Question

What defines capitalism as a socio-economic system?

Answer 1

Before going to the actual answer, let me explain in brief about different forms of economic systems. There are mainly three types of economic systems in this modern world, based on the socio, economic and political operations in the economy. They are, capitalism, socialism and communalism. These systems can be mainly differentiated in terms of ownership of factors of production, main motive of production and the role of state. Main motive of production in Capitalist County is earning profits. In case of socialism and communism, main motive is welfare of the agents in the economy. In capitalism the means of production, i.e., the factors of production are in the hands of private sector, in case of socialism and communism, the means of production are in the hands of state/government. In socialism and communism, the interference of state is so much. There is slight difference between socialism and communism. Communism is the extreme of socialism. Sometimes, it is said that in communism, the state can enter into bedroom of the citizens also. That indicates the level of interferences of state. The best example is one child policy of China, where the government decided how many kids a couple can have. Best example of Capitalist country if the United States of America, the best example of socialist country is Russia and the best example of communist country is China. There is another category of economic system, which is has features of capitalist as well as socialist economy. It is called mixed economy. Best example of mixed economy is India.

In capitalism, the government is limited. It is laissez-faire economy or it is called free market. The main job of state/government is to maintain law and order. That’s why, we can see, in US, the state does not interfere much in the activities of production and distribution. It mainly focus on law and order, defense. The market forces, i.e., supply and demand determine the level of production of goods and services in the economy. It is said that, the main motive of production is earning profits. Capitalism is one of the ways in resolving the problems of production in the economy. The problems like what to produce, how to produce, for whom to produce and optimum allocation of resources. All these problems are taken care in the capitalist country by private sector.

With respect to socio economic condition in the economy, in capitalism, although the state does not interfere much, it takes care of the social security of the agents in the economy, for example, the state provides compensation for the unemployed people in the country. The state recognizes the labor rights. In short, it can be called as welfare capitalism. Welfare capitalism is one among different types of capitalism, where the private sector provides welfare services to the agents, especially, to their employees.

In my opinion, by looking at the characteristics and working mechanism of capitalism, the market forces determining the level of production of goods and services, i.e. the demand for goods and services and supply of goods and services plays a key role, which means the demand is dependent on needs of the society. This ensures optimum allocation of resources, without much wastage. Capitalist economy is laissez-faire economy, which emphasizes on the freedom to the private sector, individuals and limits the role of state to maintaining law and order only. This mechanism helps in economic growth and this kind of capitalism sustains for a longer period, if it is handled meticulously. The best example is the United States of America, Australia, New Zealand, Canada etc., which are well-developed economies. The above mentioned features define capitalism as a socio-economic system.