6. Capitalism

JAFGAC COMPARATIVE CULTURAL ECONOMICS 331

CAPITALISM AND MARKET ECONOMIES

Comparative Cultural Economics

Dr. J. F. García III

2JAFGAC COMPARATIVE CULTURAL ECONOMICS 331

Capitalism

• Developed by Adam Smith and the Classical Economists: David Ricardo, John Locke.

• Economic institutions are the building blocks from which the economic system is construed.

• All factors of production are privately owned and control instead of just capital. In Canada the government (Queen) owns the land.

• Right of individuals to employ their talents and energies in the time they feel best.

• Non economic institutions and culture have significant bearing: freedom of religion and speech, press, democracy, abortion, merge, etc.


Capitalism

– a system of economic organization in which individual persons, singly or in groups, privately own the factors of production and possesses the right to use and dispose those economic resources generally in whatever matter they choose

• economic activities will be conducted by managers of firms instead of entrepreneurs (Joseph Schumpeter) - freedom of enterprise


Capitalism

• Capital is tangible things which are not directly use for consumption, but instead, assist in the production of goods.

• Distinguishing feature is the use in which it is put.

• capitalism is not distinguish by the mere physical presence of capital nor relatively capital intensity methods of production.

• Capitalism is not just the use of capital but also other FOP.


Institutions of Capitalism

• 1. Competition.• 2. Protestant work ethic.• 3. Private property.• 4. Freedom of Enterprise and choice• 5. Competitive market.• 6. Individualism (what about Japan –

collectivism?).• 7. Government with regulatory measures.


Capitalism– Requirements

• Competition. • Unlimited use of wants .• non-economic institutions and culture have

significant bearing in capitalism in its development.

• there should be some economic institutions in capitalism - private property - freedom of enterprise and choice - competitive markets - limited government - competition - individualism - Protestant work ethic.

• Private Property - right of individual to control property and the right to enjoy the economic rewards that result - government protects owners claims.


Capitalism• benefits are:

• (1) allow prices to reflect supply and demand (willingness, ableness, opportunity costs, and utility maximization),

• (2) will show prices and costs to be efficient,

• (3) encourages innovation, invention, flexibility, and decrease in the long run cost,

• (4) encourages equitable distribution of income,

• (5) provides a variety of goods and services.


Capitalism• functions: • (1) does not refer to only tangible

things (intellectual rights), • (2) encourage accumulation of

private property - encourages the private savings of private and corporate income

• (3) inheritance - generational transfer of wealth - separate from but attached to private property - not based on merit


Capitalism– Economic Institutions

• private property• Freedom of enterprise • competitive markets - circular flow

(factor market [supply] and product market [demand]) - owners of FOP and demanders of FOP and how they interact - to be competitive, nobody is coerced - free interaction - .

• government with regulatory matters.


Conditions of Capitalism (perfect competition)

• Product Market.• Factor Market.• Distribution of Income.• Consumers maximize total utilities or

satisfaction instantaneously and without cost, firms likewise, maximize their total profits and factor owners maximize their income.

• Consumers, firms, and FOP can enter and exit the market without costs or penalties.

• There are sufficient number of firms, costumers, and owners of FOP in each market so everyone is a price taker.


American Capitalism

• Capitalism as an existing system.• - it has imperfections originated in

the private sector or attributable to the government.

• - it is not pure capitalism. • - Largest system of production in

the world.• - Endowed with variety and quantity

of factors of production.


American Capitalism

• There are two sources of market failure:

• Private: transaction costs, economies of scale/scope, corporate business organizations, and labor unions.

• Public: public goods, public utilities and natural monopolies, indirect controls and subsidiaries, and regulations and regulatory agencies.


American Capitalism

• Private sources of failure:• Transaction costs: search, negotiation, litigation,

advertising, distribution, and transaction costs.• Economies of scale and scope: decrease in per unit

cost achieve by producing large volumes gives monopoly conditions to a firm.

• Corporate business organization or legal business organizations: market prices and entrepreneurial planning determine all decisions for profit maximization. It also allows for mergers.

• Labor unions: monopsony power and therefore, can charge higher price than otherwise.


