When you start taking a closer look at different economic systems, it can be difficult to maintain an unbiased opinion. Capitalism is viewed differently by many individuals, but it is widely characterized as an economic system that is based on little to no government intervention and the distribution of goods and services based on price mechanism alone. This means that government price controls do not exist and production means are all owned privately.
This results in an economic system that is much different from those that are currently in place in most countries. The best way to evaluate capitalism is to break it down by analyzing the advantages and disadvantages of this economic system in more depth. This allows you to compare and contrast the good gains the bad and decide what capitalism can offer based against what negative aspects it brings to light.
The level of freedom that is attainable with capitalism is somewhat unparalleled. Since the economic system of capitalism is free, it leads to a political system that is firmly rooted in freedom. A government that owns production and sets the prices leads to a political control that extends to all areas and aspects of life. A capitalist society is often described as free, which is seen as one of the most essential benefits.
2. Improved Efficiency
A capitalist society rewards efficiency and everyone benefits from improved efficiency within all firms. Producing goods that are in demand in the most efficient way is what capitalism is often reliant on. There are incentives within capitalism for those firms that cut costs and limit waste. When firms are state owned they are often not as efficient as they could be. This is due to lack of willingness to let go of surplus employees and a lack of innovative practices in the workplace. This means that capitalism has the potential to breed efficiency, which all individuals in the society can benefit from.
3. Economic Growth
Since efficiency is rewarded and firms are owned privately, this results in more economic growth and the spread of innovation. A climate of innovation is the result of trying to produce goods and services in the best way and meet the demands of the public. As a result, the living standards of a society can improve with capitalism as the economic system in control. More wealth leads to a higher standard of living, which in turn everyone can benefit from in some capacity. There is a trickledown effect of a higher standard of living that comes from the rich down to the poor. Even those that are not directly benefiting from the wealth can reap the benefits of economic growth as a society.
4. No Better Alternative
It was once said by Winston Churchill that “democracy is the worst form of government except for all the others that have been tried.” Many are of the opinion that the same sentiment could be used to describe capitalism.
1. Monopoly of Power
Even though capitalism is often linked to freedom, it is also seen as the monopoly of power by those at the top. Privately owned firms have the ability to gain monopoly power in certain industries and labor markets. This means that firms that amass this type of monopolized power have the ability to charge more and take advantage of those in the society.
2. Monopsony Power
This type of power in relation to capitalism refers to firms that have the ability to pay lower wages to workers. There is a lot of inequality between owners of firms and the employees of firms, in a capitalist society. This can lead to monopsony exploitation.
3. Ignoring Factors
Many of the negative outcomes spurred on by capitalism are ignored. This includes the pollution that stems from production, harmful living and working standards and many other negative externalities of capitalism. An inefficient allocation of resources can also be the result if negative factors are continuously ignored. Even those that support capitalism acknowledge that government provision is necessary in some instances even in a capitalist society.
4. Inequality of Wealth
With private firms taking control of wealth, this leads to inequality of wealth and inherited wealth. Those at the top stay in the top by inheriting the wealth of past generations. This makes moving up in a capitalist society increasingly difficult. The legal right to privately own property is the basis of capitalism, but the rich simply keep inheriting wealth and being born into the privileged class is a matter of chance. Equal opportunity is not something that is seen in a capitalist society. This leads to social division that can spur resentment within a society. Creating social divisions is not always seen as preferred.