Importance of Money in capitalist economy

 A capitalist economic system is one characterised by free markets and the absence of government intervention in the economy.

In practice a capitalist economy will need some government intervention, primarily to protect private property. 

Features of a capitalist economic system

  • Economic freedom. Individuals free to set up business and provide the goods and services they want.
  • Consumer sovereignty. Consumers free to decide which goods and services to purchase.
  • Limited government. Government intervention limited to the protection of private property and provision of public goods.
  • Finance sector. Capitalism requires a developed banking and financial system which can provide loans to companies and banking services to households.
  • Profit motive is seen as important for enabling an efficient distribution of resources and encouraging innovation and responsive markets.
  • Market forces. Goods and services are distributed according to ‘the invisible hand of the market’ – in other words, the allocation of goods is determined by market forces. For example, if demand rises, firms have an incentive to increase supply.
  • Flexible labour markets – easy to hire and fire workers.
  • Free trade. Low tariff barriers to encourage international trade.
IMPORTANCE OF MONEY

Money is the backbone of capitalism. The importance of Money in a capitalist economy is given below:-

1) MONEY AND PRICE MECHANISM:- The whole capitalist system revolves around price mechanism. The individual tends to maximise their benefits through price mechanism. Price mechanism operates in the market system through money because all income and price are measured in terms of Money and all economic decisions are implemented with the help of Money. Consumers come to the product market with their incomes. Given prices and incomes, they spend their incomes in such a way that their satisfaction is maximised. The producers, on the other hand, in their efforts to maximise profits, seek to produce and supply more of goods demanded by consumers.

2) IMPORTANCE IN CONSUMPTION:- The consumers get their incomes in the form of Money which gives them ready command over a variety of goods and services. Money enable the consumer to spend his limited income on different goods and services in such a way as to maximise his satisfaction. In short, the use of Money and the price mechanism has helped the consumers
(a) to choose commodities they like
(b) in desired quantities
(c) to pay the competitive price
(d) to substitute more useful goods for the less useful goods
(e) to expand their consumption

3) IMPORTANCE IN PRODUCTION:- The use of Money enables entrepreneurs to concentrate on the technical problems of his business. Without money it is not easy for the producer to distribute his product profit among different factors of production.

4) IMPORTANCE IN DISTRIBUTION:- Money also plays an important role in the process of distribution of national product among various factors of production in the form of rents, wages, interest and profits. All these incomes are measured and received in terms of Money. This essentially follows from the fact that money acts as a general medium of exchange.

5) CAPITAL FORMATION:- The process of capital formation in the modern capitalist economy is almost impossible without money. The financial institutions mobilise savings from general public and channelize them into productive uses by advancing loans to the investors.Money is an indispensable tool for the development of credit market.

6) WEALTH CONSISTS OF MONEY:- Money has become the most important form of wealth in modern times. Everyone wishes to hold some cash to meet current transaction,to face prospective uncertainties and to explore gainful opportunities in the future.

7) NON-FINANCIAL COMPARISONS:- Money has made possible the NON-FINANCIAL comparison of things and persons. In the world of DAVENPORT,"All economic comparisons are made in money terms not in terms of beauty,or of artistic,or an advocate,or a singer or teachers is greater than the other depends upon what he earns in money terms.



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