Top Menu

Capitalism: Meaning, Features, Merits and De-Merits


Let us make an in-depth study of Capitalism:- 1. Meaning of Capitalism 2. Main Features of Capitalism 3. Merits of Capitalism 4. De-merits of Capitalism.

Meaning of Capitalism:

Meaning and Definition:

Under capitalism, all farms, factories and other means of production are the property of private individuals and firms.


They are free to use them with a view to making profit. The desire to earn profit is the sole consideration with the property-owners in the use of their property.

Under capitalism everybody is free to take up any line of production he wishes and is free to enter into any contract with a view to earn profit.


(1) Prof. R. T. Bye has defined capitalism as “that system of economic organisation in which free enterprise, competition and private ownership of property generally prevail.” Thus, the definition hints at the major features of capitalism.


(2) In the words of Prof. LOUCKS:

“Capitalism is a system of economic organisation featured by the private ownership and the use for private profit of man-made and nature-made capital.”

(3) Similarly, Ferguson and Kreps has written that “in its own pure form, free enterprise capitalism is a system in which privately owned and economic decision are privately made”.

(4) Capitalism from Mc Connell view is:


“A free market” or capitalist economy may be characterised as an automatic self-regulating system motivated by the self interest of individuals and regulated by competition.”

A capitalist economy works through the Price System.

Prices perform two functions:

(i) A rationing function,

(ii) An incentive function.

Prices ration out the available goods and services among buyers according to the amounts each buyer wants and is able to pay for others whose desire is less urgent or whose income is smaller will receive smaller qualities.

Prices also provide an incentive for firms to produce more. Where demand is high prices will rise encouraging firms already in the industry to produce more and drawing new firms into the industry. Where demand is falling, prices will normally fall too. Firms will reduce their production, releasing resources for use in other industries where there is demand for them.

Firms are buyers as well as sellers. They buy material and supplies from other firms behaving exactly as private individuals do in deciding what to buy and how much to buy. If a new machine promises to reduce production costs or if a certain material can be substituted for another at a saving, the firm will buy the low-cost resources in order to complete with other firms.

The economy is tied together by millions of those interactions linking producers with one another and with consumers, linking one product with other products and linking every market with other markets. The point is that all the economic units in an economy are inter-related.

Main Features of Capitalism:

What a capitalistic economy actually is can be known through its main features. These are derived from the way certain functions are performed and the main decisions of the economy executed.


These may be stated as under:

1. Private Property and Freedom of ownership:

A capitalist economy is always having the institution of private property. An individual can accumulate property and use it according to his will. Government protects the right to property. After the death of every person his property goes to his successors.

2. Right of Private Property:

The most important feature of capitalism is the existence of private property and the system of inheritance. Everybody has a right to acquire private property to keep it and after his death, to pass it on to his heirs.

3. Price Mechanism:


This type of economy has a freely working price mechanism to guide consumers. Price mechanism means the free working of the supply and demand forces without any intervention. Producers are also helped by the price mechanism in-deciding what to produce, how much to produce, when to produce and where to produce.

This mechanism brings about the adjustment of supply to demand. All economic processes of consumption, production, exchange, distribution, saving and investment work according to its directions. Therefore, Adam Smith has called price mechanism as the “Invisible Hand” which operates the capitalist.

4. Profit Motive:

In this economy the desire to earn profit is the most important inducement for economic activity. All entrepreneurs try to start those industries or occupations in which they hope to earn the highest profit. Such industries as are expected to go under a loss are abandoned. Profit is such an inducement that the entrepreneur is prepared to undertake high risk. Therefore, it can be said that Profit Motive is the SOUL of capitalist economy.

5. Competition and Co-operation Goes Side by Side:

A capitalist economy is characterised by free competition because entrepreneurs compete for getting the highest profit. On the other side buyers also compete for purchasing goods and services. Workers compete among themselves as well as with machines for taking up a particular work. To produce goods of the required type and quality workers and machines are made to co-operate so that the production line runs according to schedule. In this way competition and co-operation go side by side.

