Capitalist Economy



There are many types of economies depending on the nature of control of the economy. Some forms look for individual profitability while others look for social good. Capitalism is a type of unique economy where private ownership is prevalent. The capitalist economy is the opposite of the socialist economy where ownerships belong to governments and social good is put on a higher pedestal than individual gains.

Capitalist Economy or Capitalism

The capitalist economy or capitalism is a form of economy where private players control and manage the property. The private players can act freely on their behalf and they set and manage prices that can bring substantial profits to their firms. The production of goods in a capitalist economy is governed by demand and supply and the capitalists produce goods depending on demand and supply rather than following the government-set benchmarks.

The most common feature of a capitalist economy is the profitability of firms. Both parties that are involved in a transaction - the producer and the consumer, have their own self-interests in a capitalist economy but neither can ignore the needs and wants of the other party. This self-interest is what makes organizations profitable and leads to economic prosperity.

Laissez-faire is the purest form of capitalism where producers can determine what to produce, how to sell the produced goods, and what should be the exchange price of the goods. This type of capitalism runs without any checks or controls.

In capitalist economies, the resources such as raw materials mine, production facilities, and railroads can be owned by a private player. Labor can be purchased in exchange for wages and the gains from investment accrue in owners’ accounts. The prices in a capitalist economy allocate labor and capital between competing utilizations.

Examples of Capitalist Economies

Capitalism is traditionally divided into two groups mainly depending on how productions are managed and organized. In a liberal market economy, the competitive market is applicable while the production is decentralized. This type of market economy is available in mostly resembling economies, such as the US and the UK. The coordinated market economies that are prevalent in Germany and Japan, on the other hand, exchange information via non-market institutions.

Modern economists have divided capitalist economists into four groups depending on the entrepreneurship patterns. In state-guided capitalism, the governments decide which sectors must be a focus of growth. Although initially implemented for growth, there are drawbacks to this type of capitalism. Some of the drawbacks of state-guided capitalism include excessive investments, corruption, and selecting the wrong participants.

Oligarchic capitalism looks after the well-being of a narrow fraction of industries. There is no desire for holistic growth in oligarchic capitalism and it is plagued by corruption and bias among other pitfalls.

The forms of capitalism that take advantage of economies of scale are known as big-farm capitalism, where the focus is on mass production. Entrepreneurial capitalism depends on breakthroughs in innovation. When mixed with big-farm capitalism, this produces the best results. The best example of such a mixed form of capitalism is in the United States.

Important Features of Capitalism or Capitalist Economy

Some of the most important features of Capitalism are as following:

Private Property

The private players can own properties in capitalism. They may also use these properties according to their own desire to earn the maximum profit.


Both the players involved in the economy, the producer and the consumer have self-interests, they want to gain the maximum profit through an exchange. But, none can ignore the needs and wants of the other party.


There is more than one player in the market economy and they can buy, sell or exit from any investment in the market that causes the competition. This leads to maximum welfare for both parties.

Decentralized Pricing Mechanism

In a capitalist economy, the prices are determined in a decentralized manner. This pricing is related to supply and demand and no one can claim to command the prices for a long period of time. The prices on the other hand allocate resources that search for the highest reward from the transaction for wages as well apart from goods and services.

Freedom of Choice

In a capitalist economy, the consumers and participants can choose any option - they can buy from a different seller, use goods produced by a different manufacturer, and/or leave a job to opt for a newer one.

Limited Government Intervention

In capitalism, the role of government is limited. The roles may be mainly included in the welfare and maintaining orderly environments by protecting the citizens.

Advantages of Capitalist Economy

Some interesting advantages of capitalism are as follows:

  • Capitalism rewards hard work and pays for it.

  • People can accumulate wealth in a capitalist economy.

  • The tax rates in the capitalist economy are lower than in most other political regimes.

  • It encourages competition which means better products and lifestyle.

  • Market efficiency is maximized in the capitalist economy.

  • It is a good economy for investors who seek to grow their investments.

  • Capitalism encourages the progress of technology.

  • Capitalism helps to grow GDP of an economy.

  • It offers higher levels of freedom than other forms of economies.

  • Capitalism encourages good international relationships.

  • It helps in lowering consumer prices.

  • It helps to improve the quality of products.

Disadvantages of Capitalist Economy

The most notable disadvantages of a capitalist economy are as follows:

  • It may help increase the wealth accumulation gap.

  • It pays too much attention to mass production and consumption.

  • It may lead to more poverty.

  • It may lead to compromises on the welfare of citizens.

  • It does not consider a minimum wage or the welfare of employees.

  • Employees may be exploited in a capitalist economy.

  • It may lead to private monopolies.

  • It may lead to higher unemployment during economic downturns.

  • It may lead to exorbitant rents and prices of private properties.

  • It may increase social tensions.

  • It may lead to unequal opportunities for people.

  • It leads to numerous environmental issues.


In modern societies, the focus on capitalist economies has increased significantly. It has many advantages as well as concerning disadvantages. By resorting to a capitalist economy, a nation can increase its international relationships too. These characteristics make capitalism a concerted choice of the most developed nations. However, one must also address the negative issues associated with the capitalist economy to serve the citizens better. Well-exploited capitalism can be a boon for the best social lifestyle in the modern world.


1. Can the private organizations completely ignore the social goods in favor of individual gains in a capitalist economy?

Ans. No. As Adam Smith, the father of modern economies has explained, organizations in a capitalist economy are directed by an invisible hand that directs them to look at social good in all types of economic environments. So, they must pay attention to social good for increasing their profits.

2. Why is Laissez-faire economics outlawed in many developed nations?

Ans. The Laissez-faire economy runs in a completely unchecked and unregulated format. Some individuals seeking the maximum benefit may ignore the rules and endanger society. That is why some government control is kept intact by ignoring the Laissez-faire economy.

3. What is the root of the capitalist economy?

Ans. The root of capitalism is feudalism. By the late middle ages, cities ruined out to be centers of trade. People started to move to cities to gain the advantages of city-centric life. This gradually grew into capitalism with the advent of time.

Updated on 13-Oct-2022 11:19:47