What is Capitalism?

Capitalism Definition

Capitalism is an economic and political system in which means of production are privately owned.  Means of production include land, labour and capital. Unlike Socialism, profit making is the driving factor in capitalism. Note that profit making as an ends to production is a fairly new concept, going only 300 years back.

Another fundamental pillar of Capitalism is ‘Free Markets‘. That’s is a market set up that is not regulated by the government and where prices of all goods and services are decided by the market force. This is called Laissez-faire, which literally means ‘allow to do’ and in economic terms translates into allowing the markets to operate freely without interference from the government. Capitalists believed that the role of government should be to act as a facilitator in ensuring that there are no market distortions like monopolies, providing national defence and proper infrastructure. in early 2021, the Prime Minister of India, Mr. Narendra Modi, spoke in strong favour of privatization of Public Sector Units (PSUs), stating that ‘the government has no business to be in business‘.


Capitalism Pros and Cons


Pros and Cons of Capitalism

Pros of Capitalism

  • Capitalism promotes and rewards innovation. A new innovation would mean that the producer would get a larger market share or would be tapping into an unexplored market, thereby making higher profits
  • Capitalism allows for goods and services to be sold in a competitive environment for best prices. This is beneficial for both producers and consumers as producers get the best possible price for their goods and services and consumers do not over-pay in a competitive market
  • Since profit making and wealth accumulation is at the core of Capitalism, it gives people an incentive to work hard and not be free-riders

Cons of Capitalism

  • Capitalism might lead to an increase in income gaps or inequalities in the society as the rich become richer and the poor stay so
  • Negative externalities like increase in pollution as a result of industrial production are not taken care of as profit making is the central goal in capitalism. Unless these negative externalities come with price repercussions, these would be left unattended as they would have a bearing on the cost of production and thus reduce profits.
  • Social welfare like free access to education and healthcare for all would not get featured in a capitalist society. This would be particularly detrimental for those segments of the society that are not independent earners like elders, children, specially abled etc.


Crony Capitalism

Though capitalism is based on free market operations, businesses may at times influence the government to introduce regulations in their favor like tax rebates, easing out entry barriers, provision of government incentives. These favors disrupt free market operations and allow one particular firm or group to grow larger than others. In return, the business might provide monetary support to the government party showering such favors.


Mixed Economies

Since both socialism and capitalism have their pros and cons, countries today have elements of both these systems, leading to a mixed economy. A mixed economy allows for a free market to operate in most of the areas, but there might be some areas that would be controlled or heavily regulated by the government. In this set-up, the private sector can flourish, even while the government is able to provide public goods that benefit the economically dependent members of the society and helps the government achieve its social aims. Examples are plenty, including United States, India, United Kingdom, France, that have highly subsidized healthcare or education schemes for its citizen, along with a booming private sector.


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