Disadvantages of Capitalism

A capitalist economic system is one where the market is allowed to function on its own accord without regulation by the government. Market forces of supply and demand determine the equilibrium levels of price, quantity etc. While a free market is an idealised form of a market economy, a capitalist economy is the extent to which this free market exists in the reality. The importance of studying a capitalist market structure stems from the fact that most important nations today follow this economic model. The US, UK, Australia, India, all twenty seven countries of the European Union (the likes of France, Germany, Italy, Spain etc) as well as numerous other nations are capitalist economies. The merits of this system have been proven through its wide application. However, as always there is a counter argument which we aim to explore through this article. Here, we examine the disadvantages of capitalism as experienced by these nations and the world in general.

Though there are a number of forms of capitalism, the one used most popularly today is free market capitalism. Mercantilism, state capitalism and mixed economy, all have varying levels of government intervention and control. However a true capitalist society is associated with a laissez faire concept which states independence of business and industry from central control. The turning point which established capitalism as a distinct economic system came around 1834 when independent markets for land, labour and capital (factors of production) came up.   In the mercantilist age, even though the aim of the ultimate aim of a nation was to accumulate wealth through overseas trade, the means of production of goods was primarily non-capitalist. The generalisation of labour and capital markets laid the foundations for capitalism. 

Capitalism faced a temporary setback in the middle of the twentieth century due to the rise in popularity of Keynesian policies encouraging government control over the economy. The Great Depression of 1930 coupled with the Second World War led to great unemployment and inflation in the economy which called for heightened government intervention in economic markets throughout much of the world. However, capitalism picked up thereafter and continued its unabated spread across economies globally. The rise of stagflation in the late 1960s and early 1970s caused social unrest ending the era of government control and causing a reversion to laissez faire capitalist policies.  The history of capitalism is dotted with some loss of confidence in capitalist policies from time to time. The disadvantages of capitalism responsible for these phases will be explored through this article. The critics of capitalism are in plenty – socialists, anarchists, communists and national socialists – to name a few. The reasons for such vehement opposition to capitalism have been expounded below.

Disadvantages of Capitalism : Income Inequality

Capitalist policies are based on the precipice of allowing capital holders the freedom to proceed with production activities as they please. There are minimal restrictions governing land and labour allowing capitalists the upper hand when it comes to production decisions. While this might be a great incentive to boost production and subsequently, economic growth in the country, it is often cited as the biggest criticism of the capitalist system. It gives maximum leverage to the capital holders, who can determine the course of production completely without having to take into account ethical dilemmas like workers conditions, compensation, environmental safeguards etc. There is a clear advantage to owners of capital, be they self made or inheritors of wealth. Thus, the rich have ample opportunities to make profits while employing the poorer sections of society who labour away at low salaries. Because production activities are fuelled by the desire to make money, there is no guarantee of welfare in such a setup.

The point being stressed upon here is that capitalism does not focus on furthering equality among various income groups. The rich continue to make large sums of money due to the conducive environment in the economy while the lower income groups have to make do with fixed monthly wages. Hence, the gap between the rich and poor continues to broaden without any help from government regulations. This has been highlighted through the figure given below which shows the skewed income distribution in USA in the year 2010. Such inequality in distribution of wealth and power in the economy leads to societal imbalance which has immediate and often extreme reactions from the masses.

Disadvantages of capitalism

Source: www.mybudget360.com


The socialist school of thought considers capitalism to be irrational owing to the great inconsistencies and inequalities brought about by such a system. Revolutionary tendencies rise among the majority of the population which should be a great cause of concern for the government of such a nation. The most recent example of such a situation arising in the modern world is the ‘Occupy Wall Street’ movement in New York. It began in one city as a protest by the masses against the mass hoarding of wealth by the elite who compose only one per cent of the population. This gradually spread to other parts of the world which follow a capitalist system of economy. This is a serious matter with long lasting ramifications and constitutes one of the biggest disadvantages of capitalism.


Disadvantages of Capitalism : Monopolisation

A capitalist economic system allows enough freedom for property holders to establish their influence in the markets without much restriction on the extent of this spread. This leads to monopolisation of markets by one or a few major players. This permits a handful of firms to dominate the market and govern prime factors like prices, quantity supplied and quality of the product without any opposition from other competitors. This also creates barriers to entry for other players in the market due to a high degree of control being exercised by the firms monopolising the markets.

Disadvantages of Capitalism : Social Evils


Since a capitalist society is seen as the diametrically opposite end of a socialist society, it suffices to say that the former does not consider the social needs of the nation as its primary objective. Stimulus to economic growth is the prime purpose of such a market setup. This overlooking of the needs of the masses leads to problems like unemployment, poverty and exploitation of labour. Labour unions are squashed and the general needs of the workers could be overlooked in such a setup. This causes some degree of social unrest among the section of the population which does not have access to capital or property. As highlighted above, such a situation could have greater and more serious ramifications for the government.

In summary, the main disadvantages of capitalism revolve around the high degree of inequality which stems directly and indirectly as a result of it. That being said, capitalism has proven itself to be a stable economic system which is being applied by numerous developed nations around the world. Hence, it might be premature to state that the disadvantages of capitalism are enough to make it fail as an effective economic system as predicted by Marx, the “father of socialism”. It is a strong system which allows the freedom to fulfil human desires and will continue to remain in the world for a long time to come.