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The Role of Markets and the State in Different Approaches to Understanding a
Capitalist Economy
Introduction
Boltanski & Chiapello in their book “The New Spirit of Capitalism” (page 47) note
that wealth created by one person is wealth to the society in general. They are of the
opinion that if theft is not used, then an individual should be left to accumulate wealth.
This is the trend that the world has taken. On the one hand the world is changing
radically in production of goods and services. Resources are limited and deserve to be
utilized to their maximum to ensure that the world is able to feed its population. On the
other hand, the increase in population is drastically and it calls for more innovations to
maximize utility of natural and artificial resources available. "We affirm that criticism is a
catalyst for changes in the spirit of capitalism. So capitalism needs its enemies, people
who have a strong dislike for it and who want to wage war against it" (Boltanski &
Chiapello 485-501). Capitalism is an economic policy / tool used by the government
aimed at minimal participation in production but allowing private people to compete
freely. In a fully capitalism economy, the main role of the government is to facilitate
trade and production through actions like provision of social needs in order to create a
smooth road for good working environment. Energy sector is left to be controlled by the
government while private sector in general is the one left to compete. The opposite of
capitalism is socialism, totalitarianism, and communism. These are the types of
economies where the government has a total control over each sphere of production
and over all resources in a country. "In the end, most economists tend to agree with
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Wolf that developing countries gain more in terms of social progress and eradication of
poverty when they engage more openly in international trade" (Vander n.p.). This paper
looks into various issues associated with capitalism as guided by various headings.
Communism, Totalitarianism, and Capitalism
Communism and totalitarianism are economies where the government plays a
role of producer and owner of capital. They have elements of dictatorship as they show
very little recognition of human rights and maintain a system that empowers the
government at the expense of its citizens. Their main goal is a distribution of wealth.
They aim at having equal distribution of wealth and do not recognize individual wealth
accumulation. From this point of view it certainly ensures that the national cake is
shared among all citizens. Citizens are not divided into different social classes so
government has a great impact on the actions and directions of the people. Sometimes
and this phenomena can be observed quite often, members of government make some
decisions for their own interest. Production is seen as not geared to profit making and
thus the adopted methods of production are in most cases not the most efficient which
limits the level of economy in a certain way. Nowadays, due to the lack of resources
these systems are not good to be adopted in any developed country moreover in less
developed countries. This is a straight way to poverty and it may take a lot of time and
efforts for the government to get out of it.
A socialist economic system is known to be a mix of totalitarianism, communism,
and capitalism. Each person is the one who accumulates or loses his wealth one way or
another way. "Socialism is usually defined as a political-economic system in which
government owns the means of production" (Bradley & Donway 74). There is
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improvement of the production methods established as the government try to compete
with the private sector. This though does not guarantee that the most effective ways are
adopted as sometimes a conflict still appears between the private and public interests.
Of course such a system should be operational in early development of the economy
and of the country as a whole. This system is applied to take control over the
distribution of resources. Nevertheless citizens have the right to dictate their rules as the
economy of the country and of the world grows. Government is qualified to check prices
for minor and regular needs while the market has a right to control other needs. As far
as this is an effective policy that is beneficial for the major part of population it hinders
the development of agriculture sector that is the backbone of most economic spheres,
especially in the developing countries.
Forbes in his book "Capitalism: A True Love Story,” says that capitalism system
of governance does not limit the citizens to the amount of wealth that they can
accumulate and gives them a level playing ground for wealth creation. Just recently
business has taken an essential part in each sphere of our economy. First of all, there
are some disadvantages associated with this system because it certainly leads to
corruption and distribution of wealth is not uniform as more than often it is divided
between small groups of people only. The larger part of the population is poorly treated
and major resources are under control of small groups. "The capitalist emphasis on
unrestricted economic activity leads many authors to conceptualize the system
according to what justifies such a ban on restrictions " (Bradley & Donway, 73).
