CAPITALISM

Meaning of Capitalism: Under capitalism, all farms, factories and other means of production are
the property of private individuals and firms. They are free to use them with a view to making
profit. The desire to earn profit is the sole consideration with the property-owners in the use of their
property. Under capitalism everybody is free to take up any line of production he wishes and is free
to enter into any contract with a view to earn profit.
Definition:
 Prof. R. T. Bye has defined capitalism as “that system of economic organisation in which free
enterprise, competition and private ownership of property generally prevail.”
 Prof. LOUCKS: “Capitalism is a system of economic organisation featured by the private
ownership and the use for private profit of man-made and nature-made capital.”
Main Features of Capitalism:
1. Private Property and Freedom of ownership: A capitalist economy is always having the
institution of private property. An individual can accumulate property and use it according to his
will. Government protects the right to property. After the death of every person his property
goes to his successors.
2. 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.
3. 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.
4. Profit Motive: In this economy the desire to earn profit is the most important inducement for
economic activity. All entrepreneurs try to start those industries or occupations in which they
hope to earn the highest profit. Profit is such an inducement that the entrepreneur is prepared to
undertake high risk. Therefore, it can be said that Profit Motive is the soul of capitalist economy.
5. Competition & Co-operation: A capitalist economy is characterised by free competition
because entrepreneurs compete for getting the highest profit. On the other side buyers also
compete for purchasing goods and services. To produce goods of the required type and quality
workers and machines are made to co-operate so that the production line runs according to
schedule. In this way competition and co-operation go side by side.
6. Freedom of Enterprise, Occupation and Control: Every person is free to start any enterprise
of his choice. People can follow occupations of their ability and taste. Moreover, there is the
freedom of entering into contract. Employers may contract with trade unions, suppliers with a
firm and one firm with another.
7. Consumer’s Sovereignty: In a capitalist economy a consumer is compared to a sovereign king.
The whole production frame works according to his directions. Consumer’s tastes govern the
whole production line because entrepreneurs have to sell their production. If a particular type of
production is to the liking of consumers, the producer gets high profits.
Merits of Capitalism:
1. Production According to the Needs and Wishes of Consumers: In a free market economy
consumer needs and wishes are the upper most in the minds of the producers. They try to
produce goods according to the tastes and liking of the consumers. This leads to maximum
satisfaction of the consumers.
2. There is Complete Freedom of Choice in a Capitalist Economy: Economic freedom means
the right to earn and retain property. It also means the freedom of enterprise and choice of
occupation. 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.
3. Optimum Utilisation of Resources: 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 & entrepreneurs to produce & sell goods. Every producer & entrepreneur tries to use
the resources at his disposal in the most economical manner in order to make maximum profit.
4. Efficient Production of Goods and Services: Due to competition every entrepreneur tries to
produce goods at the lowest cost. 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.
5. Varieties of Consumer Goods: Competition is not only in price but also in the shape design,
colours and packing of products. Consumers therefore get a good deal of variety of the same
product. They need not be given limited choice. It is said that variety is the spice of life. Free
market economy offers variety of consumer goods.
6. Take Risks & 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
maximise profits. Hence capitalism brings about great technological progress in the country.
7. 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.
8. It Provides the Best Atmosphere for Inventions: Entrepreneurs are always on the look-out for
new ideas to be applied to production. They try to beat each other in innovations. This leads to
rapid expansion, greater employment and income.
De-Merits of Capitalism:
1. Inequality of Distribution of Wealth & Income: The system of private property acts as a
means of increasing inequalities of income among different classes. Those who have wealth can
obtain resources & start big enterprises. The property less classes have only their labour to offer.
2. High Social Costs: A capitalist economy industrializes develops but the social costs are very
heavy. Factory owners running after private profit do not care for the people affected by their
production. The environment is polluted because factory wastes are not properly disposed off.
