Capitalism: Meaning,stages, features, Merits, De-Merits

and conclusion
Name: Anand Raj CLASS:B.A.B.Ed. Roll number:04 semester: 3 rd Subject: political
science

Question: 01 Discuss what is Capitalism and it’s different phases of development,

merits and demerits with conclusion

Answer: 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:
(1) 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.” Thus, the definition hints at the major features of
capitalism.
(2) In the words of 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.”

(3) Similarly, Ferguson and Kreps has written that “in its own pure form,
free enterprise capitalism is a system in which privately owned and economic
decision are privately made”.

(4) Capitalism from Mc Connell view is:

A free market” or capitalist economy may be characterised as an automatic self-
regulating system motivated by the self interest of individuals and regulated by
competition. ”A capitalist economy works through the Price System.

Prices perform two functions:

(i) A rationing function,

(ii) An incentive function.

Prices ration out the available goods and services among buyers according to the
amounts each buyer wants and is able to pay for others whose desire is less
urgent or whose income is smaller will receive smaller qualities.

Prices also provide an incentive for firms to produce more. Where demand is high
prices will rise encouraging firms already in the industry to produce more and
drawing new firms into the industry. Where demand is falling, prices will
normally fall too. Firms will reduce their production, releasing resources for use
in other industries where there is demand for them.

Firms are buyers as well as sellers. They buy material and supplies from other
firms behaving exactly as private individuals do in deciding what to buy and how
much to buy. If a new machine promises to reduce production costs or if a certain
material can be substituted for another at a saving, the firm will buy the low-cost
resources in order to complete with other firms.

The economy is tied together by millions of those interactions linking producers

with one another and with consumers, linking one product with other products
and linking every market with other markets. The point is that all the economic
units in an economy are iinter-related

2.stages of development of capitalism:

(I) The Beginning: Mercantile Capitalism, 

(14 T H TO 19TH CENTURY) :

Innovations in technology, increased travel, and commerce enabled farmer

peasants to start trading outside of the manors, which the lords couldn’t tax.
This lead to the development of town centres and cities; thus an alternative
economy started to emerge. The towns became centres of trade and
offered independence to people in the villages.
A typical example would be merchants getting a loan from a banker who
would buy goods in one country, transport them in ships to another country
where they are scarcer or more valuable, sell them for a profit, and then pay

back the banker. However, some wealthy merchants began to remove their
focus from selling goods and entered the money lending business. This was
the earliest form of Capitalism called Mercantile Capitalism. According to
Giovanni Arrighi, an Italian sociologist, capitalism first emerged in its mercantile
form during the 14th century. It was a system of trade developed by Italian
traders who wished to increase their profits by evading local markets. This new
system of trade was limited until growing European powers started to profit from
long-distance trade, as they began the process of colonial expansion. For this
reason, American sociologist William I. Robinson dates the beginning of
mercantile capitalism at Columbus’s arrival in the Americas in 1492. Either way,
at this time, capitalism was a system of trading goods outside of one’s immediate
local market in order to increase profit for the traders. It was the rise of the
“middle man.” It was also the creation of the seeds of the corporation—the joint
stock companies used to broker the trade in goods, like the British East India
Company. Some of the first stock exchanges and banks were created during this
period as well, in order to manage this new system of trade.
As time passed and European powers like the Dutch, French, and Spanish rose to
prominence, the mercantile period was marked by their seizure of the control of
trade in goods, people (as enslaved individuals), and resources previously
controlled by others. They also, through colonization projects, shifted production
of crops to colonized lands and profited off of enslaved and wage-enslaved labor.
The Atlantic Triangle Trade, which moved goods and people between Africa, the
Americas, and Europe, thrived during this period.
It is an exemplar of mercantile capitalism in action. This first phase of capitalism was
disrupted by those whose ability to accumulate wealth was limited by the tight
grasp of the ruling monarchies and aristocracies. The American, French,
and Haitian Revolutions altered systems of trade, and the Industrial Revolution
significantly altered the means and relations of production. Together, these
changes ushered in a new epoch of capitalism.