Role of Markets and the State in Different Approaches in Understanding a
Capitalist Economy
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Boltanski & Chiapello (23) estimate that “A firm’s senior managers will still
devise the competition strategies that allow it to do battle with other multinationals (on
those markets where they do not collaborate)“.
In a capitalistic market the prices are controlled by demand and supply forces. If
the market's demand is higher than its supply then the prices go up and vice versa.
Although the system is controlled by forces of the market where involvement of the
government is crucial. In a broader perspective, they use monetary and fiscal policies
for contraction or expansion reasons. When regulations are made, they may hurt or
benefit the economy both in short term and long term. The markets in a capitalistic
mode are hypothetical but the government has to come and assist in some intervention
to ensure that there is sanity and some level of discipline. For example, the private
sector cannot be left to provide roads and other infrastructure. Financial market is one
of the areas that the government exercises in its controlling power. The effects of the
financial industry on the economy are more indirect than direct, it involves mobilization
of resources, share resources using a resource pool, giving out credit, hedging out risk.
Impact of the government on financial market is felt by investors, companies, and small
business owners. Recognizing the need of regulation, the United States of America
passed a Finance bill on August 2010 which is aimed to be an addition regulating
financial markets policy.
Are markets a necessary condition for the emergence of capitalism and for the
reproduction of capitalism overtime?
Countries that have embraced the spirit of capitalism leave the market to selfdictate and control. "Many of the people protesting in the streets against globalization
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are protesting against capitalism, which they accuse of oppressing workers, exploiting
the poor and making only the rich richer" (Raghuram 1). The one company is successful
which uses its resources effectively. Other than at local levels, the world is moving
towards free trade. United States in its turn gained a leading position as the country
with the most stable economy. It has embraced capitalism in its economy and blended it
with free trade. This strategy has had a great impact and fast economic development as
a result. Germany has been the second world's largest exporter after the United States
though China is catching up with them lately. The rapid development of China to the
second largest economically developed country, based on the released in 2010
economic survey, is facilitated by the increased capitalism policies and embracing the
spirit of free trade in international trade. The living standards of people in China have
increased as consumers are enjoying a wider range of products fetched all over the
world. The country's economic growth rate on average is expected to be 8% in the year
2010. The second Quarter of year 2010, the country had a growth rate of 11.6%.
Despite the United States recognizing and enjoying benefits of capitalism, it has some
government controls for example, on September 19th 2009 the government of Barrack
Obama released a finance reform bill that was meant to regulate the financial market.
Various measures were listed there that were taken alongside the traditional role that
government plays in financial market. The regulatory bill was necessitated by the past
financial sector crisis i.e. recent global financial crisis that is believed to have started
from financial institutions (ailing of Federal national mortgage association (Fannie Mac)
and home loan Mortgage Corporation commonly known as Freddie Mac mortgage
companies in United States of America). It came into law in August 2010.
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Other policy that has been taken by the Government is participation (directly) in
the financial market by offering treasury bills and bonds. Banks and financial institutions
are attracted by the high secure of this program and poor their resources to this area
since this will give less risky return. Their disposable income to lend to households,
companies, and small-scale business will thus reduce. This program has both
advantages and disadvantages. The main disadvantage of this policy is that companies
and small-scale businesses will lack funds for their expansions or will have to attain it at
a high interest rate. There are two ways out and one of those is to cut their work force
while other one is to increase their prices in order to cover increased interest. During the
period of unemployment or whenever they decide to cut off their work force, households
are suffering from falling demand for goods and services that they provide. At the same
time if they raise prices for products then the demand reduces. The overall trend will
affect greatly in slowing the economy. One of the reasons for the government to enter
into direct trading is to cure inflation in the economy, if the excess funds were used.
Inflation at the expense of households, companies and business in general may be
cured by offering treasury bonds at a high interest rate.
