The Advantages And Disadvantages Of Capitalism - Essay Example

The Advantages and Disadvantages of Capitalism Economics Essay

Karl Max first phrased the term ‘capitalism’ to describe the ownership of private property. There have been several concepts by economists to coin the phrase capitalism. Currently, its definition refers to a system based on the private right of the different factors of production. There is the belief of a free market without any interference with the motive of profit-making. It is, however, hard to find a state that operates within this definition. Total capitalism is not practical due to its flaw in the current world. However, it is still in practice in society, pushing the agenda for development and change.

History

Capitalism dates back to the ancient era of humankind. Back then, life was simple and arranged. The society depended on simple means of survival for food and resources. In this simple way of life, decisions came through a form of leadership that governed people’s actions. The barter system was born under this system. It was where people had choices and options. The system made the exchange of commodities a possibility. However, the system had its challenges, which later the people become aware of. The differences in the value of goods sparked a debate among people who didn’t agree in terms of good equality and value.

Advancements in society ushered the new slavery system. During the period, leaders and the serfs took charge of the decision making. Therefore, the masters took control of the factors affecting the rate of production. There was an accumulation of wealth through the serfs. The slaves toiled the soil when cultivating to create wealth.

Opposition among the slaves who didn’t like the harsh treatment grew. Their agitation for equality and better treatment led to the drafting of new agreements and ground rules. The agreement saw the serfs become entitled to part of the farm produce. The results of this agreement led to the development of a feudalism state. The feudalistic state saw the growth of the masters into a Lord. The slaves turned into serfs.

Europe added to the definition of capitalism through the rise of Mercantilism. This new form of capitalism helped them spread to different parts of the globe. Mercantilism led to the growth of the Ancient Roman Empire. The practice included the supply of a nation with resources. In return, the state became under the Roman Empire while diminishing its independence. The growth of the Roman Empire led to the growth of Mercantilism. The expansion of Mercantilism diverted into the current economic practices defined under capitalism. The term describes the controlled economies of the Great Powers experienced in the First World War. Despite the nature of the situation describing the nature of a free market, there is a level of government control. The state plays a role in determining the allocation of credit and investment.

Components of Capitalism

Property Rights: The definition refers to the private ownership of property. In this essence, property refers to the factors of production. Property ownership gives the proprietor sole control over the various factors of production. The proprietor gains control of the commodities in production. Hence, the proprietors carry out decision making on the nature of goods to produce, the manufacturing process, and the market. The profit accrued by the proprietor includes the rent from the use of land, labor payments, and interest on capital. There is also the dividends gained through the exchange of skills.

Co-ordination Structure: Through co-ordination, the prices of commodities are determined. Furthermore, there is the influence of market forces with demand and supply. The prices end up high or low with the forces of demand and supply. The prices also influence the decisions of both individual buyers and sellers. There was a referral to the system in place as ‘Invisible Hand’ by Smith. In the economic system, there does not exist any interference by the state. The system ensures the proper performance of economic activities and attaining objectives part of the state.

Motivational Structure: The market propels the motivation for material incentives. The suppliers gain the economic incentive of offering the right kind of profitable commodities.

Decision-making Structure: There does not exist any centralized economic decision-making protocol. The decentralized nature of the decision-makers directly influences the market prices. Therefore, private entities carry out decisions. The decisions include the type of goods to be produced, the process, and the market.

Information Structure: The information structure, it forms part of a decentralized nature. The decentralized form is due to the horizontal channels for existing information. The forms add to the development of options are shared through the different agents. The options end up with the states who apply at a similar rank.

The Workings of Capitalism

Basing on the work of Smith, a capitalist state works through the power envisioned in the ‘Invisible Hand.’ The theory of ‘Invisible Hand’ defines operations in a free market. The theory marks the exchanging nature of the commodities. The exchange includes a price determined through the interchangeable agreement of both parties. Below is the comprehensive list of the advantages and disadvantages of capitalism economics essay. The kind of demand from the consumers for the different products causes a direct effect. The effect applies to the allocation of resources to reach a maximization of the commodity. Profit is the material gains from the production of the goods. The system ensures the presence of temporal shortcomings and overflow. In case of the presence of excess demand that leads to an undersupply, the economic market prices soar. Each customer possesses purchasing power and willingness to out-maneuver the other in a price war. The high prices correspond with the suppliers to the situation with a large supply of goods to create a balance in the market. The case is also capable of a market that exhibits excess supply. However, economical prices tend to fall with each supplier. The fall is due to the race to attract more customers from their competitors. If prices are low, consumers become highly likely to demand more. The push leads to the restoration of equilibrium.

Basing on the model by Adam Smith, there is the identification of the following:

• There exists an owner economic class. This means the production is owned by a selected few who can afford them. The category forms part of the upper-class groups as envisioned by Marx.
• The working-class system. The laborers take part in wealth creation through the production of commodities. In return, the working class earns wages with the capitalists. The group does not own any ownership of the factors of production, which Marx refers to as the lower class.
• The firms aim to maximize profit. It makes it an economic motivation for the production of the commodities: The capitalists make a judgment of the market while adjusting the output. There is the realization of the greater chance of making it profitable.
• A pure capitalist economy shows no interference by a governing body. The lack of interference often affects the growth of any state. Therefore, the market becomes free of all the decisions. The market adjusts its system with the remaining part of the equilibrium.

