Why a Capitalist economy is a better economy.
The economic system of free market capitalism, a theory traced back to the 18th century economist Adam Smith, is the only way for a nation to move forward – economically and politically. It’s the idea that trade and industry are controlled by private owners for profit rather than by the state. Contrary to capitalism is the restraining and slow-paced theory derived from Karl Marx: communism. Capitalism is the only way for a country to be ran efficiently and effectively, and to understand this we should compare the two.
Economically, capitalism works on the robust idea of price mechanisms – these essentially use supply and demand to determine price – and as all firms would be privately owned, they specifically know how to set prices to satisfy both demand and supply needs. For example, a firm selling stationary would be able to determine the price of their items by understanding how much stationary is being sold (demand), and correlate it with the amount of supply they have. If they raise their price by 100% and demand goes down, they know that at that point less people are willing to purchase their stationary at that price. Then, they would use this to accurately determine the price of their items.
To understand why this is superior we should look at how the opposite, communism works. Through communism, every resource and firm is owned by the government. Unlike capitalism, this means price mechanisms are unable to work -as the government controls resources. This misunderstanding of markets means that communist government are forced to supply only what they believe is the right amount. This leads to problems as a communist government might supply a lot of something the people don’t actually need, as they have no way of determining the demand of products – thus making it impossible to determine a price that will be beneficial to society. For example, take the USSR during the 1970’s, a contractor is building a railway from Moscow to Kazan yet a mountain lies in his way. In the communist society he lives in, he faced a question on how to get to Kazan, does he, use more steel and go around the mountain, or do he use more labour to mine through the mountain? Yes, in a communist society this would be answered quickly, as everything is government owned and they can choose what they think is the best. Yet there is no way of knowing which way that is, due to the lack of price mechanisms – the government doesn’t know which is the best for the country. Say the government went around the mountain, how do they know if steel is in short supply? How do they know if families are lacking pots and pans, or cutlery? They don’t. Say they chose the other way, going through the mountain. How do they know if the labour they have taken, was needed more for building hospitals or houses? There is no way to correctly determine the price of either or, simply due the fact they have no idea what is demanded in the economy.
Capitalism is the only way to have efficient allocation of resources, the ‘invisible hand of the market’ ensures that resources are distributed according to consumer preference and firms are not rewarded for producing goods people want. This creates a dynamic efficiency over time, as firms in a capitalist society need to respond to changes in consumer preferences and respond to new consumer trends. This also creates the financial incentive that if people work harder, they’re more likely to generate a profit. Evidence suggests that people work the hardest when there is a personal incentive – this is only achieved through private businesses. For example, entrepreneurs take the risks of setting up a business due to the potential of large financial reward. This is a huge floor in communist economics, as due to no motivation of profit, or getting anything better than the rest of society, there will be no innovation, and countries can only grow if they innovate.
Whilst saying this, I’m sure many people will object on the basis of communist countries doing well in today’s modern world. China, a communist country, has the second largest GDP in the world at $12.2 trillion dollars (according to figures published by the World Bank in 2017). Some will say, communism obviously works as China is the second largest country (GDP) in the world. Well, let’s take a look further into this. Firstly, I would like point out the largest country in the world (GDP) is the capitalist dominated USA. To date, the population of China is 1.398 billion, this is 18.47% of the world’s population. Comparing to the USA, who’s population is a mere 382.2 million, compared to China. To understand why this matters we must define the term ‘GDP per capita’, this is a measure of country’s economic output that accounts for its number of people. China, one of the largest economies in the world, has a GDP per capita in 2017 of $8,612. In comparison, the USA, had a GDP per capita in 2017 of $59,939. Does this not prove that the only reason China is one of the largest economies in the world, is due to their population? It’s logical, if you have more workers, obviously you’re going to get more done, especially when your country geographically is large. Contrasting to the USA, a country with less workers has managed to be richer than a communist state with more people.
So, China, it’s an anomaly from communist ran states? Wrong! Take the UK, a mixed economy with conservative power since the 2010 general election, and compare it to Russia, a centrally planned country. Russia is approximately 6,919% larger than the UK geographically – yet, somehow its GDP was lower by more than a trillion dollars in 2017. Not just that, it’s GDP per capita was lower at $10,846, in comparison to the $38,532 in the UK. It’s simple, wealth effectively and efficiently through a capitalist society.
To conclude, a capitalist society is the most efficient way for a country to be ran, both economically and politically. It allows resources to be catered for their people true needs, rather than guessing. It allows a profit driven incentive to boost innovation and make firms truly work hard, without it under a communist regime, everyone getting equal amount drives hard working qualities into the ground, as people know no matter how hard they work, they’ll earn the same amount.