12 Advantages and Disadvantages of Capitalism

12 Advantages and Disadvantages of Capitalism

 Capitalism is a term that elicits mixed reactions and feelings among people globally and more so in developing countries. Capitalism allows demand and supply to freely set the prices within the market for the interest of society. Capitalism is a market characterised by minimum government intervention where ownership and control of the property are in private hands. The government only intervenes in regulating a certain economic aspect solely to protect private investors.

Great men in history showed different contradictory views regarding capitalism. For instance, Milton Friedman, an American Economist, postulated that  “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” The utterances were in support of the capitalist economic system. On the other hand, John Maynard Keynes said that, “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone”, clearly being against capitalism. John Keynes was also an economist.

But why are there different views towards capitalism? In this article, we will look at the advantages and disadvantages of capitalism and leave you to judge whether it is an appropriate model for promoting economic development while minimising the negative impacts on an economy.
Advantages
 1. Promotes Economic Growth
Profit-making acts as a catalyst in encouraging hard work and innovation amongst individuals and companies. The result is economic growth through increased Gross Domestic Product (GDP) growth and improved living standards. It is presumed that through the trickle-down effect, the poor can benefit from the rich, resulting in universal growth. According to the trickle-down effect theory, income from high-salary earners filters through to the low-earning group, benefiting everyone.
2. Maximum Utilisation of Resources
The capitalist economic model seeks to generate profits through production. In a competitive market, producers tend to compete for readily available raw materials to produce highly competitive products that increase their profit margins. Competition for these products ensures that all the available materials are used in a resourceful manner without any wastage.
3. Increased Innovation and Dynamic Products
To remain highly competitive, producers must remain highly innovative. Through innovation, produced goods and services can generate profits by being highly differentiated, for instance, in terms of quality. Product differentiation also creates an array of products from which consumers can choose to achieve their desired utility. Availability of different products promotes freedom of choice and eliminates monopoly, which may be unfavorable to consumers.
4. Promotes Equality
In a capitalist economy, everyone is provided with an opportunity to create wealth. Everyone is provided with an opportunity to pursue their dreams, and in the presence of hard work coupled with innovation, financial success is achievable by everyone. It is worth noting that due to different factors, some people may be able to create fortunes more easily than others.
5. Allows the Market to Regulate Itself
As we had seen earlier, capitalism allows the demand and supply to set prices freely within the market. Companies that intend to maximize profits must produce goods and services that align with the market needs. If a firm fails to meet these needs, they risk losing customers and, in return, making losses.
6. Economic Efficiency
In a capitalist economy, the demand is equal to the supply. Firms, therefore, produce what the market demands, minimizing wastage and reducing costs. Available resources are therefore used efficiently.
Disadvantages.
1. Results in unequal Wealth Distribution
Despite the capitalist model creating equal opportunities to grow wealth, the model eventually results in unequal distribution of wealth. A few individuals in society only conduct the production process. Wealth passed down from generation to generation results in an economy with only a few wealthy individuals and many poor. This inequality creates high social division.
2. Have Negative Externalities.
The drive to generate more profits could result in firms engaging in activities that affect the environment negatively in the long run. For instance, inappropriate waste disposal might result in pollution. If these firms are not held accountable, this could result in many bigger problems, such as climate change.
3. Exploitation of Laborers
Capitalism results in a larger wealth gap where the number of the wealthy is small, whereas the number of the poor is very large. According to communists and socialists, a group against capitalism, firms owned by the wealthy pay the laborers wages for their services in the production process. These wages are low, and the firms make more money, not only widening the wealth gap but also taking advantage of the core participants in the production process. It is worth noting that the more capitalist an economy is, the lower the wages.
4. Unemployment
Capitalism is characterized by frequent recessions, which result in high unemployment levels and reduced revenues by producers. Individuals who have amassed a lot of wealth can survive through the recession period, whereas the poor live from hand to mouth. The poor groups are forced to live off social safety net programs from hand to mouth from their small paychecks.
5. Government Taxation
As we had seen earlier, government involvement in the capitalist economy is quite limited since it only engages in regulation development. The government is also responsible for providing citizens with social amenities such as schools, hospitals, and roads. Since there is no profit-making, the government generates revenue by taxing the business revenues and individual incomes. Most firms spend a lot of money on payments of wages to the laborers. As a result, the heaviest burden of paying taxes is placed on the laborers
6. Social Segregation
Capitalism results in social segregation where the rich settle in a specific area, whereas the poor settle in a different area. Individuals earning the same income tend to live within the same area. Interaction between the two groups is quite limited. The poor cannot afford decent housing, such as mansions owned by the wealthy.
The United States, Germany, and the United Kingdom (UK) are among some modern capitalist economies performing well. This, therefore, is a clear indication that despite the capitalist model possessing both negative and positive traits, it is still a model capable of driving an economy toward economic prosperity.
Different economic models have different advantages and disadvantages. To achieve the desired results within an economy, it is highly advised to combine different models, such as socialism. This neutralizes the negative effects from one model to the other. This is more so in developing countries characterized by high levels of poverty.

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