CAPITALISMCAPITALISM

Janu – Lee C. TarnateJanu – Lee C. Tarnate

What is What is Capitalism?Capitalism?

Capitalism, economic system in which Capitalism, economic system in which private individuals and business firms private individuals and business firms carry on the production and exchange carry on the production and exchange of goods and services through a of goods and services through a complex network of prices and complex network of prices and markets (Peterson, 2005).markets (Peterson, 2005).

Although rooted in antiquity, Although rooted in antiquity, capitalism is primarily European in its capitalism is primarily European in its origins; it evolved through a number origins; it evolved through a number of stages, reaching its zenith in the of stages, reaching its zenith in the 19th century. From Europe, and 19th century. From Europe, and especially from England, capitalism especially from England, capitalism spread throughout the world, largely spread throughout the world, largely unchallenged as the dominant unchallenged as the dominant economic and social system until economic and social system until World War I (1914-1918) ushered in World War I (1914-1918) ushered in modern communism (or Marxism) as modern communism (or Marxism) as a vigorous and hostile competing a vigorous and hostile competing system.system.

The term The term capitalismcapitalism was first  was first introduced in the mid-19th century by introduced in the mid-19th century by Karl Marx, the founder of Karl Marx, the founder of communism. communism. Free enterpriseFree enterprise and and market systemmarket system are terms also are terms also frequently employed to describe frequently employed to describe modern non-Communist economies. modern non-Communist economies. Sometimes the term Sometimes the term mixed economymixed economy is used to designate the kind of is used to designate the kind of economic system most often found in economic system most often found in Western nations.Western nations.

The individual who comes closest to The individual who comes closest to being the originator of contemporary being the originator of contemporary capitalism is the Scottish philosopher capitalism is the Scottish philosopher Adam Smith, who first set forth the Adam Smith, who first set forth the essential economic principles that essential economic principles that undergird this system. In his classic undergird this system. In his classic An Inquiry into the Nature and An Inquiry into the Nature and Causes of the Wealth of NationsCauses of the Wealth of Nations (1776), Smith sought to show how it (1776), Smith sought to show how it was possible to pursue private gain in was possible to pursue private gain in ways that would further not just the ways that would further not just the interests of the individual but those of interests of the individual but those of society as a whole.society as a whole.

Capitalism has also returned to its Capitalism has also returned to its roots, in the free market, and roots, in the free market, and many defenders contend that the many defenders contend that the problems capitalism encountered problems capitalism encountered were due to a loss of faith in the were due to a loss of faith in the free economy.free economy.

The Principles of The Principles of CapitalismCapitalism

Private Private OwnershipOwnership

Private ownership Private ownership of propertyof property

“…“…human beings are most effectively human beings are most effectively motivated by self interest (Sargent)”motivated by self interest (Sargent)”

In economics, this means that In economics, this means that individuals should be free (free individuals should be free (free market) to pursue their interest market) to pursue their interest (profit).(profit).

Private ownership of the means of Private ownership of the means of production is the most fundamental of production is the most fundamental of the institution of capitalism, along with the institution of capitalism, along with freedom and the pursuit of material freedom and the pursuit of material self – interest.self – interest.It underlies the division of labor on It underlies the division of labor on private ownership of the means of private ownership of the means of production is based on the very production is based on the very nature of the gains provided on the nature of the gains provided on the division of labor (Reisman,1990).division of labor (Reisman,1990).

““In order for a person to act In order for a person to act and produce on any and produce on any significant scale… they must significant scale… they must hold wealth separately and hold wealth separately and independently from one independently from one another (Reisman, 1990)…”another (Reisman, 1990)…”

The Effects of a Free MarketThe Effects of a Free Market

Goods will be sell cheaply as Goods will be sell cheaply as possiblepossible

Jobs will be createdJobs will be created

The entire economy will be The entire economy will be stimulated and grow, producing a stimulated and grow, producing a higher a higher standard of living higher a higher standard of living to everyone.to everyone.

No legal limit on No legal limit on the accumulation the accumulation

of Propertyof Property

No legal limit on the No legal limit on the accumulation of accumulation of

propertypropertyFor capitalist, liberty is founded For capitalist, liberty is founded on private property.on private property.The right to hold and use property The right to hold and use property is the key to functioning in the is the key to functioning in the free market, and thus any attempt free market, and thus any attempt to limit property holding hits of the to limit property holding hits of the whole system (Sargent).whole system (Sargent).

The amount of property and The amount of property and money held by individuals directly money held by individuals directly affects the amount of money they affects the amount of money they spend (Sargent).spend (Sargent).

