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Ba LLB 1st semester economics notes pdf
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Q. Explain the meaning and main features of Capitalism or the free enterprise economy. Explain the merits and demerits of Capitalism. (BA LLB)
Ans. Capitalism or free enterprise economy is an economic system in which each individual in his capacity as a consumer, producer, and resource owner is engaged in economic activity with a large measure of economic freedom. Individual economic actions conform to the existing legal and institutional framework of the society which is governed by the
institution of private property, profit motive, freedom of enterprise, and Consumers’ sovereignty. All factors of production are privately owned and managed by individuals. The raw materials, the machines, the firms, and the factories are owned and managed by individuals who are at liberty to dispose of them within the prevalent of the country. Individuals have loads of freedom to choose any occupation and to buy and sell any number of goods and services.
Features of Capitalism
The principal features of capitalism are as followings
(1) Private Property: Capitalism thrives on the institution of private property. It means that the owner of a farm or factory or mine may use it in any manner he likes. He may hire it to anybody, sell it, or lease it at will in accordance with the prevalent laws of the country. The state’s role is confined to the protection of the institution of private property through laws. The institution of private property induces its owner to work hard, organize his business efficiently, and to produce more, thereby benefiting not only himself but also the community at large. All this is actuated by the profit motive.
(2) Profit Motive. The main motive behind the working of the capitalist system is the profit motive. The decisions of businessmen, farmers, producers, including that of wage-earners are based on the profit motive. The profit motive is synonymous with the desire for personal gain.
(3) Price Mechanism. Under capitalism, the price mechanism operates automatically without any direction and control by the central authorities. It is the profit motive that determines production. Profit being the difference between outlay and receipt, the size of profit depends upon prices. The larger the difference between prices and costs, the higher is the profit. Again, the higher the prices, the greater are the efforts of the producers to produce the varying quantities and types of products. It is the consumers’ choices which determine what to produce, how much to produce, and how to produce.
(4) Role of the State. During the 19th century, the role of the state was confined to the maintenance of law and order, protection from external aggression, and provision of educational and public health facilities. This policy of laissez-faire- of non-intervention in economic affairs by the state-has been abandoned in capitalist economies of the West after the Second World War. Now the state has important tasks to fulfill. They are monetary and fiscal measures to maintain aggregate demand; anti-monopoly measures and nationalized monopoly corporations; and measures for the satisfaction of communal wants such as public health, public parks, roads, bridges, museums, zoos, education, flood control, etc.
(5) Consumers, Sovereignty. Under capitalism, ‘the consumer is the king’. It means freedom of choice by consumers. The consumers are
free to buy any number of goods they want. Producers try to produce a variety of goods to meet the tastes and preferences of consumers. This also implies freedom of production whereby producers are at liberty to produce a vast variety of commodities in order to satisfy the Consumer who acts like a ‘king in making a choice out of them with his given money income. These twin freedoms of consumption and production are essential for the smooth functioning of the capitalist system.
(6) Freedom of Enterprise. Freedom of enterprise means that there is a free choice of occupation for an entrepreneur, a capitalist, and a laborer. But this freedom is subject to their ability and training, legal restrictions, and existing market conditions. Subject to these limitations, an entrepreneur is free to set up any industry, a capitalist can invest his capital in any industry or trade he likes, and a person is free to choose any occupation he prefers. It is on account of the presence of this important feature of freedom of enterprise that a capitalist economy is also called a free enterprise economy.
(7) Competition. Competition is one of the most important features of a capitalist economy. It implies the existence of a large number of buyers and sellers in the market who are motivated by self-interest but cannot influence market decisions by their individual actions. It is competition among buyers and sellers that determines the production, consumption, and distribution of goods and services. There being sufficient price flexibility under capitalism, prices adjust themselves to changes in demand, production techniques, and the supply of factors of production. Changes in prices, in turn, bring adjustments in production, factor demand, and individual incomes.
Merits of Capitalism
(1) Increase in Production. Arthur Young wrote, “The magic of property turns sand into gold.” This observation of Young holds good in a free enterprise economy where every farmer, trader, or industrialist can hold property and use it in any way he likes. He brings improvement in production and increases productivity because the property belongs to him. This leads to an increase in income, savings, and investment, and to progress.
(2) Quality Products at Low Costs. The twin freedoms of consumers and producers lead to the production of quality products and the lowering of costs and prices. Thus the society as a whole stands to gain under capitalism.
(3) Progress and Prosperity. The presence of competition under capitalism leads to increasing inefficiency, encourages producers to innovate, and thereby brings progress and prosperity to the country. As pointed out by Seligman.”If competition in biology leads only indirectly to progress, competition in economics is the very secret of progress.
(4) Maximises Welfare. The automatic working of the price mechanism under capitalism brings efficiency in the production and
distribution of goods and services without any central plan and promotes the maximum welfare of the community.
(5) Optimum use of Resources. Under capitalism, producers undertake the production of only those goods which appear to yield maximum profits in anticipation of demand. This leads to the optimum use of resources.
(6) Flexible System. A capitalist economy operates automatically through the price mechanism. If there are shortages or surpluses in the economy, they are corrected automatically by the forces of demand and supply. As such, capitalism is a highly flexible system that can adapt itself to changing economic conditions. That is why it has survivéd many depressions, recessions, and booms.
Demerits of Capitalism(ba LLB notes)
(1) Leads to Monopoly. A competition that is regarded as the very basis of capitalism contains within itself the tendency to destroy competition and leads to monopoly. It is the profit motive under capitalism that leads to cut-throat competition, and ultimately to the formation of trusts, cartels, and combinations. This brings about a reduction in the number of firms actually engaged in production. As a result, small firms are eliminated in this process.
(2) Inequalities.The institution of private property inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profits to big producers, the landlords, entrepreneurs, and traders who accumulate vast amounts of wealth. While the rich roll in wealth and luxury, the poor live in poverty and squalor.
(3) Consumers ‘Sovereignty’ a Myth. Consumers’ sovereignty is a myth under capitalism. Consumers have to buy only those commodities which are manufactured and supplied by the producers in the market. The majority of consumers are not rational buyers and are often ignorant about the utility and quality of the products, available at the stores or shops. They are also misled by advertisements and propaganda about the usefulness of the products.
(4) Depression and Unemployment. Capitalism is characterized by business fluctuations and unemployment. Excessive competition and unplanned production lead to overproduction and glut of commodities in the market and ultimately depression and unemployment.
(5) Inefficient Production. Capitalism fails to produce goods in keeping with society’s requirements. Frivolous luxury goods and obnoxious articles are produced to satisfy the wants of the few rich at the expense of the necessities needed by the poor. Thus there is social wastage of the economy’s resources.
(6) Non-utilisation of Resources. The price mechanism under capitalism fails to employ the country’s resources fully. Free and unfettered competition, inequalities of the income distribution, Overproduction, and consequent depression lead to wastage of productive resources. Besides, there is mass unemployment, and freedom of occupation has little meaning under capitalism.
(7) Class Conflict. A capitalist society is characterized by class conflict. The poor are exploited by the rich. This leads to the mutual district between the workers and the employers and to social unrest.