In order to protect the consumers of financial services, the government is
mandated to ensure that different financial institutions operating in their economy have
a strong financial base. This is why it requires a certain financial reserve to be kept with
central bank to cater for safety. In order to regulate bank operations government uses
the same funds from a financial reserve. Except for the central government, recently
created Financial Regulatory Agency is aimed to operate in United States with the task
of overseeing consumer lending and giving regulations in complex lending. As far as
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this is a good measure to ensure that consumers get quality services from financial
institutions, it will certainly affect the policy of free trade. Free trade gives equal
opportunities to each player and leads to innovations. The requirement of a capital
reserve is to monitor and control operation of financial institutions. In those cases when
it is necessary to take measures to reduce the circulation of money, the percentage of
compulsory reserve of central bank increases which in turn leads to a reduction in
lending and has a negative impact on the economy. The economy will not generate
investing finances. Contractionary policies are used in order to avoid inflation during
period of economic prosperity. At a contractionary period companies, households, and
small business get loans at a high cost as this is the best way to injure the economy.
Government of the United States has a specially established consumer financial
bureau that struggles against abusive credit card and mortgage operators. These
measures are taken to ensure that consumer, companies, households, and small-scale
businesses are protected by financial institutions against irregularities.
Regulations taken by the government of B. Obama limit the amount of money the
banks can use for the purpose of speculative businesses to 3% maximum of its
borrowed capital. This move was enacted to reduce huge financial losses which have
occurred in the past from such speculations. The main goal of such actions is to ensure
the public in confidence of the banking institution. The investing environment in a
country is improved with a help of strong financial institution as investment in both
foreign and local economy has been increased, jobs created, household financially
empowered, resource mobilized and the cycle repeats. However, there is a negative
side as a bank may opt not to lose these funds previously gotten from speculation and
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this results in increasing the cost of bank operations which something may discourage
resource mobilization.
Nowadays since the great economic recession which started in United States in
2008 which was able to paralyze the entire world since United States of America is a
major player as a consumer and producer in the world. The purchasing power of the
Americans was reduced and thus demand for exports and home produced goods
reduced also. This resulted in a decrease in gross domestic earning. Companies closed
down and a sphere of trading suffered greatly. This is a great example of the past and
shows us that regulatory measures are mandatory in order to avoid such unpleasant
incidents in future.
The government requires financial institutions to pay some fixed amounts of fees
before they are given an operating license and annual fees on top of taxes. People who
own their business are obliged to pay taxes disregarding the profits they get from a
trading period. In the year 2011 such compulsory measures were taken by the
President of the USA otherwise its fragile economy could simply be destroyed as it has
previously happened in Greece where people refused to follow the rules dictated by the
government and pay increased taxes. As a result their economy is destroyed, there is
no government for the past few months and it has a huge influence on the economy and
circulation of money in Europe in particular.
"While many in the developed world are now convinced of the superiority of the
market democracy as a form of organization, far too few are aware of how fragile its
political foundations are" (Raghuram & Luigi 8).
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The government has a resolution powers over banks and non-banks financial
institutions. In United States, the work in collaboration with Federal Deposit Insurance
Corporation is mandatory. This means that financial institutions are always under
statutory audit. This guarantees that banks are working properly and in accordance with
the law. From the other point of view, if a financial institution is seen to have problems, it
is taken over before it reaches bankruptcy stage. This is a strong measure that proves
its confidence to companies, small-scale traders, and households. They are deeply
concerned that there are no risks for their budget. In the end, it will be a self-fuelled
economy with money to lend at a favorable rate. Such stable environment created will
definitely attract investors, boost small businesses and companies.
Banks operate with a loan facility that they are given by the central bank. The
central bank in various countries issue the loans to banks at a certain rate of interest.
