CAPITALIST ECONOMY

CAPITALIST ECONOMY

Capitalism, the predominant economic system in the modern global economy, is an economic system in which all means of production are owned and controlled by private individuals for profit. In short, private property is the mainstay of capitalism and profit motive is its driving force. Decisions of consumers and businesses determine economic activity. Ideally, the government has a limited role in the management of the economic auairs under this system. Some examples of a capitalist economy may include U.S., U.K., Germany, Japan, Mexico, Singapore, etc. However many of them are not pure form of capitalism but show some features of being a capitalist economy. An economy is called capitalist or a free market economy or laissez-faire economy if it has the following characteristics:

1) Right to private property: The right to private property means that productive factors such as land, factories, machinery, mines etc. can be under private ownership. The owners of these factors are free to use them in any manner in which they like and bequeath it as they desire. The government may, however, put some restrictions for the benefit of the society in general.

2) Freedom of enterprise: Each individual, whether consumer, producer or resource owner, is free to engage in any type of economic activity. For example, a producer is free to set up any type of firm and produce goods and services of his choice.

3) Freedom of economic choice: All individuals are free to make their economic choices regarding consumption, work, production, exchange etc.

4) Profit motive: Profit motive is the driving force in a free enterprise economy and directs all economic activities. Desire for profits induces entrepreneurs to organize production so as to earn maximum profits.

5) Consumer Sovereignty: Consumer is the king under capitalism. Consumer sovereignty means that buyers ultimately determine which goods and services will be produced and in what quantities. Consumers have unbridled freedom to choose the goods and services which they would consume. Therefore, producers have to produce goods and services which are preferred by the consumers. In other words, based on the purchases they make, consumers decide how the economy's limited resources are allocated.

6) Competition: Competition is the most important feature of the capitalist economy. Competition brings out the best among buyers and sellers and results in eflcient use of resources.

7) Absence of Government Interference: A purely capitalist economy is not centrally planned, controlled or regulated by the government. In this system, all economic decisions and activities are guided by self interest and price mechanism which operates automatically without any direction and control by the governmental authorities.