In this article we will discuss about features, merits and demerits of capitalism economic system.

Features of Capitalism:

The capitalistic economy or simply capitalism has the following features:

(a) The Institution of Private Property:

In a capitalistic economy, prop­erty and means of production belong to the private individuals. Their owners are free to use their resources in the way they like the best. Individu­als are protected by law in the enjoyment of rights to own, use and employ both wealth and talent to gain an income. State ownership of property is practically non-existent.


(b) Freedom of Enterprise:

Capitalism preaches the freedom of enter­prise, which means that everybody is free to engage in whatever economic activity he likes, except for a limited number of services rendered by the government (e.g., transport and communication, water supply, etc.). Trade, business and commerce are absolutely free from state intervention and control. Business decisions are made by the private owners, called capitalists.

(c) Freedom of Choice by Consumers:

Consumers enjoy freedom or sovereignty regarding their consumption. Decisions are made by individual consumers about what goods to buy, how much to save, etc. The people in a free enterprise economy are free to spend money on any goods and services or are free to save their money in the way they like the best.


(d) Role of the Price System:

In the free enterprise system the economy is controlled and directed by the invisible hand or the price system. Prices provide the signals that guide the direction of production and thus deter­mine the allocation of resources as well as income distribution.

(e) Incentive System:

The capitalistic system is governed by what is called the price-profit mechanism. There is no system of price-control in such an economy. When prices rise, profits will also rise. Rising profits will induce the producers to expand their business.


When prices fall, profits will fall; and producers will cut down their business. It is through this invisible hand of price-profit mechanism that capitalism works, and some kind of balance is established between consumers’ demand and producers’ supply.

(f) Market Competition:

In a free enterprise economy, business firms compete with one another to increase their own economic well-being. High prices and excessive profits by some firms encourage others to enter the industry.

(g) Limited Role of the Government:

The market economy is character­ised by a relative absence of government control over economic activity, particularly over price and production. Government control over the econ­omy in the capitalistic system of today is, of course, much greater than what it was in the past century.

Merits and Demerits of Capitalism:

Capitalism as an economic system has both merits and demerits.

Its merits are:

(a) An efficient production system based on private property and profit,

(b) Low costs of production due to keen compe­tition among the producers,


(c) Maximum satisfaction of the consumers due to freedom of choice,

(d) Absence of the government’s bureaucratic control over the economic affairs, and

(e) Automatic working of the system through the price-profit mechanism.

Its main demerits are:


(a) Emergence of monopolies in business and industry,

(b) Serious problem of unequal distribution of income and wealth,

(c) Loss of consumers’ sovereignty due to high prices charged by the monop­oly-capitalists,

(d) Production of harmful goods,


(e) Waste of resources due to duplication of goods and services,

(f) Exploitation of labourers by the capitalist and

(g) Frequent business cycles and mass unemployment.


Owing to the growing evils of capitalism, its old form has already disappeared. Now, in that place we find the controlled capitalism in the countries where it still exists.