Role of State in Capitalist Economy - Case Study Example

Role of State in Capitalist Economy Name: Course: Tutor: Date: Introduction Capitalism is ideally an economic system where the means of production are owned by the private sector, which operates for profit. This means that decisions that relate to demand, supply, distribution, price and so forth are made by the players in the market rather than by the central government. Capitalism is typically exemplified by a ‘market economy’ that is propelled by free enterprise. This means that the invisible hand of market pricing mechanisms coordinates demand and supply in the market in a manner that reflects the best interest of society. Yet even as the market economy should be controlled by the private sector players, the state appears to play a significant role in capitalist economies. This paper seeks to address this issue, that is, the connection between the capitalist economy and the state. In doing so, the paper also addresses the idea of self regulation as employed in orthodox economic theory. The role of the state in solving economic and social problems related to business is also discussed. Overview of capitalism and the ‘market economy’ In a broad context, the institutions of capitalism are set up around a fundamental logic that brings together private property and the private enterprise that combines the factors of production (mostly labour and capital, which are differentiated as interest rates, wage labour, information and dividends); a generalized market, and a state that is based on the rule of the law, whose role is to enforce the rules to be used in the market in ultimate subordination to the smooth operation of the market (Comeliau, 2002, p. 32). From this perspective, it is evident that even though the capitalist economy is supposed to be self-regulating, it cannot be separated from the state, which provides an ambience for the market’s effective functioning. Capitalism is founded on commodity production and is therefore a generalized form of production in double sense. First is that under capitalism, most goods and services produced are meant for sales on the market, that is, goods and services are commodities. A good example to illustrate this is the existence of a market for capital. The second point is that under capitalism, one type of thing is significantly a commodity – that is labour power, or the capacity for work in the market economy. Thus, an important feature of capitalism is the existence of a labour market in which labour is paid for by an employer, which is required to put work in an organization according to the stipulations of the employment contract (Hodgson, Itô & Yokokawa, p. 4). As it was mentioned earlier, one of the key aspects of capitalism is the creation of a free market. The capitalist market emphasizes on efficiency in production rather than social justice (Hillman, 1991, p. 182; Noonan, 2006, p. 153). In a capitalist market, under certain conditions, competitive pricing selects the goods to be produced and hence determines the allocation of resources for the production of such goods (Noonan, 2006, p. 153). This means that left on their own, capitalists are likely to venture only in the production of goods and services they know can be produced in the most efficient manner in order to maximize profit. Consequently, the economy may realize growth in one sector and retardation in another as capitalists go for the areas that are most profitable. A clear illustration of the aforementioned point can be made using the orthodox economic theory. According to this theory, if all other factors are held constant, “efficiency outcomes are optimized when markets are self-regulating institutions” (Pritchard & Burch, p. 97). Government influences over business, such as minimum price regulations, are understood by orthodox economists to inhibit market responsiveness to changes in supply and demand. But it clear that government regulations may be necessary, for example, to protect small businesses from the threat of big businesses (Denny, 2006, p. 2). In contrast to the points mentioned above, it is obvious that producers in the capitalist market are likely to face a lot of competition among themselves. This means that they are likely to spread their ventures and deal in areas that pose little competition – thus ensuring all-round growth in the economy. According to Rajan and Zingales (2003), competition is inconvenient to company managers because it disciplines their most rapacious tendencies. This is the reason why socialist governments typically abolish both political and economic competition in their regimes. In contrast, even without the interventions of the state, players in a capitalist market are not likely to earn arbitrarily just because the market determines what they do as they face serious competition from each other. Even with this point in mind, the state has, and still plays an important role in capitalist economies as will be discussed in the next section. Role of the state in a capitalist economy Ideally, from the definition of capitalism as given in this paper, state governments should play a minimal role in capitalist economy. However, from another perspective, capitalism is perceived as an indirect system of governance, in which private actors are empowered by a political authority (government) to own and manage the use of resources for private gain subject to a set of regulations and laws (Scott, 2006). From this point of view, the ‘free market’ exists as a three-level system in which markets are characterized by competition at the first level, the institutional foundations that govern those markets take the second level, and the political authority that administers the prevailing system takes the their level. In essence, the state has a fundamental role to play in coordinating the modernization of market frameworks in line with the changing circumstances, including the altering standpoints on societal benefits and costs. In a capitalist economy, the state has two major roles to play. First is to manage the existing institutional frameworks, including providing infrastructure and administering laws and regulations. The second role is to mobilize political power in order to spur modernization of the existing frameworks as the market conditions and or social priorities change (Noonan, 2006, p. 153). Along this line, in order for a capitalist market to be efficient, it must have two essential features: an invisible hand that is inherent in the market pricing mechanism and a discernible hand in terms of explicit management by the government through its legislature and bureaucracy (Scott, 2006). In view of this, the role of government in a capitalist market cannot be overstated. In the purview of the issues discussed so far, this paper focuses on the role of government in the capitalist market in two contexts: solving economic problems and solving social problems. Solving economic problems Human wants are limitless but the means that can satisfy these wants are limited. It is therefore not possible for any economy to produce every kind of good or service for every citizen because no economy in the world has unlimited resources. This means that every economy has to