13 Advantages and Disadvantages of Capitalism

Capitalism is a political and economic system where the industry and trade for a country are controlled through private ownership. Profits are generated by this ownership instead of the control being mandated by the government.

There are specific characteristics of Capitalism which make it a unique type of economic system. It combines the elements of voluntary exchange with capital accumulation, private property ownership, competitive markets, and pricing systems. Wage labor is included in this economy as well.

Decisions are made by the owner of wealth in a society based on Capitalism. If you own property or a production capability, then you have wealth. Although there are different ways to apply these concepts, Capitalism always comes back to private ownership over public ownership.

Here are the critical points to consider when looking at the advantages and disadvantages of Capitalism today.

List of the Advantages of Capitalism

1. Capitalism naturally promotes equality for each person in the society.
What is unique about capitalism is that everyone is provided with the same chance to find success. Not everyone may achieve their definition, but it doesn’t change the starting point for each person. No matter what a household’s socioeconomic status happens to be, there is an opportunity for them to pursue their goals, achieve financial success, and chart their own course. If you’re willing to work hard, then you’ve got the same shot as everyone else.

2. It also creates more opportunities for innovation.
In the world of Capitalism, competition is what leads to profits. When you have the best product in your industry, then you’ll likely have the most customers. That means companies and individuals are constantly working toward innovative ideas, services, and products which better the lives of everyone. Although there is no guarantee of success at the individual level, there is nothing which stops people from trying multiple times to succeed either. Everything that is produced is intended to help others in some way.

3. Free market systems are allowed to develop under Capitalism.
Instead of having governments interfere with pricing, product availability, or taxation value, Capitalism places the focus of each product and service on the individual. Pricing is driven by demand for that product. Supplies are pushed upward or downward based on a need response. Within this type of society, each person is naturally provided with the opportunity to choose what they believe will meet their needs in the best possible way. No one dictates what they must purchase or how much they must spend.

4. Self-regulation occurs naturally in an economy powered by Capitalism.
Because Capitalism is governed by the rules of supply and demand, providers of goods and services are encouraged to be “good actors” in society. If they mislead consumers about the quality or problem-solving ability of what they sell, then they’ll go out of business fast. If products are unsafe, they won’t be purchased. That encourages self-regulation to occur because a business which wants to stay operational must always be focused on meeting the exact needs of their future customers.

5. Capitalism is not without compassion.
Some believe that Capitalism is a self-centered type of society because the primary focus is on oneself. That is not always the case. People develop goods and services to solve problems. That’s how you make money in such a society. To gain the attention of potential customers, you must proactively help other people to prove what you have created will actually work. Although the purpose of doing this work is certainly self-motivated, compassion is dictated in Capitalism because the only way to make money is by helping other people in some way.

6. There is a focus on individual skills in a Capitalist society.
Even though Capitalism is often approached in a nationalist sense, it is more of a globalist idea. The G20 will almost always accept immigration applications from people who have needed skills or perspectives. If you work hard enough, no matter where you happen to live in the world, then you are given an opportunity. You can then take what you learn to bring it back home, improving local conditions along the way. Even with its emphasis on the individual, Capitalism brings the world together in a way that is unique.

List of the Disadvantages of Capitalism

1. A lack of consumption destroys the foundation of Capitalism.
If people decide to save their money instead of spending it, then Capitalism struggles to survive. People must be buying and selling goods and services for the economy to grow. Purchasing is what creates jobs for others. When more people are driven to purchase something specific, it creates new opportunities for growth. That’s why wealth accumulation at the top 1% of society can create shortages of income for the entry-level worker.

2. A first fair chance is not the same as ongoing equal opportunities.
The amount of wealth a person or their household controls will dictate the number of chances they have for success. With enough wealth, your chances are infinite. If you’re born into a household that is below the poverty line, you might get one chance to find the success you want. Just because Capitalism offers everyone the same first chance doesn’t mean that it is a fair system. For many, the opportunities to chase dreams are momentary at best.

3. If you can’t produce, then Capitalism says you get left behind.
It is up to each household to care for the people who are unable to care for themselves. In a true society based on Capitalism, if you are unable to support yourself in some way, then there is no responsibility to provide services or support. It doesn’t matter if you were born with a disability or someone purposely injured you to stop working. You must be essential to the survival of the society to be important.

4. Capitalism changes the emphasis on governing.
Because the state doesn’t control businesses in a Capitalist society, it must generate income from other resources. That is why taxation is a common element in this type of society. Private businesses have one large expense: labor. Because they are constantly forced to innovate, their allocation of resources is always taken away from jobs when there is a threat to their existence. Then the government taxes the profits of individuals and businesses to provide social services. At the end of the day, it is the worker who is most at risk in this society, not the business or the government.

5. Capitalism creates the need to monopolize.
As new businesses try to sell goods or services to consumers, the largest companies in each industry pay attention. They’ll purchase companies through mergers and acquisitions to limit the number of competitors that could disrupt their pricing mechanisms. The goal is always the same – monopolization. If a company can monopolize a market, then it can set its own price for goods or services, which reduces consumer choice instead of increasing it. When there are anti-monopoly laws in place, it could be argued that the society is not following a true Capitalism model.

6. Businesses can become “too big to fail.”
Governments support the wealthiest individuals and the largest companies with assets and subsidies because they are the driver of the society. That practice can lead to a misuse of funds, poor investment decisions, and other financial issues that affect everyone in society. During the recession years of 2007-2009, the United States offered “bailouts” to several companies to prevent them from going under because of the detrimental consequences that the society as a whole would endure if it happened. If you earn $60,000 per year and your company goes bankrupt, your best option is an unemployment ruling in your favor.

7. Capitalism can create a “race to the bottom” for wages.
Although businesses survive when they cater to the needs of their core demographics, that rule doesn’t apply to their labor force. Wages often stagnate in times of economic decline because businesses recognize that someone with similar skills will do the same work as their current employees for a smaller paycheck. When good economic times return, the worst-case scenario is that the new employees get paid at the same level as the previous employees. Then the cycle can repeat itself during the next downturn of the economy. That’s why Middle-Class wages in the United States are lower than they were in 1980 when looking at the value of spending power.

It is true that the advantages and disadvantages of Capitalism encourage societal development. This societal structure pushes innovation, encourages strength, and embraces compassion. It can also cause people to focus on wealth accumulation and personal consumption. That is why societies that are based on these principles are often regulated. Once that regulation occurs, however, it could be said that such a society is no longer capitalistic. That’s the Catch-22 of this structure.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.