6. Freedom of Enterprise, Occupation and Control:


Every person is free to start any enterprise of his choice. People can follow occupations of their ability and taste. Moreover, there is the freedom of entering into contract. Employers may contract with trade unions, suppliers with a firm and one firm with another.

7. Consumer’s Sovereignty:

In a capitalist economy a consumer is compared to a sovereign king. The whole production frame works according to his directions. Consumer’s tastes govern the whole production line because entrepreneurs have to sell their production. If a particular type of production is to the liking of consumers, the producer gets high profits.

8. It arises Class Conflict:

From this class-conflict arises. The society is normally divided into two classes the “haves” and the “have-not’s”, which are constantly at war with each other. Conflict between labour and capital is found in almost all capitalistic countries and there seems to be no near solution of this problem. It seems that this class-conflict is inherent in capitalism.

9. Leading Role of Joint Stock Companies:

In a joint stock company, business is carried on by a board of directors which is democratically elected by the shareholders of the company at its general body meeting. In view of this, it has been said that Joint stock Companies “Democratic Capitalism”.

However the real functioning of the corporate sector is not really democratic because there is one-share-one vote election. Since, big business houses own a majority of the shares of a company, they manage to get re-elected and the company is run as if it were their family business.

10. Important Role of the Entrepreneur:

The entrepreneurial class is the foundation of capitalist economy. The whole of the economic structure of the capitalist economy is based on this class. Entrepreneurs play the role of leaders in different fields of production. Presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main sources of dynamism of the capitalist economy.

Merits of Capitalism:


The main merits and advantages of capitalism are as follows:

1. Production According to the Needs and Wishes of Consumers:

In a free market economy consumer needs and wishes are the upper most in the minds of the producers. They try to produce goods according to the tastes and liking of the consumers. This leads to maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.

2. Higher Rate of Capital Formation and More Economic Growth:

People under capitalism have the right to hold property and pass it on in inheritance to their heirs and successors. Owing to this right, people save a part of their income so that it can be invested to earn more income and leave larger property for their heirs. The rate of capital formation increases when savings are invested. This accelerates economic growth.

3. There is Complete Freedom of Choice in a Capitalist Economy:

Economic freedom means the right to earn and retain property. It also means the freedom of enterprise and choice of occupation. This leads to the automatic channelization of the country’s man power resources in different vocations. There is no need to direct people or force them. Further, there is the freedom of contract which ensures smooth and flexible functioning of different production units.

4. Optimum Utilisation of Resources Available:

The limited resources of the community are put to the most economical uses with as little waste as possible. There is keen competition among producers and entrepreneurs to produce and sell goods. Every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit.

5. Efficient Production of Goods and Services:

Due to competition every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.

6. Varieties of Consumer Goods:


Competition is not only in price but also in the shape design, colours and packing of products. Consumers therefore get a good deal of variety of the same product. They need not be given limited choice. It is said that variety is the spice of life. Free market economy offers variety of consumer goods.

7. In Capitalism there is no Need of Inducement or Punishment for Good and Bad Production:

A capitalist economy provides encouragement to efficient producers. The able an entrepreneur is, the higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism punishes the inefficient and rewards the efficient on its own.

8. It Encourages the Entrepreneurs to Take Risks and Adopt Bold Policies:

Because by taking risk they can make higher profits. Higher the risk, greater the profit. They also make innovations in order to cut their costs and maximise their profits. Hence capitalism brings about great technological progress in the country.

9. It Provides the Best Atmosphere for Inventions:

Entrepreneurs are always on the look-out for new ideas to be applied to production. They try to beat each other in innovations. This leads to rapid expansion, greater employment and income. The investors are suitably rewarded with their royalties, through the copy right. Similarly, innovators enjoy the benefits of their research, through the system of patents and trade-marks.

