, there is no limit to the
level of wealth an individual can accumulate through progression within the economy.
Capitalism allows individuals choice both in commodity purchase and employment
opportunities. It allows resources to be distributed according to consumer choice rearing the
market in a more productive consumer friendly range.
Through capitalism firms are inclined to produce with greater efficiency, by cutting cost and
improving efficiency becomes an aim to prevent losses in an industry where competition is high
bettering the economy as a whole
In such industries company effectively respond to changes in consumer desires better the
economy and improving efficiency. In attempts to ensure the highest possible level of
productivity, financial incentives are provided to employees by companies so as to better
improve self interest in company proficiency. This is beneficial on a global level as these
countries generally become exemplary innovative fronts for improvement in technology and
implications of productive changes.

As company proficiency improves so does the ability for people to move through social class as
an increase in wealth is available. This pushes individuals to work harder in the interest of selfpreservation to achieve more. Profit increase within the economy and personal industry, allows
an expansion in wealth and company resources, resources that will be used so as to best benefit
the company and in turn the economy by promoting foreign investment.
Individuals possess a freedom of choice to purchase and engage in virtually any and all
economic activities with little restraint. Promoting trade among nations and individuals that will
mutually profit persons with and the economy itself.
Profit maximization is a main priority within the capitalist's state; this can be produced via
meeting consumer wants. This causes large suppliers of goods and services that are similar
diversification in brands allow for customer distinction and individuality, catering for the
necessary changes in desire for certain goods among the lower and higher income classes.

Within the capitalists state the consumer has all the power in the economy because some people
will always be able to work harder, achieve more and eventually achieve dominance above
others in the economy. Along with a lack of Government welfare and human nature several
disadvantages would eventuality occur within the economy.
As dominance within the economy is formed by the elite few, wealth is recycled in this small
percentage who has gained a monopoly through limited Government control. This normally
occurs through construction of rules that limit the flexibility of the money flow between classes.
Leading to exploitation in labor resulting in revolt and strike within the market negatively
affecting the entire economy by halting and disrupting production.
Due to market being profit and demand driven, negative externalities such as pollution are
generally ignored until they become a serious issue within the economy. This leads to a necessity
to reduce the money supply in the economy to resolve these issues.
Firms that have been able to gain monopolies early within market development, pushes out
smaller firms from entering due to the high level of competition where they may not be able to

In today's world it is hard to pinpoint a pure capitalist state since many capitalist countries does
not possess all the features of pure capitalism. A pure capitalist state is one with no government
intervention and its demand and supply are left in what Adam Smith called "Invisible Hand".
However, it's private ownership and a profit driven motive shows that such an economy is
competitive in nature. Therefore the question still remains why it's impossible to locate a pure
capitalist state? But does one exist or have ever existed before?

It was observed that over the years capitalism has pass through many phrases which forced
capitalist economies to amend or adjust their rules under which they reside. These changes put
capitalist states either more too pure socialism or more to pure capitalism.

Private ownership
Private ownership is one of the most important factors in capitalist state that adds fuel to a
competitive and market oriented economy. Significant changes in the shares of public and private
ownership of property can alter the nature of a capitalist economic system. Indeed if the state
owned a major share of existing property, we would no longer classify the system as capitalist."

Working participation
Owners of capital (proprietors, partners and shareholders) are rewarded out of their profits while
workers are paid with wages which does not vary with profits. The higher the profits of a firm
the greater the returns of proprietors, partners and shareholders whereas workers' wages remains
fixed regardless of the fluctuation of profits.
If workers (driven by their own self-interest) were allow to increase profits of the enterprise
operating within the capitalist state - this would considered that capitalism has evolved from its
basic form.
It has change today - if workers' income depends on the profits of a firm then that becomes a
self-motivation hence they would be more interest in the profitability of the firm.

Government intervention
Fiscal Policies: fiscal policy is discussed as government budget deficit (government expenditures
less government revenue). It is also government spending or taxes to stimulate the economy. If
aggregate income is too low (actual income is below potential income), the appropriate fiscal
policy is expansionary fiscal policy: increase the deficit by decreasing taxes or increasing
government spending. If aggregate income is too high (actual income is above potential income),
the appropriate fiscal policy is contractionary fiscal policy: decrease the deficit by increasing
taxes or decreasing government spending.
Welfare: In the late 1930s and the 1940s, workers dominated the political agenda. During this
time the capitalist economies developed an economic safety net that included government funded
programmes such as public welfare, unemployment insurance, and established an extensive set
of regulations affecting all aspects of the economy." This safety net is frequently found in
capitalist economies globally since its make available a form of security for the population
(working class).
Minimum Wage Laws: Government has enforced the minimum wage law which also kept the
market from operating by itself. The government causes wage rigidity [17] when it prevents
wages from falling to equilibrium levels. Minimum-wage laws set a legal minimum on the wages
that firms pay their employees. Since the passage of the Fair Labour Standards Act of 1938, the

U.S. federal government has enforced a minimum wage that usually has been between 30 and 50
percent of the average wage in manufacturing. For most workers, this minimum wage is not
binding, because they earn well above the minimum. Yet for some workers, especially the
unskilled and inexperienced, the minimum wage raises their wage above its equilibrium level. It
therefore reduces the quantity of their labour that firms demand."

Over the years capitalism has evolved. Starting with the bartering system which led to slavery
system, then the Feudalism followed by mercantilism then to capitalism. It was suggested by the
classical school of economics that government role should not be removed from economic
system but, its role should be limited only to protect individual rights and providing public goods
and services. History reveals that government is necessary and its role has expanded. We cannot
deny that without government intervention we would have fail. With government intervention
capitalism has develop over the years. Government involve in the form of nationalization,
welfare and fiscal policies and minimum wage laws which adds to the development of
capitalism. In the world today pure capitalism is not practiced but rather a mix economy by
former capitalist states like the United State where government plays a more important role in
market decisions.
However, like everything else capitalism has its disadvantages such as negative externalities like
pollution and diminishing non-renewable resources; a disproportionate distribution of wealth or
income; and high unemployment rates and economic instability due to the cyclical nature of the
capitalistic system. Additionally the main motives of firms was gaining a profit which lead to the
misallocation of scarce resources and stagnation.
Even with consistent conflicts between upper and lower class, capitalism has survived. It
survives from the elite's desire to remain in control of the means of production and, therefore,
wealth. It causes exploitation between classes (the elite benefits at the expense of labour from the
lower class) and was self-seeking since persons seek their own self-interests, regardless of the
effects their actions have on others. This system found ways to suppress the working class and
keep the bourgeois in dominant position in society.