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Principles of Capitalism Illustrations by Tony Biddle Please Note • This curriculum material has been developed by the Canadian Centre for Policy Alternatives and is provided to support union, community, and non-profit organizations to undertake popular economics training. • Non-commercial use and reproduction, with appropriate citation, is authorized. • Commercial or professional use is prohibited without approval from the Canadian Centre for Policy Alternatives, Ottawa, Canada. • This material has been edited by the NYC Virtual Enterprises Office for educational purposes. Some of the original slides may have been removed and replaced with other slides. www.economicsforeveryone.com © Canadian Centre for Policy Alternatives, 2009 Key Topics Covered • Defining features of capitalism • Changes in capitalism – “Post-Industrial” or “Services” Economy – “Information” or “Knowledge” Economy – “Shareholder” Economy • Types of capitalism – – – – Anglo-Saxon Continental Asian Nordic Capitalism: One Kind of Economy • All economies require work to be done to produce the goods and services we need. • But they organize that work (and the distribution and use of output) differently. • Our economy today does that in a particular way. – It’s called “capitalism.” • Strange irony: mainstream economics almost never mentions the word “capitalism.” – They assume that it’s a “natural state of affairs.” – But that’s wrong: capitalism is a historical stage. How Capitalism Functions • Wealth-seeking individuals choose to invest in different business ventures and modes of production, this concept sets the entire economy in motion. – Capital is initially invested to create a business, more capital is generated by the created business and then reinvested to increase capital production capability of the business The Two Defining Features of Capitalism 1. Most production is initiated & undertaken by private companies who aim to generate profit from this activity. • “Production for profit.” 2. Most work is performed by individuals who work for someone else in return for money (wages or salaries). • • “Wage labor.” We call this type of work “employment.” How Capitalism Works • • Most of the world economy today is capitalist. The key features of capitalism tend to produce & reproduce key behaviors over time, including: – – – – – – Competition between private companies for markets, sales, and profit. Innovation, as companies constantly experiment with new technologies, new products, and new forms of organization. An inherent tendency to growth, resulting from the desire of each individual company to make more profit. Deep inequality between those who own successful companies and the rest of society who do not own companies. General conflict of interest between those who work for wages and the employers who hire them. Economic cycles or “rollercoasters,” with periods of strong growth followed by periods of stagnation or depression. Changes in Capitalism Some aspects of capitalism have evolved. • The “post-industrial” or “service” economy – Shrinking importance of goods and increasing importance of services • The “information” or “knowledge” economy – Economy centered on information rather than commodities • The “shareholder” economy – Individuals can own shares or other forms of financial wealth – Fixated on maximizing interest of the shareholder Labor Force by Sector 1840-2010 1950–2010: Bureau of Economic Analysis, National Income and Product Accounts. Output by Sector 1840-2010 1950–2010: Bureau of Economic Analysis, National Income and Product Accounts. Has it changed? • But the core “logic” of capitalism (production for profit and wage labor) is still present. The system has not fundamentally changed. • Some argue that the problems associated with “older” versions of capitalism (inequality, poverty, or social conflict) have been “solved. Varieties of Capitalism • • The core common features (production for profit & wage labor) are visible in every capitalist economy. But there are important differences between versions or “models” of capitalism. • • • • Anglo-Saxon: The most unequal, deregulated, and financialized type of capitalism. Continental: Larger state, more regulation. Asian: State plays leading role in economic and industrial development. Nordic: Very large public sector, most equal income distribution. Anglo-Saxon Model • Associated with the United Kingdom, the United States, Canada, New Zealand, Australia and Ireland • Patterned after the classical economics of Adam Smith – “invisible hand” • Based on principle that government intervention in the economy should be limited • Heightened free-market tendencies • Less regulated financial and labor markets Continental or European Model • Usually associated with France, Germany, and Italy • Places less faith in the “invisible hand” • Calls for increase government intervention in economic activity • More state ownership East Asian Model • • • • Currently associated with Japan, South Korea, China, and Taiwan Varying degree of government ownership and control Government decides which industries are important and invest in those sectors Exists in several different forms Nordic or Scandinavian Model • Usually associated with Denmark, Norway, Finland, Sweden, and Iceland • Large public sector • Citizens have a high degree of trust in the government • Strong focus on wealth distribution and less income inequality • Variety of social benefits (free healthcare and free education) Types of Capitalism (in the advanced countries) Type of Capitalism Role of government: taxes as share of GDP Role of government: economic regulation Financial sector (banks, stock market) Income distribution Managing income distribution Union coverage as % workforce AngloSaxon 30-35% Weak Very large Very unequal Market power 10-30% Continental 35-45% Moderate Moderate Somewhat equal Mild corporatist^ 50-90% Asian 25-35% Strong* Relatively small Somewhat equal Paternalist corporatist^ 10-20% Nordic 45-55% Strong Relatively small Very equal Strong corporatist^ 50-80% * The state is especially active in the Asian model in stimulating capital investment and managing the sectoral make-up of the economy. ^ Corporatism refers to a system of centralized negotiations between business, labor, and government. Homework Assignment In a short paragraph (consisting of 4-5 sentences) explain what the different capitalist models indicate about the social values that exist within that model. Example: The Scandinavian model shows how the people and government of the countries that follow the model care for the well-being of every citizen.