Capitalism Pros And Cons – More Freedom, Less Security, Not Fair?

Capitalism – the mere mention of the word can spark fiery debates. Some hail it as the ultimate champion of individual freedoms, while others denounce it as a reckless system that is neither fair, nor stable. So, where’s the truth? Does capitalism truly unleash our full potential, or is it a recipe for economic chaos? In this article, I’ll look at capitalism pros and cons. Specifically, I’ll examine its benefits and its ugliest excesses. Moreover, I’ll look at capitalism’s core three components – control of the means of production, resource allocation, and the distribution of goods and services. By the end, you’ll have the information to form your own opinion: is capitalism a force for good, or a dangerous gamble?

What is Capitalism and its Pros and Cons?

There are many pros and cons of a Capitalist economic system, but first what is capitalism? In Economics Help’s article, 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. Thus, the primary advantage of capitalism is that it maximizes individual freedoms, and its greatest disadvantage is that there is no overarching authority to govern fairness and stability in the economy.

To further examine the pros and cons of a Capitalist economy system, let’s break out the pros and cons by the components of an economic system – production, resource allocation, and distribution. 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.”

In the following paragraphs are the pros and cons of capitalism broken out by its components: Production, Resource Allocation, Goods and Services, and Distribution.

1. Means of Production Privately Owned – Capitalism Pros and Cons.

First, let’s look at capitalism from a production perspective. As in any economic system, production is driven by resources available: land, labor, capital and the enterprise (entity with plans, know-how, innovation). So, a capitalist system favors the private owners who control these production resources. Specifically, the pros and cons of the capitalist form of production 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 with the most productive as well as those who inherit wealth. Hence, 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, thus it can create inequality and social division. Indeed, 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. Hence, new methods and technologies are invented and applied under capitalism.
• Wage Growth Limited – Con. Due to capitalism being decentralized, companies can create situations to limit wage growth and exploit employees. 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. In this case, 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. In this case, these workers may not have the means to be economically self-sufficient.

2. Decentralized Resource Allocation – Pros and Cons.

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Now, let’s take a look at resource allocation in a capitalist society. Indeed, by its nature a capitalist system is decentralized in terms of resource planning and allocation of resources for select goods and markets. Specifically, the pros and cons of resource allocation under capitalism 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 – Both Pros and Cons. As with any economic system, capitalism drives the quality, quantity, variety, and consumption of goods and services. Below are the pros and cons of capitalism in terms of goods and services:
  • .Better Quality of Products – Pro. Due to competition, product quality is higher. Hence, companies with higher quality products will stay in business. On the other hand, companies producing lower quality goods and services will eventually go out of business.
  • Bigger Variety of Products – Pro. Because capitalism encourages both innovation and competition as well as not having a central authority that may limit 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.

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3. Market-Based Distribution – Capitalism Pros and Cons.

Lastly, let’s look at the pros and cons of distribution of goods under capitalism. Unquestionably, a capitalist system favors price in determining how goods and services are distributed. Indeed, prices are influenced by both supply and demand as well as competition. The pros and cons of distribution of good and services under capitalism are: 

• Political Freedom – Pro. Capitalism provides for a free economy which complements political freedom. Indeed, 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. As a result, 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 monopolistic 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.

For more on capitalism pros and cons see Environmental Conscience Blog’s Capitalism Pros and Cons and Economics Help’s Capitalism Pros and Cons.

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