American Capitalism

• Public sources of cost failure (government) - violations of pure capitalist systems - government distorts prices instead of allow the price to be determined through equilibrium:

• Provision of Public goods: free rider and externalities.

• Public utilities and natural monopolies (antitrust laws): regulation of economic activities because monopolies create consumer convenience and decreases costs. .

• Indirect controls and subsidies: government activities which depart from competition such as fiscal and monetary policies (Fed) and grants.

• Regulations and regulatory agencies: government intervention through quasi organizations.


Strengths of US Capitalism

• Flexibility.• Raising standard of living.• Individual opportunity.• Technical progress.• Economic development – not just

growth but also happiness, standard of living, health, education mortality rate and variety.


Weakness of American Capitalism

• Shortcomings of institutions when promoting human welfare:

• Pecuniary vs. human values (monetary vs. non-monetary values).

• Unemployed resources.

• Inequality.


Future of American Capitalism

• Continue preservation of rights and freedoms.• Democratic political institutions prevail.• Long run economic growth of real national income (4% or

higher).• Advance production technology and full employment of all

productive resources.• Application of wage labor regulation.• Relative price stability.• Control of inflation, unemployment, budget deficits.• Can give long range goals despite not being a planning system.• country has to big of a size of production to make predictions.• In reality oligopolies and administrative prices exist.• Fiscal and monetary policies are avenues through which

capitalism may acquire its goals.• Increase and constant government regulations may seriously

impair the system in the long term.• Difficult to preserve each private individuals’ interest rights.• Automatic competition of large firms and large capital

investment.


Sweden• Best example of capitalist welfare system with

Social Democratic Government.• is a market system dominated by a Social

Democratic Party.• socialism through gradual reform to socialism,

rather than revolutionary change (most European have gone through gradual but revolutionary changes).

• democracy is a route to the establishment of socialism in Sweden - transformation from old-style capitalism to contemporary managed capitalism.

• democratic socialism meant, traditionally, government ownership of industries (Nazi Germany).


SwedenSix policies used in Sweden:

1. monetary and fiscal policies.

2. private ownership and price system.

3. means associated with socialism - planning (rejected in 1994).

4. equality - reduction in inequalities of income, wealth, and occupation.

5. allocation of resources between private and public sectors.

6. power and participation of private associations: L.O. (confederation of trade unions) and S.A.F. (employers association).


Sweden

• Four types of government Economic Planning:

• 1. provision of government services: education, medicine,

housing, national defense. • 2. macroeconomic aggregate

plans.• 3. government owned enterprises.• 4. guidance of private sector and

stabilization of income.


Sweden’s environment & Culture

• Geography has been kind to Sweden, relatively isolated in the Scandinavian peninsula.

• The Swedes had not participated in major war save for the fight against Napoleon.

• Spare the economic and human devastation of WWI & WWII.

• Neutrality has allow them to devote only a small share of the national income to military and military related expenses (23%).

• Rich in natural resources: timber, wood pulp, iron, gold, fishery, services.


Sweden

• Social democracy: socialism through gradual reform of capitalism rather than violent revolutions.

• Unlike USA, Russia, and Germany but very similar to Japan.

• Population has a high degree of ethnic and religion homogeneity.

• 96% of population are Germanic Scandinavian of the Lutheran faith.

• Serf-lord never took place because servants maintained their freedom.

• Heavy welfare state where the income is redistributed from one cultural group to another and the “haves” can not be distinguish from the “have nots”.


Sweden

• Solidarity of Swedish workers and welfare state policies have provided stable prices, low inflation, low unemployment (2%) and economic growth.

• Like Japan, Sweden has penchant cooperation and consensus rather than conflict and litigation.

• Fiscal stabilization methods with tax advantages during economic stagnation.

• Institutional form of income policies with wage policies, trade unions, and association of employers.


Sweden’s Democratic Socialism

• Democracy as a route to the establishment of a socialist economy and extension of democracy from politics into the economy, industry, and society at large.

• It is part of the transformation from the old style capitalism to contemporary managed capitalism.

• Traditional democratic socialism meant government ownership at least of strategic and basic industries, and government planning on means beyond the market to values establish as basis to control private, public, and economic power.


