What Is Capitalism?

In the 18th century, after the Industrial Revolution in England and other Europe an countries, the importance of capital as a means of production increased and t his resulted into the origin of a new economic system called Capitalism. In Capi talism, all factors of production are privately owned and government of the nati on does not interfere in the economic activities of a country. Profit earning is the sole objective for starting a business. Labour like other factors of produc tion, is also a saleable commodity. Capitalism economy is also known as Free Mar ket Economy as all (producers, sellers, buyers, employers, employees, consumers etc.) are free to enter into any occupation or agreement. Countries with this ty pe of economic systems are: England, Japan, America etc. Features of Capitalism:- Main features of Capitalism are as follows:1. Private Property:- Under capitalism, people have full right to use their own or private property in any manner they like and this right is protected by gover nment. They can use the means of production like machine, tools, lands etc. in a ny manner. In case of death of owner of the property, his property passes to his successors. 2. Price Mechanism:- Price mechanism is the guiding principle of capitalism. In Capitalism, price is determined by the forces of demand and supply. Government d oes not interfere in the fixation of price. Equilibrium between price and demand is brought through the process of price mechanism. 3. Freedom of Enterprise:- In capitalism, every enterprise is free to choose any kind of business. He can take independent decisions with regard to what, where, how and when to produce. 4. Competition:- In capitalism, freedom of enterprises leads to more and more co mpetition, which ultimately results in efficiency of industrial units and produc tion of goods at low costs. 5. Profit Motive:- The only aim to start the business is to earn and maximize th e profit in capitalism. 6. Sovereignty of the Consumer:- Under this economic system, consumer is soverei gn. Consumer buys only those things which give maximum satisfaction to them. 7. Labour as a commodity:- In capitalism, labour acts as a commodity and can be bought and sold like any other commodity in the labour market. In some cases, ex ploitation of labour also takes place.

Explain Socialist Economies And Inflation? Socialism is a different type of economic system that is based on the ideology o f central ownership of capital. In a socialist economy the central government re gulates the magnitude of income that an individual can spend or consume, so in t his way government tries to regulate the direction of flow of money in the count ry. Socialist governments also have a say in fixing or defining the needs of cit izens. Purpose for this kind of regulative intervention is to ensure the social equality among everyone in the country. So, Socialistic economies favor the utop ian societies, in which everyone is believed to be equal. In general, the ideolo gy of socialist economies is termed as socialism. It s true that different types o f socialism exist; but on a generalized basis all of them balance in between the ideologies of capitalism and communism.

1. There is more regulation over the citizens by the central government 2. Compensations and Wages come out as central decisions. 3. Taxes are much higher because the government takes care about the needs of ci tizens. 4. The gap between classes is smaller as compared to the capitalistic societies. 5. The government regulation is only for the good of citizens and not for their exploitation.

Meaning of Economic Environment:- Those Economic factors which have their affect on the working of the business is known as economic environment. It includes sy stem, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth etc. Economic environment is very dynamic and complex in nature. It does not remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations. Elements of Economic Environment:- It has mainly five main components:1. Economic Conditions 2. Economic System 3. Economic Policies 4. International Economic Environment 5. Economic Legislations Economic Conditions:- Economic Policies of a business unit are largely affected by the economic conditions of an economy. Any improvement in the economic condit ions such as standard of living, purchasing power of public, demand and supply, distribution of income etc. largely affects the size of the market. Business cycle is another economic condition that is very important for a busine ss unit. Business Cycle has 5 different stages viz. (i) Prosperity, (ii) Boom, ( iii) Decline, (iv) Depression, (v) Recovery. Following are mainly included in Economic Conditions of a country:I. Stages of Business Cycle II. National Income, Per Capita Income and Distribution of Income III. Rate of Capital Formation IV. Demand and Supply Trends V. Inflation Rate in the Economy VI. Industrial Growth Rate, Exports Growth Rate VII. Interest Rate prevailing in the Economy VIII. Trends in Industrial Sickness IX. Efficiency of Public and Private Sectors X. Growth of Primary and Secondary Capital Markets XI. Size of Market Economic Systems:- An Economic System of a nation or a country may be defined as a framework of rules, goals and incentives that controls economic relations amo ng people in a society. It also helps in providing framework for answering the b asic economic questions. Different countries of a world have different economic systems and the prevailing economic system in a country affect the business unit

