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Merits and Demerits of Capitalistic System


Merits of Capitalistic System:

The main merits of this system are:

(i) Economic Freedom:

The foremost advantage of this system is that everybody enjoys’ economic freedom as one can spend one’s income according to one’s wishes. Producers have complete freedom to invest in any business or trade.

(ii) Automatic Working:

Another advantage according to classical economists is an automatic system. Equilibrium point is automatically come with the forces of demand and supply.

(iii) Variety of Goods and Services:


All the basic decisions of what to produce, how to produce and for whom to produce are taken by producers. Every producer gives attention to consumers’ taste and preferences. Hence, there are large variety of goods and services; produced in the economy.

(iv) Optimum Use of Resources:

All natural resources are used to their optimum level as production is undertaken with a sole purpose: of earning profit and no scope for wastages at all.

(v) Efficient Producer:

There is very tough I competition among entrepreneurs. They always encouraged to produce best quality of products. Thus, technical development will lead to increase in higher productivity as well as efficiency.

(vi) Higher Standard of Living:

Varieties of goods at cheap rates make it easy to be within the; reach of poor and weaker sections of society. This results in rise in their standard of living.

(vii) Incentive to efficient:


In this system, incentives are given to the efficient workers in cash or kind. This means every worker should get reward according to his ability. Hence, workers will try to work more and more, therefore, total output will also increase.

(viii) New Inventions:

In this type of economy, there is ample scope of new invention. To get more profit every producer takes initiative to develop new techniques in production.

Demerits of Capitalistic System:

According to Karl Marx, “Capitalism contains the seeds of its own destruction.”

The main demerits of this system are given below:

(i) Labour Exploitation:


The main defect of capitalism is the exploitation of labour. Labourers get less wages in comparison to their working hours. The wages less than their marginal productivity are not sufficient for their livelihood.

(ii) Class Struggle:

A lion’s share of income and resources is controlled by the upper sections of the society, while others remain deprived of the basic amenities of life. Thus, the entire society is divided between ‘haves and ‘have not’s. Hence, the continuous class struggle spoils the health environment of the economy.

(iii) Wasteful Competition:

Capitalism is a wasteful competition. A lot of money is spent on advertisement and publicity for pushing the sale of the commodity. Its burden ultimately is borne by the poor consumers in the form of increased price.

(iv) Threat of Over-Production:

The production is made on a large scale which cannot be changed in a short period. Therefore, under capitalism, fear of over-production always exists. The Great Depression of 1930s in USA is an example of it.

(v) Economic Fluctuations:

Being automatic in nature, capitalist economy always faces the problem of economic fluctuations and unemployment. This means the state of instability and uncertainty,

(vi) Unbalanced Growth:

All the resources are put only to those channels where there is maximum profit. Other sectors of the economy are neglected. As there is no check on the economic system, the growth is unbalanced in nature.

(vii) No Welfare Activities:

In capitalism, the sole motive is maximum profit, but not the public welfare. Variety of goods are produced according to market demand, not for any welfare activity.

(viii) Monopoly Practices:

This economic system has been criticised on the fact that it develops monopoly activities within the country.

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