Managed Capitalism in Sweden

1. Monetary and fiscal policies.2. Private ownership and market prices.3. State polices control industry and

comprehensive planning.4. Equality: reduction of inequality of income,

wealth, and position (occupation).5. Allocation of resources between private and

public sectors.6. Power and participation of private

organizations.


Great Britain: Declining Capitalism

• Reasons for declining capitalism:• Failure to maintain a technological lead.• Slow in capacity to produce energy, chemicals, steel,

and other major and integral industries.• Government laissez faire policies in advance

technology and production.• Financial power was attributed to the spirit of middle

class but the third generation declined symptoms (apathy).

• Government encouragement of mergers.• Labor legislation and union growth.• Fraud, negligence, and monopolistic banking

practices and financial regulations.


Great Britain

• Not a socialistic state but a mixed capitalism with failures such a social reforms and nationalization.

• Government discretionary policies have allowed socially owned industries.

• Social security system, unemployment compensation, welfare and retirement programs are less comprehensive than other developed countries such as Japan, Germany, and Scandinavia.


Great Britain• Power resides in different degrees with the

consumer, the firm or some social collective (local, regional or national) government.

• Private firms are free to determine their output and input mixed in pursuit of profit maximization.

• Individuals have the right to freely choose employment and what he/she wishes to consume.

• Firms are small in most industries.• Nationalized industries are market oriented.• Government intervenes in the economy but it is

limited to changing the environment of doing business and induced people to do things rather than forcing them.


Great Britain• Capitalist economy with a strategic sector of

socially owned industries.• The locus of decision making is principally

private and decentralized with a number of social programs running directly by a subsidized levels of the government.

• The market signals and directs the activities of most economic actors with even the socially owned industries responding to the market forces and dealing thorough markets with the private sector.


France• Great exporter of ideas through the

physiocrats, natural economic order, policy of laissez-faire, circular flow model, national economic planning, and indicative planning.

• Indicative planning was established after WWII to improve the operations of the market mechanism through cooperation and exchange of information among all sectors of the circular flow.


France: Indicative Planning

• Compliance with plan is voluntary but it is encourage by government financial and regulatory actions and by relatively new system of plan contracts.

• Modern mixed economy with a unique blend of economic institutions.


France’s criteria of Mixed Economy

• Private vs. Public sectors:• Private ownership is predominant but the public

sector by US standards is quite large, the state owned public utilities, energy industry, airlines, railroads, control interest on petroleum, autos, aircrafts, banks, large sector of insurance industry, and other major industries.

• Approximately 40% of GDP flows through the central government including goods and services and transfer payments.



• Power:• Economic power (market and circular flow) in

France resides both in the individual consumer and private firms as well as the state.

• The private decision maker is free to choose his/her employment and consumption patterns.

• The private firm is free to determine its output and input mixed.

• Collective decision making has a powerful influence in the nature of private decisions.



• The state is able to modify many parameters entering into the private decision making and thus able to modify the decisions themselves by using the following techniques:

• Indicative planning.• Planning organizations.• Planning cycles.• Monetary and credit controls.• Taxes and tax policies.• Wage controls.• Development of income policies.• Social welfare.• Regional planning.



• Resource allocation among competing uses:• signals of resource allocation is done by the

market.• despite extensive government influence in the

economy and national plans, few economic actions are the result of the direct order of the government.

• government intervene in the market by altering the demand and supply conditions but this intervention is reflected in the changing costs of doing business and influence the profitability of the private sector.


Germany• Mixed capitalism characterize by social market

economy, neoliberalism, and codetermination.• Private property predominates but the

government owns and runs wide variety of enterprises.

• Although the great majority of economic decisions are made by individual consumers and firms, collective decision making has a significant impact on the structure and direction of the economy.

• Government influences the economy through the operation of a large budget.


Germany

• The market carriers the economic decisions, public as well as private.

• Although the state sector is large, most state owned enterprises act independently and are concerned with their profitability.


German’s Neoliberalism• Luidwig Erhart and Walter Ericken.• Alternative philosophy to laissez faire, total

planning of China, or partial planning of France and Sweden.

• The efficiency of the price system combined with competition and monetary stability and the need of the government interference.

• The government primary responsibility is to promote competition by removing trade and market barriers, state controls, and by dissolving economic groups.