3. Too Much Competition: Consumers have to pay a high price for their freedom of choice. There
is too much competition leading to unnecessary high costs of production because competitors
bid the prices of resources too high. There is wasteful advertisement.
4. Instability of the Capital Economy: A capitalist economy is unstable. There is recurring
business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close
down, and workers are unemployed. These alternating periods of recession and boom lead to a
good deal of wastage of resources.
5. Unemployment & 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 labour force going unemployed during depressions.
Not only this, workers are not able to get full time employment except under boom conditions.
6. 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.
7. Slow and Unbalanced Growth: A free market economy may work automatically but the rate of
growth is rather slow. Moreover as the economy progresses, there is no all round development.
Some areas develop much faster while others remain backward. Industries may expand fast
while there may be poverty in agriculture.
 SOCIALISM
Meaning of Socialism: The word socialism has been defined as “such type of socialist economy
under which economic system is not only regulated by the government to ensure, welfare equity of
opportunity and social justice to the people.”
Mr. Webb: “A socialised industry is one in which the national instruments of production are owned
by public authority or voluntary association and operated not with a view to profiting by sale to
other people but for the direct service of those whom the authority or association represents.”
Prof. Dickinson: “Socialism is an economic organisation of society in which the material means of
production are owned by the whole community & operated by representatives of the people, who
are responsible to the community according to a general plan, all the members of community being
entitled to the benefits from results of such socialised, planned production, equal rights.”
Main Features of Socialism:
1. Socialism is Social or Collective Ownership of Resources: In such an economy, all the means
of production are owned and operated by the state in the interest of society as a whole. This is to
ensure equality of opportunity to all the citizens with regard to earning of income.
2. It is a Fully Planned Economy: A socialist economy is necessarily a fully planned economy
otherwise the economic system cannot run. There is a choice between centralized and
decentralized planning. All socialist economics were fully planned economics.
3. It is the Responsibility of the Central Planning Authority: Planning is the responsibility of an
authority at the centre. It may be known as the Planning Commission in India. The main task
given to this body is to formulate long-term and short-term plans for the economy.
4. It has Definite Aims and Objectives: Socialist economy has specified aims or objectives.
Generally, they are included in the constitution itself but these are given specific shape by the
planners. As far as possible the objectives are clearly and quantitatively defined.
5. Specific Long-Term Plans: The Central Planning authority is given the responsibility to chalk
out specific long-term plans for the country. These long-term plans are called “Perspective
Plans”. These may range from twenty to thirty years. These are in the nature of a blue-print of
the path the economies have to follow in the near future.
6. Central Control and Ownership: A fully planned economy is by implication a controlled
economy. Government controls the main aspects of all economic activity. There are controls on
production through licensing. Consumption is also controlled indirectly through controlled
production. There are existing controls generally operated by the Central Bank of the economy.
7. Much Less Importance of Price Mechanism: A socialist economy gives much less importance
to market forces and therefore, the price mechanism is given a minor role in resource allocation.
Private profit is not allowed. Public interest is given more importance. The means of production
are directed by the Government and are used in promoting the general welfare of the people.
8. People’s Co-operation is Essential: A socialist economy is run with the active co-operation of
the people in the fulfillment of plan targets. No plan can possibly succeed without people’s
participation. The plan is prepared and implemented by the Government.
Merits of Socialism:
1. Social Justice is Assured: The chief merit of socialism is social justice. The socialist principle
provides for a fair share for all. Every individual is assured of equal opportunities, irrespective
of caste, and religion. Every child whether he is born in a poor or in a rich family is given an
equal opportunity to develop his faculties through proper education and training.
2. Rapid Economic Development: A socialist economy is likely to grow much faster than a
capitalist economy. The experience of the U.S.S.R. and other socialist countries proved this. The
main factors making the fast growth rate is the full use of resources, planning & quick decisions.
