The Role of Markets and the State in Different Approaches to Understanding a Capitalist Economy

Words: 4130
Topic: Business & Economics
Updated:

[toc title=”Contents”]

  1. Introduction
  2. Communism, Totalitarianism, and Capitalism
  3. Role of Markets and the State in Different Approaches in Understanding a Capitalist Economy
  4. Are markets a necessary condition for the emergence of capitalism and for the reproduction of capitalism overtime?
  5. Is State Action required to Create and Maintain the Markets in a Capitalist Economy?
  6. Can The State Substitute for Markets?
  7. Conclusion
  8. Works Cited

[/toc]

Introduction

Boltanski & Chiapello in their book “The New Spirit of Capitalism” (page 47) note that wealth created by one person is wealth to the society in general. They are of the opinion that if theft is not used, then an individual should be left to accumulate wealth. This is the trend that the world has taken. On the one hand the world is changing radically in production of goods and services. Resources are limited and deserve to be utilized to their maximum to ensure that the world is able to feed its population.

On the other hand, the increase in population is drastically and it calls for more innovations to maximize utility of natural and artificial resources available. “We affirm that criticism is a catalyst for changes in the spirit of capitalism. So capitalism needs its enemies, people who have a strong dislike for it and who want to wage war against it” (Boltanski & Chiapello 485-501). Capitalism is an economic policy / tool used by the government aimed at minimal participation in production but allowing private people to compete freely. In a fully capitalism economy, the main role of the government is to facilitate trade and production through actions like provision of social needs in order to create a smooth road for good working environment.

Energy sector is left to be controlled by the government while private sector in general is the one left to compete. The opposite of capitalism is socialism, totalitarianism, and communism. These are the types of economies where the government has a total control over each sphere of production and over all resources in a country. “In the end, most economists tend to agree with Wolf that developing countries gain more in terms of social progress and eradication of poverty when they engage more openly in international trade” (Vander n.p.). This paper looks into various issues associated with capitalism as guided by various headings.

Communism, Totalitarianism, and Capitalism

Communism and totalitarianism are economies where the government plays a role of producer and owner of capital. They have elements of dictatorship as they show very little recognition of human rights and maintain a system that empowers the government at the expense of its citizens. Their main goal is a distribution of wealth. They aim at having equal distribution of wealth and do not recognize individual wealth accumulation. From this point of view it certainly ensures that the national cake is shared among all citizens. Citizens are not divided into different social classes so government has a great impact on the actions and directions of the people. Sometimes and this phenomena can be observed quite often, members of government make some decisions for their own interest. Production is seen as not geared to profit making and thus the adopted methods of production are in most cases not the most efficient which limits the level of economy in a certain way. Nowadays, due to the lack of resources these systems are not good to be adopted in any developed country moreover in less developed countries. This is a straight way to poverty and it may take a lot of time and efforts for the government to get out of it.

A socialist economic system is known to be a mix of totalitarianism, communism, and capitalism. Each person is the one who accumulates or loses his wealth one way or another way. “Socialism is usually defined as a political-economic system in which government owns the means of production” (Bradley & Donway 74). There is improvement of the production methods established as the government try to compete with the private sector. This though does not guarantee that the most effective ways are adopted as sometimes a conflict still appears between the private and public interests. Of course such a system should be operational in early development of the economy and of the country as a whole. This system is applied to take control over the distribution of resources. Nevertheless citizens have the right to dictate their rules as the economy of the country and of the world grows. Government is qualified to check prices for minor and regular needs while the market has a right to control other needs. As far as this is an effective policy that is beneficial for the major part of population it hinders the development of agriculture sector that is the backbone of most economic spheres, especially in the developing countries.

Forbes in his book “Capitalism: A True Love Story,” says that capitalism system of governance does not limit the citizens to the amount of wealth that they can accumulate and gives them a level playing ground for wealth creation. Just recently business has taken an essential part in each sphere of our economy. First of all, there are some disadvantages associated with this system because it certainly leads to corruption and distribution of wealth is not uniform as more than often it is divided between small groups of people only. The larger part of the population is poorly treated and major resources are under control of small groups. “The capitalist emphasis on unrestricted economic activity leads many authors to conceptualize the system according to what justifies such a ban on restrictions ” (Bradley & Donway, 73).

Role of Markets and the State in Different Approaches in Understanding a Capitalist Economy

Boltanski & Chiapello (23) estimate that “A firm’s senior managers will still devise the competition strategies that allow it to do battle with other multinationals (on those markets where they do not collaborate)“.

