Advantages of Capitalism

Readers Question: What are the advantages of capitalism?

Capitalism is an economy based on free markets where resources and firms are privately owned. In practise, this usually involves some state intervention to protect private property and regulate certain aspects of the economy. Most would argue that the UK and US is essentially capitalist despite the government spending between 35 and 40% of GDP.

Advantages of Capitalism

1. What is the alternative? Churchill’s quote on democracy springs to mind.

“It has been said that democracy is the worst form of government except all the others that have been tried.”

One could say the same for capitalism. Basically, when governments attempt to control the economy. We end up with problems such as:

  • Corruption
  • Lack of incentives
  • Poor information

2. Efficient Allocation of Resources

In theory, capitalism or the ‘invisible hand of the market’ ensures resources are distributed according to consumer preferences. Firms are not rewarded for producing goods people don’t want.

3. Efficient Production

In a market system, firms have incentives to be productively efficient – cutting costs to improve competitiveness and productivity. If firms don’t remain productive and efficient they will go out of business.

4. Dynamic Efficiency

This is efficiency over time. Firms in a capitalist system need to respond to changes in consumer preferences and respond to new consumer trends.

5. Financial Incentives

Evidence suggests that people work hardest when there is a personal financial incentive. E.g. entrepreneurs only take risks in setting up businesses because of the potential for large financial reward. If this scope for private profit is absent then new firms won’t be set up.

See also:

12 Responses to Advantages of Capitalism

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  4. arbie o. napat November 23, 2009 at 11:31 am #

    thank u so much for a lot of information u help thank u!

  5. matov baker May 2, 2010 at 9:04 am #

    it has helped us enrich our knowledge on the socialism Vs capitalism war of ideologies which occured and stopped when we were young

  6. Salai Lian Bawi Thang October 26, 2010 at 7:53 am #

    It’s very helpful and beneficial website. I personally believe too that capitalism is the best possible of world economics.

  7. wamimbi julius September 19, 2011 at 2:10 pm #

    your contribution is worth in the world of academics. thank you

  8. kate November 26, 2011 at 9:11 pm #

    very interesting,woman is not only oppressed by man but also by capital

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    It got what you want. thanks alot.

  10. Tefo Ben August 9, 2013 at 12:37 pm #

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