What is Capitalism?
The aspect of capitalism is an economic system where properties are privately owned, and the property owners and the businesses control them in accordance with their interests. The laws of supply and demand freely dictate the prices of goods and services to the society best interests. In essence, the most prominent feature of capitalism is to make huge profits. Adam Smith, the father of the modern economics and the 18th-century philosopher, indicated that it is not from the benevolence of the brewer, baker, or the butcher that we anticipate our dinner but from their personal interest. Therefore, the parties, the buyer and the seller, have to voluntary exchange transaction with their interest in the outcome, but no one can get what he/she wants without addressing what the other requires. In fact, it is through this rational self-interest which paves the way for the economic prosperity. In the capitalist economy, the factors that yield public good, especially the capital assets such as railroads, mines, and factories, can be controlled by the private sector, where labor is purchased for wages, the private owners enjoy the capital gains. Prices distribute labor and capital between the contending users. Indeed, almost all the current and developed economies have achieved excellence because they have embraced some form of capitalism. In fact, almost all the economies were between the capitalism and socialism. In socialism, the approach was different, and the state owned the enterprises and the means of production, hence, focusing on maximizing the social good than making astronomical profits.
Pillars of Capitalism
There are several pillars that capitalism is founded:
Self Interest. In this pillar, the people focus specifically on their own good without considering the social, political pressure, a situation that brings individuals who are not coordinated with the provision of goods and services (Piketty 45). However, they end up benefitting the people, although at a cost, as if “invisible hands” directed them, as Smith had indicated.
Private Property. In this aspect of capitalism, individuals can own tangible assets, including houses and land. On the other hand, they can own intangible assets, including bonds and stocks.
Competition. Under this principle, the firms can compete without any regulation. They can enter and exit the market any time they want, maximizing the social welfare between the consumers and the producers.
Market Mechanism. In the market mechanism, the prices are determined in a decentralized manner where the sellers and the buyers interact, and in return, resources are allocated, which seek the highest compensation for services, goods and the wages.
Freedom to Choose. Considering the investment, production, and the consumption, then when a customer is dissatisfied, they can buy the goods and services from different suppliers without necessarily being coerced by the sellers (Boltanski and Chiapello 164). On the other hand, investors can pursue other ventures that they feel lucrative and profitable. Finally, the workers can also leave their jobs to look for better pay.
Limited role of Government.The role of the government in this setup, although limited, is to protect the right of the citizens and, at the same time, maintain the conducive environment which will facilitate the appropriate functioning of the firms. Evidently, the scope to which the pillars of capitalism operate will distinguish the various forms of capitalism in the world. For instance, in the free market, commonly known as the laissez-faire economies, the firms are allowed to operate with less or no regulation from the governing authorities. In addition, there is the mixed economy, where the government and the market blend in all the market operations (Beinhocker and Hanauer 163). In this approach, the firms play the dominant role in the provision of good and services, but the government regulates these markets to correct the market failures, including traffic congestions and the pollution, as well as promote social welfare such as the public safety and defense. In the current 21st century, many economies operate under mixed capitalist economies.
Shades of Capitalism
Capitalism is classified into various groups within different criteria based on the production organization. In the UK and US, there is the liberal market economy where markets are very competitive and good, and services are produced in bulk in a decentralized aspect. On the other hand, there are the coordinated markets, as seen in Japan and German, where there are non-market institutions, including business associations and unions, where they exchange private information (Hall and Soskice 4).
Forms of Capitalism
Recently, the economists have identified other forms of capitalism based on the role of the entrepreneurship in the institutional settings and the aspect of driving innovation where new ideas are applied to spur the growth of the economy (Baumol, Litan, and Schramm 15).
In-State Guided Capitalism
In this capitalism, the government makes the outright decisions based on the areas where growth is mostly required. It was developed to stimulate economic growth in areas considered crucial for entire populations. However, this approach has a few pitfalls, including susceptibility to corruption, excessive investment, challenging removing support when it is no longer required, and selecting the wrong winners.
This approach aims to enrich and protect a small fraction of the population (Baumol, Litan, and Schramm 20). The aspect of economic growth is not the fundamental objective in a country. In fact, those countries that have embraced this kind of capitalism are faced with high levels of corruption and inequality.
In this aspect, the economy takes advantage of the economies of scale during the production. It focusses on the mass production of goods and services, while embracing the principle that for every unit produced, there is a reduction of the overall prices of the entire units.
These aspects of capitalism have seen a lot of growth in the current world and a big impact on individuals. In addition, this capitalism has made breakthroughs in automotive, computing, and telephone innovations anchored on new firms and individual efforts (Baumol, Litan, and Schramm 11). In essence, the big firms are encouraged to market new products which has been mass-produced. In fact, entrepreneurial and big-firm capitalism may appear to be better when mixed in a particular economy. Indeed, the United States of America have been characterized by this kind of mix more than other successful economies in the world.
