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1. Comparative Economic Systems
CAPITALISM
Definitions of Capitalism
G.D.H. Cole has defined capitalism as a “system of
production for profit under which instruments and
materials of production are privately owned and the
work is done mainly by hired labour, the product
belonging to the capitalist owner or owners”
In the words of Loucks, “Capitalism is a system of
economic organization featured by the private
ownership and use for private profit for man-made
and nature-made capital”

2. Comparative Economic Systems
CAPITALISM
Without critically going into the merits of these definitions,
we may say that capitalism is an economic system in
which land and other productive resources are mostly
owned by the private individuals and are operated to earn
profit, in which in spite of a degree of State intervention,
economic activities are mostly unplanned and
uncoordinated. From our point of view, we shall not only
designate the American economy as capitalistic but shall
bring the economies of Canada, England, Australia, Japan
and France etc also under contemporary capitalism. This
is, notwithstanding the fact that the term “capitalistic” has
become untouchable to many in the modern international
community and each would rather prefer to be designated
as a “mixed economy”

3. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Private Property and its Functions
1. Gross has observed, “Private enrichment has a social
function, it is the incentive for productive activity. To
discourage it unduly is to undermine the economic
order.”
2. The second function that private property performs in a
capitalist economy is to promote saving and capital
formation.
3. The third function of the right to property is to ensure
liberty.

4. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
I. Private Property and its Functions
1. Gross has observed, “Private enrichment has a
social function, it is the incentive for productive
activity. To discourage it unduly is to undermine the
economic order.”
2. The second function that private property performs
in a capitalist economy is to promote saving and
capital formation.
3. The third function of the right to property is to
ensure liberty.

5. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Disadvantages of Private Property
 First, the unit of ownership may be too small.
 Secondly, the private owner holds the future at a
discount.
 Thirdly, Grossman remarks, “It creates powerful
vested interests that are at times hard to control and
regulate by democratic processes even if the general
welfare would seem to require.”
 Fourthly, private production has a bias in favour of the
production of private goods rather than public
services. This does not promote the general social
welfare.

6. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
II. The Right of Inheritance
Loucks, however, is of the view that the institution of
inheritance is separate from the institution of private
property. Social restriction of the one does not necessarily
imply the restriction of the one does not necessarily imply
the restriction of the other.
III. Competition
Competition is one of the vital pillars of capitalism. In a
capitalist system competition means “economic rivalry”.

7. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Advantages of Competition
Competition under capitalism has certain special functions and
advantages as well as disadvantages.
Completion tends to promote economic efficiency and
economic progress. Competition tends to assure that goods
and services will be produced at the lowest possible cost of
production. As Seligman pointed out long ago, “if completion in
biology leads only indirectly progress, competition in economics
is the very secret of progress”. Competition is said to be the
indispensable displinarian of the market economy. Under
competitive conditions only efficient firms will remain in the line,
others would be automatically eliminated. Competition compels
the firms to use the least cost combination of factors. They
must use the most efficient productive technology. Competition
promotes scientific research and inventions.

8. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Advantages of Competition
Salvadori has quoted certain other advantages of competition.
1. Competition tends to assure that profits will be held to the
minimum, because prices have to be kept down:
2. Tends to assure that the energy and raw materials and
productive capacity of the nations will be used for providing
those goods and services which public wants and in proportion
to the relative demands of the public as reflected in the market
place;
3. Tends to assure that each factor of production will be paid
through wages, rent, interest or profits in harmony with the
public estimate of the contribution it makes;
4. Assure that a constant effort will be made to widen the choice
of goods and services offered for sale.

9. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Advantages of Competition
5. Assure that a constant effort will be made to improve the
attractiveness of goods offered for sale.
6. Assure freedom of opportunity, by making it possible for any
one at any time, to enter any line of business he desires, for
which he has the necessary capital, and
7. assure free and continuous progress and a gradually
improving scale of living, through the production of more and
more kinds of goods, of better and better quality, at prices
which a larger proportion of the public can afford to pay.
To summarize the benefits of competition to the capitalistic society,
Salvadori again observes, “In a word, from the point of the public
welfare, completion serves as a regulator and reducer of prices, an
incentive to improved production efficiency, as a guarantor that we shall
get what we want, and protector of the freedom of opportunity”.

10. Comparative Economic Systems
INSTITUTIONS OF CAPITALISM
Disadvantages of Competition
1. Extreme competition makes the sellers depreciate the quality of the
products. It is done in such a subtle and clever way that the consumers
cannot easily recognize it. By reducing the quality of the product the
producers may reduce the cost of production of the product and sell it at a
competitive price no doubt. But the consumers get an inferior article without
realizing it.
2. Competition may lead to overcrowding in an industry than what can be
profitably supported by the existing demand conditions. This led Prof. Ely to
remark, “Competition is wasteful”. This ultimately paves the way for the
growth of monopoly.
3. Sometimes fierce competition leads to deliberate obsolescence of
commodities. For example, in the U.S. an endless stream of ‘revolutionary
improvement’ is advertised in an effort to persuade the customer discard his
current motor car. To present a more prosperous appearance to the world
the consumers opt for the latest model. Although these so called changes
may be meaningless or at best superficial, such changes involve staggering
expenses and constitute an waste from the social point of view.

11. Comparative Economic Systems
Disadvantages of Competition
4. Competition also leads to maintenance of secrecy in matter relating to
production process etc. this leads to duplication of energy in research and
waste of resource.
5. Sometime due to cut-throat competition the firm may offer the wholesaler
and the middlemen higher margins of profit, so that they would be
interested to push the sale of that particular brand over the others. This wi
have a tendency to push up the prices.
6. Competition sometimes compels the competing firms to resort to
competitive advertisement. This is a social waste.
7. Due to severe competition some inefficient firms will have to close down
This will lead to unemployment of the workers who were working therein
This will lead to distress and misery on the port of the unemployed worker
– at least temporarily.
8. A large number of small firms are not suitable to promote research and
technological development. Modern research is highly expensive. A large
firm with adequate resources is in a position to finance research
expenditure. This progressiveness of pure competition has been a matter o
long debate

12. Comparative Economic Systems
Disadvantages of Competition
9. Normally by competition we understand fair competition. But if the businessmen
are corrupt, dishonest and unscrupulous, this spirit of fair competition may be
absent. Hence vicious, unethical methods may be adopted to curse one’s rival in
a ruthless manner. Here competition becomes undignified and unethical.
10. So far we have discussed completion in the traditional sense. But with the
technological growth I the U.S.A. another type of competition arose. This was
within a few. The big firms very often overbuilt. Competition not only became
severe buts also proved expensive. There was competition among the giants in
each field. But such cut-throat competition although for some time was favorable
to the consumers, yet, as Heilbroner say, it led to “bankruptcy on a multimillion
dollar scale”.
11. Besides, as pointed out be Bye and Hewitt, “free competition is not necessarily
equal completion. Under capitalism a person with wealth, proper education and
right connections is definitely in a better position than his unfortunate counterpart.
Obviously, he has greater chances to come out victorious in the race of
competition. Competition bestows its prices upon the strong and luck at the
expense of the weak and unlucky. Under pure capitalism competition is the
touchstone, the regulator, the mechanism by means of which maximization of
national income and public welfare is brought. From the point of view of public
welfare, competition serves as a regulator of prices, as an incentive to improved