Capitalism is an economic system characterised by:
- Lack of government intervention
- Means of production owned by private firms.
- Goods and services distributed according to price mechanism (as opposed to government price controls)
Pros of capitalism
“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
― Milton Friedman
- Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may extend into other areas of life.
- Efficiency. Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste. State-owned firms often tend to be more inefficient (e.g. less willing to get rid of surplus workers and fewer incentives to try new innovative working practices.)
- Innovation. Capitalism has a dynamic where entrepreneurs and firms are seeking to create and develop profitable products. Therefore, they will not be stagnant but invest in new products which may be popular with consumers. This can lead to product development and more choice of goods.
- Economic growth. With firms and individuals facing incentives to be innovative and work hard, this creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards. This increased wealth enables a higher standard of living; in theory, everyone can benefit from this increased wealth, and there is a ‘trickle-down effect‘ from rich to poor.
- There are no better alternatives. As Winston Churchill, “It has been said that democracy is the worst form of government except for all the others that have been tried.” A similar statement could apply to capitalism.
Cons of capitalism
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”– John Maynard Keynes (1)
- Monopoly power. Private ownership of capital enables firms to gain monopoly power in product and labour markets. Firms with monopoly power can exploit their position to charge higher prices. See: Monopoly
- Monopsony power. Firms with monopsony power can pay lower wages to workers. In capitalist societies, there is often great inequality between the owners of capital and those who work for firms. See: Monopsony exploitation
- Social benefit ignored. A free market will ignore externalities. A profit maximising capitalist firm is likely to ignore negative externalities, such as pollution from production; this can harm living standards. Similarly, a free-market economy will under-provide goods with positive externalities, such as health, public transport and education. This leads to an inefficient allocation of resources. Even supporters of capitalism will admit that government provision of certain public goods and public services are essential to maximise the potential of a capitalist society.
- Inherited wealth and wealth inequality. A capitalist society is based on the legal right to private property and the ability to pass on wealth to future generations. Capitalists argue that a capitalist society is fair because you gain the rewards of your hard work. But, often people are rich, simply because they inherit wealth or are born into a privileged class. Therefore, capitalist society not only fails to create equality of outcome but also fails to provide equality of opportunity.
- Inequality creates social division. Societies which are highly unequal create resentment and social division.
- Diminishing marginal utility of wealth. A capitalist society argues it is good if people can earn more leading to income and wealth inequality. However, this ignores the diminishing marginal utility of wealth. A millionaire who gets an extra million sees little increase in economic welfare, but that £1 million spent on health care would provide a much bigger increase in social welfare.
- Boom and bust cycles. Capitalist economies have a tendency to booms and busts with painful recessions and mass unemployment. See: Boom and bust economic cycles
Economists on the pros and cons of capitalism
“I react pragmatically. Where the market works, I’m for that. Where the government is necessary, I’m for that. I’m deeply suspicious of somebody who says, “I’m in favor of privatization,” or, “I’m deeply in favor of public ownership.” I’m in favor of whatever works in the particular case.” – John K. Galbraith 
Most economists take a nuanced approach to capitalism. Supporting broad principles of free-market, but concerned with abuses of free markets, such as monopoly, inequality and externalities. However, some like Hayek are more passionate in support of limited government intervention and virtues of capitalism.
Economists supporting the virtues of capitalism
- Friedrich Hayek – The Road to Serfdom (1944)
- Milton Friedman – Capitalism and Freedom (1962)
- Adam Smith – The Wealth of Nations (1776)
Economists critical of capitalism
- Karl Marx – Das Capital / Communist Manifesto
- Joseph Stiglitz
- Thomas Piketty
Different types of capitalism
All types of capitalism imply that the economy is ‘market-based’ However, within the broad term of capitalism, there are different varieties which can have profoundly different outcomes. For example, unregulated capitalism – sometimes termed ‘turbo-capitalism’ will see greater problems associated with inequality, under-provision of public services and greater inequality. A primarily ‘capitalist’ society with some regulation on inequality, environment and monopoly power can create a very different outcome to a pure ‘capitalist’ society.
See: different types of capitalism
When people talk about capitalist societies, e.g. the US, there is actually significant government intervention in areas such as education, healthcare and transport. US government accounts for around 35% of GDP.