The banks on their side have the objective that each business has, that is of making
profits. When they are lending to their customer, they have to charge an interest that is
higher than the one the central bank is offering. It follows that if the central bank offers
credit to the banks at a higher rate then the rate of interest in the country will be
reduced. There are various reasons that can make the central bank to increase the rate
of interest. More than often it involves monetary policies that are used to reduce inflation
in the country. This is for the reason that if the bank’s interest rate is high, then the
loans are not attractive and thus the money in circulation will be reduced. When loans
are not attractive companies lack funds to invest and thus the economy suffers. If the
government wants to expand its economy it reduces the amount of interest that it lends
to commercial banks: the reduced interest trickle down to the consumers. Social welfare
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of the population will increase greatly along with investment in the economy. According
to De Soto:
I intend to demonstrate that the major stumbling block that keeps the
rest of the world from benefiting from capitalism is its inability to produce
capital. Capital is the lifeblood of the capitalist system, the foundation of
progress, and the one thing that the poor countries of the world cannot
seem to produce for themselves, no matter how eagerly their people
engage in all the other activities that characterize a capitalist economy.
(2).
Is State Action required to Create and Maintain the Markets in a Capitalist
Economy?
Forbes in his book "Capitalism: A True Love Story” notes that markets alone
cannot be left to control an economy. The economy cannot be left alone to regulate
itself. There is a need for government intervention in various strategic sectors of the
economy though it ensures that the control over it is as minimal as possible.
Regulations that are targeted at protecting the consumer will have a positive
effect on their lives. Consumers will be protected from dubious operations of banks and
insurance companies. Credit card and debit cards had been used by some traders to
exploit the general society and thus deteriorate their economic situation. With the help
of protective regulation, general public will have confidence in financial institutions
operating within their countries. When resources are mobilized, loans are more
affordable. Another way for the government to approach its regulation is by rewarding
“whistle blowers” with up to 30% of funds recovered, and by enforcing a resolution
power on Federal Deposit Insurance Corporation. This will result in an increased
service delivery which certainly counts as a benefit of the public.
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Fiscal policy is enforced to change and to lower the taxing and to increase
government spending. At the same time monetary policy is being controlled by the
Federal Reserve System and its aim is to lower interest rates and increase the money
supply. These two policies monetary and fiscal are enforced to cure a deflation or
inflation in the economy. If the government increases its lending rate to commercial
banks then the amount in circulation will be reduced. In this situation a country can
produce a variety of products at the lowest cost. When these goods are exported, they
are competitive enough to the benefits of international consumers as well as the local
ones.
By the way if the government employs an expansionary measure, for example,
by reducing its lending rate to commercial banks, the flow of money in the economy is
increased and as a result we have an increased cost of products. Goods are produced
at a high cost, they become expensive and hardly affordable to the local and
international consumer. It has a detrimental effect on the global economy. One of the
benefits of capitalism system is a usage of resources by maximum, spirit of competition
which producers experience when providing goods and services. At the same time
people enjoy a wide variety of goods and services offered, they enjoy recently increased
employment opportunities and improvements in health and standards of living. "This
concept presents similar difficulties as the concept of competition in the economic
sphere, with which it may be usefully compared. In economic life competition is never
completely lacking, but hardly ever is it perfect" ( Schumpeter, 271). For the past twenty
years a great number of countries have entered into the group of global leading
economies at the same time reducing in the number of people living in poverty. Many
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trade unions have been established, for example, the European Union, which accrues
many benefits to its members. Citizens of the European Union member countries have
a huge advantage of travelling to any country which is a member of EU.
Free trade as an element of capitalism has brought a new economic integration,
which has promoted co-operation among nations. Nations can seek help or assistance
from other international countries in times of difficulties. International trade has also
helped nations in realizing their potential. Some nations are well known for the
production of petroleum products while others are popular for the production of
agricultural products, such as, coffee and tea. With globalization, information can be
shared and dispersed easily among nations. "Every developed nation in the world at
one time went through the transformation from predominantly informal, extralegal
ownership to a formal, unified legal property system" (Soto 12-56). Various decisions
are taken by the government to minimize chances of the private sector to take control
over society. Some important spheres that may influence greatly on the economy of the
country are kept in hands of the government those are, for example, laying of roads,
sources of communication and other. There is no doubt that fruitful international
relations might facilitate trading but unfortunately the private sector has absolutely no
influence under establishing these relations. The main goal of the private sector is to
make profit and thus leaving the economy in their hands could be dangerous and less
productive.
