What is Capitalism? What are its advantages and disadvantages? What is Crony Capitalism, Sustainable capitalism? And does capitalism hamper democracy?


What is Capitalism?

Capitalism is an economic system based on private ownership of the factors of production (capital, land, entrepreneurship and labour). The sole aim of capitalism is generation of profits.

  • Under capitalism, a country’s trade and industry are controlled by private owners for profit, rather than by the state.
  • Private people are free to use the factors of production to make profit.
  • The production of goods and services is based on supply and demand in the general market (market economy), rather than through central planning (planned economy or command economy).
  • The purest form of capitalism is free market or laissez-faire capitalism, in which private individuals are completely unrestrained in determining where to invest, what to produce or sell, and at which prices to exchange goods and services, operating without check or controls.
  • Most modern countries practice a mixed capitalist system of some sort that includes government regulation of business and industry.

What are the main features of Capitalism?

  • 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.

  • Price Mechanism

This type of economy has a freely working price mechanism to guide consumers. Price mechanism indicates free working of the supply and demand forces without any external intervention. Producers also get assisted through 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. Adam Smith has called price mechanism as the “Invisible Hand” which operates the capitalist.

  • Profit Motive

The desire to earn profit is the most important inducement for economic activity. Profit is such an inducement that the entrepreneur is prepared to undertake high risk.

  • Competition

A capitalist economy is characterised by free competition between the producers to produce goods and services. On the other side buyers also compete for purchasing limited goods and services.

  • 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.

  • Consumer is the King

In a capitalist economy a consumer is compared to a sovereign king. If a production is to the liking of consumers, the producer gets high profits.

  • It gives rise to Class Conflict

The society is divided into two classes the “haves” and the “have-nots”. 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.

  • 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. So, Joint Stock Companies indicate “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.

  • Important Role of the Entrepreneur

The entrepreneurial class is the foundation of capitalist economy. Presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main sources of dynamism of the capitalist economy.


What are the Advantages of Capitalism?

  • 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.

  • 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.

  • There is Complete Freedom of Choice in a Capitalist Economy

Economic freedom means the right to earn and retain property. In addition, it also indicates the freedom to use that property without any forceful intervention by the state.

  • Optimum Utilisation of Resources

The goal of capitalism is to earn profits. In pursuing this goal, the producers tend to utilize the limited resources of the community in the most efficient manner, decreasing the costs and maximizing he profits.

  • Better Quality of Goods and Services

Entrepreneurs try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost.

  • More options for Consumers

There is competition not only in price but also in the shape, design, colours and packing of products. Consumers get a good deal of variety of the same product.

  • It Provides the Best Atmosphere for Innovation

Most important for economic growth is innovation. This leads to rapid development, greater employment, technological progress and higher income.

  • 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.

What are the disadvantages of Capitalism?

  • Capitalism ignores society as a whole

Capitalism doesn’t provide for those who lack competitive skills. This includes the elderly, children, the developmentally challenged and their caretakers. To keep society functioning, capitalism requires government policies that value the family unit.

  • No Equality of Opportunity

Capitalism does not promote equality of opportunity. Those without the proper nutrition, support and education may never make it to the playing field. Society will never benefit from their valuable skills. In the long term, this can limit diversity and innovation.

  • 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 class has only its labour to offer. Although this class has an overwhelming majority in the population, their share of income is relatively much lower.

  • Class Struggle

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” are few. The “have nots” 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.

  • Capitalism ignores external costs

Social and environmental costs of capitalism are high. The environment gets polluted because factory wastes are not properly disposed of. Over time, it depletes natural resources and lowers the quality of life. The problems of poverty, inequality, slums, push-factor migration etc. are intrinsic to capitalist system, especially in developing countries.

  • High Price for Consumer Freedom

Consumers pay a high price for their freedom of choice and provision of variety. There is too much competition leading to unnecessary high costs of production because competitors bid the prices of resources too high. There is wasteful advertisement.

  • 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.

  • Unemployment and Under-employment

Business fluctuations result in a large part of the labour force suffering from an insecurity of employment.

  • Unbalanced Growth

As the economy progresses, there is no all-round development of all the sectors. Some sectors develop much faster while others remain backward. In­dustries may expand fast while there may be poverty in agriculture. There are variations in regional development as well.

  • Exploitation pf the workers

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.

  • Development of Monopolies

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. They charge high prices and do not have any compulsion to improve efficiency of production.

Capitalism and Democracy

What does democracy indicate?

