Capitalism refers to a society where private individuals own the means of production. In a capitalist society, the government does not interfere with the price of commodities. Equilibrium price is determined by forces of demand and supply. This type of system has some merits. However, it is not the key to eradication of poverty because of its demerits.
There are several advantages that the society derives from capitalistic economy. One, it encourages efficiency in production. The private firms ensure efficiency utilization of resources to achieve the goal of maximizing returns. This is unlike nationalized firms that are quite inefficient due to political interference. Two, it puts the society in the path of economic growth because firms and individuals are motivated by self-interest to work hard, innovate and expand. Thus, the economy grows at the fastest rate possible. Finally, the transfer of resources to private hands limits the power of the state. The limitation of state power minimizes bureaucracy in society (Taylor, Imad & Bruce, 18).
The reasons why capitalism is not the key to world poverty lies on its numerous demerits. The first demerit is that it leads to the growth of firms to a point where they have a lot of political and market influence. This growth leads to monopoly power. The monopoly firms exploit the public through offering commodities at high prices. Moreover, they do not operate at full capacity to utilize all the available resources in the society because their aim is to maximize profit yet they prevent new firms from joining the industry (Pettinger, 1).
The second demerit is monopsony exploitation. This exploitation results from inequality between owners of capital and the workers. The owners of capital underpay the workers in the society. Thus, the gap between the rich and poor in the society widens and the average living standards fall.
The third demerit is that a free market ignores externalities. The firms are motivated to maximize their returns at the expense of the welfare of the society. This behavior leads to excessive pollution and under the provision of goods with positive externalities. This results in inefficient allocation of resources in the society and decline in welfare.
The fourth demerit of capitalism results from inherited wealth. Capitalism promotes private ownership of poverty and transfer of poverty rights to future generations. This creates a class of people who are rich because their parents were rich. Thus, the society does not provide equal opportunities to all the people (Pettinger, 1).
The fifth demerit of capitalism is the prevention of government from interfering with the economy to ensure it operates at its full capacity. In many cases, the economy enters into recession and the level of unemployment increase. The free market concept of capitalism denies the government chance to apply expansionary fiscal policies that can increase aggregate demand and drive the economy through recovery path at a fast rate (Hubbard, 24).
The last demerit of capitalist society is its ignorance to diminishing the marginal utility of wealth. The capitalist society encourages the accumulation of individual wealth leading to wealth and income inequality. This accumulation principle fails to realize that an extra million earned by a millionaire makes a little increase in economic welfare (Pettinger, 1).
The explanations show that hooking people to capitalism doesn't solve the problem of poverty. This is because the mere growth of the economy which is the main merit of capitalism does not translate to the improvement of standards of living.
References
Hubbard, R. Glenn. Macro Economics. Frenchs Forest, N.S.W.: Pearson Prentice Hall, 2009.
Print.
Pettinger, Tejvan. "Pros and Cons of Capitalism." Economics Help. 20 Mar. 2013. Web. 17 Apr.
2016. <http://www.economicshelp.org/blog/5002/economics/pros-and-cons-of-capitalism/>.
Taylor, John B., Imad A. Moosa, and Bruce Cowling. Micro Economics. Milton, Qld.: John
Wiley & Sons, 2000. Print.
