Capitalist Economy: Individual and Institutions Units - Essay Example

? 3: Which unit of analysis is more useful for an understanding of the capitalist economy and its dynamics: s or the individual? Justify your answer. Introduction: The paper on the understanding of the capitalist economy discusses different emerging and existing schools of thought in the light of empirical studies. It focuses two units, namely individual and institutions, to analyse how these two units integrate a capitalist economy and concludes which unit is more practical in a capitalist economy. Given the empirical studies, we normally grasp a capitalist economy that distinguishes itself from other economic systems in that it depends upon the idea of private property, labour market and profit motive. In particular, the salient features of a capitalist economy are right to private property, profit-motive, freedom of choice, market forces and minimal role of government. Thus, as such determine the capitalist economy that is characterised by a complex system interacted with individual and institutions. Institutions in border definition are thought as the rules of the game in society or are humanly devised constraints that shape human interaction. Consequently, they can structure incentives in human exchange in such a capitalist economy. On the other hand, individual units such as people, organisations of people, workers, capitalists, consumers, firms, and so on, play an important role in capitalist economy to contribute the economic activities that shape a market force centralised on price mechanism. This paper will analyse the individual unit and institutions unit at the theoretical level through observed scenarios to compare which unit is more practical in a capitalist economy. First of all, I will present the individual unit analysis on understanding a capitalist economy through private property, labour market and profit motive. Second, I will exploit an institutionalist analysis based on its historical and actor centred versions. Third, I will compare individualist analysis and institutionalist analysis and conclude which unit is more useful for better understanding a capitalist economy. Individualist analysis on understanding a capitalist economy: *Private property: As indicated, a capitalist economy is characterised by an economic system that is based upon private ownership of the means of production and the existence of wage labour. This means that things that we buy and sell in the market such as necessaries, cars, homes, and so on, are produced in a process that is privately controlled. According to orthodox economics, the method of itself is to start from the single units that make up the economy, to exploit the functioning of those individual units. In particular, the analytical work done by Callero (2009), states that individualism is a belief system that privileges the individual over the group, the private over the public, and the personal over the social. In other words, this means a capitalist economy that is consisted of individual units like workers, people, capitalists, consumers and firms and as such social forces determines the formation of a capitalist economy. Given the private property as the trait of the capitalist economy, we can normally perceive a sense of how individual units work in the capitalist economy. For instance, a relatively small number of individuals own the factories that produce our cars and computers; a small number percentage of the population owns the land that grows our food and feeds out live-stock, and the raw materials needed to construct out buildings and power our automobiles are held by the very wealthy elite. Those evidences illustrate that the vast majority of people in capitalist economy do not personally own the means of production. Thus, individual units like capitalists, organisations of people and firms own the means of production that are a phenomenon to understand social forces building up a capitalist economy. *Labour Market: As a fundamental characteristic of capitalism, the labour market provides a clear insight about the roles that individuals play in the exchange of goods. In this economic system, the individual is incapable to produce what he needs and he will consume. There is a highly specialized division of labour that people rely on others, particularly, the producers, in order to survive. Callero explained that when someone is looking for a job in a capitalist economy, that individual is engaging in a capitalistic exchange using his skill and abilities as a commodity to be traded for wage, which is necessary in the procurement of food, shelter, clothing and other goods. (p. 25) The labour market also collectively demonstrates the flow of goods in capitalism and depicts several capitalistic principles. For instance, in the labour market there is the labour force and the employers. The movements in this market are determined by the law of supply and demand. If there is excess in the labour force, unemployment and low wage emerge as a result. The implication of this situation demonstrates two important points. First is that the unemployed or the labor force in general will be engaged in fierce competition for the scarce work and this is often characterized by enhancing competitive advantage. (Todorova 2009, p. 31) *Profit Motive: The economics of capitalism always works within the principle of the profit motive. Here, each individual lives with profit and self-interest in mind. Suffice it to say, most individuals are not interested in the welfare of others, the community, the society and whatever groupings they belong. At the very least, these variables are relegated merely as secondary to individual gains. According to Jain and Khanna (2011), profit plays a key role in capitalist economy for three important reasons: 1. the factors of production are allocated on the basis of profit; 2. profit encourages innovations and investment and that if an entrepreneur does not yield any of it, investments cannot be increased or, worse, production will be stopped, negatively affecting the capability of the economy to provide income and employment; and, 3. profit determines the economic justification of capitalistic economies. (p. 386) Capitalism, with the profit motive principle, is all about the encouragement of individualism and achievement. Profit is considered as a reward and a justification for individuals, entrepreneurs and organizations who work hard, invest, take risks and innovate in their economic activities. Mink (2004) stressed that it is behind efficient production, which is considered as the core of capitalism and is kept at the forefront of the process through the dynamics of capitalist competition. This variable is supposedly responsible for the way actors within the system constantly innovate and encourage entrepreneurship. (Mink, p. 125) On one hand, the profit motive may appear cold, heartless and greedy in individual entrepreneur and organizations. But, on the other hand, the principle is the driving force beyond further investments, additional production and further expansion that is responsible for the level of income and employment within an economic system. Some economists refer to this phenomenon as the “invisible hand”, the phenomenon wherein individual actors – in rationally following their own interest in profit - become part of a system that can stimulate economic activity. When a business organization expands, it needs more labour for the additional production, effectively contributing to the increase in the employment rate and the earning capability of an economy. (Mink, p. 124) Institutionalist analysis on understanding a capitalist economy: The institutional arrangements, argued