A capitalist economy can be classified as a money
economy as money plays a crucial role in its functioning. Each individual
enjoying a certain degree of economic freedom is engaged in the economic
activity. The factors of production are privately owned and managed by the
people. The individuals acknowledging their freedom choose any occupation as
well as buy and sell various numbers of commodities.
The most essential role of money lies in the
economy's functionality of price mechanism. The prices prevailing in the
economy depends upon the consumers choices of different goods and services.
These prices give an indicator to the firm's owners to organize production and
distribute them widely.
As defined by Adam Smith, in "The invisible
hand theory", these demand and supply forces of lead to effective resource
allocation and higher profits for the producers. As the prices are expressed in
money, it simply indicates that price mechanism under capitalism is not
possible to function without money.
The consumer with its income buys goods that give
him maximum satisfaction. Similarly, money is equally important for the
producers as they buy the inputs for production and aim at maximizing profit to
get a good sum of return for their efforts. Nowadays, credit is a common
characteristic of a capitalist society. Money even establishes a link between
the present and future when people save a portion of their income which acts as
an investment greatly contributes to the economy's growth.
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