3. Production According to Basic Needs: In this economy the production is directed to satisfy the
basic needs of the people first. As far as possible, the production of food, clothing or building
materials is guided by the basic needs of the people. Therefore, the phenomenon of the poor
going hungry while the rich feast cannot be seen in the socialist economy.
4. Balanced Economic Development: Economic planning is meant to carry out balanced
development of the economy. All the regions of the country are taken care of. Development of
the backward areas is also given a priority. Similarly, agriculture and industry, heavy and small
industry develops side by side. As a result there is no lop-sided development of the economy.
5. It has More Flexibility: A socialist economy is much more flexible than a capitalist economy
because of the control on market forces. The socialist economy can be geared to war times as
early as it is operated during peace-time.
6. Equitable Distribution of Wealth and Income: A socialist economy is operated with the aim
of providing equal opportunity for all citizens in earning incomes. Generally, private property is
restricted to some basic needs. There is no amassing of wealth by a few. Wealth is also equitably
distributed because private enterprise is given a limited role.
7. Social Welfare Activities: A Socialist Economy is oriented to the social needs. The government
provides for full security. There is automatic care for the children of those who meet accidents
 while performing their duties. There is provision for old age pension for all. The slogan is “to
each according to his needs, from each according to his capacity.”
Demerits of Socialism:
1. No Suitable Basis of Cost Calculation: It means production being owned by the government,
there is no market price for the factors of production. In the absence of market mechanism there
is no standard way of calculating costs of production for different goods and services.
2. Choice of Working Incentives: The most difficult problem in this system is the choice and
working of incentives in the absence of profit motive. The Russian Government has been using
the policy of “Carrot and the Stick”.
3. There is Loss of Economic Freedom: A very important charge against socialism is that, when
freedom to enterprise dis-appears, even the free choice of occupation will go. Workers will be
assigned certain jobs and they cannot change them without the consent of the planning authority.
Every worker will have to do work what he will be asked to do.
4. Lack of Data, Experts and Administrators: Operating a socialist economy as a planned
economy requires huge data, a good number of experts and an equal number of administrators at
different levels for administering the plan. No doubt machine can help to process the data and
experts can advise but there has to be decision-making at different levels of government.
5. Loss of Economic Freedom and Consumer Sovereignty: Under socialism all economic
activity is directed by the central planning authority. There is no significant role given to private
investment and initiative. Consumers are compelled to accept whatever public enterprises
produce for them. Generally, there is limited variety of goods and restricted available choice.
6. Too Much Power is Concentrated in the State: Under socialism the state is not merely a
political authority but it also exercises unlimited authority in the economic sphere. In this, all
power is concentrated in the state. It means the state is everything and individual nothing. After
all the human institutions are for man and not man for these institutions.
7. Bureaucracy and Red-Tapism: A socialist economy is a state enterprise economy. Every bit of
the plan is to be cleared by bureaucrats. This often leads to red-tapism. Even simple state
forward jobs may take unduly long-time to be done. In many countries where socialism had
been brought about hastily, work came to a stand-still leaders had to revert to liberal policies
containing elements of the capitalist economy.
 MIXED ECONOMY
Meaning: It is a golden mixture of capitalism and socialism. Under this system there is freedom of
economic activities and government interferences for the social welfare. Hence it is a blend of both
the economies. The concept of mixed economy is of recent origin. The developing countries like
India have adopted mixed economy to accelerate the pace of economic development. Even the
developed countries like UK, USA, etc. have also adopted ‘Mixed Capitalist System’.
According to Prof. Samuelson, “Mixed economy is that economy in which both public and private
sectors cooperate.”
“Mixed economy is that economy in which both government and private individuals exercise
economic control.” –Murad.
Main Features of Mixed Economy:
1. Co-existence of Private & Public Sector: Under this system there is co-existence of public and
private sectors. In public sector, industries like defence, power, energy, etc., are set up. On the
other hand, in private sector all the consumer goods industries, agriculture, small-scale
industries are developed. The government encourages both the sectors to develop
simultaneously.