In a capitalistic market the prices are controlled by demand and supply forces. If the market’s demand is higher than its supply then the prices go up and vice versa. Although the system is controlled by forces of the market where involvement of the government is crucial. In a broader perspective, they use monetary and fiscal policies for contraction or expansion reasons. When regulations are made, they may hurt or benefit the economy both in short term and long term. The markets in a capitalistic mode are hypothetical but the government has to come and assist in some intervention to ensure that there is sanity and some level of discipline. For example, the private sector cannot be left to provide roads and other infrastructure. Financial market is one of the areas that the government exercises in its controlling power. The effects of the financial industry on the economy are more indirect than direct, it involves mobilization of resources, share resources using a resource pool, giving out credit, hedging out risk. Impact of the government on financial market is felt by investors, companies, and small business owners. Recognizing the need of regulation, the United States of America passed a Finance bill on August 2010 which is aimed to be an addition regulating financial markets policy.

Are markets a necessary condition for the emergence of capitalism and for the reproduction of capitalism overtime?

Countries that have embraced the spirit of capitalism leave the market to self-dictate and control. “Many of the people protesting in the streets against globalization are protesting against capitalism, which they accuse of oppressing workers, exploiting the poor and making only the rich richer” (Raghuram 1). The one company is successful which uses its resources effectively. Other than at local levels, the world is moving towards free trade. United States in its turn gained a leading position as the country with the most stable economy. It has embraced capitalism in its economy and blended it with free trade. This strategy has had a great impact and fast economic development as a result. Germany has been the second world’s largest exporter after the United States though China is catching up with them lately. The rapid development of China to the second largest economically developed country, based on the released in 2010 economic survey, is facilitated by the increased capitalism policies and embracing the spirit of free trade in international trade. The living standards of people in China have increased as consumers are enjoying a wider range of products fetched all over the world. The country’s economic growth rate on average is expected to be 8% in the year 2010. The second Quarter of year 2010, the country had a growth rate of 11.6%. Despite the United States recognizing and enjoying benefits of capitalism, it has some government controls for example, on September 19th 2009 the government of Barrack Obama released a finance reform bill that was meant to regulate the financial market. Various measures were listed there that were taken alongside the traditional role that government plays in financial market. The regulatory bill was necessitated by the past financial sector crisis i.e. recent global financial crisis that is believed to have started from financial institutions (ailing of Federal national mortgage association (Fannie Mac) and home loan Mortgage Corporation commonly known as Freddie Mac mortgage companies in United States of America). It came into law in August 2010.

Other policy that has been taken by the Government is participation (directly) in the financial market by offering treasury bills and bonds. Banks and financial institutions are attracted by the high secure of this program and poor their resources to this area since this will give less risky return. Their disposable income to lend to households, companies, and small-scale business will thus reduce. This program has both advantages and disadvantages. The main disadvantage of this policy is that companies and small-scale businesses will lack funds for their expansions or will have to attain it at a high interest rate. There are two ways out and one of those is to cut their work force while other one is to increase their prices in order to cover increased interest. During the period of unemployment or whenever they decide to cut off their work force, households are suffering from falling demand for goods and services that they provide. At the same time if they raise prices for products then the demand reduces. The overall trend will affect greatly in slowing the economy. One of the reasons for the government to enter into direct trading is to cure inflation in the economy, if the excess funds were used. Inflation at the expense of households, companies and business in general may be cured by offering treasury bonds at a high interest rate.

In order to protect the consumers of financial services, the government is mandated to ensure that different financial institutions operating in their economy have a strong financial base. This is why it requires a certain financial reserve to be kept with central bank to cater for safety. In order to regulate bank operations government uses the same funds from a financial reserve. Except for the central government, recently created Financial Regulatory Agency is aimed to operate in United States with the task of overseeing consumer lending and giving regulations in complex lending. As far as this is a good measure to ensure that consumers get quality services from financial institutions, it will certainly affect the policy of free trade. Free trade gives equal opportunities to each player and leads to innovations. The requirement of a capital reserve is to monitor and control operation of financial institutions. In those cases when it is necessary to take measures to reduce the circulation of money, the percentage of compulsory reserve of central bank increases which in turn leads to a reduction in lending and has a negative impact on the economy. The economy will not generate investing finances. Contractionary policies are used in order to avoid inflation during period of economic prosperity. At a contractionary period companies, households, and small business get loans at a high cost as this is the best way to injure the economy.

Government of the United States has a specially established consumer financial bureau that struggles against abusive credit card and mortgage operators. These measures are taken to ensure that consumer, companies, households, and small-scale businesses are protected by financial institutions against irregularities.