Keynesian Aspect on Capitalism
It would be worthwhile to consider some aspect of the greatest economist regarding this issue of capitalism. During Keynes time, there was the great depression in the 1930s, where the advanced economies under capitalism experienced widespread unemployment. According to Flaschel and Greiner, capitalism would struggle to recover from the investment slowdown because the capitalist economy would remain indeterminately in equilibrium with no growth and high unemployment (36). He challenged the argument of laissez-faire capitalist approach, which indicated that economies would operate without government intervention to stimulate aggregate demand and eliminate deflation and high unemployment, as seen in the 1930s depression. He suggested that the intervention from the state was required to salvage the economies from the recession. In this aspect, he indicated that the government would intervene by reducing taxes to the firms and individuals and increasing spending, which would stimulate economic growth. The government intervention, according to Keynes, would calm the bust and boom of the business cycle and assist the capitalism in recovering from the depression. In fact, Keynes never advocated for the replacement of the market-based economy, but indicated that periodic intervention from the government was imperative.
The forces that bring capitalism’s successes can as well usher some failures. The free markets will only flourish if the government has set the rules that will govern the firms from exploiting the consumers (Gane 33). The laws may include property rights, which will support markets with the required infrastructure, including highways and roads, which will facilitate movement of goods and people. However, the government should be cautious not to fall victim of the regulations that will only protect the businesses at the expenses of the public interest.
Rajan and Zingales aver that the society under capitalism must be protected from capitalists (23). In this aspect, the government should take the proper steps that will protect the free market from the interest of the powerful private sector, which pursue to impede the efficient functioning of the capitalist. Therefore, the concentration of productive asset ownership must be controlled to ensure fair competition and in the instance that there are many losers; the government should try to compensate them. The competitive pressures on the firms will ensure that personal interest is minimized, a situation that encourages the successes of the free trade. The public should see the virtue of the free market and, on the other hand, oppose the intervention from the government, which is aimed at protecting the existing powerful firms at the expense of the consumers and economic prosperity.
In fact, under capitalism, the economic growth surpasses other economic systems. However, the issues of inequality remain heavily contested and controversial aspect. Several questions come into play, including whether the dynamics of privately owned capital accumulation will lead to the buildup of wealth in fewer hands and whether the balancing of technological advancement and forces of growth reduce inequality. In the aspect of inequality, various approaches indicate the driver of inequality in an economy. Piketty avers that in the contemporary economies, the investment rate of the return will exceed the overall growth (15). If the discrepancy increases, the wealth held by the capital owners will escalate than other forms of earnings, including wages, hence, exceeding them by an extensive margin. Although Piketty has faced many critics, his assertions have added to the big debate on the distribution of wealth as well as strengthened the belief that a capitalist economy must be driven in the right direction by the policies formulated by the government and the public to safeguard the interests of the society.
Elements of Capitalism
In the classic theorist, there is a shift of emphasis on analyzing the capitalist economy. Each theorist indicates a special and non-exclusive aspect of a certain element. For instance, Smith focused on how the capital was utilized to employ labor. He concentrated on the extension of the market exchange and division of labor in the commercial society in the better part of the 18th century. In the 19th century, the enterprises were already established, and Marx focused on the intensified struggle between the labor and capital as well as the cycles of the economic contraction and expansion. The attention later shifted to expanding the banking system towards the end of the 19th century and the role played by the capital markets. During this period, the Marx analysis was augmented by Hilferding, who brought the finance capital into the aspect of the account (Hall and Soskice 22). Later, Schumpeter disambiguated that finance, banking, and money were the capitalism’s unique features from the initial stages of growth that were strategic to understanding the operation of capitalism. However, Marx and Smith understood the financial and monetary side of the capitalism, but their approaches were directed elsewhere for its conclusive features. Indeed, with Keynes as indicated, money will always take center stage in the capitalistic economy.
Considering all the above approaches, it is evident that there are three crucial aspects or clusters of the capitalist economy. These include the market exchange, production of commodities by private enterprise, and the monetary structure that produces bank-credit money.
