Are we witnessing the collapse of capitalism? Is capitalism the best economic system? We discuss its pros and cons of free market economy. Join our debate
Is capitalism the best economic system?
The severity of the global financial crisis has brought capitalism back into the spotlight. Many academic discussions and public opinion debates have emerged on the limitations and flaws of capitalism. But what is capitalism? Capitalism is an economic and political system that drives most of the economies in the world. Its main principles are private enterprise and ownership, free market, individualism, and lack of government intervention. Prices are the result of supply and demand. Unlike in state control systems such as socialism or communism, prices are not determined by the governments and the means of production are owned by individuals or private firms, not by state-controlled organizations or groups.
Capitalism, as we know it today, emerged when a group of 18th century thinkers, such as Adam Smith and David Hume, criticized the mercantilist doctrines that ruled western economies. During the Industrial Revolution gradually their ideas acquired salience. The merchants lost prominenced and many protectionist policies were abandoned. Imperialism and globalization helped expanding capitalism during the 19th and 20th centuries. Although Capitalism underwent important crises and was challenged by socialism and other economic conceptions based on central-planning, it still remains today the most widespread economic system in the world. There are, nonetheless, different conceptions of capitalism should work. For instance, keynesianism and monetarism are two capitalist paradigms on the role of governments in societies.
Pros and cons of Capitalism
In order to decide if capitalism is the best economic system or needs to be modified or replaced, it is important to assess its advantages and limitations. These are some of the most commonly use arguments found in academic and political debate:
- Efficiency. Capitalism creates incentives for companies to provide services and goods in an efficient way. Competition forces them to improve the way they are organized and make a better use of the resources available.
- Consumer satisfaction. Competition and efficiency is supposed to encourage cheap prices and good quality products and services. In a capitalist system there is often a wider variety of products available for purchase. Some alternative systems do not recognize private ownership, which could be problematic from the point of view of consumers.
- Growth. Capitalist societies have historically proven a great capacity to grow economically.
- Freedom. Capitalism resonates with some democratic ideals such as individual freedom and separation of powers. In central-planned economies governments hold stronger sway on the economy. Some argue that democracy is only possible in a capitalist society.
- Curb differences. Free market and free trade is supposed to contribute to gradually balance differences across countries. Countries can have access to goods and services from all over the world and play their competitive advantages.
- Monopolistic and oligopolistic practices. In capitalism some firms or groups of firms can end up controlling the supply of some products and services. If governments do not intervene, these dominant players can harm smaller players and consumers rights. Some mega-corporations even have the power to shape political decisions.
- Underprovision of social services. There are services that citizens need and that profit maximizing companies would not be willing to provide at affordable prices. Public health, public transport, defence, etc. Public goods entail positive externalities which are problematic in a pure capitalist system. Governments, need to step in and ensure the adequate provision of public services. In capitalist societies negative externalities, such as pollution and environmental impact are also a common side effect.
- Wealth inequality. Wealth can be inherited. So some people can be rich just due to the hard work or luck of their ancestors. Capitalist societies are failing to create both equality of outcomes and equality of opportunities. Class gap tends to be wider than in collectivist societies.
- Economic booms and crises. Capitalist systems are subject to cycles which can prove extremely harmful for the population. Excessive economic specialization driven by capitalism, such as that of resource-rich countries can increase vulnerability to certain external shocks.
- Abuse of legal loopholes. Many firms and companies increase their profits by exploiting loopholes in the legal system. Profit making is the ultimate goal. This may lead to some practices that although legal, may not contribute to the overall wellbeing of society.
What do you think about capitalism? Is there any better alternative? Are we witnessing a slow collapse of capitalism? Does capitalism need to be reformulated as a doctrine or replaced by another economic system? Do we need more or less government intervention?
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Pros and cons of capitalism: Is capitalism the best economic system?
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