Capitalism and Social Progress the Future of Society in a Global Economy - Research Paper Example

? Capitalism: Market Failure Inserts His/Her Inserts Grade Inserts (31, August, Introduction In 20th century, broadly speaking, two major economic systems were in place throughout the world, capitalism and communism. These economic systems are based on different philosophies. Capitalism focuses on free market and liberalization where every player has a right to earn profits. Government control and intervention is only nominal in capitalistic economy. Communism, on the other hand, aims at a classless society where everyone is equal and state is extremely strong. In communism people do not have a right to private property and state intervenes in the economy regularly. There are many subsets of both capitalism and communism but mainly these two economic systems exist. The economic crises of the 20th century have caused many people to think differently about capitalism and many reservations are raised. In this paper we will critically evaluate whether market failure is the inevitable consequence of capitalism. We will discuss both pro capitalist and anti capitalist arguments in order to critically evaluate the above statement. Capitalism: An Overview The roots of capitalism lie in mercantilism which was prevalent between the 16th and 18th century (Burnham, 2003). Mercantilism was basically a system that was based on profit seeking trades. Adman Smith in the 18th century gave the basic tenants of capitalism and his ‘invisible hand’ theory became popular (Buchan, 2006). Adam Smith argued that markets can balance themselves and there is no need for government intervention. Capitalism became widely accepted in the 20th century and many countries had capitalist economies. Now we will discuss the arguments in favour of capitalism. Pro-Capitalist Views Economists who argue in favour of capitalism generally base their argument in freewill. They believe that everyone in this world should have the power to take part in profit seeking activity and there should be no force that should restrict this power of an individual. They also think market failure is not the inevitable consequence of capitalism. More arguments in favour of capitalism are given below. Encouragement of Innovation Capitalist argue that people need some incentive in order to work hard. This is only possible if people reap the fruits of their hard work. Innovation, according to this view will only prosper if people are encouraged with reward (Cantwell & Santangelo, 2000). Capitalism offers encouragement and monetary incentives and this in turn motivates people to innovate. The argument that capitalism encourages innovation is quite ponderous because people do get motivated by incentives. It is human nature to work for profits and capitalist economies allow profit seeking behaviour. Opportunity for Social Mobility People also get an opportunity in capitalistic society to move forward and attain a higher social position. Free market mechanism allows anyone, who is willing to work hard enough, to grow socially and financially. There is room for a person to improve his or her life style and living standards under capitalist economies. This argument explains the importance of freedom in human life. Human beings need freedom to live a healthy and satisfactory life therefore they should have freedom in their economic life as well. Government therefore should not intervene in matters of economy. Other economic systems do not allow social mobility (Fitzpatrick, 2002) therefore capitalism is to be preferred. Consistent with Human Behaviour It is argued that capitalism is consistent with human behaviour therefore it cannot lead to market failure. Markets are made by people and if a system is in placed that are consistent with human behaviour and nature then it cannot fail. Fighting and surviving is the way through which human beings have survived since their ancient times so this makes it clear that it is human behaviour to fight in order to survive. The same principle if applied to the economic system can never fail because it will be based in human nature. Human beings are ‘envious zero sum thinkers’ who only want their own benefit (Wilkinson, 2005). This is why capitalism is best suited for human society and if it is representative of human nature then it cannot lead to market failure. Diverse Population Human beings are very diverse and a system that endorses the differences between human beings will work. Capitalist economy takes into account diverse demands of human beings. People are free to make and consume whatever they want under capitalist system. This endorsers their differences and therefore will work. Other economic systems have a serious deficiency that they do not endorse human differences (Brittan, 1996). Capitalism is therefore will not need to market failure because it allows for human differences. Efficient Allocation of Resources One of the most discussed advantages of capitalism is that it allows efficient allocation of resources. When government controls or intervenes in the economy than efficient allocation is not possible. When there is a demand for a product than people will start to manufacture it. And when people will manufacture something they will do it on a lowest possible price. This allocates all the resources in the economy efficiently. It is seen that usually when government intervenes many problems arises in economies (Drago, 1986). It is because government allows through subsidies and other intervention methods room for people to relax and this affects efficiency. Promotes Growth Capitalism promotes growth in an economy. People try to work harder when they are given economic and social benefit which is better for the economy as a whole. Innovation also leads to increased efficiency and performance. All these things add to the growth of an economy. Capitalism is also promotes competition and thereby increases growth (Salsman, 1999). Growth is important for an economy because of many reasons. It takes care of the increasing population and shows that economy is heading in the right direction. This is possible because of competition that is bred by capitalism. Anti Capitalist Views There are also strong arguments against capitalism. It is important to understand these arguments before we answer the question of market failure under capitalism. Arguments of capitalism include increased greed and social disparity. It is said that capitalism is a system that is based on wrong principles. Also there is strong evidence that capitalism invites crises more than other economic system. Great depression and other economic crisis have forced the world to look capitalism with suspicious eyes. It is also argued that market failure is the inevitable consequence of capitalism because there is no limit to greed. People will earn more and more, and in the process they may not follow rules by the book. For this reason government intervention is welcomed. All the main arguments are given below. Profit making at Social Expense It is said that capitalism allows profit making without any control whatsoever and at times firms and individuals attempt to make profits at