The aspect of commodities exchange in the market is anchored on the competition between the seller who supplies the goods and services and the buyers who create the demand in the market. All these activities between the buyer and sellers transact at the prices acceptable by both. In this mechanism of demand and supply, there are three phases coordinated with the production under capitalist approach. There is the money-capital (finance), capital and labor (production), and consumption (Hall and Soskice 34).The bank finances the credit facilities in the form of shares, stock, and loans. This is usually in the form of labor employment to realize high-profit levels through the means of production and the consumption of goods, as indicated by the Marx’s M-C-M1. In addition, capitalism exhibit speculative aspect in the financial assets that embrace M-M1 exchanges. In fact, all forms of goods, services, properties, and enterprises and their anticipated revenue are considered as financial assets in the market, including securities, bonds, stock, and shares. Therefore, the uncertainty of the asset prices will change over time, giving rise to the speculative market tendencies that purely involve the financial exchange where the assets are transacted with an expected change of prices (M-M1deals) (Weber 17). In this approach, capital is awarded both speculative asset and productive resource characteristics. Therefore, capitalism exhibits the basic market concepts, which include:
- The labor market that dictates the wages
- The money and money capital, where demand and supply are coordinated and price established
- The existence of dual market in production, which the first one is the production of goods, and the second one is the consumption of goods
- The financial asset market in this facet is anchored on the fact that the ownership of the entire properties in capitalism is under marketable “”
Considering the discussion on the theorist, it is quite clear that those two divergent analyzes of the above interactions exist. Consequently, the Smith aspect of the “invisible hand” stresses on the effectiveness of the integration and coordination of complex systems of economy, which are decentralized. In this feature of capitalism, the competition yields an encouraging outcome where all the resources are utilized. In addition, the economic agents, including the managers, bankers, and workers among others, are rewarded according to their functional contribution dictated by the competitive cycle of demand and supply. For instance, when there is a shortage in the supply of the highly productive labor, then there will be a substitution of the physical capital of laborsaving. In addition, this approach indicates that efficiency and economic integration will create social integration by bringing the agents of the economy together in a mutually beneficial exchange.
Keynes and Marx point out that there is a power of inequality, especially in the property rights amid the agents and economic classes. They further indicate that the divided functions of the economy do not necessarily collaborate but struggle with the surplus tendencies. For instance, capital can control the operations of the firm during the distribution and calculation of the profits rather than the wage-labor. In fact, the financial asset markets are the source of dynamism and flexibility in capitalism because they enable capital to be withdrawn when it is not profitable and reinvested in other cost-effective areas. However, as Keynes highlighted, the economy can be incapacitated by this method if there is an extensive withdrawal of capital from the consumption or the production. Additionally, if there is more speculation under conditions of uncertainty, the initiative can attract instability and asset price bubble, which can agitate the production of services and goods. However, with all those diverse views on the stability and efficacy of market mechanism, it is evident that economic growth is accelerated by the market competition, which drives capitalist entrepreneurs to revolutionize their methods of production, as asserted by Schumpeter when he used the terms “creative destructive.”
Monetary System and Bank-Credit Money
Enterprise production and market exchange will only exist where there is a viable monetary system. The forces of demand and supply coordinate the seller, and buyers through the prices, an aspect that accepts this means of payment and exchange. The calculation of net profits and costs of production in a firm necessitate a monetary standard of value, while the money capital for financial speculation and production is formed with loans and created by a bank that realizes an interest as a form of profit. Therefore, financing the production of money capital, will exhibit capitalism as an economic system. In the previous economies, the wage labor, market exchange, and enterprises mildly existed; however, their expansion to a principal method of production was encouraged by the institution of money-producing systems of banking. In this aspect, the capital is considered the sum of payment that are available at any instance of transmission to entrepreneurs (Baumol, Litan, and Schramm 21).
Private Enterprise that Produce Commodities
The production of goods and services in a capitalist economy occurs in private enterprises separated institutionally from the state and the households who support the consumption. It is worth noting that wage labor and money-capital meet at the enterprise that aims to calculate the production cost and the exchange value to yield a profit. The entire production is private property under an enterprise that constitutes material or physical capital. In essence, the production is carried out by the free labor employed by the enterprise under set wages (Hall and Soskice 44). Therefore, the money and physical means applied in the production process are considered as capital because they are not controlled or owned directly by those who operates-managers and workers. In this feature, Marx indicates that capital is not considered by its functional role during production but through a power relation. In addition, money becomes money capital when there is property-less labor, which indicates that the agents can only survive by selling their utmost property, which is the labor power. When a large corporation develops and includes salaried managers and shareholders, the status indicates that the private ownership has been separated from the firm’s control. In fact, control of capital and ownership remain a focal point, which is outside the purview of almost all the employees.
It is worth noting that states can own the means of production. In this setup, the workers are not able to dictate their deployment, disposal, and use; hence, such feature of the economy can be described as the state capitalism instead of regarding it as a form of socialism. In this case, few examples indicate state capitalism, including communist China Enterprises, Mexico’s Pemex, and Saudi Aramco, as well as Saudi Arabia gas and oil enterprise (Salverda and Mayhew 130). Still, the enterprise can be viewed from two standpoints, just like the market. First, it is viewed as the most efficient means coordinating the country’s economic activities. Secondly, it can be regarded as the exploitation of the conflict between economic classes and agents. In fact, through coordination of the enterprise, the approach is not based on the “invisible hand” aspect.