Regulations taken by the government of B. Obama limit the amount of money the banks can use for the purpose of speculative businesses to 3% maximum of its borrowed capital. This move was enacted to reduce huge financial losses which have occurred in the past from such speculations. The main goal of such actions is to ensure the public in confidence of the banking institution. The investing environment in a country is improved with a help of strong financial institution as investment in both foreign and local economy has been increased, jobs created, household financially empowered, resource mobilized and the cycle repeats. However, there is a negative side as a bank may opt not to lose these funds previously gotten from speculation and this results in increasing the cost of bank operations which something may discourage resource mobilization.

Nowadays since the great economic recession which started in United States in 2008 which was able to paralyze the entire world since United States of America is a major player as a consumer and producer in the world. The purchasing power of the Americans was reduced and thus demand for exports and home produced goods reduced also. This resulted in a decrease in gross domestic earning. Companies closed down and a sphere of trading suffered greatly. This is a great example of the past and shows us that regulatory measures are mandatory in order to avoid such unpleasant incidents in future.

The government requires financial institutions to pay some fixed amounts of fees before they are given an operating license and annual fees on top of taxes. People who own their business are obliged to pay taxes disregarding the profits they get from a trading period. In the year 2011 such compulsory measures were taken by the President of the USA otherwise its fragile economy could simply be destroyed as it has previously happened in Greece where people refused to follow the rules dictated by the government and pay increased taxes. As a result their economy is destroyed, there is no government for the past few months and it has a huge influence on the economy and circulation of money in Europe in particular.

“While many in the developed world are now convinced of the superiority of the market democracy as a form of organization, far too few are aware of how fragile its political foundations are” (Raghuram & Luigi 8).

The government has a resolution powers over banks and non-banks financial institutions. In United States, the work in collaboration with Federal Deposit Insurance Corporation is mandatory. This means that financial institutions are always under statutory audit. This guarantees that banks are working properly and in accordance with the law. From the other point of view, if a financial institution is seen to have problems, it is taken over before it reaches bankruptcy stage. This is a strong measure that proves its confidence to companies, small-scale traders, and households. They are deeply concerned that there are no risks for their budget. In the end, it will be a self-fuelled economy with money to lend at a favorable rate. Such stable environment created will definitely attract investors, boost small businesses and companies.

Banks operate with a loan facility that they are given by the central bank. The central bank in various countries issue the loans to banks at a certain rate of interest. The banks on their side have the objective that each business has, that is of making profits. When they are lending to their customer, they have to charge an interest that is higher than the one the central bank is offering. It follows that if the central bank offers credit to the banks at a higher rate then the rate of interest in the country will be reduced. There are various reasons that can make the central bank to increase the rate of interest. More than often it involves monetary policies that are used to reduce inflation in the country. This is for the reason that if the bank’s interest rate is high, then the loans are not attractive and thus the money in circulation will be reduced. When loans are not attractive companies lack funds to invest and thus the economy suffers. If the government wants to expand its economy it reduces the amount of interest that it lends to commercial banks: the reduced interest trickle down to the consumers. Social welfare of the population will increase greatly along with investment in the economy. According to De Soto:

I intend to demonstrate that the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. Capital is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for themselves, no matter how eagerly their people engage in all the other activities that characterize a capitalist economy. (2).

Is State Action required to Create and Maintain the Markets in a Capitalist Economy?

Forbes in his book “Capitalism: A True Love Story” notes that markets alone cannot be left to control an economy. The economy cannot be left alone to regulate itself. There is a need for government intervention in various strategic sectors of the economy though it ensures that the control over it is as minimal as possible.

Regulations that are targeted at protecting the consumer will have a positive effect on their lives. Consumers will be protected from dubious operations of banks and insurance companies. Credit card and debit cards had been used by some traders to exploit the general society and thus deteriorate their economic situation. With the help of protective regulation, general public will have confidence in financial institutions operating within their countries. When resources are mobilized, loans are more affordable. Another way for the government to approach its regulation is by rewarding “whistle blowers” with up to 30% of funds recovered, and by enforcing a resolution power on Federal Deposit Insurance Corporation. This will result in an increased service delivery which certainly counts as a benefit of the public.

Fiscal policy is enforced to change and to lower the taxing and to increase government spending. At the same time monetary policy is being controlled by the Federal Reserve System and its aim is to lower interest rates and increase the money supply. These two policies monetary and fiscal are enforced to cure a deflation or inflation in the economy. If the government increases its lending rate to commercial banks then the amount in circulation will be reduced. In this situation a country can produce a variety of products at the lowest cost. When these goods are exported, they are competitive enough to the benefits of international consumers as well as the local ones.

