“Module code:POL6615
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Title:
The capitalism and the regularly experience crisis
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Lavery ,ScottWord count:
1800 words
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Introduction
An economic system is a means through which resource distribution occurs throughout a country. This is dependent upon who is the decision maker as well as to whom the production factors belong, that is, the government or various sectors in society. Some types of economic systems are capitalism, communism and socialism. Today communism is practiced in China, Vietnam, Cuba, North Korea, and Laos. A number of countries have previously been communist states. When it comes to socialism; Bangladesh, Guyana, Tanzania, Portuguese Republic, North Korea, Nepal, and Sri Lanka are said to be socialist nations. Some countries are said to fall within the socialist and communist categories (Allen, Carletti, & Marquez, 2007). Some capitalistic countries are the United States, the United Kingdom, Australia, Germany, and Canada. These are not exhaustive lists. In this case, however, the focus is on capitalism. This essay will, therefore, provide a definition and detailed view of capitalism as well as providing the reason behind capitalism experiencing crisis regularly.
Meaning of Capitalism
Capitalism is an economic system based on private ownership of the means of production and their operation for profit. According to Lanchester (2018), capitalism influenced the economic flow in 2008 since it was the only legitimate system since the cold war. Every person was considered a winner provided they played the game. The private companies take on the control of the profits, trade and industry within a country. Activities of the economy are based on the interests of these parties. Demand and supply make it possible for the market price setting so that the needs of society are met in the process. Private ownership, production and distribution are made possible within markets in such countries (Jahan & Mahmud, 2015). This is different from other economic systems which are guided and dictated by the government or having this role fall within the hands of an institution. Its basis, therefore, is private ownership, the government’s limited role, profit-driven, freedom to choose, self-interest, the market, and lined with competitive forces, thus laying an “equal” groundwork for all actors involved.
The theory behind capitalism can be traced back to Adam Smith who was a political economist based in Scotland. This is said to be based on An Inquiry into the Nature and Causes of the Wealth of Nations, a treatise from the 18th Century by Adam. Adam Smith recommended leaving economic decisions to the free play of self-regulating market forces. However, capitalism dates back to the 16th Century without a specific person to point back to as having invented capitalism. England, for instance, took on capital accumulation resulting from its massive, industrialization practices further increasing production.
To date, only a few countries view themselves as socialist nations. These are Vietnam, Laos, Cuba, and China. This is based upon the theories of Karl Max and Lenin. Even the countries that are said to socialist nations may not be purely socialist. They may take on a combination of economic systems, such as, capitalist and socialist economic systems. Countries in the Western world, especially, are of a capitalistic economic system. Capitalism within the countries is characterised by capital accumulation, competitive markets, a price system, private property, recognition of property rights, voluntary exchange and wage labour. The capitalist economy is guided by market forces where consumers pay high prices for the goods they require most and the products will keep producing them since they make high profits.
Like any other economic system, capitalism has both advantages and disadvantages. Looking at the advantages, one of the most important advantages is the economic freedom that countries get to enjoy. This economic freedom easily translates into political freedom. If price-setting and ownership of the factors of production would fall within the hands of the government, then it would mean that all the power would belong to the government. This easily translates into bureaucracy, and not only within the realms of politics and the economy (Friedman, 2016). With the presence of capitalism, there is hope for economic growth since expansion of the economy as well as the motivation for innovation may result. This results from the competition to do better as well as motivation to work smart and hard for better results. Not only do the living standards improve, but the wealth as well as the country’s GDP grow. Economic growth may be greatly driven by incentives provided to the people for greater outcomes or productivity. Looking further into incentives, another advantage of capitalism is seen, that is, efficiency. With incentives comes efficiency and demand for goods. The incentives encourage the need for reduction of wastage as well as cost-cutting practices.
Capitalism, in comparison to socialism and communism, can be said to be the alternative there is. The economic freedom works to the benefit of all players or actors involved. The actors within capitalistic nations usually embrace change, especially in light of production of more profitable versions of products for greater market and economic relevance. Investment is, therefore, done in new, innovative products which are openly embraced by the consumers, thus creating a wider array of products for consumers to choose from. According to Lanchester, (2018), when there are changes in the economy, it needs to benefit everyone as a whole. Therefore, this challenges the government to have policies that focus on education, lifelong training and redistribution of wealth through tax and benefits system.
On the other hand, capitalism has its fair share of disadvantages as in the case of the other economic systems. Economic booms and bust cycles are common in capitalism. It is great when booms are in play but difficult during the periods of recessions which then result in loss of employment for many. Social classes result from inequality. This is very common since the countries end up with people who are very poor, those within the average bracket, and the very rich. This would explain the existence of crime as a result. Corporate social responsibility is ignored by firms that are out to make profits only, with little or no regard for the communities within their vicinity (Hernández & Luna, 2020). Resource allocation, therefore, ends up being inefficient. Companies that end up being monopolies take advantage of their positions to charge more for their goods and services, with little or no say by the smaller companies and by the consumers. The other issue lies in firm owners owning great amounts of capital with much lower wages for their workers. There is lack of both an equality of opportunity and outcome since most rich people end up being born into wealthy families, thus gaining generational wealth, contrary to the expectation of results of one’s efforts.