s to a large extent. Economic conditions of a nation can be of any one of the fo llowing type:1. Capitalism:- The economic system in which business units or factors of produc tion are privately owned and governed is called Capitalism. The profit earning i s the sole aim of the business units. Government of that country does not interf ere in the economic activities of the country. It is also known as free market e conomy. All the decisions relating to the economic activities are privately take n. Examples of Capitalistic Economy:- England, Japan, America etc. 2. Socialism:- Under socialism economic system, all the economic activities of t he country are controlled and regulated by the Government in the interest of the public. The first country to adopt this concept was Soviet Russia. The two main forms of Socialism are: (a) Democratic Socialism:- All the economic activities are controlled and regula ted by the government but the people have the freedom of choice of occupation an d consumption. (b) Totalitarian Socialism:- This form is also known as Communism. Under this, p eople are obliged to work under the directions of Government. 3. Mixed Economy:- The economic system in which both public and private sectors co-exist is known as Mixed Economy. Some factors of production are privately own ed and some are owned by Government. There exists freedom of choice of occupatio n and consumption. Both private and public sectors play key roles in the develop ment of the country. Economic Policies:- Government frames economic policies. Economic Policies affec ts the different business units in different ways. It may or may not have favora ble effect on a business unit. The Government may grant subsidies to one busines s or decrease the rates of excise or custom duty or the government may increase the rates of custom duty and excise duty, tax rates for another business. All th e business enterprises frame their policies keeping in view the prevailing econo mic policies. Important economic policies of a country are as follows:1. Monetary Policy:- The policy formulated by the central bank of a country to c ontrol the supply and the cost of money (rate of interest), in order to attain s ome specified objectives is known as Monetary Policy. 2. Fiscal Policy:- It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in eco nomic and social growth of a country. It is framed by the government of a countr y and it deals with taxation, government expenditure, borrowings, deficit financ ing and management of public debts in an economy. 3. Foreign Trade Policy:- It also affects the different business units different ly. E.g. if restrictive import policy has been adopted by the government then it will prevent the domestic business units from foreign competition and if the li beral import policy has been adopted by the government then it will affect the d omestic products in other way. 4. Foreign Investment Policy:- The policy related to the investment by the forei gners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign ca pital in the country which ultimately results in more industrialization and grow th in the country. 5. Industrial Policy:- Industrial policy of a country promotes and regulates the industrialization in the country. It is framed by government. The government fr om time to time issues principals and guidelines under the industrial policy of the country. Global/International Economic Environment:- The role of international economic e nvironment is increasing day by day. If any business enterprise is involved in f oreign trade, then it is influenced by not only its own country economic environ ment but also the economic environment of the country from/to which it is import ing or exporting goods. There are various rules and guidelines for these trades which are issued by many organizations like World Bank, WTO, United Nations etc.

Economic Legislations:- Besides the above policies, Governments of different cou ntries frame various legislations which regulates and control the business.

