Role of Money in Capitalist Economy | What is the Role of Money in a Capitalist Economy?

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Hi friends, in today’s article we are going to know about the role of money in capitalist economy. So let’s discuss in details.

Role of Money in Capitalist Economy

Money plays a vital and all pervading role in the smooth and efficient functioning of the capitalist system. It is not only facilities the automatic working of the market mechanism but also provides necessary motivation for economic progress.

According to Marshall, money is the pivot around which the economic science clusters. Crowther said that, is one of the most fundamental of man’s inventions. The importance of money in a capitalist economy is detailed below –

• Money and the price mechanism in a capitalist economy – The most significant role of money lies in the functioning of the price mechanism. The price system functions through prices of goods and services. Prices determine the production of innumerable or uncountable goods and services.

They organize production and help in the distribution of goods and services. Since prices are expressed in money, the price mechanism under capitalism can not function without money.

• Importance in Consumption – Under capitalism, the consumer is the king who buys only those commodities which give him the maximum satisfaction with a given money income. This he does by equalizing the marginal utilities of different goods he wishes to buy.

When the price of each commodity expressed in money equals its marginal utility, the consumer gets maximum satisfaction. Thus money enables or gives a consumer to make a rational choice out of the various commodities he wants to buy with his given money income.

• Importance in Production – Money is equally important for the producer who buys and sells inputs and outputs in terms of money. (i) The use of money enables a producer to concern trade on the organization of the production process. (ii) It also help in borrowing and lending which are essential part of production process.

• Importance in Distribution – Money is also plays an important role in the process of distribution of national income among various factors of production in the form of wages, rent, profit and interest. All these incomes are measured received in terms of money.

• Basis of Credit – The entire capitalist system of production is based on credit. Credit instruments are a form of money which is issued by banks to facilitate trade, commerce, industry, agriculture, transport, etc. under capitalism.

It is on the basis of credit instruments that banks advance loans to the different sectors of a capitalist economy. The amount of credit is determined by the interest rate which express the price of loan-able funds and loans find their expression in money.

• Means of capital Formation – The process of capital formation in the modern capitalist economy is almost impossible without money. The Financial Institutions mobilize saving from the general public and channelize them to productive uses by advancing loans to the investors.

• Wealth consists of Money – Money has become the most important form of wealth in modern times. One wishes to hold some cash to meet current applications to face prospective uncertainties and to explore gainful opportunities in the future.

• Importance in Public Finance – Public finance deals with government income and government expenditure. Government receives income by way of taxes, fees, find prices of services rendered or provided, etc. All of which are collected in the terms of money.

• Link between present and the Future – Money establishes a link between the present and future through the freedom of enterprise and freedom of consumption under capitalism.

The freedom of consumption the part of the consumer leads to freedom to save a part of his money income. Saving leads to the production of capital goods via investment and capital goods contribute to the growth of the economy.

• Money and technical Progress – The development of money led to expansions in internal and international trade. The producers were induced to expand the scale of production. It necessitated the adoption of the modern techniques of production, product and process specialization and standardization.

From the above account, it is clear that money is certainly a pivot around which the capitalist system revolves.


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