Most of the developed countries like USA, Great Britain and France have become rich through the capitalist economic system. The main merits of capitalism are as follows:
1. Incentive:
In the capitalist economic system, entrepreneurs have sufficient incentive to undertake enterprise and bear risks. The profit motive induces them to invest money even in those industries which involve great risks. Employers are motivated to work hard in order to make more profits. Employees work hard to earn higher wages.
2. Efficient Utilization of Resources:
Under capitalism, the scare resources of the country are used most economically and with minimum waste. Every business firm wants to minimize costs so that it can compete in the market. In order to minimize costs producers attempt to utilize factors of production in the best possible manner. Firms which cannot make optimum use of resources have higher costs of production. They cannot stand the competition and are forced to go out of business. Self-interest and free mobility of factors of production also help in rational allocation and better utilization of resources.
3. Rapid Economic Growth:
The capitalist system helps in rapid economic growth due to incentive and initiative. Countries operating under the capitalist system have achieved a considerable increase in per capita income. Rapid economic growth enables people to enjoy a high standard of living.
4. Capital Formation:
People have the incentive to save money and invest it in order to earn larger incomes in future due to the right of private property and inheritance. Every individual wants to create wealth so that he can leave behind more wealth for the children. High rates of public savings and investment lead to a higher rate of capital formation in the country. Institution of private property and profit motive also facilitate growth of new entrepreneurs.
5. Flexibility and Adaptability:
Capitalism has an inherent ability to change according to changing requirements and circumstances. It is a dynamic system and can be adapted to the changing environment. That is why capitalism has survived for centuries.
- Democratic Nature:
People enjoy full economic freedom under capitalism. The entrepreneurs, the consumers, the workers and the owners of capital are all free to do work as they like to fulfill their needs and wants. Individual freedom makes capitalism democratic.
Innovation:
In order to survive in a competitive market, entrepreneurs introduce new products, new techniques of production and distribution and other improvements. They introduce new innovations to increase profits. These innovations generally lead to improvement in the techniques of production. As a result the costs of production decline and goods become cheaper. Great technological progress has been achieved in the capitalist countries through innovations.