Benefits and Drawbacks of the Capitalist Economic System Essay

Introduction

Over the last century, the prevailing understanding of capitalism has undergone various remarkable changes with regards to its inherent structure and societal outcomes. Today, the world is dominated by a capitalist economic system which has existed for many years in human history. Nevertheless, there are other economic systems such as command and traditional economies that are still widespread in different parts of the world. The first extensive appearance of capitalism occurred in Western Europe during the 1700s. Consequently, the rise of class societies during the industrial era in the mid-nineteenth century led to the full realization of capitalism in many countries such as Great Britain, France, and the United States. Ideally, capitalism refers to an economic system where the means of production and distribution of goods and services are privatized. According to Adam Smith, a Scottish economist, and philosopher, the system works by means of "invisible hand" (John). Smith observes that the capitalist economy promotes the free market in which the exchange of products and is determined by buyers and sellers. As such, the forces of demand and supply are allowed to work independently so as to determine prices and output with profit as the main motivation. Just like other economic systems capitalism is not an ultimate system and it is almost impossible to find pure capitalist countries. Capitalism has numerous advantages as well as disadvantages.

In capitalist economies, there are two main social classes. These are the employees and the employers. According to Karl Marx, the employees are also referred to as proletariats while the employers are known as the bourgeoisie. The proletariats are the direct producers who are engaged in the day to day generation of surplus while the bourgeoisie represents the dominant class who are the owners of capital and receive the surplus while making decisions on what to do with them (Marx). In this system, the proletariats usually lack sufficient access to income apart from engaging in wage labor. Given that bourgeoisie are the owners of the capital they are entitled to all the revenues generated by the firm.

Advantages

Efficiency

In a free market system resources are allocated according to forces of demand and supply (Anna & Cedrini). As such, both the producers and consumers act in their individual self-interest in an environment where there is freedom of choice. This implies that consumers are free to purchase products and services that fulfill their needs while producers, on the other hand, have the freedom of investing in products that can earn profits. Producers that manage to meet the market demands with products that align to consumer preference are able to make enough profits to stay in business and vice versa. Incredibly, free markets provide entirely all human wants without the help of a mechanism that dictates what to produce and where to supply.

Innovation

Economic rewards to developers of new products encourage many businesses to innovate commodities that consumers are not even aware that they need them. In a capitalist economy, there are valuable rewards to innovators who prove capable of understanding the mood of consumers by developing new items. For instance, Mark Zuckerberg, the brain behind the development of the Facebook application is among the top richest people in the world. With this regard, innovation is highly promoted as many businesses seek to earn huge financial rewards by developing new products for the market.

Economic growth

Economic growth is highly attainable in capitalist economies because the primary motivation is the making of profit. In free markets, numerous firms strive to maximize their profit margins (Anna & Cedrini). As such, a lot of effort is put in gaining new customers, development of new products and incorporation of advanced sales techniques all of which contribute to economic growth. While free markets promote the development of numerous startups there are harsh economic judgments to those businesses that do not meet the market demands. By only encouraging successful businesses capitalist economies accelerate economic growth.

Competition

Free markets are characterized by high competition which regulates prices of commodities. Unlike in command economies where authorities determine the prices of commodities, free markets rely on the equilibrium of demand and supply to mark the prices of commodities or services. In this case prices, neither favor the producers or consumers. However, competition limits exploitation of consumers through the monopoly of businesses.

Disadvantages

Monopoly

In free markets, monopolies occur as a result of businesses driving out their competitors due to efficiency and development of better products (David). When this happens monopolies affect the pricing of commodities by establishing high prices for their products and services. In most cases, given their efficiency and quality products, consumers are left with no choice but to pay the high prices demanded. Moreover, they affect supply by creating shortages through withholding their commodities so as to inflate prices. Unfortunately, some monopolies gain more power by generating vast profits which they use for political leverage.

Class societies

One major disadvantage of the capitalist economic system is the creation of class societies. In such systems, the gap between the poor and the rich is usually high. The owners of capital often make their profits at the expense of the poor (David). There is less sympathy for workers who are the primary producers of the goods and services. Workers are paid small wages so that they continue to live in deplorable conditions in order to provide continuous labor to the rich. Under free markets, people become more selfish as they seek to gain more profits.

Pollution

With limited government control a lot of pollution occurs in capitalist economies. Potential polluters pay less attention to their implications on the environment but rather to the huge profits gained. Also given that the efforts to conserve the environment benefit all members of the society including those who do not fund the conservation projects; there is a temptation to evade environmental taxes. Furthermore, free markets promote the development of more industries which add more pollutants to the environment.

Conclusion

The economy plays a critical role in society because it determines the production and distribution of commodities. Capitalist economy puts a great emphasis on the natural equilibrium of demand and supply. As such, it promotes the system of free markets which has numerous advantages. While there are several disadvantages to the capitalist system more and more countries are continuously exploring it as a better option for market freedom and an improved economy.

Works Cited

Carabelli, Anna M., and Mario A. Cedrini. "Great Expectations and Final Disillusionment: Keynes,''My Early Beliefs''and the Ultimate Values of Capitalism." Cambridge Journal of Economics (2018).

Commons, John R. Legal foundations of capitalism. Routledge, 2017.

Karl, Marx. "Classes in capitalism and pre-capitalism." Inequality. Routledge, 2018. 21-35.

Schweickart, David. Against capitalism. Routledge, 2018.