progressive economists, are effective analytical approach in understanding capitalist economy. Boyer (2002), in his discussion of the Japanese firm, explained this, explaining that an analysis of a business organization must be complemented by the analysis of a set of articulated institutional forms. (p. 33) The point is that such approach is the only way to link the microeconomic analysis of institutions and individual behaviours. For example, through the concept of “regulation” economic norms are established so that institutions can effectively address the many challenges involved in the capitalist system. Through such regulations, the economic system is kept from being torn apart by the antagonisms, conflicts and diversity of interests in the liberal economy. They provide some semblance of control so that different and highly independent behaviours do not harm the system. The institutionalist approach claims that economies cannot grow or expand if it cannot navigate the diverse and often opposing economic variables that make the capitalistic system heterogeneous. By focusing on institutions, wrote Chowdury (2007), capitalism can be understood as something dispersed and fragmented but can be negotiated by capitalistic institutions successfully. (p. 49) This is supposedly best demonstrated through the historical, contextual and institutional analyses of economies. Such analytical approach are said to yield better insights on capitalistic practices, diversity in capitalistic systems due to differences in culture, history and geography. For example, capitalism dominates the global system, with very few economies opting for different models. The consensus is that, so far, capitalism is the best economic model in order to achieve economic growth. However, some capitalist countries are more successful than others with the same system. The differences supposedly highlight the weakness of the individualist approach. By outperforming others, the institutional differences that set a country apart are highlighted. A case in point is the South Korean experience. Miller (2005), explained that the country’s strong economic performance was attributed to the central role given to its economic institutions. (p. 35) Here, it is clear that policies that lead to economic growth are driven by institutional dynamics and cultural factors. There is also the school of thought claiming that the institutionalist approach is better equipped to explain contemporary issues in capitalism. This is can be illustrated in the way the status of consumption has been transformed. In the modern context, consumer empowerment has emerged out of specific institutional developments. The most important of which was the cohesion of consumers as an important and influential interest group, as reflected, according to Trumbull, in the proliferation of consumer associations, advocacy groups within the government, and the legal recognition of consumers as a class. (Trumbull, p. 2) An investigation of this development, through institutional analysis, could reveal the dynamics by which the policy networks have increasingly created a pro-consumer economic landscape. Through regulatory policies that emerge in the process, consumers became more informed, secured, protected, proactive and organized, influencing policy and standards in the capitalist system. This example is best explained by Schumpeter’s, theory of the democratic methods. By his definition, it is an “institutional arrangement for arriving political decisions in which individuals acquire the power to decide by means of a competitive struggle for people’s vote.” (Mueller and Cantner p. 269) The progressive argument is that together with democracy, liberal economy has built institutions and mechanisms that govern economic activity and that the capitalist system could only be comprehensively understood by understanding them. Institutionalist approach also emphasizes that barriers to capitalistic advancement, growth and development are often unrelated to individual effort, ability or motivation. (Baiman 2000, p. 16) There are numerous institutional and structural barriers that impact economic activity in capitalism. For example, in investigating unemployment, a country becomes a unit of analysis. Here the national institutional characteristics, explained Campbell and Pedersen, are measured, then, linked to unemployment trends, operating on the assumption that institutions are sources of contextual effects – those that shape the influence of market forces. (p. 81) This brings us to what Boyer has stated, that “as the ensemble of institutions causes socio-economic system to reproduce – producing a cumulative process of evolution and structural change – the mode of the articulation of institutions and coordinating mechanisms they produce must be those that need to be investigated :in a particular context in the socio-economic system as well as a particular stage of historical development.” (p. 33) Conclusion: Individual vs. Institution All in all, the individualist unit of analysis is still the more important in comparison with the institutionalist approach. It is valid because capitalism is all about individuals and human actions. Institutions may exist but the fact is that they are still end results of human activities. For example, the Korean economic miracle has been brought about by cultural factors in addition to specific laws and economic norms. The key to understanding the dynamics of the country’s development may rest in the understanding of its institutions but the fact is that such institutions were still created by human actions and motivations. When individuals are free to make rational economic choices, mechanism are created by which a capitalist economy navigates through the conflicts and shocks it experiences. Focusing on institutions will endanger an analytical activity to digress on several unrelated variables because institutions are not merely economic but also cultural, sociological and political in nature. The concept of the “invisible hand” and “regulation” cited by this paper should already cover the area by which institutionalist approach proponents are trying to raise. In order to examine the capitalist economic sphere effectively, it must be separated from society wherein nonmarket activities and the impact of socio-cultural variables are taken out of the investigation. References Baiman, R., Boushey, H. and Saunders, D. (2000). Political economy and contemporary capitalism: radical perspectives on economic theory and policy. New York: M.E. Sharpe. Boyer, R. and Yamada, T. (2002). Japanese Capitalism in Crisis: A Regulationist Interpretation. London: Routledge. Callero, P. (2009). The myth of individualism: how social forces shape our lives. Lanham, MD: Rowman & Littlefield. Campbell, J. and Pedersen, O. (2001). The rise of neoliberalism and institutional analysis. Princeton University Press. Chowdury, S. (2007). Everyday economic practices: the "hidden transcripts" of Egyptian voices. New York: Taylor and Francis. Jain, TR and Khanna, O.P. (2011). Business Economics. New Delhi: V.K. Publications. Miller, M. (2005). Worlds of capitalism: institutions, governance and economic change in the era of globalization. London: Routledge. Mink, G. and O-Connor, A. (2004). Poverty in the United States: an encyclopedia of history, politics, and policy, Volume 1. Santa Barbara, CA: ABC-CLIO. Mueller, D. and Cantner, U. (2001). Capitalism and democracy in the 21st century. Berlin: Springer. Todorova, Z. (2009). Money and households in a capitalist economy: a gendered post Keynesian-institutional analysis. Cheltenham: Edward Elgar Publishing Limited. Trumbull, G. (2001). Consumer capitalism. Cornell University Press. Read More