social costs (Brown & Launder, 2001). Profit maximizing firms and individuals do not have a regard for society and they try to earn profits even at the expense of society. Firms try to maximize profits even at the expense of environment and society as a whole. Environment is destroyed by capitalistic firms and we have seen a worldwide increase in pollution after industrialization. All this tell us one important fact and that is capitalism encourages firms to make profits at the cost of society. In free market any firm is allowed to make any kind of products, but sometimes these products are not healthy for public. Extensive marketing makes these products desirable and people consume it even though it hurts them. Junk food, alcohol, and cigarettes are a few examples of such products. Promotion of Economic Disparity Capitalism also plays a major role in promoting economic disparity in the society. This is a major argument against capitalism. It is seen in the world that whenever capitalistic systems are implemented in a society economic disparity increases. This happens because rich people have a greater opportunity to excel in a capitalist economy than poor people. This allows rich to become richer and poor to become poorer. It is argued that under capitalist economy economic differences increases and this creates a society with different classes. The widening difference between classes allows hostile feelings to flourish and it may lead to criminal behaviour. Due to this capitalism is a system that is destined to fail the market. Monopoly Power and Capitalism Under capitalism firms also enjoy monopoly power and they tend to abuse it. When firms are allowed to operate freely and there is no cap on their profits so this leads to monopoly power. Firms who are already large grow bigger and bigger, and a time comes when they charge abnormally high prices for their products and services which is not beneficial for the society as a whole. Monopoly power also hinders competition which affects production efficiency (Burawoy, 1979). Monopoly power also hurts the end users and that is why it is a danger to the society. This is why monopoly power is not something desirable and in capitalism firms will sooner or later acquire monopoly power. Benefit of the Few Capitalism provides benefits to a few individuals in the economy rather than to all members of the society. This is the most significant criticism of capitalism. The idea that market can itself balance and there is no need for government intervention leaves the ‘many’ dependent on the ‘few’. People who have resources get stronger and stronger, and wealth is not distributed among all members of the society. A system which cannot protect and benefit everyone is destined to fail and this is why capitalism will eventually fail the markets. Economic Crises The world has seen a surge of economic crises in the 20th century. The whole world still has not forgotten the great depression of 1929. Then came many more in 1970s, 1980s and in 1990s. All these economic crises have been a product of rampant capitalistic thinking of economies. These crises have made the world think differently about capitalism because it invites problems and more problems (Cassidy, 2009). The recent economic crisis the world is facing today is again because ‘free market prevailed’. Does Capitalism lead Market Failure? Now we are in a position to answer our main question of whether capitalism leads to market failure or not. By analyzing arguments of both the sides of the debate it is clear that the arguments against capitalism are more serious. Capitalism has not yielded good results for the world so it is not pragmatic enough to advocate such a system. The economic crises that the world has faced today came because markets were unregulated and government did not intervene at the right moment. It is because of this that the system collapsed. This makes capitalism a system which is inherently prone to crises (Easterling, 2003). The world financial markets are collapsing today and complex financial products are increasing the risk of crisis. This is all because government intervention is discouraged by the leading economist. The people have actually shown that they are greedy and rampant, and they ought to be stopped. Capitalism also will ultimately lead to market failure because it brings instability in an economy (Engels, 1888). It also increases economic disparity in the society therefore it is important to understand the perils it has to offer. Market cannot balance itself and there is no such thing as an invisible hand because financial and commodity markets have become extremely complicated. There is a lot of information that does not get out therefore efficient markets do not exist. It allows some people to make profits and these people make the lives of everyone else miserable. Conclusion Capitalism is an economic system that advocates free market economy without any sort of government intervention. The efficacy of capitalism is often questioned because the world has seen many economic crises in 20th and 21st century. It is also argued that market failure is an inevitable consequence of capitalism. This claim is not ill founded as there is logical and empirical evidence that supports this claim. Market will eventually fail human beings are rampant and they ought to be control. Firms can do anything for profits therefore government control is essential in order to stabilize the market. Bibliography Brittan, Samuel. 1996. Capitalism with a human face. London: Harvard University Press Buchan, James. 2006. The Authentic Adam Smith: His Life and Ideas. London: W. W. Norton & Company Burawoy, Michael. 1979. Manufacturing consent: changes in the labor process under monopoly capitalism. California: University of Chicago Press Burnham, Peter. 2003. Capitalism: The Concise Oxford Dictionary of Politics. Oxford: Oxford University Press Cantwell & Santangelo. 2000. Capitalism, profits and innovation in the new techno-economic paradigm. Journal of Evolutionary Economics, 10(2): 131-157 Cassidy, John. 2009. Rational Irrationality. The New Yorker. Accessed from http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy Drago, Robert. 1986. Capitalism and Efficiency: A Review and Appraisal of the Recent Discussion. Review of Radical Political Economics, 18(4): 71-92 Easterling, Stuart. 2003. Marx’s theory of economic crisis. International Socialist Review Issue, 32 Engels, Fredrick. 1888. On the Question of Free Trade. Marxist Organization. Accessed from http://www.marxists.org/archive/marx/works/1888/free-trade/index.htm Fitzpatrick, Sheila. 2002. Education and Social Mobility in the Soviet Union 1921-1934. London: Cambridge University Press Lauder & Brown. 2001. Capitalism and social progress: the future of society in a global economy. New York: Palgrave Macmillan Salsman, Richard. 2000. What does Competition mean under Capitalism? Capitalism Magazine. Accessed from http://www.capitalismmagazine.com/markets/antitrust/241-what-does-competition-mean-under-capitalism.html Wilkinson, Will. 2005. Capitalism and Human Nature. CATO Institute. Accessed from http://www.cato.org/research/articles/wilkinson-050201.html Read More