The Second phase: Classical (or Competitive)

(II)
Capitalism- (19th century to mid 20th century)
During these times, some discovered that the way to gain wealth was to create
factories to mass produce goods. This phase of Capitalism is called Industrial
Capitalism. Entrepreneurs needed a lot of capital to satisfy the demand for
railroads, cars, ships, etc., which they didn’t have; so new types of financing
were needed. This led to the emergence of investment banks, who would
eventually gain control of the economy because they provided the capital.

Additional highlights of this system were tough working conditions (which

gave rise to labour unions), monopolies, and the Prussian design of public
schools (which I call assembly line education) to pump out more workers for
the factories.Classical capitalism is the form we are probably thinking of when
we think about what capitalism is and how it operates. It was during this epoch
that Karl Marx studied and critiqued the system, which is part of what makes this
version stick in our minds. Following the political and technological revolutions
mentioned above, a massive reorganization of society took place. The bourgeoisie
class, owners of the means of production, rose to power within newly formed
nation-states and a vast class of workers left rural lives to staff the factories that
were now producing goods in a mechanized way.

This phase of capitalism was characterized by free market ideology, which holds
that the market should be left to sort itself out without intervention from
governments. It was also characterized by new machine technologies used to
produce goods, and the creation of distinct roles played by workers within a
compartmentalized division of labour.
The British dominated this epoch with the expansion of their colonial empire,
which brought raw materials from its colonies around the world into its factories
in the UK at low cost. For example, sociologist John Talbot, who has studied the
coffee trade throughout time, notes that British capitalists invested their
accumulated wealth in developing cultivation, extraction, and transportation
infrastructure throughout Latin America, which fostered a huge increase in flows
of raw materials to British factories. Much of the labour used in these processes
in Latin America during this time was coerced, enslaved, or paid very low wages,
notably in Brazil, where enslavement was not ended until 1888.
During this period, unrest among the working classes in the U.S., in the UK, and
throughout colonized lands was common, due to low wages and poor working
conditions. Upton Sinclair infamously depicted these conditions in his novel, The
Jungle. The U.S. labour movement took shape during this epoch of capitalism.
Philanthropy also emerged during this time, as a way for those made wealthy by
capitalism to redistribute wealth to those who were exploited by the system.
(III) The Third phase: Keynesian or "New Deal" Capitalism
(1970 to present)
As the 20th century dawned, the U.S. and nation states within Western Europe
were firmly established as sovereign states with distinct economies bounded by
their national borders. The second epoch of capitalism, what we call “classical” or
“competitive,” was ruled by free-market ideology and the belief that competition
between firms and nations was best for all, and was the right way for the
economy to operate.
However, following the stock market crash of 1929, free-market ideology and its
core principles were abandoned by heads of state, CEOs, and leaders in banking
and finance. A new era of state intervention in the economy was born, which
characterized the third epoch of capitalism. The goals of state intervention were
to protect national industries from overseas competition, and to foster the growth
of national corporations through state investment in social welfare programs and
infrastructure.
This new approach to managing the economy was known as “Keynesianism,” and
based on the theory of British economist John Maynard Keynes, published in
1936. Keynes argued that the economy was suffering from inadequate demand for
goods, and that the only way to remedy that was to stabilize the populace so that
they could consume. The forms of state intervention taken by the U.S. through
legislation and program creation during this period were known collectively as
the “New Deal,” and included, among many others, social welfare programs like
Social Security, regulatory bodies like the United States Housing Authority and
Farm Security Administration, legislation like the Fair Labour Standards Act of
1938 (which put a legal cap on weekly work hours and set a minimum wage), and
lending bodies like Fannie Mae that subsidized home mortgages. The New Deal
also created jobs for unemployed individuals and put stagnant production
facilities to work with federal programs like the Works Progress
Administration. The New Deal included regulation of financial institutions, the
most notable of which was the Glass-Steagall Act of 1933, and increased rates of
taxes on very wealthy individuals, and on corporate profits.
The Keynesian model adopted in the U.S., combined with the production boom
created by World War II, fostered a period of economic growth and accumulation
for U.S. corporations that set the U.S. on course to be the global economic power
during this epoch of capitalism. This rise to power was fueled by technological
innovations, like radio, and later, television, that allowed for mass mediated
advertising to create demand for consumer goods. Advertisers began selling a
lifestyle that could be achieved through consumption of goods, which marks an
important turning point in the history of capitalism: the emergence of
consumerism, or consumption as a way of life.

