Continue to second part of Properties of capitalism, for reading first part click the link below.
4) The system of competition:
The capitalism is furnished with perfect competition in the factor, goods and credit markets. The existence of competition in the goods or production market entails normal profit to the producers. It can explain as; we suppose that some producers in any industry are reaping abnormal profit. This will induce other firms to enter in the market, as a result the production will increase and the prices will fall, abnormal profits will be washed away, all firms will earn normal profit. Moreover, in the product market, in the presence of competition, the price is determined by the force of demand and supply. The price so determined will prevail in the market and no producer will be able to influence such price. This shows that the presence of competition puts an embargo on the motive of self interest.
In addition to the goods market, the competition also exists in case of factor market. As a result, the wages of labour are determined by the force of demand for labour and supply of labour. In this way there do not exist the chances of unemployment and excess demand for labour. This is the reason that full employment will prevail in the presence of flexibility of wages which becomes possible due to competition.
In addition to goods and product market, the competition also exists in the credit market. The rate of interest is determined where the demand for credit becomes equal to supply of credit. The existence of competition in the credit market puts a ban on the lower limit and upper limit of rate of interest. Thus according to old and new friends of capitalism (Adam Smith and Milton Friedman) the equilibrium is brought about in every sector of economy through the forces of competition. The widespread diffusion of economic power underlying competition controls the use and limits the potential abuse of that power. Thus the competition is the basic force in equilibrium.
5) The system of market and price:
The basic coordinating system of capitalist economy is the market or price system. The capitalism is a market economy. The decision regarding the buyers and sellers of the product and resources are made effective through a system of markets. We know that market is simply a mechanism or arrangement which brings the buyers or demanders and seller or suppliers of a good or service into contact with one another. As a competition is a controlling mechanism whiles the system of markets and prices is a basic organising force in capitalism. The market system is an elaborate communication system through which innumerable individual free choices are recorded, summarized and balanced against one another. Those who obeys the dictates of market system are rewarded and those ignore them are penalized by the system. Thus through this communication system the important decisions of economic systems i.e. what to produce, how to produce, and how the distribution will be performed. Under capitalism all the activities pertaining to consumption, allocation and distribution are made through the signal of prices and market. This is the reason that Smith in 18th century accorded England as ‘A nation of shopkeepers’.
6) The system of limited role of government:
In the ideal system of capitalism there is a limited role of government. Govt is to perform duties of law and order; issue the currency, save the domestic borders, issues the weights and measures, impose taxes and keep an eye on the illegal activities; as such all can not be entrusted in the hand of the people. All this means that under capitalism, state has to concentrate upon social and illegal activities while most of the economic activities remains confined to the people.