make a choice as how to utilize optimally the resources available at its disposal. Such resources include labour, land, and capital, which can be used for different purposes. Economic problems arise when there are conflicts in the allocation of resources to be used in production and how various resources are allocated for different purposes. The problems here can be referred to as problems of economical use of scarce resources. Nevertheless, these problems do not arise because of allocation of present resources only; they can also occur due to anticipated concerns in their growth and distribution in future. Thus, economic problems are concerned with the “optimum allocation of present resources and with the growth and distribution of future resources” (Jain & Khanna, 2009, p.3). Through its authority and provisions as mentioned above, the state strives to narrow the gap between current wants and supply by ensuring that manufacturers have an enabling environment for their activities, and that they operate within the boundaries set by the law. It is important to note that the fundamental problem with capitalism is not on the production side. According to Schweickart (2002, p. 176), almost all enterprises are operated at less than their full capacity. The persistent problem with capitalism is that there is lack of effective demand for all the goods the market is capable of producing. The role of the government here thus is to assess the economy and identify the areas that are in need of investors by creating conducive environments for them to do business. This will ensure that what is produced is at least in line with meeting the needs of the market in order to avoid the prevalence of lack of effective demand for what producers have in the market. The state thus has an important role to play in ensuring that supply goes in tandem with the present and future needs of the market. States also have a duty to protect the ideas that investors come up with. For instance, governments have to protect creator’s rights through patents, copyrights and trademarks. If governments fail to play this role, there will be no incentives to innovate and this will create more economic problems. On the other hand, governments do not have to be too protective as this will also make it difficult for ideas to evolve. It is notable that how well a government protects the ideas that various entities come up with determines how eager companies are eager to carry out business and how much technology is required. This directly relates to how economic problems in society can be solved (Chandler, 2010). Solving social problems Capitalism, as opposed to socialism, emphasizes individual freedom. It is characterized by economic motivation through profit, where the determination of prices and wages is primarily through demand and supply (Mooney, David & Schacht, 2001 p. 251.) It is not possible to have a purely capitalistic economy, where no government intervention in business is the other feature of the economy. Nevertheless, in economies where near-true capitalism has been exhibited, critics of the system have argued that capitalism leads to many social evils, such as alienated workers, poor working conditions, unemployment, near-poverty wages, a polluted and depleted environment, as well as world conflict over resources (Mooney, David & Schacht, 2001, p. 251). State governments intervene in markets in a number of helpful ways. For instance, the governments may set minimum wage to ensure that employees are not exploited by capitalists. Governments also have agencies through which they monitor the production of goods and services and the quality of these commodities. There are national standards of quality of products or services that manufacturers and other players must conform to. It is evident that without such oversight authorities, firms would exploit their employees or produce low quality goods or services just to ensure that they incur the least expenses in the production process. Governments can also identify projects that are potentially beneficial in terms of creating meaningful employment and ensure that investors meet the required standards. One sensitive area with respect to capitalism is the environment. The fact that firms understand the consequences of their actions to the environment is not a big issue; the burning issue is whether such firms can take responsibility for their actions on their own (Dăianu & Vranceanu, 2005, p. 200). State governments have the responsibility to ensure that firms are responsible for their actions on the environment by employing methods to mitigate adverse impacts. In turn, firms have extended their operations beyond caring for the environment – there are a wide range of operations by firms to care for the communities in whose areas they operate (corporate social responsibility). This would not have been possible were firms allowed to operate in purely capitalistic systems. Conclusion This paper has discussed capitalism as an indirect system of governance in which private actors are empowered by the state to own and manage the use of resources for private gain by working within the rules set forth by the state. However, there are no purely capitalistic economies, and governments intervene by trying to ensure that the private actors bridge the gap between demand and supply in a reasonable way. For instance, the government creates an enabling environment for business so that private investors can act to reduce the prevailing economic problems. The state also promotes resolving social problems by ensuring that private actors offer viable employment and treat their employees according to the employment law. Further, governments are instrumental in ensuring that firms care for the environment in which they operate by mitigating pollution. References Chandler, M. Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange, John Wiley and Sons, New York. Dăianu, D. & Vranceanu, R. 2005, Ethical Boundaries of Capitalism, Ashgate Publishing, Ltd., London. Denny, J. A. 2006, The Role of Government in Economy and Business, PT LKiS Pelangi Aksara, New Delhi. Economy Comeliau, C. 2002, the Impasse of Modernity: Debating The Future Of The Global Market, Zed Books, New York. Hillman, A.L. 1991, Markets and Politicians: Politicized Economic Choice, Springer, New York. Hodgson, G. M., Itô, M. & Yokokawa, N.2001, Capitalism in evolution: global contentions--East and West, Edward Elgar Publishing, New York. Jain, T.R. & Khanna, O.P. 2009, Business Economics, V. K. Publications, New Delhi. Mooney, L.A., Knox, D. & Schacht, C. 2008, Understanding Social Problems (6th edition), Cengage Learning, New York. Noonan, J. 2006, Democratic Society and Human Needs, McGill-Queen's Press - MQUP, Melbourne. Pritchard, B. & Burch D. 2003, Agri-food Globalization in Perspective: International Restructuring in the Processing Tomato Industry, Ashgate Publishing, Ltd., London. Rajan, R. & Zingales, L. 2003, Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, Greenwood Publishing Group, NJ. Schweickart, D. 2002, After Capitalism, Rowman & Littlefield, London. Scott, B. R.2006, ‘The Political Economy of Capitalism,’ Available from www.hbs.edu/research/pdf/07-037.pdf (9th October 2010). Read More