What are the main Features of New Economic Policy of India? The main features of the new economic reforms/policy are stated below: 1. Liberalisation: The fundamental feature of the new economic policy is that it provides freedom t o the entrepreneurs to establish any industry/trade/ business venture. The entrepreneurs are not required to get prior approval for any new venture. Wh at they need is that they have to fulfill certain conditions to get into a line of one's choice. The procedure involving a case by case examination of the proposals for new vent ures has been wiped off. Apart from this the entrepreneurs no longer need licens es to come into business. The capital markets have also been freed and opened to the private enterprises. A new company can now be floated with new issue of shares, debentures etc. In ca se the entrepreneurs require imported equipment, they are no longer required to approach the central authority for foreign exchange. The area of liberalization is (i) licensing business, (it) Foreign Investment (iii) Foreign Technology (iv) Establishment, Merger, Amalgamation and taken over, and (v) Simple Exit policies . 2. Extension of Privatization: Another feature of the new economic policy is the extension in the scope of priv atization. Now, the majority of economic activities will be conducted by the pri vate sector. In the wave of privatization, out of 17 industries reserved for pub lic sector, 11 industries have been given to the private sector. Moreover, Govt has also privatized the ownership of some public sector undertaki ngs by the sale of capital of some selected enterprises to the private sector. The field of privatization has further been extended by offering greater opportu nities of investment to the foreign private investors. Economic Policy seeks to accord priority role to the private sector. Tendency to expand private sector is evident from the following facts: (i) Number of industries reserved for public sector has been reduced from 17 to 6. Private sector can now set up its units in the field of iron and steel, energ y, air transport, etc. (ii) Till the end of 6th Plan, share of public sector in total investment contin ued to be greater than that of the private sector. It is intended to be reduced to 45% in the 8th Plan. Thus 8th Plan aims at raising the share of private secto r investment to 55% of the total. (iii) Shares of public enterprises are to be increasingly sold to the workers an

d general public, with a view to increasing the participation of private individ uals. (iv) A large part of industrial investment of the private sector to be financed by; National Industrial Finance Institutions. These institutions, while sanction ing loans for the new projects, used to exercise their right of 'Conversion' inv ariably. It implied the right of converting the loans into share capital by the Financial Institutions. Thus, the private firms were always under the constant threat of conversion. Acc ording to the New Industrial Policy, the Financial Institutions will not insist on the conversion clause. With the expansion of privatization there is every pos sibility of increase in productivity and efficiency. 3. Globalization of Economy: The new economic policy has made the economy outwardly oriented. Now, its activi ties are to be governed both by domestic market as also the world market. It means unification of the domestic economy with the world, economy. In fact, t his has become possible by various policy initiatives taken by the Govt. For ins tance, devaluation of rupee in June 1991 was intended to do away with the artifi cially controlled overvalued exchange rate of the rupee. Now, the rupee has been made fully convertible on current account of the balance of payments. Moreover, elimination of licensing of a large number of import ite ms has enabled the importers to import any where in the world. The reduction in custom duties on imports has also been done to bring them in line with the dutie s in other countries of the world. In short, globalization means (a) Reduction of trade barriers with a view to allowing free flow of goods to an d from the country. (b) Free flow of foreign capital in terms of investment i.e., direct and portfol io for ensuring conducive atmosphere. (c) Free flow of technology, and (d) Free movement of labour and manpower. 4. Market Friendly State: The role of the state is one that is confined to selected non-market areas and i s largely to ensure a smooth functioning of the market economy. As compared to past, the ownership of some selected enterprises has been transfe rred to private sector. Its activities as owner of resources have been confined to two types of activities. One covers the activities which are badly needed for the operation of the econom y and the other pertains to social services such as education, health, etc. However, more importantly, the state is to ensure a smooth functioning of the ma rket. For this, the state has to ensure stability in the market through the use of macro economic policies. The state will also intervene in the market when it fails. 5. Modernization:

New economic Policy accorded high ugment the growth rate of sunrise ics to Indian industry, the Govt, rivate entrepreneurs will be free their own behalf.

priority to modern techniques. It aims at to a industries. In order to import technical dynam decided to clear all foreign collaborations. P to settle the terms of such collaborations on

Moreover, Govt has also been trying to stimulate private entrepreneurs to establ ish their own research and development centers by offering them various tax conc essions. Efforts are also being made to revive and modernize the sick industrial units both within the public and private sectors. 6. New Public Sector Policy: Public sector attracted priority. In the words of Dr. Manmohan Singh, Finance Mi nister in Congress Govt. that this priority was given to the public enterprises in the hope that it will help to accumulate capital, industrialization, economic growth and removal of poverty. But none of these objectives were achieved. Thus, new economic reforms are tryin g to shift the emphasis from public to the private sector.