This leads us to the most current form of Capitalism, Finance Capitalism. This
type of economic system isn’t based on producing physical goods like
Capitalism 2.0, rather it relies on the sale of financial products and services to
create profits. High labor costs, in countries like the United States, create
strong demand for outsourcing cheap labour to countries like China, to
produce goods for resale.

3.Main Features of Capitalism:

What a capitalistic economy actually is can be known through its main features.
These are derived from the way certain functions are performed and the main
decisions of the economy executed.

These may be stated as under:

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.

This mechanism brings about the adjustment of supply to demand. All economic
processes of consumption, production, exchange, distribution, saving and
investment work according to its directions. Therefore, Adam Smith has called
price mechanism as the “Invisible Hand” which operates the capitalist.
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. Such industries as are expected to go
under a loss are abandoned. 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 and Co-operation Goes Side by Side:

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. Workers compete among themselves as well as
with machines for taking up a particular work. 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.

8. It arises Class Conflict:

From this class-conflict arises. The society is normally divided into two classes
the “haves” and the “have-not’s”, which are constantly at war with each other.
Conflict between labour and capital is found in almost all capitalistic countries
and there seems to be no near solution of this problem. It seems that this class-
conflict is inherent in capitalism.

9. Leading Role of Joint Stock Companies:

In a joint stock company, business is carried on by a board of directors which is
democratically elected by the shareholders of the company at its general body
meeting. In view of this, it has been said that Joint stock Companies “Democratic
Capitalism”.
However the real functioning of the corporate sector is not really democratic
because there is one-share-one vote election. Since, big business houses own a
majority of the shares of a company, they manage to get re-elected and the
company is run as if it were their family business.

10. Important Role of the Entrepreneur:

The entrepreneurial class is the foundation of capitalist economy. The whole of
the economic structure of the capitalist economy is based on this class.
Entrepreneurs play the role of leaders in different fields of production. Presence
of good entrepreneurs is a must for healthy competition. Entrepreneurs are the
main sources of dynamism of the capitalist economy.

4.Merits of Capitalism:
The main merits and advantages of capitalism are as follows:
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 as
obtained from his expenditure on the needed goods.

2. Higher Rate of Capital Formation and More Economic Growth:

People under capitalism have the right to hold property and pass it on in
inheritance to their heirs and successors. Owing to this right, people save a part
of their income so that it can be invested to earn more income and leave larger
property for their heirs. The rate of capital formation increases when savings are
invested. This accelerates economic growth.

3. 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. This leads to the automatic
channelization of the country’s man power resources in different vocations. 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.
4. Optimum Utilisation of Resources Available:
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 and
entrepreneurs to produce and sell goods. Every producer and entrepreneur tries
to use the productive resources at his disposal in the most economical manner in
order to make maximum profit.

5. Efficient Production of Goods and Services:

Due to competition every entrepreneur tries to produce goods at the lowest cost
and of a durable nature. 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.

6. 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.

7. In Capitalism there is 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 Encourages the Entrepreneurs to Take Risks and 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 their
profits. Hence capitalism brings about great technological progress in the
country.