By the way if the government employs an expansionary measure, for example, by reducing its lending rate to commercial banks, the flow of money in the economy is increased and as a result we have an increased cost of products. Goods are produced at a high cost, they become expensive and hardly affordable to the local and international consumer. It has a detrimental effect on the global economy. One of the benefits of capitalism system is a usage of resources by maximum, spirit of competition which producers experience when providing goods and services. At the same time people enjoy a wide variety of goods and services offered, they enjoy recently increased employment opportunities and improvements in health and standards of living. “This concept presents similar difficulties as the concept of competition in the economic sphere, with which it may be usefully compared. In economic life competition is never completely lacking, but hardly ever is it perfect” ( Schumpeter, 271). For the past twenty years a great number of countries have entered into the group of global leading economies at the same time reducing in the number of people living in poverty. Many trade unions have been established, for example, the European Union, which accrues many benefits to its members. Citizens of the European Union member countries have a huge advantage of travelling to any country which is a member of EU.

Free trade as an element of capitalism has brought a new economic integration, which has promoted co-operation among nations. Nations can seek help or assistance from other international countries in times of difficulties. International trade has also helped nations in realizing their potential. Some nations are well known for the production of petroleum products while others are popular for the production of agricultural products, such as, coffee and tea. With globalization, information can be shared and dispersed easily among nations. “Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system” (Soto 12-56). Various decisions are taken by the government to minimize chances of the private sector to take control over society. Some important spheres that may influence greatly on the economy of the country are kept in hands of the government those are, for example, laying of roads, sources of communication and other. There is no doubt that fruitful international relations might facilitate trading but unfortunately the private sector has absolutely no influence under establishing these relations. The main goal of the private sector is to make profit and thus leaving the economy in their hands could be dangerous and less productive.

Can The State Substitute for Markets?

Forbes in his book “Capitalism: A True Love Story” notes that the trend of the economy requires both the anticipation of the government and private sector. The government actually is the capital owner and people in the economy are only used as laborers. Such kind of governance cannot dictate its rules for a long. It leads to great poverty and people feel oppressed by the government. In the past, we may find many examples of government-controlled economies existence. “Individuals and groups are swayed primarily by economic motives, which in some important respects is wrong and for the rest piteously trivial. ” (Schumpeter 11).

Centrally controlled economy is a first step to totalitarian dictatorship which simply gives all the rights and powers to the government to take control and use its population. This is the only system that gives the power for a dictator to make people dependent on the government. This is a system of highly centralized government where one political party or a group of people takes control over others and expresses neither recognition nor tolerance to others. The totalitarian type of economy makes it possible for the dictator to take control over each sphere of public and private life of the workers by using terror and violence to force obedience, crush opposition and make them dependent on the government.

Government is the only power that determines the route of relationship that the country should follow with the outside world. The public cannot influence on the decision that the government has made towards international agreement. In its turn the government is the only body that has a right to dictate rules for private and public life of its citizens. Civil societies have no right to organize for strikes to express their disagreement. On the other hand, colonialism took the form of socialism, which caused much unrest in different countries. Zimbabwe became the poorest country in the world when the government started to control all resources in the country. It has shown us that full control initialized by the government is not good for the economy and thus a mix with capitalist system is important (Forbes 1-24).

Conclusion

Capitalism is a form of an economic policy where involvement of the private sector is highly supported by the government. In this market, the government plays a role of the observer, their aim is to oversee the process and make sure everything is on the right track. Transport and communication networks are offered as supportive facilities. It attracts investments and provides perfect international and regional linkages in trade. Government uses monetary, fiscal and administrative measures to regulate market. Developed market structure is a backbone of the economy of any country which is essentially important for the economy in whole. Administrative measures are taken in order to benefit the operation of the economy as they protect consumers. Regulations have an effect on global social-economics, it gives confidence to companies, small-scale traders and investors of their financial safety and as a result we have increased resources mobilization. However, some expansionary measures injure global social-economic as they lead to an increase in cost of goods. It is a common known fact that economy cannot work effectively if its not controlled by the government this applies to both capitalist or fully government regulated. These two types of economic strategy need to be integrated in order to achieve the most favorable results.

Works Cited

Bradley, Robert J. R. and Donway Roger. “Capitalism, Socialism, and “the Middle Way” A Taxonomy.” Independent Review 15.1, 2010.

Boltanski, Luc., and Chiapello, Ève. The New Spirit of Capitalism. New York: Verso, 2005. Print.

De Soto, Hernando. The Mystery Of Capital: Why Capitalism Triumphs In The West And Fails Everywhere Else. New York: Basic Books, 2000. Print.

Forbes, Steve. “Capitalism: A True Love Story.” Forbes 184.7, 2009 :1-24.

Raghuram G. Rajan., and Zingales, Luigi. “Making Capitalism Work for Everyone.” National Interest. 2007. Web.

Schumpeter A. Joseph. Capitalism, Socialism and Democracy. New York: Routledge, 1994. Print.

Vander Weyer, Martin. “Can free trade be fair trade?” New Statesman. 2005. Web.