COMPARATIVE ECONOMIC

SYSTEMS-2

Gopika Kumar
Capitalism-Meaning
Capitalism is the name given to that social system under
which the land , factories , implements, etc. belong to a
small number of landed proprietors and capitalists, while
the mass of the people possess no property or very little
property and is compelled to hire itself out as workers. The
landowners and factory owners hire workers and make them
produce wares of this or that kind which they sell on the
market .The factory owners further more, pay the workers
only such a wage as provides a bare subsistence for them
and their families, while everything the workers produces
over and above this amount goes into the factory owners
pocket a s his profit.
Capitalism-Features

1. Right to Private Property

Private Property refers to the right vested in an owner and
protected by society whereby the owner exercises full
control over the uses of the things owned. Private
Property is an inherent part of Capitalism.
Functions:
1. Placing the power to decide upon the uses to which
productive agents shall be put
2. It induces the accumulation of wealth.
3. It acts as a stimulus to conserve wealth
4. Orderly estimates of depreciation
Capitalism-Features

2. Right of Inheritance
It refers to owning of the property of a father by his heirs as
a matter of legal right.
Capitalism-Features
3. Right of Free Enterprise
An individual is free to exercise his own initiative in economic matters.
As a consumer he is free to spend his income on whatever goods and
services he chooses to buy and to consume them in whatever manner
he desires. There is Consumers Sovereignty.
As a producer an individual may make his living , when, where and in
whatever way he desires.
 The agents of production are directed into their best uses.
 Entrepreneurs are free to discover what they consider advantageous
possibilities
 Full Utilization of existing resources.
 It encourages inventions and use of new kinds of machinery and new
technological know how.
Capitalism-Features

4. Perfect Competition
Competition is the act of striving for something that is sought
by another at the same time. Competition means rivalry
between the participants in the market.
Benefits:
1. Fair Prices are determined
2. Creates and Preserves efficiency
3. Healthy effect on the labor
Capitalism-Features

5. Profit Motive
It is the guiding star of the capitalistic society.
Functions:
1. Central Controlling Mechanism
2. Coordinating force
3. Induces entrepreneurs to come forward and bear risks
Capitalism-Features

6. Self Interest or Economic Motivation

A Capitalist economy is individualistic. Each
individual is guided by his self interest. He is
motivated by the desire for economic gain.
Self Interest works as an INVISIBLE HAND to
coordinate the activities.
Capitalism-Features

7. Price Mechanism
The basic coordinating mechanism of a
capitalistic economy is the price
system determined by the forces of
demand and supply.
Capitalism-Features

8. The Role of Government

Areas for Government intervention identified under
Capitalism:
1. Collective Wants which cannot be met by
private operations
2. Technical nature of production process is
unfavorable
3. Danger of monopolistic exploitation
How does a Capitalist
Economy Work?
Resource Allocation under Capitalism-
PRICE MECHANISM

Demand and Supply taken together determine the prices in

the market. The prices thus determined are the
equilibrium prices.

Equilibrium is a position from where there is no incentive

for change.
How does a Capitalist
Economy Work?
Resource Allocation under Capitalism-
PRICE MECHANISM
Price Mechanism works on the following two bases:
 Self Interest: asserts that every individual, left to himself
will place himself in a position where he expects to get
maximum compensation for his efforts.
 Invisible Hand: is the self adjusting, self correcting
mechanism that regulates the economic activity and
brings about automatic adaptability.
How does a Capitalist
Economy Work?
Resource Allocation under Capitalism-
PRICE MECHANISM
Functions of Price Mechanism:
1. Price Mechanism acts as a rationing mechanism for the scarce products
and resources available.
2. Prices act as a signal to firms about what should be produced in the future
3. It acts as a guide to the organization of production
4. It provides information about peoples preferences
5. Influences the decisions on which production techniques to use
6. It allocates resources
7. It creates incentives to avoid unnecessary costly methods and develop
new technologies
8. It coordinates the desires of millions of individuals, firms and households
How does a Capitalist
Economy Work?
Resource Allocation under Capitalism-
PRICE MECHANISM
Limitations of Price Mechanism:
1. Divergence between private and social costs

2. Market imperfections

3. Collective consumption goods

4. The desire to protect some individuals from decisions

taken on their behalf of others
5. Compassion
Capitalism-Merits

1. Flexibility
2. Increase in Standard of Living
3. New Consumer Goods
4. Growth of Entrepreneurship
5. Technological Progress
6. Higher rate of Capital Formation
7. Optimum Utilization of Productive
Resources
8. Greater Individual Freedom
Capitalism-Demerits

1. Inequality of Income
2. Conflict between Monetary Values
and Economic Welfare
3. Too Much Waste
4. Uncertainty and Instability
5. Limitations of Private Ownership
6. Consumers Sovereignty a false
slogan
Monopoly Capitalism
Monopoly Capitalism

Evolution-
As a result of the process of concentration of
production and capital and centralization of
capital monopoly capitalism came into
existence.
Factors Responsible:
1.Wasteful competition

2.Advantages of Large Scale operations

3.Desire of Monopoly Power

Monopoly Capitalism

Types of Monopolies:
1. Gentlemen’s agreement
2. Pools
3. Cartels
4. Syndicates
5. Trusts
6. Holding Companies
7. Mergers
 Capitalism
Antagonistic
Productive Forces Production Relations Ownership of the
Means of Production
 Labour: Human ability  Complex Division of  Capitalist owns the
and skill specialisation Labour means of production
 Means of Labour:  Commodity  Have-nots do not
Sophisticated and
Production own any means
advanced techniques
of production,  Close
Industrial Plants, interdependence
equipment, tools  Mutual Cooperation
 Objects of Labour:  Wages and
Land-Principle means
payments to other
of production
factor services