MOUNT KENYA UNIVERSITY

(NAKURU CAMPUS)

SCHOOL OF APPLIED SOCIAL SCIENCES

DEPARTMENT OF BUSINESS AND SOCIAL STUDIES

UNIT N TITLE: POLITICAL SYSTEMS AND DEVELOPMENT

UNIT CODE: BDS 121

TOPIC:

Discuss the advantages and disadvantages of capitalism as an economic system to be adopted by a country.

SUBMITTED TO: LECTURER DR. TARUS

SUBMITTED BY: JACKSON MAINA WANGOMBE

ADM. NO: 3013/10

DATE SUBMITTED: 19TH NOVEMBER 2011

Introduction

Capitalism as an extreme economic system developed incrementally from 16th century in Europe although pro-capitalism existed in the ancient world and early aspects of merchant capitalism flourished during late middle ages. Capitalism became dominant in the western world following the demise of feudalism. Capitalism spread gradually throughout Europe and in 19th and 20th century, it had provided the main means of industrialization in the majority of countries in the world. Today, capitalism system is the world’s most dominant form of economic model. This paper discuses some advantages and disadvantages of capitalist economic system. It starts with defining capitalism and highlights some of its economic elements , show how it works, includes some of the roles government plays, gives it advantages and disadvantages and finally shows some various types of capitalism.

Definition of capitalism

Capitalism is an economic system in which the means of production are privately owned and operated for a profit. decisions regarding supply, demand, price distribution and investment are made by private actors in the free market. Profits are distributed to owners who invest in business and are paid to workers and are employed by business and companies. Some define capitalism as where all means of production are privately owned and some define it more loosely where merely ‘most’ are in private hands while others refer to the latter as a mixed economy biased towards capitalism.

More fundamentally, capitalism is a system where production is carried out to generate profit or exchange value regardless of the legal ownership titles. Private ownership in capitalism implies the right to control property including determining how it is used, who uses it whether to sell or rent tit the right to revenue generated by the property. Economists, political economists and historians have taken a different perspective on the analysis of capitalism. Economists usually emphasize the degree that the government does not have control over market (Lazier faire) and on property rights. Most political economists emphasize private property, power relations, wages, labour and class. There is a general agreement that capitalism encourages economic growth. The extent to which different markets are free as well as the rules defining private property is a matter of politics and policy and many states which are termed mixed economies. Karl Marx’s (1818-1883) nation of capitalism mode of production is characterized as a system of private ownership of means of production in a mainly market economy with legal or commerce and a physical infrastructure provided by the state. Other terms used to refer to capitalism are capitalist mode of production, economic liberalism, free-enterprise economy, lazier faire, market economy, market liberalism, self regulating market and economic elements in capitalism.

Economic elements in capitalist system

For any country to decide whether to adopt capitalism as an economic system it is good to know some of its main economic elements. Capitalist economic development interaction has a variety of elements. A product is one of major elements of capitalism. It is any good produced for exchange on a market. The second elements comprises ‘Commodities,’ which denotes the standard products especially raw materials such as grains and metals that is not associated with particular producers or brands and trades on organized exchanges. There are two types of products; capital goods and consumer goods. Capital goods that is raw materials and tools industrial machines vehicles and factories) are used to reduce consumer goods (for example televisions, cars, computers, houses) to be sold to others. There are three inputs required for production which includes labour, land and capital goods.

Capitalism entails land and capital goods. This is propelled by a class of owners called capitalists either individually or correctively or through a state apparatus that operates for a profit or serves the interests of the capital owners. Modern transaction involves money as the standard medium of exchangeable assets and the accumulation of money through ownership exchange interest and various other instruments. However, besides serving as a medium of exchange for labour and services, money is also store of value, similar to precious metals. Labour includes all physical and human resources including entrepreneurial capacity and management skills, which are needed to produce products and services. Production is the act of making products or services by applying labour power to means of production.

