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Economic Theory

functions. They include regulation of market, defense, foreign policy,
currency, etc.
Merits of Capitalist Economy are:
1) increase in productivity: in a capitalist economy every farmer,

trader or industrialist can hold property and use it in any way he likes. He
increases the productivity to meet his own self-interest. This in turn leads

to increase in income, saving and investment;
2) maximizes the welfare: it is claimed that there is efficiency in
production and resource use without any plan. The self-interest of
individual also promotes society’s welfare.

3) flexible system: the shortages and surpluses in the economy are
generally adjusted by the forces of demand and supply. Thus it operates
automatically through the price mechanism;

4) non-interference of the State: the State has a minimum role to play.
There is no conflict between the individual interest and the society. The
economic institutions function automatically preventing the interference of
the government;

5) low cost and qualitative products: the consumers and producers
have full freedom and therefore it leads to production of quality products
at low costs and prices;

6) technological improvement: the element of competition under
capitalism drives the producers to innovate something new to boost the
sales and thereby bring about progress.

Disadvantages of Capitalist Economy are:
1) inequalities: Capitalism creates extreme inequalities in income and
wealth. The producers, landlords, traders reap huge profits and accumulate

wealth. Thus the rich become richer and the poor poorer. The poor with
limited means are unable to compete with the rich. Thus capitalism widens
the gap between the rich and the poor creating inequality;
2) leads to monopoly: inequality leads to monopoly. Mega corporate

units replace smaller units of production. Firms combine to form cartels,
trusts and in this process bring about reduction in number of firms engaged
in production. They ultimately emerge as multinational corporations

(MNCs) or transnational corporations (TNCs). They often hike prices
against the welfare of consumer;
3) depression: there is over-production of goods due to heavy
competition. The rich exploit the poor. The poor are not able to take

advantage of the production and hence are exploited. At another level,

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