2. Personal Freedom: Under mixed economy, there is full freedom of choice of occupation,
although consumer does not get complete liberty but at the same time government can regulate
prices in public interest through public distribution system.
3. Private Property is allowed: In mixed economy, private property is allowed. However, here it
must be remembered that there must be equal distribution of wealth and income. It must be
ensured that the profit and property may not concentrate in a few pockets.
4. Economic Planning: In a mixed economy, government always tries to promote economic
development of the country. For this purpose, economic planning is adopted. Thus, economic
planning is very essential under this system.
5. Price Mechanism and Controlled Price: Under this system, price mechanism and regulated
price operate simultaneously. In consumer goods industries price mechanism is generally
followed. However, at the time of big shortages or during national emergencies prices are
controlled and public distribution system has to be made effective.
6. Profit Motive and Social Welfare: In mixed economy system, there are both profit motive like
capitalism and social welfare as in socialist economy.
7. Check on Economic Inequalities: In this system, government takes several measures to reduce
the gap between rich and poor through progressive taxation on income and wealth. Other steps
like concessions, old age pension, free medical facilities and free education are also taken to
improve the standard of poor people. Hence, all these help to reduce economic inequalities.
8. Control of Monopoly Power: Under this system, government takes huge initiatives to control
monopoly practices among the private entrepreneurs through effective legislative measures.
Besides, government can also fake over these services in the public interest.
Types of Mixed Economy:
Capitalistic Mixed Economy: In this type of economy, ownership of various factors of production
remains under private control. Government does not interfere in any manner. The main
responsibility of the government in this system is to ensure rapid economic growth without allowing
concentration of economic power in the few hands.
Socialistic Mixed Economy: Under this system, means of production are in the hands of state. The
forces of demand and supply are used for basic economic decisions. However, whenever and
wherever demand is necessary, government takes actions so that basic idea of economic growth is
not hampered.
Advantages of Mixed Economy
1. Efficiency: There will be competition between public and private industries, which will result in
greater efficiency and production in a mixed economy.
2. Reduced inequality: The profit of public sector industries goes to the Government and as a
result inequalities of income will be reduced in mixed economy.
3. Systematic plan: In a mixed economy, economic activities are carried out as per plan. The
entire economic system is subject to systematic planning of the Government.
4. Economic Stability: The economic activities take place in a planned manner. So there will be
economic stability in mixed economy.
5. Consumer sovereignty: Goods are produced as per the wishes of the consumers, which results
in consumer’s sovereignty in a mixed economy.
6. Freedom: In mixed economy, freedom of enterprise and profit motive are the important
features. Further there is competition between public and private sectors. These factors increase
efficiency, initiative, innovation and productivity.
7. Promotion of social welfare: Mixed economic system gives importance to the promotion of
social welfare. Under this system, both private and public sectors work for the welfare of people.
8. Rights of Individual: Under mixed economy, individual rights are protected. People have
freedom to buy any commodity.
Demerits of Mixed Economy
1. Unhealthy Competition: There is unhealthy competition between private and public sectors in
a mixed economy.
2. No freedom to private sector: There is no freedom to private sector in mixed economy. This is
because Government regulates private industries through its various regulations and licensing.
3. Inefficient public sector: Inefficiency of public sector is another demerits of mixed economy.
They may suffer heavy losses. People will have to bear these losses. The objective and targets of
economic planning also may not be achieved in a mixed economy.
4. Unemployment and Uncertainties: On account of capital scarcity, Government regulation and
control, the growth of private sector may be less than what is fixed in plan. It may lead to
unemployment and uncertainties in a mixed economy.
5. Threat of Nationalization: There is always a threat of nationalization in the mixed economic
system because of which the private sector does not work actively. In spite of the defects in the
mixed economy, it has become popular in some countries. India is one of the important
countries, which adopted mixed economy.