10. It Provides a Good Deal of Flexibility:

This type of economy can automatically change with the circumstances. During war time market regulations are adopted to provide for the war machine. As soon as there is peace, the economy reverts to the free functioning of markets.

De-Merits of Capitalism:

The capitalist economy has been showing signs of stress and strain at different times. Some have called for a radical reform of the free-market economy. Others like Marx have considered capitalism economy to be contradictory in itself. They have predicted the ultimate doom of capitalist economy after a series of deepening crisis.


The main de-merits or dis-advantages of capitalist economy are as follows:

1. Inequality of Distribution of Wealth and Income:

The system of private property acts as a means of increasing inequalities of income among different classes. Money begets money. Those who have wealth can obtain resources and start big enterprises. The property less classes have only their labour to offer. Profits and rents less classes have only their labour to offer. Profits and rents are high.

Wages are much lower. Thus the property holders obtain a major share of national income. The common masses have their wages to depend upon. Although their number is overwhelming their share of income is relatively much lower.

2. Class Struggle as Inevitable in Capitalist Economy:

Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two main classes into which capitalist society is divided. The ‘haves’ which are the rich propertied class own the means of production. The “have not’s” which constitute the wage earning people have no property.

The ‘haves’ are few in number. The ‘have not’s are in majority. There is a tendency on the part of the capitalist class to exploit the wage-earners. As a result there is a conflict between the employers and the employees which leads to labour unrest. Strikes, lockouts and other points of tension. All this have a very bad effect on production and employment.

3. Social Costs are Very High:

A capitalist economy industrialises and develops but the social costs of the same are very heavy. Factory owners running after private profit do not care for the people affected by their production. The environment is polluted because factory wastes are not properly disposed of. Housing for factory labour is very rarely provided with the result that slums grow around big cities.

4. Unnecessary Multiplicity and too Much of Competition:


Consumers have to pay a high price for their freedom of choice and provision of variety. There is sometimes too much competition leading to unnecessary high costs of production because competitors bid the prices of resources too high. There is wasteful advertisement. Sometimes sub-standard goods are highly advertised and the consumer is deceived.

5. Instability of the Capital Economy:

A capitalist economy is inherently unstable. There is recurring business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close down, workers are rendered unemployed. At other times business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating periods of recession and boom lead to a good deal of wastage of resources.

6. Unemployment and Under-employment:

A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions. Business fluctuations also result in a large part of the labour force going unemployed during depressions. Not only this, workers are not able to get full time employment except under boom conditions.

7. Working Class does not have Adequate Social Security:

In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment. As a result, widows and children have to undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in over populated less developed countries.

8. Slow and Unbalanced Growth:

A free market economy may work automatically but the rate of growth is rather slow. Moreover as the economy progresses, there is no all round development. Some areas develop much faster while others remain backward. In­dustries may expand fast while there may be poverty in agriculture.

9. No Bargaining Capacity of Labourers hence Exploitation:

In a capitalist economy, workers are often paid a wage rate below their productivity. This is because; they do not have the bargaining power to get their due from the rich capitalist. Women and children are often paid a very low wage rate. There is no equal pay for equal work.

10. Growth of Monopolies with their Evils:

A capitalist economy is competitive only in theory. In practice, the few competitors often arrive at an understanding and exploit the consumer. Sometimes the bigger firms buy or eliminate the smaller firms to establish their supremacy in particular lines or production. They charge high prices and do not have any compulsion to improve efficiency of production. Thus, the much talked about efficient working of a capitalist economy becomes a myth.


Economists now agree that there are certain imperfections in a free enterprise economy which must be corrected. The Government must come out to regulate the economic machine so that it does not run down occasionally. Government has a positive role to play in promoting unemployment, price stability and orderly growth. The difference of opinion now is not on whether the government should regulate or not, but is rather on how much control is appropriate under different circumstances.

hit counter