Even a country like France, where the government spend 50% of GDP has an economy which may be considered to be primarily ‘free market’. There is no clear cut point when an economy stops being capitalist and becomes a ‘mixed economy’.
 Attributed. Moving Forward: Programme for a Participatory Economy Michael Albert, (2000)
 Interview with Brian Lamb, on Booknotes C-SPAN, 1994-11-13.
Last updated: 10th July 2019, Tejvan Pettinger, www.economicshelp.org, Oxford, UK
50 thoughts on “Pros and cons of capitalism”
From what I have witnessed via my son in law working for KFC is that they only care for the bottom line, the profits! They dont give a damn about their employees and overwork them like slaves with little pay!
Social Democracy would change that
Equality for the worker! Equality for all!
Where did that idea come from. You realize how much of a headache it would be to make it so that people doing tiny jobs like cooking a burger and moping a floor could possibly be payed more, because an increase to minimum wage would affect at least 25 to 40 percent of the population and now that they have more money THEY ARE STILL PART OF THAT 25 to 40 PERCENT. AS THE WORTH OF THE MONEY COINCIDES WITH THE JOB
You act like KFC is the only job he can get. Lazy mentality calls for the help of someone else AKA the government. Good luck with that.
Mattias I don’t appreciate your tone! You act like the job conditions at KFC aren’t the same everywhere else! STAY WOKE!!!
Simply because they aren’t.. Other places have better working conditions and if our public school system wasn’t so messed up and children where actually taught how to care and grit then people wouldn’t be forced to work minimum wage jobs. Also I don’t appreciate your tone you sound like a 60 your old man trying to impress his grandchild.
“If our public school system wasn’t so messed up right now”. Really, education is a business. It goes to show that it too doesn’t give a damn about the teachers or the consumers.
likes to be right and always in control
Economic freedom helps political freedom.
como estas ?
capitisim isn’t bad but it isn’t good
We know capitalism has its pros and cons. I see the problems of market failure and externalities as leading to some of the issues of climate change, since firms in most cases are free to dispose of waste and pollution without cost. The inequality of wealth and income is grossly unfair to the poor. Those very people who produced the goods and services that earns the profit for the billionaire bosses.
Under capitalism it said you have freedom. But freedom has be back my money to buy the things you want for your family. These include: health care, housing, education and put food on the table. Of course, governments do invest in health, education and housing but not enough for the poor.
—There are no better alternatives. As Winston Churchill, “It has been said that democracy is the worst form of government except for all the others that have been tried.” A similar statement could apply to capitalism.—
My reply: Churchill said it so it has to be true!
There are much better alternatives. Not for Capitalists but for people that care about the wellbeing of themselves and others as well as the biosphere and all other living things. Capitalism in any variation will lead to greed, excess, and exploitation of the workers. Continuous growth is Capitalism and it is killing this world.
We need an equitable, just, and mindful way to work and live. Intergenerational discounting (see: https://www.sciencedirect.com/science/article/abs/pii/0301421595901643) is and should be treated as a crime against all of humanity. Money systems must go. Money is corrupting. Top-Down hierarchies must go. As far as I see it he best alternative is Anarcho-Communism which is a mutually-shared decision on a local-level through healthy cooperative behavior and proper representation not fake representation by Ivory Tower Politicians (Right, Center, or Left) that never feel the repercussions of their more than often greedy and self-interested or purely partisan policies. I hope readers don’t fall for this writer’s error in thinking or ignorance.
What are the better alternatives then?
How can “better than alternatives” be a pro?
The moment you realize that the system was built this way to keep you trapped, is the moment you free yourself. BE AWAKE.
“Better than alternatives” is not pro. It is an opinion that relies on an assumption of a worse reality under another economic system. The word “worse” is subjective. No part of this “pro” is based on fact.
“Tends to lead to inequality” and “firms can gain monoploy”. This is a naive statement that implys that this does not always occur. History has shown us that this always occurs under capitalism under any political philosophy.
I can tell u are trying to promote a capitalist ideology by saying these things rather than an unbiased critique of the economic system.
lol mad political people
I love capitalism!!!! I am a slave to the matrix. I enjoy being blinded by media and told every move. STAY SLEEPING!!
hello. capitalizm means you can stay in that house you bought. you own it, you own your phone, your pants, and your soul