Can The State Substitute for Markets?
Forbes in his book "Capitalism: A True Love Story” notes that the trend of the economy
requires both the anticipation of the government and private sector. The government
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actually is the capital owner and people in the economy are only used as laborers.
Such kind of governance cannot dictate its rules for a long. It leads to great poverty and
people feel oppressed by the government. In the past, we may find many examples of
government-controlled economies existence. "Individuals and groups are swayed
primarily by economic motives, which in some important respects is wrong and for the
rest piteously trivial. " (Schumpeter 11).
Centrally controlled economy is a first step to totalitarian dictatorship which
simply gives all the rights and powers to the government to take control and use its
population. This is the only system that gives the power for a dictator to make people
dependent on the government. This is a system of highly centralized government where
one political party or a group of people takes control over others and expresses neither
recognition nor tolerance to others. The totalitarian type of economy makes it possible
for the dictator to take control over each sphere of public and private life of the workers
by using terror and violence to force obedience, crush opposition and make them
dependent on the government.
Government is the only power that determines the route of relationship that the
country should follow with the outside world. The public cannot influence on the decision
that the government has made towards international agreement. In its turn the
government is the only body that has a right to dictate rules for private and public life of
its citizens. Civil societies have no right to organize for strikes to express their
disagreement. On the other hand, colonialism took the form of socialism, which caused
much unrest in different countries. Zimbabwe became the poorest country in the world
when the government started to control all resources in the country. It has shown us
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that full control initialized by the government is not good for the economy and thus a mix
with capitalist system is important (Forbes 1-24).
Conclusion
Capitalism is a form of an economic policy where involvement of the private
sector is highly supported by the government. In this market, the government plays a
role of the observer, their aim is to oversee the process and make sure everything is on
the right track. Transport and communication networks are offered as supportive
facilities. It attracts investments and provides perfect international and regional linkages
in trade. Government uses monetary, fiscal and administrative measures to regulate
market. Developed market structure is a backbone of the economy of any country which
is essentially important for the economy in whole. Administrative measures are taken in
order to benefit the operation of the economy as they protect consumers. Regulations
have an effect on global social-economics, it gives confidence to companies, smallscale traders and investors of their financial safety and as a result we have increased
resources mobilization. However, some expansionary measures injure global socialeconomic as they lead to an increase in cost of goods. It is a common known fact that
economy cannot work effectively if its not controlled by the government this applies to
both capitalist or fully government regulated. These two types of economic strategy
need to be integrated in order to achieve the most favorable results.
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Works Cited
Bradley, Robert JR., and Donway Roger. "Capitalism, Socialism, and "the Middle Way"
A Taxonomy." Independent Review 15.1, 2010.
Boltanski, Luc., and Chiapello, Ève. The New Spirit of Capitalism. New York: Verso,
2005. Print.
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De Soto, Hernando. The Mystery Of Capital: Why Capitalism Triumphs In The West
And Fails Everywhere Else. New York: Basic Books, 2000. Print.
Forbes, Steve. "Capitalism: A True Love Story." Forbes 184.7, 2009 :1-24.
Raghuram G Rajan., and Zingales, Luigi. "Making Capitalism Work for Everyone."
National Interest. 20 Apr. 2007. Web. 15 Jan. 2012
<http://faculty.chicagobooth.edu/raghuram.rajan/research/papers/World%20Economics.p
df>
Schumpeter A. Joseph. Capitalism, Socialism and Democracy. New York: Routledge,
1994. Print.
Vander Weyer, Martin. “Can free trade be fair trade?” New Statesman. 28 Feb.2005.
Web. 15 Jan.2012 <http://www.newstatesman.com/200502280013>