What is a capitalist (market / free) economy?
The Capitalist Economy
What is a capitalist (market / free) economy?
The capitalist system operates on the basis of the private ownership of the country's wealth. The driving forces behind the capitalist system are based on private enterprise in the pursuit of making profit. It is a system in which individuals, who privately own resources, can use these in whatever manner they choose, as long as they do not violate the minimal legal restrictions1.
The Characteristics of the Market Economy:
Looking broadly at the Capitalist System, it could be seen that there is a great amount of economic freedom granted to individuals concerning the ownership of resources as well as private property. Thus, one could question how does such an economic system with this amount of freedom not lead to confusion. The answer could be found in the carefully crafted and balanced characteristics of this system, which are explained below, that maintain the country's structure without plunging the economy into chaos.
. The System of Private Property:
In the Capitalist system, property is owned by individuals or groups of individuals, indicating that the state is not the predominant owner of the property. This private ownership is harnessed by the country's legal system and police force, so that the individuals are free to do whatever they choose with their property so long as they do not violate the property rights of others, determined by the government of the capitalist country.
2. Free Enterprise and Free Choice:
This means that individuals have the right to allocate resources, process them, and sell a product to the market, without restrictions by the government. Similarly, any individual in the market can buy whatever good he/she chooses. Based on this it could be seen that it is the consumers themselves who decide what products are to be produced. This occurs based on the idea that demand determines the products being supplied.
3. Competition and Unrestricted Markets:
Competition is rivalry between sellers in the aim of attracting consumers to buy ...
This is a preview of the whole essay
2. Free Enterprise and Free Choice:
This means that individuals have the right to allocate resources, process them, and sell a product to the market, without restrictions by the government. Similarly, any individual in the market can buy whatever good he/she chooses. Based on this it could be seen that it is the consumers themselves who decide what products are to be produced. This occurs based on the idea that demand determines the products being supplied.
3. Competition and Unrestricted Markets:
Competition is rivalry between sellers in the aim of attracting consumers to buy their products. For this to occur, it is necessary that there is a large number of sellers, and that theses sellers have the freedom to enter or leave the market whenever they find fit. Having a large number of sellers ensures that no one buyer or seller can influence the price of a certain product in the market. According to "Economics Explained", competition imposes limits on the self-interest of buyers and sellers. Competition then is the regulating force in Capitalism.
4. Self-Interest:
Self-interest means that the different parts of the economy function in the pursuit of the maximum profit and the minimum losses. Thus, it is this idea of self-interest that "is the guiding light of Capitalism"2.
5. The Pricing System:
The Capitalist system is based on the prices set for products, which are determined by factors, including competition, supply, demand, and monopolies. Since the prices are not fixed, incentives and motivation of the entrepreneurs and manufacturers increase.
6. The Limited Role of the Government:
The role of the government is to protect the property rights of the workers and entrepreneurs, and to keep control of the property vested with the owners. Therefore, it is necessary that the government plays a role in the economy, but in a restrained way. This could be called "Laissez Faire", which means that the businesses and the economy should be 'left alone' by the government.
The What, How and For Whom:
The decision for what is to be produced is made by the consumers who 'vote' with their money for the goods and services desired. This is done using market research. The method in which products are produced is regulated by competition and advertising. The competition between firms raises incentives and encourages companies to produce products of maximum quality and presented in the most original manner possible. These products are distributed amongst those who have the money to spend on these goods.
Examples of Countries with the Market (Free) Economy:
The Market Economy is seen most clearly in countries like Hong Kong, the USA and Western Europe. Other countries, which formerly had Centrally Planned Economies, such as the USSR, and China, are moving gradually towards a more Free Economy. However, it is necessary to note that none of the examples given above, are pure Capitalist Economies. In practice, all economies involve a mix of planned and private sectors, though these sectors vary from country to country. Britain, though technically a Capitalist Economy, under the current labor party, it seems to be a good example of a rather mixed economy.
Some Disadvantages of the Market Economy:
Despite the characteristics mentioned above, a capitalist economy could lead to extremism in the sense that wealth may be concentrated in the hands of a few businessmen, thus, creating extreme wealth versus extreme poverty. This disparity in wealth could, in the long run, lead to recession or even depression in the economy. Furthermore, a common feature of a Market Economy is the rise of monopolies and the setting of unfair prices. Moreover, since the driving force of capitalism is profit making, some industries, albeit not profitable but still necessary, may be ignored. Examples include keeping a non-profit-making factory open so as to avoid laying off workers, or extending a bus service to a remote part of the country.
Nevertheless, it could be said that the market economy is one that has benefited millions throughout the world. However, the question as to how far this system is a good one, remains a controversial issue.
Bibliography:
- Maunder and Myers, "Economics Explained- Second Edition", Collins Educational, 1992.
2- Glanville, Allan, "Economics from a Global Perspective", Allan Glanville, 1997.
3- J Beardshaw, "Economics a Student's Guide- Third Edition". Pitman Publishing, 1992.
4- Lowe, Norman, "Mastering Modern World History- Third Edition", Macmillan, 1982.
This information is taken from the book, "Economics Explained", second edition, by Maunder and Myers 1992.
2 This is quoted from the book, "Economics Explained".
