Last Updated 08 May 2020

What Is Capitalism?

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Capitalism is a system based on economic enterprise involving exchanging within the market, it is a private economy where profit-seeking establishments employ salary-earning employees to carry out the production of goods and services (Stanford,2008).

Advocators of capitalism are those who support an economic system based on the freedom of private ownership (Amadeo, 2018). It would be difficult to find a pure capitalist country at present as similarly like a number of other systems, capitalism can’t be pronounced as a perfect system as there are always weaknesses that come to light.

However, it still functions in our society today due to its’ capability of changing and enriching countries (Mankiw,2003). In a relatively capitalist society, it is likely the indifference between the unfortunate and the domination of the fortunate will cause friction due to wage labour occurring (Stanford,2008).

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Capitalism is the only necessary condition for political freedom, history suggests (Friedman,2002). Throughout this essay I will be discussing and analysing capitalism through the key thinkers Adam Smith, John Manyard Keynes and Karl Marx’s beliefs to make a judgement on their ideas to decide which is more realistic in terms of running a successful economy. I also aim to evaluate if the ‘economic freedom’ capitalism is deemed to provide is equally apportioned between those who are fortunate and those who are not within a capitalist economy.

In order to succeed, capitalism must have a free market economy. It must promote freedom and democracy, through distributing products and services in line with the laws of supply and demand which directs the production of goods and services. A free market economy also ensures that all factors of production are utilised. Supply comprises natural resources, capital, enterprise and labour.

Demand consists of purchases by customers, businesses, as well as the government (Amadeo, 2018). A supporter of this was Adam Smith who celebrated capitalist society. Smith believed that the manufacturing and exchanging of goods could be encouraged and proclaimed that division of labour doesn’t depend solely on technological practicality, but also depends heavily on the market’s range. He believed that the market economy he defined could only function and bring about benefits when its specific guidelines were followed.

This highlights that Smith believed the safeguarding of justice as well as what law dictates is therefore vital if it is to thrive in a capitalist economy (Smith,1789.) Technological progression within a nation in turn pivots based on the division of labour. This has an impact on productivity of labour as this is based upon economic growth. Smith’s theory of growth is based around the fact that division of labour is a dynamic force (Viner, 1927).

As these reasons stand, Smith felt that a limited government would work best, which implies the idea of ‘Laissez-Faire’ requiring that government should not place any constraint on individuals’ freedom, as this then ensures that producers are able to yield as much produce as they desire, earn as much coinage as they like and save what they need to live a fulfilled life (Duignan, 2018).

Smith believed a sensible idea would be to leave the economy to be controlled, driven and steered by a force known as the “invisible hand”, meaning that there would be an open and free market economy existing and measures to prevent any way that may misrepresent it (Smith, 1789), thus allowing the economy to grow.

The “invisible hand” theory states that in a free market enterprise, the trading of products in return for money or a price is determined based on the agreement of both purchasers and sellers of the goods (Hill,1990). Having the government following certain principles within a free market, involved allowing free flowing trade between borders and facilitated keeping taxes relatively low. The diminished tariffs which were favoured by Smith involved placing taxes on goods making them more expensive for consumers.

This also hampered trade abroad and in turn negatively affected industry. To ensure consumers can buy goods they must have the funds to do so. With some capitalist firms using credit from central banks unproductively with little economic output, this negatively effects the economy with households taking on credit to subside lifestyles more than their income permits.

From this, lending can also be significant for the economy as it adds to the growing capacity of the economy which increases GDP as they fund investment. Capitalists will usually push government to alter and implement navigation in their favour showing disproportionate power.

In addition, high levels of inequality still exist and there is an ongoing conflict of interest between those who are in possession of wealthy companies and the rest of ‘us’ (Stanford,2008.) From Karl Marx’s perspective, capitalism is based around the perception of capitol meaning that the control and ownership of production is by those wealthy enough to hire employees to produce goods and services for them and in return will receive a wage.

He saw that there was the chance that the wealthy capitalist leaders would use their buying power to exploit their own workers for profit and this showed exploitation did not benefit everyone as it was down to the fact there were some winners and numerous losers (Biernat, 2017).

However, some may say in theory, everyone is able to reap the advantages in terms of money from a capitalist system because the money gradually “trickles downwards” from the top to the bottom, better known as from rich to the poor (Donlan, 2008). The main motive within capitalism is to produce goods and provide a service in order to exchange them to make a profit, as opposed to satisfying people’s needs. Deriving their income from ownership, gives the incentive to maximise profits and is why many capitalists say “Greed is good.” (Amadeo, 2018).

It could be said that socialism is for the wealthy and capitalism is for the poor as the government usually protect the needs of large capitalist firms as governments and central banks act to provide stability in macroeconomic environments. Marx thought of socialism as a lesser form of communism so rightly held the judgement that socialism was a transitional movement stepping towards communism from capitalism (Woods, 2013).

He argued that alienation occurred within a capitalist economy as workers are alienated from what they are producing. This is as they are only seeing one stage of production due to the production process involving many different workers as procedures are distributed to employees to complete different tasks across the production process. He developed this theory in order to expose the idea that measured forces are governing society which human activity is in front of (Cox,1998).

