Concept of Capitalism and its Characteristics

Concept of Capitalism and its Characteristics

Last updated: November 17, 2019

What is Capitalism?

  • Capitalism is an economic system in which trade, industry, and means of production are controlled by private owners with the goal of making profits in a market company.
  • Capitalism is an economic system in which private individuals or businesses own capital goods.
  • The production of goods and services is based on supply and demand in the general market—known as a market economy—rather than through central planning—known as a planned economy or command economy.
  • Capitalism is an economic system based on the private ownership of the means of production and their operation for profit.
  • Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets.
  • In a capitalist market economy, decision-making and investments are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.
  • The term capitalism was first introduced in the mid-19th century by introduced in the mid-19th century by Karl Marx.

Meaning of Capitalism

  • Capital is wealth—that is, money and goods—that’s used to produce more wealth.
  • Capitalism is practiced enthusiastically by capitalists, people who use capital to increase production and make more goods and money.
  • Capitalism works by encouraging competition in a fair and open market.
  • Its opposite is often said to be socialism.
  • Where a capitalist economy encourages private actions and ownership, socialism prefers public or government ownership and control of parts of the economy.
  • There would be no public schools or public parks, no government programs such as Social Security and Medicare, and maybe not even any public highways or police.
  • In a purely socialist system, there wouldn’t be any private corporations.
  • There’s just about no such thing as pure capitalism or pure socialism in the modern world.
  • It is all about:
    • Supply and demand
    • Freedom
    • Incentives
    • Choices
  • It is an ecosystem-based on three things:
    • Wage labor
    • Private Ownership
    • Production for exchange and profit
Views of Karl Marx on Capitalism Click Here
Views of Max Weber on Capitalism Click Here
Marx vs Weber on Capitalism Click Here


Definition of Capitalism:

  • According to Prof. R. T. Bye: –

“Capitalism  is that system of economic organization in which free enterprise, competition and private                              ownership of property generally prevail.”

  •  According to prof. Loucks: –

“Capitalism is a system of the economic organization featured by the private ownership and the use for the                      private profit of man-made and nature-made capital.”

  • According to  Merriam-Webster:

“It is an economic system characterized by private or corporate ownership of capital goods, by investments that             are determined by private decision, and by prices, production, and the distribution of goods that are                               determined mainly by competition in a free market.”

  • According to Karl Marx:

“It is a form of historical perspective which is a stage in the development of human society.”

Types of Capitalism:

There are four types of capitalism which are as follows: –

  • Free-market Capitalism:
    • All aspects of society to be governed by the markets.
  • Corporate Capitalism:
    • Bureaucratic corporation dominant the economy.
  • Social Democratic Capitalism:
    • Mode of social market economy attempt to balance the benefit of a free market system with a strong support structure.
  • State Level Capitalism:
    • Mode of production are owned by the government but run in a capitalistic way that is a means of profit.

Characteristics of Capitalism:

The Characteristics of Capitalism are as follows: –

  • Private Property and Freedom of ownership:

    • Not owned by the government.
    • Individuals own property and resources
  • Right of Private Property:

    • The most important feature of capitalism is the existence of private property and the system of inheritance.
    • Everybody has a right to acquire private property to keep it and after his death, to pass it on to his heirs.
  • Price Mechanism:

    • This type of economy has a freely working price mechanism to guide consumers.
    • Price mechanism means the free working of the supply and demand forces without any intervention.
    • Producers are also helped by the price mechanism in-deciding:
      • what to produce
      • how much to produce
      • when to produce and
      • where to produce
    • This mechanism brings about the adjustment of supply to demand.
    • All economic processes of  work according to its directions:
      • consumption
      • production
      • exchange
      • distribution
      • saving and investment
    • Therefore, Adam Smith has called the price mechanism as the “Invisible Hand” which operates the capitalist.
  • Profit Motive:

    • Money leftover can be spent in any way the manufacturer wants.
    • Production under capitalism is profits oriented.
  • Competition and Co-operation Goes Side by Side:

    • A capitalist economy is characterized by free competition because entrepreneurs compete for getting the highest profit.
    • In Capitalism, there is extreme competition between capitalist.
    • Demand is artificially increased and supply is decreased.
    • There is cut-throat competition under capitalism.
  • Freedom of Enterprise, Occupation, and Control:

    • Every person is free to start any enterprise of his choice.
    • People can follow the occupations of their ability and taste.
    • Moreover, there is the freedom of entering into the contract.
    • Employers may contract with trade unions, suppliers with a firm and one firm with another.
  • Consumer’s Sovereignty:

    • In a capitalist economy, a consumer is compared to a sovereign king.
    • The whole production frameworks according to his directions.
    • Consumer’s tastes govern the whole production line because entrepreneurs have to sell their products.
    • If a particular type of production is to the liking of consumers, the producer gets high profits.
  • It arises Class Conflict:

    • From this class-conflict arises.
    • The society is normally divided into two classes:
      • The “haves”
      • The “have-nots”
    • The conflict between labor and capital is found in almost all capitalistic countries and there seems to be no near solution to this problem.
    • It seems that this class-conflict is inherent in capitalism.
  • Leading Role of Joint Stock Companies:

    • In a joint-stock company, business is carried on by a board of directors which is democratically elected by the shareholders of the company at its general body meeting.
    • In view of this, it has been said that Joint-stock Companies “Democratic Capitalism”
  • Important Role of the Entrepreneur:

    • The entrepreneurial class is the foundation of the capitalist economy.
    • The whole of the economic structure of the capitalist economy is based on this class.
    • Entrepreneurs play the role of leaders in different fields of production.
    • The presence of good entrepreneurs is a must for healthy competition.
    • Entrepreneurs are the main sources of dynamism of the capitalist economy.
  • Large Scale Production:

    • Capitalism arose as a result of the industrial revolution which made large scale production possible.
    • More production means a wider use of capital and leads to more profit.
  • Price Mechanism: –

    • In capitalism,  the price of the commodity is determined not by the cost of production but by the law of demand and supply.
  • Wage Institutions:

    • The objective of the capitalist is to pay low wages as possible and to take as much work as possible out of them.
  • Money and Credit:

    • In capitalism, the institution of credit becomes important.
    • The capitalist gets money on loans and develops its business.
  • Laissez-Faire Competition:

    • There is no governmental control over the forces of:
      • Production
      • Distribution
      • Exchange
    • It is controlled by the forces operating in markets.
  • Responsible Capitalism:

    • It is essentially a free market economy.
    • But with a degree of government regulations to avoid the accesses and inequalities of capitalism.
  • Turbo Capitalism:

    • It refers to an unregulated form of capitalism with financial deregulation, privatization and lower tax on higher earners.
  • Crony Capitalism:

    • A term used to refer to the situation where business success is related to strategic influences with civil servants, politicians in those in authority.
  • State Capitalism:

    • It occurs when state-owned industries play a key role within the market economy.

Merits/Advantages of Capitalism:

The Merits/Advantages of Capitalism are as follows: –

  • Production according to the Needs and Wishes of Consumers:

    • In a free-market economy, consumer needs and wishes are the uppermost in the minds of the producers.
    • They try to produce goods according to the tastes and liking of the consumers.
    • This leads to the maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.
  • Higher Rate of Capital Formation and More Economic Growth:

    • People under capitalism have the right to hold property and pass it on in inheritance to their heirs and successors.
    • Owing to this right, people save a part of their income so that it can be invested to earn more income and leave the larger property for their heirs.
    • The rate of capital formation increases when savings are invested.
    • This accelerates economic growth.
  • There is Complete Freedom of Choice in a Capitalist Economy:

    • Economic freedom means the right to earn and retain the property.
    • It also means the freedom of enterprise and choice of occupation.
    • This leads to the automatic channelization of the country’s manpower resources in different vocations.
    • There is no need to direct people or force them.
    • Further, there is the freedom of contract which ensures smooth and flexible functioning of different production units.
  • Optimum Utilisation of Resources Available:

    • The limited resources of the community are put to the most economical uses with as little waste as possible.
    • There is keen competition among producers and entrepreneurs to produce and sell goods.
    • Every producer and entrepreneur tries to use productive resources at his disposal in the most economical manner in order to make maximum profit.
  • Efficient Production of Goods and Services:

    • Due to competition, every entrepreneur tries to produce goods at the lowest cost and of a durable nature.
    • Entrepreneurs also try to find out superior techniques of producing the goods.
    • Consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.
  • Varieties of Consumer Goods:

    • Competition is not only in price but also in the shape design, colors, and packing of products.
    • Consumers, therefore, get a good deal of variety of the same product.
    • The free market economy offers a variety of consumer goods.
  • In Capitalism there is no Need of Inducement or Punishment for Good and Bad Production:

    • A capitalist economy provides encouragement to efficient producers.
    • The able an entrepreneur is, the higher is the profit he obtains.
    • There is no need to provide any kind of inducement.
    • The price mechanism punishes the inefficient and rewards the efficient on its own.
  • It Encourages Entrepreneurs to Take Risks and Adopt Bold Policies:

    • Because by taking risk they can make higher profits.
    • Higher the risk, greater the profit.
    • They also make innovations in order to cut their costs and maximize their profits.
    • Hence capitalism brings about great technological progress in the country.
  • It Provides the Best Atmosphere for Inventions:

    • They try to beat each other in innovations.
    • This leads to rapid expansion, greater employment, and income.
    • Similarly, innovators enjoy the benefits of their research, through the system of patents and trade-marks.
  • It Provides a Good Deal of Flexibility:

    • This type of economy can automatically change with the circumstances.
    • During wartime market regulations are adopted to provide for the war machine.
    • As soon as there is peace, the economy reverts to the free functioning of markets.

