How does society see the role of the government? If that society desires a lack of government intervention within the production and various economic systems, relying on market-based competition and supply/demand needs instead, then that society will desire Capitalism. In Capitalism, goods or services are distributed based on societal mechanisms instead of government controls or mandates.
The primary benefit of Capitalism is that every individual has some level of control over their own fate in life. They can choose to own a business, work at a specific employer, work as a freelancer, or not work at all. Whatever dream they have, there is an opportunity to pursue it at some level.
Capitalism can also segregate people into socioeconomic classes that limit the opportunities that are available to them. People who become rich tend to reinforce their position because they have a greater access to the societal mechanisms which bring wealth. Because those who are poor have less access, they have fewer chances to change their circumstances. This causes the rich to become richer and the poor to stay poor.
Here are some additional key points to consider when looking at the overall pros and cons of Capitalism.
What Are the Pros of Capitalism?
1. Capitalism encourages innovation.
Because there is a need to compete to remain profitable, Capitalism is a system that encourages innovation like no other system of economics. This occurs at every level. Businesses invest into research and development to create better products. Employees focus on improving their best practices so they can remain as productive as possible. Services are improved to solve more problems.
2. It is a society that is based on the service of others.
There are two ways to look at Capitalism. The first, and most common, is that people in a Capitalistic society are working for their own benefit. The second is that every job in a society focused on Capitalism helps someone else in some way. People who manufacture goods can earn a good paycheck while creating something that solves a problem for another person in that society. Goods and services in Capitalism are all designed to help someone live a better life.
3. Capitalism promotes equality.
Although the rich do tend to get richer and the poor tend to stay poor, everyone within a society focused on Capitalism does have an initial opportunity to find success. Some may need to work harder at it than others, but there is always an opportunity available at some level. The rewards are not always monetary. There is one guiding principle: if you work hard, then you have the chance to meet your definition of success.
4. It provides freedom.
Governments that intervene in an economic market are doing so for their benefit, not that of the individual. With Capitalism, the focus is on the individual. Pricing and supply is driven by demand. People have the freedom to choose the goods and services that best meet their needs instead of being given a limited set of options due to government interference that is intended to preserve the structure of the ruling body.
5. Capitalism promotes self-regulation.
Businesses in a Capitalistic society only have power because consumers allow them to have it. If buyers are not interested in the goods or services that are offered by an organization, then that business will not continue to exist. This means businesses must create goods or services that are desired by the society and this helps to serve the needs of individuals and households.
6. It provides a wider range of products or services.
People have unique problems which must be solved. This wide array of needs allows for businesses to find a niche so they can exist. If there is value in the goods or services being offered, defined as being able to solve a problem, then it will continue to operate. That results in a society that offers a wider range of products or services than those that operate with government interference or mandate.
7. There is an opportunity to be involved in governance.
Capitalism encourages people to get involved in all aspects of society to create the best possible outcome for themselves. That means it is a system that encourages people to be involved with their governance. From voting to serving on local boards to running for a national office, people get involved with government so they can create their preferred outcome.
8. Capitalism embraces a smaller world.
There are people with tremendous skills in the developing world that are under-utilized. Global Capitalism allows businesses to tap into these resources so they can innovate. These innovations allow for the developing world to continue improving conditions for local populations, which can eventually work toward ending hunger, water scarcity, and other potentially life-threatening conditions.
What Are the Cons of Capitalism?
1. Capitalism creates an economy that is based on consumption.
There is a specific focus on money within a society that is based on Capitalism. You need money to consume items that are produced. You need to earn money so that you can purchase items that you want to consume. This means more people are driven toward working for an employer than working for themselves. There is a choice to work, but choosing not to work makes it difficult to be a participant in a society that is based on Capitalism.
2. It places the needs of the business above the needs of the individual.
Businesses take the place of the government in a Capitalistic society. The business must continue to innovate and reduce costs for it to remain operational. Because the largest expense of most businesses is the labor needed to produce goods and services, the emphasis of Capitalism is to eliminate the need for workers instead of creating more needs for them. Self-checkout stands at restaurants and grocery stores is an example of this evolution.
3. Equal opportunities can be brief and fleeting.
Everyone may have their own opportunities to succeed, but without some level of governmental interference, those opportunities can be extremely brief. People who have access to more resources can create more for themselves. At the same time, people with limited access to resources often focus their energy on self-perseverance instead of wealth-building. This creates two basic groups of people: haves and have nots.
4. People with an inability to be productive are left behind.
Capitalism focuses on able-bodied individuals. If someone is unable to be productive, either because of injury or disability, then they no longer have an ability to contribute. These individuals get left behind, discarded because they are essentially not necessary to the survival of the society. The focus on Capitalism is competitive supply and demand. If you can’t provide a supply and have no resources to be part of the demand, then you’re not needed.
5. Unregulated Capitalism eventually leads to consolidation.
Businesses will eventually consolidate in a pure form of Capitalism until only one provider is available in the market. The goal is to limit competition so the most profits can be obtained by the goods or services being offered. This is called a “monopoly.” When such a circumstance occurs, all the power in the business-to-consumer relationship lies with the business. They can charge any price for what is being offered and the customer must pay it.
6. Even when workers are needed, there is no incentive to pay them “fairly.”
Capitalism, in its pure form, is a race to the bottom for workers. Businesses are encouraged to pay the least amount possible to retain workers while charging the highest possible prices for their productive capability. There will always be someone willing to work for a lower wage, which means workers must either accept the lower wages or be without any wages.
7. Competition is forced out of the market.
Capitalism focus on providing only the best. This means larger businesses with more capital work to force smaller businesses out of their niche. It also means that workers with “superior” skills work to force out workers that may have an average skill base. That is why Capitalism creates gaps between different socioeconomic groups. At some point, people and businesses must either choose to learn the skills or find new ways to compete or they become discarded in the society.
8. There is no social or environmental point of focus.
The goal of Capitalism is based on consumption, so energy is placed on that need alone. There is no consideration given to the environment, the social structures of the society, or whatever harm may be done in any other area. If the actions are profitable, then they are worth pursuing. This creates a natural outcome of corporate and individualistic greed.
9. Governance serves the best and ignores the worst in Capitalism.
Governments support the best businesses and the wealthiest individuals because they contribute the most to the infrastructure of the society. The poor receive services as well, but not to the same extent, because their contribution levels are “less” than others.
The pros and cons of Capitalism encourage development. They also encourage people to surround themselves with like-minded individuals to create polarized cliques. It can be beneficial, but if left unregulated, can lead to a polarized society where the needs of the few outweigh the needs of the many.
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.