Some of us have settled opinions, good and bad, about capitalism. Some say that Capitalism maximizes individual freedoms. Others say there it has no central authority to govern fairness and stability in the economy. What are the benefits of Capitalism? What are the excesses? This article breaks down capitalism pros and cons by the major components of any economic system: means of production, how resources are allocated and how goods & services are distributed.
What is Capitalism and its Pros and Cons?
There are many pros and cons of a Capitalist economic system, but first what is Capitalism? Economics Help’s Capitalism Pros and Cons describes Capitalism as an economic system characterized by:
- Lack of government intervention
- Means of production owned by private firms
- Goods and services distributed according to price mechanism (as opposed to government price controls)
So as an economic system, Capitalism relies less on a centralized Government authority and puts control in the hands of individuals: the producers, the sellers, and the consumers. So the pro of Capitalism is that it maximizes individual freedoms, and the con is that there is no overarching authority to govern fairness and stability in the economy.
To identify the pros and cons of a Capitalist economy system, let’s break out the pros and cons by the components of an economic system. According to Wikipedia “An economic system … is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area.” Below are the pros and cons of Capitalism broken out by its components: Production, Resource Allocation, Goods and Services, and Distribution.
Production – Capitalism Pros and Cons.
As in any economic system, production is driven by resources available: land, labor, capital and the enterprise (entity with plans, know-how, innovation). A capitalist system favors the private owners who control these production resources. The pros and cons of this are:
- Efficient Use of Resources – Pro. With private owners controlling production they have an incentive to use their resources wisely as this will maximize their profit.
- Wealth Inequality – Con. Over time wealth will accumulate to the most productive as well as those who inherit wealth. Capitalism creates economic classes that unchecked, creates a privileged class and fails to provide equality of opportunity.
- Social Division – Con. As Capitalism by its nature creates economic classes, and thus inequality and social division. If the inequality is great (the 1% versus the 99%), this creates resentment and social division.
- Innovation – Pro. Under Capitalism, entrepreneurs driven by profit create and develop new and better products. New methods and technologies are invented and applied.
- Wage Growth Limited – Con. Due to capitalism being decentralized, companies can create situations to limit wage growth and employee exploitation. This includes inhibiting collective bargaining, limiting profit-sharing, not paying workers for the value that they create, and making it hard for employees to switch jobs.
- Individual Performance is Valued – Pro. Individuals who are skilled, talented, and hard working are rewarded and valued under a Capitalist system.
- Bad for Low-Skilled Workers – Con. Low-skilled workers may not have an adequate wage to be economically self-sufficient.
Resource Allocation – Capitalism Pros and Cons.
By its nature a capitalist system is decentralized in terms of resource planning and allocation of resources for select goods and markets. The pros and cons of this are:
- Social Benefits Ignored – Con. A Capitalist economy unchecked will under-provide goods and services that serve the overall public good such as environment, health, public transport and education.
- Lower Taxes – Pro. As a Capitalist economy is not dependent on a large Government bureaucracy, taxes are less than with other types of economies.
Goods and Services – Capitalism Pros and Cons. As with any economic system, Capitalism drives the quality, quantity, variety, and consumption of goods and services. The pros and cons of this are:
- .Better Quality of Products – Pro. Due to competition, product quality is higher. Companies producing lower quality goods and services will eventually go out of business.
- Bigger Variety of Products – Pro. Because of innovation, competition, and no central authority limiting the variety of products, consumers have a large selection of goods that they can buy.
- Focus on Consumption – Con. Due to its nature capitalism leads to an excessive focus on consumption versus what is of value or what serves the public good.
Distribution – Capitalism Pros and Cons.
A capitalist system favors that the distribution of goods be governed by price. Price is influenced by supply and demand as well as competition. The pros and cons of this are:
- Political Freedom – Pro. Capitalism provides for a free economy which complements political freedom. A centralized state controlling the means to production and pricing creates a large bureaucracy which usually extends into other areas of life.
- Lack of Welfare for the Needy – Con. With a decentralized and volatile economy, this can lead to more homelessness and insufficient welfare for the unfortunate.
- Economic Growth – Pro. Capitalism creates an environment where entrepreneurs and individuals are incentivized to be innovative and work hard. This increases Gross Domestic Product (GDP) and leads to improved living standards.
- Monopolies – Con. Due to capitalism being decentralized, it can create conditions where one company can eliminate the competition for a select goods or services. Here the company can drive up the price because it controls the supply of goods and services.
- Lower Prices – Pro. Due to competition and increased productivity, consumers in a capitalist economy enjoy lower prices.
- Boom and Bust Cycles – Con. Capitalist economies have a tendency to boom and bust with painful recessions and mass unemployment.
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