  • A form of government in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system.
  • Equality of opportunity
  • A society characterized by formal equality of rights and privileges. Absence of privileges based on birth
  • Fair distribution of wealth of the nation
  • Fair distribution of the benefits accruing from the utilization of community resources as well as natural resources of the nation
  • Wellbeing of an individual as well as of the society as whole

To what extent is Capitalism compatible with Democracy?

Capitalism is compatible to democracy till the point it does not compromise on the above indicators of a fair system of democracy.

When does Capitalism start hampering democracy?

Capitalism starts hampering democracy:

  • When business lobbies succeed in influencing policies of the government so that allocation of resources favour a few capitalists at the expense of the whole society and nation itself.
  • When there is unfair concentration of wealth in a country.
  • When there is absence of equality of opportunity; capital weighs more than merit and talent in a claim for an opportunity.
  • There are certain basic rights of a citizen, which he/she has just by the virtue of being a citizen. When these legitimate claims/rights of citizens of a nation can be claimed only on the basis of the capital an individual owns. Then, democracy is compromised.
  • When capital starts influencing election results; by the way of illegitimate political funding, influencing the common citizen through propaganda, persuasion and/or force.
  • When the participation or success of an individual or a group or a political party in democratic political process depends on the amount of capital they own.
  • When profit earning of capitalist producers/providers takes precedence over access to timely, qualitative and affordable basic services like education, healthcare, sanitation etc.

Crony capitalism

An economic system characterized by close, mutually advantageous relationships between business leaders and government officials.

Under crony capitalism businesses thrive not as a result of risk taken by them, but, as a result of an illegitimate nexus between the business class and government officials/politicians on money amassed through a nexus between a business class and the political class.


India ranks 9th in crony-capitalism index 2016: What does it mean for India

India has been ranked at the 9th position in the index of crony-capitalism. India’s crony-sector wealth accounts for only 3.4 percent of the gross domestic product (GDP) as per the new study by The Economist.

Here is all you would like to know about the ranking:

  • Faring worst in the list, Russia tops the index with crony-sector wealth accounting to 18 percent of the country’s GDP
  • Russia has been followed by Malaysia at number 2, Philippines at number 3 and Singapore at 4th position
  • Top ranking indicates that the country is engaged more in crony-capitalism
  • The position of India in the index hasn’t changed from the last year’s
  • Germany has been ranked the cleanest country in the index appearing at the 22nd position (last position)
  • Crony-capitalism aims to find out whether the lives of people in a certain country is easily affected by the crony-capitalism
  • Among the 22 economies in the index, crony wealth has fallen by 116 billion USD since the year 2014
  • The combined fortune of capitalist-tycoons has dropped 16 percent since 2014
  • The worth of crony industries had soared by 385 percent between 2004 and 2014
  • The study claims that the crony capitalists’ wealth in India is now down to 3 percent.


What are the ill-effects of Crony Capitalism?

  • Allocative inefficiencies

Resources are allocated on the basis of relationship between the capitalists and the political class. Efficiency, in addition to morality, suffers in this unfair transaction

  • Corruption and transaction costs

The cost of corruption on the society and economy multiplies manifolds.

  • Problems of social and political stability

The relationship between the business class and political class is of mutual benefit. However, it is unstable, as either of the classes change colours without battling an eyelid whenever they see an incentive to do so. This leads to political and social instability.

  • Concentration of wealth

The discourse has also centred around how a few rich and influential have cornered most of the natural resources, licences and contracts. Crony capitalism also implies lack of level playing field in curbing competition.

  • Rise of Monopolies
  • Inefficient use of natural and community resources


What is Sustainable Capitalism?

  • Sustainable capitalism is a conceptual form of capitalism based upon sustainable practices that seek to preserve humanity and the planet, while reducing externalities.
  • Capitalist systems are often thought to be destructive to the environment as well as certain individuals without access to proper representation.
  • However, sustainability provides quite the opposite; it implies not only a continuation, but a replenishing of resources.
  • Sustainable capitalism applies sustainable principles to economic governance and social aspects of capitalism as well.
  • This is a concept of capitalism described in Al Gore and David Blood’s manifesto for the Generation Investment Management to describe a long-term political, economic and social structure which would mitigate current threats to the planet and society.
  • According to their manifesto, sustainable capitalism would integrate the environmental, social and governance (ESG) aspects into risk assessment in attempt to limit externalities. Effects on Society


Guide us on how/what to improve, below...