The decision made about distribution and production of goods and services in capitalism are anchored on the economic rationality, which are the relative prices and the cost of production. Therefore, the separation of the economy as a discrete entity does not presume that it is entirely autonomous and separate from the society. Still, the capitalistic economy does not regulate or self-produce itself, but the aspect of the free market and other institutions of this system (banking and enterprise) are all maintained and produced by the cultural beliefs, norms, and, more importantly through the law.
The Outcome of Capitalism
Capitalism convenes economic power on the owners of the capital who have an economic interest that keeps the population in an economically dependent and vulnerable position. In fact, capitalism is driven by the pursuit of never-ending profits that pushes the firms to attempt continually to make more profits or risk high losses (Friedman and Friedman 36). The aspect of making more profits by capitalist firms focusses on labor activities of the employees. The hired workers are used as a means of production of goods and services that are later sold by the capitalist firm. For the firms to maximize profits, they are faced with a dilemma of maintaining the wages as low as possible and, on the other hand, encourage the workers to be diligent and work very hard. Therefore, to achieve the required profits, capitalists ensure that they extract much effort of labor at a minimal cost, an instance that brings exploitation. In essence, they ensure that large numbers of workers are competing for fewer jobs, which will bring down the level of wages, while unemployment levels remain high to create tension to the employed about the prospect of being laid-off. In this aspect, the employees remain exploited unless there is the intervention of the state to regulate the wages.
Negative externalities bring inefficiencies in the resource allocation. Efficient allocation of resources takes place when the firm experiences the costs that depict the true production costs. In this aspect, the demand for the products sends the actual signal to the producer. It is worth noting that in capitalism, the greatest problem is that the producer tries to displace much of their costs on other entities so that they remain competitive in the market. They avoid responsibilities that would cost them money in an attempt to maximize their profits (Friedman and Friedman 66). For instance, many firms ignore the issue of pollution because it does not have an immediate consequence of the cost of production; hence, the incentive is only to make a profit and consequently ignore the cost of responsibility. Therefore, without government regulations, capitalism brings the problem of negative externalities because their economic decisions are profit-driven.
Through capitalism, technological changes as the production increases. Therefore, the capitalists must adopt technology to increase productivity because fewer inputs will be required to yield a certain level of output. In every capitalist economy, technology is a great achievement embraced when organizing the production firms. However, the problem with technological change is that it destroys jobs, displaces workers, and renders skills obsolete. On the other hand, the prospect of capitalism would argue that embracing technology creates demand for jobs and new skills, a situation that have a long-term advantage because there will be an upgrade of wages and the quality of jobs (Rajan and Zingales 65). However, the argument fails to highlight that capitalism does not have a mechanism for moving people with skills into other areas that require more skilled individuals and experts; rather, they will hire other employees that meet the current market requirements. Finally, technological changes may bring marginalization, which will eventually generate poverty.
There is always a complex relationship between human flourishing and competition. Competition can be viewed as an aspect of being better than others where social processes prompt people to invest resources, energy, and time required to nurture their talents. More profoundly, competition guarantees the culture of accomplishment that only assesses individuals regarding their comparative standing compared to others. In addition, only one winner receives a reward, while the rest do not (Friedman and Friedman 76). Therefore, capitalism brings intense competition that negatively impacts a person’s flourishing. In this case, those who feel that their chances of winning are minimal get discouraged, and they may end up giving up. Consequently, those who feel that they have the potential to reach the top may bring unhealthy competition, which focuses on the profit making instead of social impact, a situation that contributes to negative externality such as pollution.
As is evident from the above analysis, the outcome of capitalism depends on various factors. The scope to which the pillars of capitalism operate will distinguish the various forms of capitalism in the world. In the laissez-faire economies, firms are allowed to operate with less or no regulation from the governing authorities. However, in the mixed economy, the government and the market blend in all the market operations. In this approach, the firms play the dominant role in the provision of good and services, but the government regulates these markets to correct the market failures, including traffic congestions and the pollution, as well as promote social welfare. In essence, the entrepreneurial and big-firm capitalism may appear to be better when mixed in a particular economy, as is the case with the United States. Nevertheless, under capitalism, the economic growth surpasses other economic systems, and the investment rate of the return will exceed the overall growth. Finally, the systems of the economy cannot be replaced, but it is necessary to have periodic interventions of the government to control every market.
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