The amount of individuals spend directly The amount of individuals spend directly affects the amount of industry can affects the amount of industry can produce; the amount of industry it can produce; the amount of industry it can produce affects the amount of number of produce affects the amount of number of people it can hire; the amount the people it can hire; the amount the industry can hire again affects the industry can hire again affects the amount of money available to be spent amount of money available to be spent by individuals for the products of the by individuals for the products of the company.company.

Free Market – No Free Market – No government government

intervention in the intervention in the economyeconomy

The Free Market – no The Free Market – no government intervention government intervention

in the economyin the economyNo government No government intervention/regulation in the intervention/regulation in the economy because it destroy the economy because it destroy the capitalist system, and, hence, capitalist system, and, hence, individualism and liberty.individualism and liberty.

Economic freedom promotes political Economic freedom promotes political freedom because it separates economic freedom because it separates economic power from political power and in this way power from political power and in this way enables the one to offset the other.enables the one to offset the other.

With economic freedom, the relationship With economic freedom, the relationship between the government and centers of between the government and centers of economic power is rather like the checks economic power is rather like the checks and balances system within the and balances system within the government.government.

There is a free market toward the There is a free market toward the establishment of a uniform rate of establishment of a uniform rate of profit on capital invested in all profit on capital invested in all different branches of industrydifferent branches of industry

The uniformity-of-profit principle is The uniformity-of-profit principle is what keeps the production of all what keeps the production of all the different items directly or the different items directly or indirectly necessary to our indirectly necessary to our survival in proper balance.survival in proper balance.

In a free market there is a In a free market there is a tendency toward the tendency toward the establishment of a uniform price establishment of a uniform price for the same good throughout the for the same good throughout the world.world.

In a free market there is a In a free market there is a tendency toward the equalization tendency toward the equalization of the price of a good in the of the price of a good in the present with the expected price in present with the expected price in that good in the future.that good in the future.

In a free market there is a In a free market there is a tendency toward an equalization of tendency toward an equalization of wage rates for workers of the wage rates for workers of the same degree of ability.same degree of ability.

What is The Role of What is The Role of the Government?the Government?

Government is a social institution Government is a social institution whose proper function is to protect whose proper function is to protect individual from initiation of force.individual from initiation of force.

it exists to make possible an it exists to make possible an organized, effective defense and organized, effective defense and deterrent against the initiation of deterrent against the initiation of force (Reisman, 1990).force (Reisman, 1990).

The Profit motiveThe Profit motive

The profit motives provides The profit motives provides powerful incentives for the steady powerful incentives for the steady expansion and improvement of expansion and improvement of production and, at the same time production and, at the same time operates to keep the relative size operates to keep the relative size of all the various industries and of all the various industries and occupations in proper balance occupations in proper balance (Reisman, 1990).(Reisman, 1990).

The profit motive is what balances the The profit motive is what balances the demand and supply of each product demand and supply of each product and ensures the most rational and and ensures the most rational and efficient distribution of each product efficient distribution of each product over space and time – among all over space and time – among all markets that compete for it- and its markets that compete for it- and its delivery into the hands of those delivery into the hands of those individuals who, within the limits of individuals who, within the limits of their wealth and income, need or their wealth and income, need or desire most (Reisman 1990).desire most (Reisman 1990).

The profit motive ensures the most The profit motive ensures the most rational and efficient allocation of rational and efficient allocation of capital and of every type of labor and capital and of every type of labor and material among its possible alternative material among its possible alternative uses, and makes the economic system uses, and makes the economic system respond to changes in economic respond to changes in economic conditions in the most rational and conditions in the most rational and efficient manner possible (Reisman, efficient manner possible (Reisman, 1990).1990).

Thus, the profit motive is what Thus, the profit motive is what prevents any sort of “anarchy of prevents any sort of “anarchy of production” and, instead creates production” and, instead creates economic order and harmony who economic order and harmony who comprise the economic systemcomprise the economic system

Thus, Capitalist Thus, Capitalist believes that the profit believes that the profit motive drives people to motive drives people to succeed and create succeed and create wealth (Sargent). wealth (Sargent).

Critics of CapitalismCritics of Capitalism

Result of Capitalism…Result of Capitalism…

extremes of wealth and power, the extremes of wealth and power, the power such wealth gives its owners power such wealth gives its owners over the political processes,over the political processes,

and the extreme inequality between and the extreme inequality between employer and employee (Sargent).employer and employee (Sargent).

Sources: Sources:

Reisman, George (1990). Capitalism: A Reisman, George (1990). Capitalism: A Treaties on Economics. James Book, Treaties on Economics. James Book, Ottawa Illinois. Ottawa Illinois.

Fin…Fin…

Merci beaucoup!Merci beaucoup!