• Price stability is ensure only by the government responsibilities to conduct monetary policies.


German’s Neoliberalism• Neoliberalism is compatible with

government redistribution of income, social welfare programs and measures, and environmental control.

• Market equilibrium may be government manipulated including changing in technology and demand conditions, and countercyclical policies.


German codetermination

• Workers are given a voice in the management of their companies.

• Employees are able to participate in management through work councils and through representation on corporate supervising boards.

• Work councils are in charge of job evaluations, overtime, breaks, holiday schedules, recruitment selection, dismissal, training, and safety of workers.


Germany’ social market economy

• Social Market Economy (SME): created after WWII with one of the most extensive welfare systems in the world which combines market system efficiency with the decency of the welfare state.

• SME is based on a rejection to central planning and an affirmation of the market system with an active effort to abolish cartels and establish competition, a supply side fiscal policies, a monetary policy dedicated to price stability, and extensive social welfare system.


Japan

• Modern economic growth was launched in 1868, when the Meiji restoration abolished feudal controls and opened the nation to foreign trade and technology.

• Market economy based on the feudal Samurai system.• After the devastation of World War II, rapid economic

growth resumed in the 1950's and 1960's, caused first by the growth of the capital stock and then by the contributions of knowledge and technology, the growth of the size and quality of the labor force, economies of scale, and the shift of laborers from primary production to industry.

• The Japanese economy was shaken by the oil shocks of the 1970's, the bubble economy of the late 1980's, and the collapse of the bubble during the early 1990's. Now it is passing through a difficult process of administrative reform and deregulation.


Japan• The business community is organized in a dual

market structure: very large businesses and very small businesses with few in the middle.

• Many of the big companies are members of zaibatsu and keiretsu conglomerates, which provide protected markets and financing for their members and exert considerable influence over governmental policies.

• The small companies are centered in distribution and subcontracting; they serve to reduce labor and inventory costs and to absorb the effects of business cycles for the larger firms.


Japan• The labor market, which is credited with much of

Japan's success, is organized around a relatively docile network of company unions that participate in a semi-decentralized system of collective bargaining known as the Spring Labor Offensive.

• The lifetime employment system, which applies to more than one‑quarter of the work force, strengthens the family spirit of enterprises and may encourage technological innovation, but it reduces labor mobility and may impose a burden on employees who are not covered by the system.

• Support for lifetime employment seems to be waning among both employers and employees.

• Pay is strongly influenced by seniority and a relatively large proportion is paid in bonuses. The latter may help to explain the high savings rate and the low unemployment rate in Japan.


Japan• Led by the Ministry of International Trade and

Technology (MITT) and centered on the large city banks, the Japanese financial system played a pivotal role in the growth miracle and in the rise and fall of the bubble economy.

• Individual families were encouraged to save by the convenience and tax advantages of the postal savings system.

• Today, Japan is passing through a "Big Bang" program of financial reforms, designed to strengthen the efficiency and competitiveness of the system.

• The government plays a limited role in the economy in direct taxation, expenditure, and nationalization. It plays an important role, however, in regulation lending, and the formulation of indicative plans and industrial policies.


Japan• The Japanese culture is influence by three values of

Confucianism ethics which are of particular interest: loyalty, reciprocal obligations, and honesty in dealing with others. This creates ethics of hard work and cooperation between management and labor for the good of the company.

• Reciprocal obligations and honesty fosters trust between companies and sellers in Japan, and therefore, long-term relationships which help with inventory reductions, quality control and joint designs to improve organizational competitiveness.

• Individual entrepreneurial lacks because it is a product of individual mind-set and not groups. On the other hand, the United States values individualism and innovation, e.g., biotechnology and computers.


Japan’s indicative planning• Uses the market to coordinate short run

decisions in combination with plan to coordinate long run decisions.

• Includes broad goals for the entire industries over a long time horizon.

• Private companies are not legally required to comply with plan targets, but the government may use fiscal and monetary policy instruments to encourage voluntary compliance.

• The government plays a limited role in direct taxation, expenditure, and nationalization.

• It plays an important role, however, in regulation, lending, and formulation of indicative plans and industrial policies.

• Japan uses quality control circles.




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6. Capitalism