Reasons for Capitalism Experiencing Crisis.
According to Lanchester, (2008), capitalism has been formed by austerity which increases inequality, impunity and imperviousness of finance and technology companies. It also leads to increase n corporate profits and stock market hence decreasing real pay and huge growth of in-work poverty. The challenges cause a crisis in the economy. Capitalism only gives the private sector the ability to control the market through pricing and production. Therefore, the crises occur in the market and the experiences received by the farms and consumers. The crisis that has and can still be pointed out in capitalism is based on the risks identified in the market. Costly market risks result from the need for neoliberals to increase their benefits. When the risks are too heavy to bear, they pass them on to the society, at least those who have not enjoyed the fruits of booms as much as they have. The crisis is not based on the conduct of individuals but is majorly based on contradictions within the system resulting in systemic imbalances due to actions against competing parties.
Capitalism is prone to crises due to speculation and deregulation. In this case, the crisis can best be attributed to huge bonuses given to the elite (economically). The private sector may act without considering the actual conditions of the economy hence consider factors that are not important to the economy. These can be pointed back to fraudulent activities which have especially been said to be present in the businesses within the construction realm as well as the banking sector resulting in bubbles. During the speculation waves in capitalism, rules are broken in the form of credit which are then coupled with debt instruments to match their weight (Katz, 2008). Great profits, at least for the bigwigs, result. Such actions and results can be pointed back to deregulation, a situation that ought to be corrected to help prevent the occurrence of crises. The institutions that are expected to take charge of such situations have delegated their power to banks while inching close to the authorities that ought to oversee the required changes. With such actions, crisis reoccurs, thus explaining its regularity. With the need to increase the capital value, then regulation sterilization results.
Capitalism is also prone to crises due to overproduction. The pricing of products in a capitalism economy depends on the private sector hence can be high and leading to high profits for the company (Moore, 2016). Therefore, the companies produce more expecting to sell more. There is, therefore, a relationship between production and financial capital. During overproduction, demand is usually less than that supplied. Hence most of the surplus products goes to waste due to low demand in the market. Therefore, it creates a crisis in the real estate sector where residential and commercial units are in the excess of those demanded. This leads to auctions and evictions as most of produced products lack consumers. Overproduction is usually based on speculation to meet a supposed increasing demand, which is not actually existing within the market (Patomaki, 2017). Overproduction leads to losses with no immediate returns hence causing bankruptcy. In such cases, the leaders within government and the big companies (especially manufacturing companies, take on an attack against the working class (middle- and low-income earners), demanding a slash in salaries, cost reduction in retirement and benefits, and layoff from work. The focus is on the benefit of the leader.
Capitalism simultaneously creates increasing poverty and increasing wealth within societies which cause the class polarization crisis. The poverty occurs due to the rising prises of products and services which people fail to afford due to low income. On the other hand, there is an increase in wealth to those in the private sector who determine the condition of the market and the prices of commodities. Increase in cost as well as the presence of inflation have great effects on the profits. Competing firms used to operations through price lowering then find it difficult to operate in such climates when the product prices are on an increase. This price increase can be attributed to a way through speculators try to earn back their money following a loss in stocks through purchase of basic goods (Katz, 2008). The supply and demand at this point is no longer free and fair. Price determination in such markets, however, is difficult. They rise and fall when it is least expected. Shortages of resources that are non-renewable may require greater investments which are unavailable at the time of crisis. Bringing back the country to the position of having enough non-renewable resources might take long, thus resulting in yet another crisis. Even in such moments, underdeveloped nations are not usually able to take advantage when the economy is at an all-time high, thus leaving them dependent on exports and external aid.
Conclusion
To summarize, capitalism is an important part of many economies around the world, especially those that provide an opportunity for economic freedom, unlike the case of communism and socialism. Many countries around the world are of a capitalistic nature. Capitalist nations, as much as they are said to have a lot of advantages, also have a lot of disadvantages to their names. At the same time, capitalism is said to regularly experience crisis. This would be explained by the free markets within which the actors in such countries operate. Inequality and self-interest contribute greatly to the crisis that so often occurs. In this regard, this essay has provided a detailed view of what capitalism is as well as providing reasons behind the regular occurrence of crisis within capitalism.
References
Allen, F., Carletti, E., & Marquez, R. (2007). Stakeholder capitalism, corporate governance and firm value. Corporate Governance and Firm Value (September 16, 2009). EFA.
Friedman, M. (2016). 61. Capitalism and Freedom (pp. 344-349). Columbia University Press.
Hernández, F. A. M., & Luna, V. M. I. (2020). CAPITALISM: COMPETITION, CONFLICT, CRISES.
Jahan, S. & Mahmud, A.S. (2015). What Is Capitalism? International Monetary Fund.
Katz, C. (2008). The crisis of capitalism: Beyond regulation and greed. reprinted in English translation at: https://isreview. org, (65).
Lanchester, J. (2018), ‘After the Fall’, London Review of Books, https://www.lrb.co.uk/v40/n13/john-lanchester/after-the-fallMoore, J. W. (2016). Anthropocene or capitalocene? Nature, history, and the crisis of capitalism.
Patomäki, H. (2017). Capitalism: Competition, conflict, crisis. Journal of Critical Realism, 16(5), 537-543.