How capitalism works

In a capitalist economy, the price of goods and services are controlled mainly through supply and demand and competition. Supply is the amount of goods or services produced by a firm and which is available for sale. Demand is the amount that people are willing to buy at a specific price. Prices tend to rise when demand exceeds supply and to fall when supply exceeds demand. In theory, the market is able to coordinate itself when new equilibrium prices and quantity is reached. Competition arises when more than one producer is trying to sell similar products to the buyers. In capitalist theory, competition leads to innovation and more affordable prices. Without competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the total output in the market. The firm therefore limits output and raises prices because it has no fear of competition. A cartel is a group of firms that act together in a monopolistic manner to control outputs and to raise prices.

The role of government in a monopolistic economy

Government plays a vital role in the process of decision making and implementation in any country. Most importantly therefore because economic decisions affect other sectors in the country, it is now crucial to consider some of the roles government plays in a capitalist economy. In a capitalist economy system, the government does not prohibit private property or prevent individuals from working where they please. The government does not also prevent firms from determining the wages they will pay workers and what price they will charge for their products. Many countries however have minimum wage and laws and minimum safety standards. Under some version of capitalism, the government carries out a number of economic functions such as issuing money, supervising public utilities and enforcing private contracts. Others hand have competition laws that prohibit monopolies and cartels from forming. Despite antimonopoly laws, large corporations can form near monopolies near some industries.

In some countries, public utilities (for example electricity, heating, fuel and communication) are able to operate as monopoly under government regulation due to high economies of scale. Government agencies regulate the standards of services in many industries such as airlines and broadcasting industries as well as financing a wide range of programs. In addition, the government regulates the flow of capital and uses financial tools such as ‘interest rates’ to control factors such as inflation and unemployment.

Advantages of capitalism

Capitalism as an economic system has got several advantages. To start with, it enhances economic growth. Capitalism has been credited to the increased economic growth. In the years 1000 to 1820 world economy grew six-folds 50% per person. After capitalism had started to spread widely in the year 1820 to 1918, world economy grew 50-folds. That is 9-folds per person. Most regions such as United States of America, Europe, Canada, Australia and New Zeeland experienced a higher growth of 19-fold per person. Many theorists and policy makers in predominantly capitalist nations have emphasized the significance of capitalism in promoting economic growth as measured by Gross Domestic Product (GDP), capacity utilization and standards of living. This argument was central to Adams smith among other scholars, who advocated for free market control, production and price and allocation of resources. Many theorists have noted that this increase in global GDP over time coincides with emergence of the modern world capitalist system. Capitalist economy also offers more opportunities for individuals to raise their incomes through new professions or business venture than do other economic forms. Hence, this potential is much greater than in either traditional feudal or tribal societies or in socialist societies.

Second, there is economic freedom for individuals. Capitalism is said to have ability to expand individuals’ freedom. It allows individuals to engage in personal activities that do not contradict a country’s legislation freedom. Ayn Rand was a notable advocate of lazier faire capitalism and in best selling novel Atlas struggled has been an influential publication on business. Rand wrote that “capitalism is a social system based on the recognition of individual rights including property rights in which all property is privately owned.” The third advantage of capitalism is that it enhances political freedom. Milton Friedman argued that economic freedom of competitive capitalism is a requisite of political freedom. He also stated that centralized control of economic activities is always accompanied by political repression. Others who shared the same view were John Keynes and Fredrick Hayek, both of them believed that capitalism is both vital for freedom to survive and thrive.

Further, capitalism leads to technological improvement. The element of competition under capitalism drives producers to innovate something new to boost the sales and thereby bring about progress. In addition, capitalism leads to a flexible economic system. The shortages and surpluses in the economy are generally adjusted by the force of demand and supply. Thus, it operates automatically through the price mechanism. Capitalism also increases productivity in a capitalist economy or system. Every farmer, trader or industrialist can hold property and use it in any way he or she likes. He/she increases productivity to meet his or her self interest. This in turn leads to increased income, saving and investment.

Capitalism brings about welfare maximization. It is claimed that it leads to efficiency in production and resources use. The self interest individual also promotes societies welfare. Lastly, capitalism increases economic opportunities. Capitalism is opening up numerous opportunities with its competitive nature. It often leads to the creation of job opportunities. The success of American economy is credited with providing numerous job opportunities which is largely as a result of capitalism.