Marx was one of the first people to realise the importance of limited liability in a capitalist market and during the end of the nineteenth century and moving into the early part of the twentieth century, it is notable that limited liability had a great impact on enhancing capital accumulation and evolution of technology (Chang,2010).

During the Great Depression of the 1930s, capitalism was beginning to fade and liberal economists alleged that the revival of capitalism would quickly occur after the depression without innervation from the government. Due to this, the government were urged by these economists to sit back and virtually do nothing to boost economic recovery. However, with the economy remaining unchanged and no noticeable indicators of progressing on its own, people began to think that a permanent slump might occur if the lack of market demand was permanent.

This led to the Marxist ideas becoming more popular to many people. At this point it did seem likely soon that there would be a replacement of capitalism by socialism. However, it was thought by John Maynard Keynes, that with the new circumstances that capitalism could last open-endedly providing changes were made to certain polices of capitalist governments as well as central banks (Williams,2013).

The Great Depression was resolved by the Second World War as unemployment rates lowered due to people selling their labour for wages in factories. This led to economic growth with GDP more than doubling as standards of living as well as wages increased rapidly. The process of recovery led to the ‘Golden Age’ of capitalism. The independence this system provided could be abused by the most powerful individuals and companies.

As a result, they could build monopolies, control wages and prohibit unions (Weir, 2007). Smaller firms can struggle to enter the marketplace due to the high level of competition they face from companies capable of gaining monopolies early on within market development meaning they are less likely to be able to produce effectively as economies of scale will act as an issue, putting prices of manufacturing up per unit for smaller firms.

Keynes wanted capitalism without its contradictions, the problem didn’t lie with capitalism, but the “laissez-faire” approach capitalism took. Meaning that investors were then left and enable to pursue their own individual profit at the expense of the rest of society, without a care (Booth, 2012).

Keynes’ solution to this was to encourage investment and consumption which was achievable through the State intervening. If the state increased their spending this would mean investment would be increased, if the incomes of the rich were taxed this would allow for consumption to be raised by giving some to the poor as it is based around the theory that as a consumer, the poor as a collective will spend more than a few rich people (The Socialist Party,1979).

Capitalism is a system that is based on production powers and ownership inequality but may lead to innovation in the market. An economic structure such as capitalism is known for wealth inequality and distribution being unequal of resources (Clarke, 2012) but for the proper functioning of capitalism, within the working class there must be individuals willing to sell their labour-power to capitalists for money, a wage and in return the capitalist class receive a commodity.

Being an economy that is focused on profit, it is ultimately keen to increase production meaning increased wage labour. This generally conflicts the interests of employees who work for a wage and those that they are hired by. It allows for companies to experiment with new products and technologies, allowing innovation to occur which keeps markets competitive which forces capitalist firms to plough as much of their profits as they can afford, allowing them to keep their methods of production up to date. An important role within capitalism is markets as they initiate some form of competition (Stanford,2008).

Competitiveness between companies mean they are always trying to drop costs through cutting wages or increasing productivity, leading to negative social implications, namely physiological needs of workers. This may be an issue causing unethical practice. As capitalism is profit driven it has been blamed for many negative implications on humanity, namely resource overexploitation, pollution as well as inequality in terms of financially and non-financially (Novkovic and Webb 2014).

It was thought by Smith that an almost elementary level individuals had the power to determine their own success. Whereas Marx would expostulate that to begin with wealth is advantageous to people within a capitalist economy as their profit is increased based on their original acquired capital. Capitalism is created through splitting up tasks into practical roles which result in improved efficiency resulting in excellent division of labour.

With company expertise’s developing, the ability for individuals to move through social classes eases resulting in increasing the wealth that is available, acting as a motivation to work harder in the interest of preservation instinct to accomplish more. Displaying how manufacturing extra goods goes in the direction of the growth of capital and how Smith and Marx agreed upon the benefits of boosted production (Bryer,2012).

To conclude, it is easier to agree that Marx’s opinion was more developed of capitalism than Smith. Despite the different conclusions and findings of the capitalist system for all parties both Smith and Marx seemed to agree on numerous concepts. Notably labour being the foundation of commodities’ value, as well as division of labour increases productivity (McKay, 2012). Capitalism was not “saved” by Keynes, as the system was able to save itself.

Capitalism was still able to overcome the struggle with socialism, despite Marx’s prediction and liberal democracy now stands unhampered (Giddens, 1997). With the recent market financial crisis in 2008 being the wickedest economic disaster seen since the Great Depression of 1929 (Amadeo,2018), occurring mainly due to the way markets were being run, Smith’s theories support the opinions that there is no need for government interference.

It can be said his theories act as a solid foundation in numerous ways in today’s world, evident in new business ventures. However, if his theory was followed it would have resulted in an even more chaotic situation as evidentially absence of government involvement in this scenario was simply not an option. With effective government involvement allowing capitalism to continually progress, minimum wage laws and fiscal policies have overall supported the development of capitalism (Moss,2002).

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