Performance Under Capitalism

When analyzing the performance as per the individualistic state, it involves evaluating the nature of economic growth going by the rare of performance:

Economic Efficiency

Economic effectiveness reflects on the capability of accomplishment of a task with the least resources on different levels as needed. The performance criteria review the state of the economy response with resource allocation. The resource ends up in maximizing the production of commodities while taking into consideration the welfare of individuals. An efficient state has the creation of high levels of GDP. The GDP encourages innovation and allowance of freedom of choice by individuals.

Economic Stability

A couple of factors necessitate the determinants for the stability of a state. These factors include the rates of inflation, unemployment, and general growth. When operating in free space, stability becomes inconsistent due to cases of rising and falling nature of inflation in addition to growth.

Income Distribution

Capitalism offers a different generation of income, which is part of the economy. Income distribution is by the expertise and competence of the individual possesses. Individuals that possess skills and qualifications are in addition to capital resources. The value of the market receives high incomes. However, the lower incomes come with allocations to persons who possess related skills and resources.

Economic Growth

This refers to the measurement of the rate of growth in an economy. The growth also increases in terms of GDP. A capitalist economy shows slow economic growth. The increasing rate of the GDP makes the economy grows spontaneously. There exists the rising and falling with the business cycle. The imbalance leads to regressive economic growth with instability. Furthermore, it causes the economy to go into recession.

Advantages of Capitalism

Individualism refers to any economy with resources and firms which are privately owned with the free market. This usually involves different government interventions. The interventions lead to the formation of regulations for different aspects of the economy with the protection of private property. There are various benefits accrued from such an economy.

State involvement and interventions remain limited to different issues that cause intervening by the government. Some negative effects of intervention include corruption, poor circulation of information, and a lack of self-interest within the market. All these vices do not exist in the economy of a capitalistic state. Hence, it gives individual incentives to work hard to achieve the best.

The economy depends on the push factor by the individual. No limitations exist with the acquired wealth by an individual in accumulation. The progression shows the growth of the state of the economy.

Creative destruction is a function of capitalism. There is a powerful influence practiced with capitalism in case firms do not conform to the current changes in the modern world. The firms end up outdated and inefficient. Customers possess the purchasing power and make decisions on what commodities to select. There is a short term problem that comes with inefficiency, such as unemployment. The new state allows for a shift in terms of resources such as capital and labor. Therefore, it leads to the formation of new industries.

Capitalism allows for individualistic choice for commodity purchase and job creation. The distribution of resources becomes possible based on consumer choice. The choice is while bearing in mind that the market is in a more productive and consumer-friendly manner. The wide variety of choices by the consumers also impacts the quality of the goods. High competition leads to high-quality goods.

There is also the inclination of individualism firms to production with effectiveness. The inclination is through cutting down costs while improving efficiency. Consequently, they are preventing the losses related to the industry. The losses depict high competition in improving the economy.

Related industries show effective correspondence to changes with the consumer’s desires. The change improves the economy leading to increased efficiency. Attempts exist to ensure a high level of productivity. There is the provision of financial incentives to workers by firms as a means of improving the nature of self-interest with the firm’s activities. The move becomes advantageous at the global level, with these countries becoming an exemplary, innovative front. Therefore, it improves technology and other implications for productive changes.

Improvement of the proficiency of the firm leads to an increase in the skills of people. The people go through the social class with the increasing wealth. In the process of making wealth, there is the improvement of skills for the workers. Therefore, it leads to an increase in output from the manufacturing firm.

The progress creates an incentive for the workers to work hard with interest in achieving more in life. The increase in profit gains with the economy and industry allows for the expanding wealth and resources. The resources later benefit the firm and thus improves the economy through an increase in the rate of foreign investment.

There is a certain level of freedom of choice for purchase and engagement. The freedom comes with the little level of intervention for all the activities.

The promotion of trade between states and individuals leads to mutual gains with the economy.

Increasing profit margins becomes the focus of the state. The production caters to meeting the customers’ needs. The needs cause a large supply of commodities leading to diversification of the brands. The diversification allows for customer individuality and distinction, thus catering for the related changes with the desire for specific commodities between the high and low social classes.

Disadvantages of Capitalism

The capitalist state gives the consumer all the power in the economy. People are gaining incentive to work harder to achieve more leads to achieving dominance with others in the economy. The lack of government intervention has various shortcomings witnessed in an economy.

The dominance of the economy forms part of the chosen few. There is the recycling of wealth with a small party that gains an economic monopoly with the lack of government control. The instance occurs when governing rules are limiting. The rules limit the flexibility of money flow between different classes. There is the exploitation of labor. The cause leads to revolt. Revolt strikes the market negatively. The impact affects the economy through the disruption of production.

The market focus on profit and demand leads to negative economic externalities. Externalities include pollution, which is ignored based on the issues with the economy. This further leads to a critical situation for the reduction of the money supply for the economy for resolving the various issues.