Disadvantages of capitalist economy

Capitalism as an economic system has got a variety of disadvantages. First, it leads to exploitation of labour. Stringent labour laws are enacted for the exclusive profit motive of capitalist. ‘Fire and hire’ policy has become order of the day. Such laws have also helped to exploit the labours by keeping their wage rate at its lowest minimum. Secondly, brings about increased mechanization and automation of modes of production. This will result in unemployment particularly in labour surplus economies. The effect is mostly felt in third world countries. In additionally, capitalism increases levels of Inequalities in income and wealth among individuals. The producers, landlord and traders reap huge profits and accumulate wealth. Thus, the rich become richer and the poor become poorer. The poor with limited means are unable to compete with the rich. Thus, capitalism widens the gap creating inequalities.

In a capitalist economic system, basic social needs are often ignored. There are many basic social sectors involved in providing literacy, public health, drinking water, social welfare and social security. As the profit margin in these sectors is low, capitalists are generally shy to invest in them. Hence, most of these vital human issues will be ignored in a capitalist system. As well, capitalism leads to economic exploitation of the poor. There is overproduction of goods and services due to heavy competition. The rich exploit the poor. The poor are not able to take advantage of the production and hence do not take part in sharing returns from input. This leads to economic instabilities.

Capitalism leads to increased monopoly. Mega corporation units replace smaller units of production. Firms combine to form cartels trust and in this process, bring about reduction in the number of reduction in number of firms engaged in production. They ultimately emerge as multinational corporations (MNCs) or transnational corporations (TNCs). They often hike the prices against the welfare of the consumers. Also, capitalism causes environmental degradation. The entrepreneurial ‘spirit’ of capitalism if not checked could result in massive destruction of the environment. The current challenges experienced as a result of industrialization are a result of uncontrolled industrialization, often the outcomes of capitalistic economy. Capitalism is associated with increased moral decay. Balance for the transfer of immoral forms of behaviours from western countr4ies is based on capitalism. The media, especially the internet has become global the movie culture into many parts of the world. In some countries like China, the information access to some citizens is regulated. Many religions have criticized or opposed specific elements of capitalism. Traditional Judaism, Christianity and Islam forbid lending money at interest although alternative methods of banking have been developed.

Types of capitalism

There are many variants of capitalism in existence. This call for economic, monetary and fiscal policy makers and people in other decision making bodies in various countries to choose which types of capitalism fits them. One of these is the free market capitalism. This consists of free price system where supply and demand are allowed to reach the point of equilibrium without the intervention of government. Productive enterprises are privately owned and the role of the state is limited to enforcing property rights. The second is the social market economy. It is normally free market system where government intervention in price formation is kept to a minimum but the state provide for moderate provision of social security, unemployment benefits and recognition of labour rights through national collective bargaining schemes. The social market is based on private ownership of business. A third type is the state capitalism. This consists of state ownership of profit seeking enterprises that operate in a capital manner in a market economy. Example includes corporate government agencies or partial ownership of shares in public-listed firms by the state. It also refers to an economy consisting mainly of private enterprises that are subjected to comprehensive national economic planning by government whereby the state intervenes in the economy to protect specific capitalistic businesses.

Another type is corporate capitalization. This is a free or mixed economy characterized by the dominance of hierarchical bureaucratic corporations which are regally required to pursue profit. State monopoly capitalism refers to a form of corporate capitalism where the state is used to benefit, protect from competition and promote the interest of dominant or established corporations. Another type of capitalism is mixed economy system. This refers to a largely market –based economy consisting of both public ownership and private means of production. In practice, a mixed economy will be heavily slanted towards one extreme. Most capitalist economies are defined as ‘mixed economies’ to some degree characterized by dominance of private ownership.

Conclusion

All nations in this world are striving hard to register and achieve positive economic growth. One aspect that is considered to indicate people’s welfare is the rate of economic growth in terms of gross domestic product (GDP).

This being the case, then, an invitation is now made to all economists, politicians, historians and vital stake-holders in a country to consider which type of capitalism is best for their particular nations. However, a keen precaution should be taken when deciding on which type of capitalism to adopt. It also advisable to be keen and investigate the benefits derived the different types of capitalisms. The biggest challenge remains to countries which have a contrary opinion about capitalist economic system. This is because impacts of globalization is affecting all nations in the world leaving opponents with only few options that is to embrace capitalism or be left behind and isolated.

References

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