De-Merits of Capitalism

The main de-merits or dis-advantages of the capitalist economy are as follows:

  • Inequality of Distribution of Wealth and Income:

    • The system of the private property acts as a means of increasing inequalities of income among different classes.
    • Money begets money.
    • Those who have wealth can obtain resources and start big enterprises.
    • The propertyless classes have only their labor to offer.
    • Profits and rents fewer classes have only their labor to offer.
    • Profits and rents are high.
    • Wages are much lower.
    • Thus the property holders obtain a major share of national income.
    • The common masses have their wages to depend upon.
    • Although their number is overwhelming their share of income is relatively much lower.
  • Class Struggle as Inevitable in Capitalist Economy:

    • Some critics of capitalism consider class struggle as inevitable in a capitalist economy.
    • There are two main classes in which capitalist society is divided.
    • There is a tendency on the part of the capitalist class to exploit the wage-earners.
    • As a result, there is a conflict between the employers and the employees which leads to labor unrest.
    • Strikes, lockouts and other points of tension.
    • All these have a very bad effect on production and employment.
  • Social Costs are Very High:

    • A capitalist economy industrializes and develops but the social costs of the same are very heavy.
    • Factory owners running after private profit do not care for the people affected by their production.
  • Unnecessary Multiplicity and too Much of Competition:

    • Consumers have to pay a high price for their freedom of choice and provision of variety.
    • There is sometimes too much competition leading to unnecessarily high costs of production because competitors bid the prices of resources too high.
    • There is a wasteful advertisement.
  • Instability of the Capital Economy:

    • A capitalist economy is inherently unstable.
    • There is a recurring business cycle.
    • Sometimes there is a slump in economic activity.
    • At other times a business is brisk, prices rise, fast, there is a good deal of speculative activity.
    • These alternating periods of recession and boom lead to a good deal of wastage of resources.
  • Unemployment and Under-employment:

    • A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions.
    • Business fluctuations also result in a large part of the labor force going unemployed during depressions.
    • Not only this, workers are not able to get full-time employment except under boom conditions.
  • Working Class does not have Adequate Social Security:

    • In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment.
    • As a result, widows, and children have to undergo a good deal of suffering.
    • Governments are not in a position to provide for adequate social security in overpopulated less developed countries.
  • No Bargaining Capacity of Labourers hence Exploitation:

      •  This is because; they do not have the bargaining power to get their due from the rich capitalist.
      • There is no equal pay for equal work.
  • Growth of Monopolies with their Evils:

    • A capitalist economy is competitive only in theory.
    • In practice, the few competitors often arrive at an understanding and exploit the consumer.
    • Sometimes the bigger firms buy or eliminate the smaller firms to establish their supremacy in particular lines or production.
    • They charge high prices and do not have any compulsion to improve the efficiency of production.
    • Thus, the much talked about the efficient working of a capitalist economy becomes a myth

Captains of Capitalism:

  • There are three main Captains of Capitalism which is as follows:
    • Andrew
    • J.P Morgan
    • John D. Rockefeller

Problems of Capitalism:

  • Inequalities
  • Monotony
  • Immobility
  • Environmental costs
  • Monopoly of power
  • Short-termism
  • Economic Stability


  • Economists now agree that there are certain imperfections in a free enterprise economy that must be corrected.
  • The Government must come out to regulate the economic machine so that it does not run down occasionally.
  • The government has a positive role to play in promoting unemployment, price stability, and orderly growth.
  • The difference of opinion now is not on whether the government should regulate or not but is rather on how much control is appropriate under different circumstances.

Concept of Capitalism and its Characteristics

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Concept of Capitalism and its Characteristics What is Capitalism Meaning of capitalism Concept of capitalism Definitions of capitalism Characteristics and Features of capitalism Concept of Capitalism and its Characteristics Factors of capitalism Advantages of capitalism Disadvantages of capitalism  Concept of Capitalism and its Characteristics Captains of capitalism Problems of capitalism Conclusion Concept of Capitalism and its Characteristics

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