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:
- 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.