Capitalism, a term of disparagement coined by socialists in the mid-nineteenth century, is a misnomer for “economic individualism,” which Adam Smith earlier called “the obvious and simple system of natural liberty” (Wealth of Nations). It is now quite commonly used to describe the social system in which we now live. It is also often assumed that it has existed, if not forever, then for most of human history. In fact, capitalism is a relatively new social system.

If capitalism can be said to have a birthplace, the most likely location would be in northern Italy.

Capitalism is that part of economic systems where productions are owned and managed by private individuals and institutions. Or it is economic individualism wherein the individuals are the one to decide what and how much to produced and distributed. They are at liberty to use any technique of production and produce anything they like. In this economic system, State is to take care of only internal and external security of the country. Normally the activities related to Defence, Police, Administration and Courts of Justice are controlled by the government.

A private enterprise economy characterized by the existence of business fluctuations and considerable unemployment. In capitalism there will be considerable ups and downs – swings of the business cycle with their inevitable repercussions on the people.

There are two types of capitalism

  1. Classical Capitalism
  2. Monopoly Capitalism

Classical capitalism

For this credit goes to Adam Smith, in fact Adam Smith the founder of economics presented the idea. Adam Smith assumed the presence of perfect competition.  The state is more or less non-existent so far as the economic matters are concerned. The State job was restrained to enforcement of contracts, protection of property, maintain law and order national frontiers. They were on the opinion the State has no right to interfere in the country economic activities. In this type the principle of laissex-faire dominated.

Monopoly Capitalism

There is no more room for classical capitalism in today’s economic system. Free market, perfect competition and State’s non-interference in the economic activities are not existed. Perfect competition is yielded to imperfect competition. Nowadays market is restricted. Now countries are intervening in the activities of their economic systems.


Under capitalism the most important (but not only) institution of allocation is the market. Markets consist of buyers and sellers of commodities, which are goods and services bought and sold for a price.

Based on the type of commodity being produced and consumed, as well as the amount and nature of competition, markets come in a huge variety. They range from free-wheeling and highly competitive, with many small producers who must accept the price the market hands them, to large markets dominated by a few major producers, or oligopolists, who can shape the market price.

Main Characteristics of Capitalism

  • Right to own property
  • Profit motive
  • Private ownership of means of production
  • Consumer’s sovereignty
  • Economic freedom
  • Social division of people
  • Price mechanism

Merits of Capitalism

  • Stable economic system
  • Reduction in cost of production due to efficient control
  • Efficient control of production process
  • Improved quality of goods
  • Consumer’s choice is given full weight
  • Varieties of products

Demerits of Capitalism

  • Inequality in the distribution of national wealth
  • Fluctuations in the level of employment
  • Class conflicts
  • Waste of talents
  • Heavy expenses on publicity result into increase in cost and price of the commodity
  • Results in imbalances in opportunities

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