Companies that benefit from the monopolies in the early market development phase push out the smaller companies. This is because of the high level of economic competition that they might not produce.

Changes in Capitalism

The current world it’s hard to find a state that has pure capitalism. The fact is because the various capitalist government does not practice individualism to the core. A pure state exhibits no government intervention. The forces of demand and supply majorly depend on the individuals.

The advent of private ownership with profit-driven motivation proves that such an economy is competitive. The level of competition breeds the question of why it is hard for a government to practice pure capitalistic space. It also necessitates the question of why there has never been a pure capitalist state before.

There is an observation over the years that individualism passes through the various phrases. The phases enforce the capitalist economies to adjust the rules which they abide by. The changes make the capitalist state to practice pure socialism or pure individualism.

Private Ownership

Private ownership forms part of the essential factors with the capitalist state. It adds to the competitive nature of the economy. Various changes with the shares of public and private ownership change the capitalist system. A state-owned entity that possesses a significant share for the current property will be no longer fall under the classification of the system as a pure capitalist.

Working Participation

The capital owners, inclusive of partners, proprietors, and shareholders, becomes a reward from their profits. Workers earn their wages differently from their profits. The high rate of profit margins from a firm reflects the higher the level of returns for the shareholders, proprietors, and partners. The other wages for the workers remain part of the fixed aspect despite the profit fluctuations. Self-interest allows people to increase the profit margins for firms. Thus, the forms operate with the forces of a capitalist state. There are considerations can be made of the evolving nature from the original form.

In case of changes currently faced, the worker’s income becomes dependent on the firm’s profits. The wages act as part of the self-motivation increasing level of interest. The increase in motivation leads to high-profit margins for firms.

Government Intervention

Fiscal policies are part of the budget deficit with government expenditures with fewer government revenues. There is also government expenditure or taxes help in stimulating the economy. In case the aggregate income is becoming low, the same fiscal policy becomes part of the expansionary fiscal policy. This leads to an increase with the deficiency through the decreasing taxes or other increase with government expenditure. In case the aggregate income becomes high, which forms part of the actual income is above the potential income, there are the appropriate fiscal policy forms part of the fiscal policy. There is a decrease in deficiency, which leads to an increase in taxes or decreasing government expenditure.

Welfare: The 1930s and 1940s saw the political agenda became dominated by the workers. There is the development of the capitalist economies for a safety net. The net included government-funded programs, including the public welfare, establishment of an extensive set of regulations. It also included other unemployment insurance affecting all other aspects of the economy. The safety net frequently related to capitalist economies globally because it makes it an available form of security for the working class.

Minimum Wage Laws: There is the enforcement of the minimum wage laws by the government, which helps in keeping the businesses with the operations. There is the wage rigidity which is caused by the government, leading to the prevention of wages from failure to balance the equilibrium levels. There is a set of a legal minimum of the wagers with the minimum-wage laws which firms are liable to pay the workers. Because of the passage of the Fair Labor Standard Act of 1938, there is the U.S federal government provides the enforcement for a minimum wage that usually has between the range of 30 and 50 percent that takes care of the average wage in the sector of manufacturing. For part of the employees, there is the minimum wage, which does not bin; this is because they earn above the minimum. Despite some workers with the unskilled labor force, there is the raising of the wage for the workers. The rise in wages is above the equilibrium level. There is a reduction in the quantity of labor that firms demand.

Conclusion

The years have been a change in the individualistic state. It began with the barter system that grew to the slavery structure. The structure followed by the Feudalism that paved the way for Mercantilism, which gave birth to individualism. There was a suggestion by the school of economics for the removal of the government role from the system. However, the role remains with the protection of individual rights with the provision of public goods and services. Throughout history, it reveals the necessity of government and its expanding role. Without government interference, there would be a failure of the entire structure. There is the development of individualism over the years with the government in mind. The form of government involvement with the nature of nationalization, fiscal policies, welfare, and minimum wage laws leads to the addition of the development of capitalist nature.

In the current world, there is no practice of it in a capitalistic state. However, it forms part of a mixed economy. This economy is common with the former capitalist states such as the United States, where the state makes the decisions.

Some shortcomings relate to the nature of individualism. The shortfalls include negatives such as pollution, disproportionate distribution of wealth, and income. With this state, it reduces non-renewable resources, high levels of unemployment, and instability because of the dynamic nature of capitalism. There are other economic motives for the firms for gaining profit that leads to the misappropriation of scare resources.

Despite the constant conflicts witnessed between the upper and lower classes, there is still space for the capitalist economic system in the current world. The survival of the capitalistic nature in the modern world leaves space for the upper class in society. The economic state refers to their desire to remain in control with the means of production. This amasses much more wealth. There are cases of exploitation between the different economic classes with the upper class benefitting from the expense of labor from the lower class and ways of self-seeking. This is because people are on a mission to seek their self-interest, despite the effects of the actions it has on others. The capitalist system provides for means of suppressing the working class and keeping up with the nature of the bourgeois, which represents a dominant economic stance in society.