The capitalist system is one characterized by the private ownership of the means of production, individual decision making, and the use of the market mechanism to carry out the decision of individual participants and facilitate the flow of goods and services in markets.

In a capitalist economy, households and firms are the basic production units. Each individual household is the owner of productive factors. These factors include the household’s own labor and may also include land, capital and raw materials. Each household sells the services of its factors to the basic production unit, the firm. Private firms, organized by individuals, combine these productive factors to produce goods. The difference between revenues and costs constitutes profits, which then form the income of the firm’s organizers. The income earned from the sale of a household’s productive factors enables it to purchase the finished products of the firms.

The capitalist system is also known as free enterprise economy and market economy. Two types of capitalism may be distinguished, viz.,

• The old, laissez-fair capitalism, where government intervention in the economy is absent or negligible
• The modern, regulated or mixed capitalism, where there is a substantial amount of government intervention.

FEATURES

 The principal characteristics of a pure capitalist system are:

(i)          Private Ownership:

In a capitalist economy, the factors of production-land, labor and capital- are privately owned, and production occurs at private initiative. Individuals have their property rights protected and are usually free to use their property as they like as long as they do not infringe on the legal property rights of others. Private property, however, is protected, controlled and enforced by law.

(ii)        Free Enterprise:

Free enterprise, an essential feature of the capitalist system, is merely an extension of the concept of property rights. The term free enterprise implies that private firms are allowed to obtain resources, to organize production and to sell the resultant product in any way they choose. In other words, there will not be any government or other artificial restrictions on the freedom and ability of the private individuals to carry out any business.

(iii)     Consumers Sovereignty:

Consumer’s sovereignty is at its best in the capitalist system where consumers have complete freedom of choice of consumption. The production decisions in the tree market economy are based on the consumer desires which are reflected in the demand pattern.  Frederic  Benham  remarks:  Under  capitalism,  the consumer is the king.

(iv)      Freedom of Choice of Occupation:

In a capitalist economy, the individual is free to choose any occupation he is qualified for. This freedom of choice enables the worker to make the best possible bargain for his labour. This implies that the employers have to competitively bid for labour. Freedom of occupational choice, however, does not mean guarantee of the job a worker opts for; the choice is practically limited by the extent of availability of the jobs.

(v)        Freedom to Save and Invest:

The freedom to save is implied in the freedom of consumption, for savings depend on income and consumption. The term saving implies the sacrifice of consumption. As George Halm observes: The right to save is supported by the right to transmit wealth, so that the choice between present and future consumption is not limited to the adult life of one person. The freedom to save, inherit, and accumulate wealth is, therefore, a right which is perhaps more typical for the private enterprise system than is free choice of consumption and occupation.

(vi)      The Market System:

The market mechanism is the key factor that regulates the capitalist economy. A market economy is one in which buyers and sellers express their opinions about how much they are willing to pay for or how much they demand of goods and Services. Prices guide the purchase decisions of the consumers.  At the same time, while they decide to buy or not to buy a product, consumers vote for or against the product by using their money. Thus, market prices, which reflect the desires of millions of consumers, provide guidance to investors and other business persons. The market system, also called the price system, may, therefore, be regarded as the organising force in a capitalist economy.

(vii)    Competition:

Competition among sellers and buyers is an essential feature of an ideal capitalist system. Competition reduces market imperfections and associated problems. Therefore, in a free  market  economy,  a  sufficient  amount  of competition is considered necessary if the whole production and distribution process is to be  regulated  by  market  forces.  Competition is necessary in a private enterprise economy to keep initiative constantly on alert, to protect the consumer, and to maintain a sufficiently flexible price system.

(viii)  Absence of a Central Plan:

As is clear  from  the  features  mentioned  above,  the  capitalist  system  is essentially characterized by the  absence  of  a  central  plan.  That  is,  the  activities of the numerous economic units  in  a  capitalist  system  are  not  guided, coordinated or controlled by a central  plan.  Freedom of enterprise, occupation and property rights rule out the possibility of a central plan. Resource allocation and investment decisions in a free market economy are influenced by market forces rather than by the State.

(ix)      Limited Role of Government:

The absence of a central plan does not mean that the Government does not play any role in a private enterprise economy. Indeed, Government intervention is necessary to ensure some of the essential features and smooth functioning of the capitalist system. For example, Government interference is necessary to define and protect property rights, ensure freedom of entry and exit, enforce contractual agreements among private entrepreneurs, ensure the satisfaction of certain community wants, etc. However, Government interference in the system is comparatively very limited.

The pure capitalist system which has been described above is a highly idealized system. There is hardly any pure capitalist of free enterprise system in the real world today. The capitalist economies of today are characterized by state regulation in varying degrees.