9. 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. The investors are suitably rewarded
with their royalties, through the copy right. Similarly, innovators enjoy the
benefits of their research, through the system of patents and trade-marks.

10. It Provides a Good Deal of Flexibility:

This type of economy can automatically change with the circumstances. During
war time market regulations are adopted to provide for the war machine. As soon
as there is peace, the economy reverts to the free functioning of markets.

5.De-Merits of Capitalism:
The capitalist economy has been showing signs of stress and strain at different
times. Some have called for a radical reform of the free-market economy. Others
like Marx have considered capitalism economy to be contradictory in itself. They
have predicted the ultimate doom of capitalist economy after a series of
deepening crisis.

The main de-merits or dis-advantages of capitalist economy are as

follows:
1. Inequality of Distribution of Wealth and Income:
The system of private property acts as a means of increasing inequalities of
income among different classes. Money begets money. Those who have wealth
can obtain resources and start big enterprises. The property less classes have only
their labour to offer. Profits and rents less classes have only their labour to offer.
Profits and rents are high.

Wages are much lower. Thus the property holders obtain a major share of
national income. The common masses have their wages to depend upon.
Although their number is overwhelming their share of income is relatively much
lower.

2. Class Struggle as Inevitable in Capitalist Economy:

Some critics of capitalism consider class struggle as inevitable in a capitalist
economy. Marxists point out that there are two main classes into which capitalist
society is divided. The ‘haves’ which are the rich propertied class own the means
of production. The “have not’s” which constitute the wage earning people have no
property.
The ‘haves’ are few in number. The ‘have not’s are in majority. There is a
tendency on the part of the capitalist class to exploit the wage-earners. As a result
there is a conflict between the employers and the employees which leads to
labour unrest. Strikes, lockouts and other points of tension. All this have a very
bad effect on production and employment.

3. Social Costs are Very High:

A capitalist economy industrialises and develops but the social costs of the same
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 of. Housing for factory labour is very rarely
provided with the result that slums grow around big cities.

4. Unnecessary Multiplicity and too Much of Competition:

Consumers have to pay a high price for their freedom of choice and provision of
variety. There is sometimes too much competition leading to unnecessary high
costs of production because competitors bid the prices of resources too high.
There is wasteful advertisement. Sometimes sub-standard goods are highly
advertised and the consumer is deceived.

5. Instability of the Capital Economy:

A capitalist economy is inherently unstable. There is recurring business cycle.
Sometimes there is a slump in economic activity. Prices fall, factories close down,
workers are rendered unemployed. At other times business is brisk, prices rise,
fast, there is a good deal of speculative activity. These alternating periods of
recession and boom lead to a good deal of wastage of resources.

6. Unemployment and 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.

7. 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. As a result, widows and
children have to undergo a good deal of suffering. Governments are not in a
position to provide for adequate social security in over populated less developed
countries.

8. 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.

9. No Bargaining Capacity of Labourers hence Exploitation:

In a capitalist economy, workers are often paid a wage rate below their
productivity. This is because; they do not have the bargaining power to get their
due from the rich capitalist. Women and children are often paid a very low wage
rate. There is no equal pay for equal work.

10. Growth of Monopolies with their Evils:

A capitalist economy is competitive only in theory. In practice, the few
competitors often arrive at an understanding and exploit the consumer.
Sometimes the bigger firms buy or eliminate the smaller firms to establish their
supremacy in particular lines or production. They charge high prices and do not
have any compulsion to improve efficiency of production. Thus, the much talked
about efficient working of a capitalist economy becomes a myth.

6. Conclusion:
Economists now agree that there are certain imperfections in a free enterprise
economy which must be corrected. The Government must come out to regulate
the economic machine so that it does not run down occasionally. Government has
a positive role to play in promoting unemployment, price stability and orderly
growth. The difference of opinion now is not on whether the government should
regulate or not, but is rather on how much control is appropriate under different
circumstances.