Every economic system must answer these five questions effectively or the system itself is ineffective.
1. What goods does the economy produce?
For capitalism the answer is simply “Whatever the people are willing to buy.” Since capitalism is driven solely by self interest anything that can be produced at a profit will be produced. In order for something to be produced demand for that product must be sufficient to support the production of the product. So if demand for a specific product drops, production of that product will also drop and vice versa.
2.How does the economy produce the chosen goods?
For capitalism the answer is “In the most cost effective way.” Regardless of any ethical or moral questions capitalism will seek out the absolute cheapest and most effective way to produce a product. Once again, self interest is the driving force as business owners seek to cut costs in order to increase profits.
3. Who gets the goods that are produced by the economy?
In a capitalism the answer would be “Whoever wants the good AND can afford to buy it.” If you want the good that has been produced that is fine and dandy, but if you can’t afford it your not going to buy it.
4. How does the economic system accommodate change?
The world changes. Peoples tastes change, technology advances, and the scarcity of resources changes. An economic system has to be flexible enough to adapt to changes in the economic environment. In capitalism this flexibility is attained through self interested companies ,investors , and entrepreneurs. Money in a capitalistic society flows freely to where ever a profit can be made.
5. How does the economic system promote progress?
Progress of course refers to economic growth and standards of living. People want more money and a better lifestyle. People want to be living in better conditions ten years from now as the result of societies advancements. In a capitalist system this advancement is done by self interested researchers, inventors, and politicians. For example, the researcher that discovers the cure to AIDS will most likely become rich, famous, and respected. Likewise, a researcher that discovers how to cut the costs of a company by ten percent using a new method will also gain wealth and respect.
Please note that some books refer to capitalism as “The Market System” or “Market System” the terms are interchangeable.
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