The Disadvantages of Capitalism in the Economic System

by Timothea Xi; Updated September 26, 2017
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Capitalism, a market-based economic system where goods and services are produced for profit, has its share of problems. Although capitalism's benefits include higher gross national product, consumer choice and improved standards of living, the lion's share of benefits tend to accrue to those who own the capital. Thus, while great wealth is possible, it is not enjoyed equally by all members of society.

Concentration of Power

One of the downsides of a capitalistic economic system is that private ownership of capital allows firms to maintain monopolistic control over resources and therefore, charge higher prices. In a similar vein, capitalism allows for monopsonies to develop, where there is one employer and many employees. Firms wielding such power can pay lower wages when workers need jobs and other alternatives are scarce, leading to a large disparity of means between the owners of capital and laborers.

Wealth and Social Inequality

Concomitant with the lopsided gains produced by capitalism are inequalities of social standing and wealth. Because capitalism is based on a system of inherited wealth, where people pass down their property over the generations, the wealth that is produced by capitalism is not shared equally. By the same token, the opportunity to advance is not equal among society's members. The differences between rich and poor in capitalism are more pronounced than in other economic systems. Socially, these disparities give rise to discord and the stratification of members of society.

Externalities Ignored

A further disadvantage of the capitalistic system stems from how externalities, or consequences to others that are not related to producing or consuming a good, are handled. Capitalism tends to ignore negative externalities such as pollution, so long as the profit motive is satisfied. At the same time, a capitalist-based system tends to downplay positive externalities by not providing sufficient health and education services, leading to unmet needs and inefficient allocation of resources.

Cyclical Downturns

For all the boom periods that capitalism is known for, major recessions, too, come with the package. When an economic system is based on a producer-consumer culture, periods of economic expansion tend to eventually give way to periods of contraction or recession. With these declines comes unemployment on a large scale, which in turn takes its toll on people's livelihood and future outlook. In socialist regimes, these business fluctuations are curbed, because a socialist economy coordinates production to make full use of resources, rather than discriminating between savings and investment.

About the Author

Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.

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