LECTURE 5 THE NATURE OF CAPITALISM

AN OVERVIEW
This lecture introduces capitalism as an economic system. It discusses the difference between capitalism and socialism, key features, moral justifications and criticisms of this economic system.

LEARNING OBJECTIVES
By the end of this lecture, student should be able to:
y define capitalism; y identify the key features of capitalism; y examine the moral justification and criticism of

capitalism.

INTRODUCTION
Capitalism
y An economic system in which production and distribution is in

private hands, operating for profit (self-interest) and under market system (depends on demand and supply).

Socialism
y An economic system characterized by public ownership of

property and a planned economy. government

y Public ownership of property y A planned economy

not owned by individual but by

government set output target, income, price does not allow complete freedom of production.

Hybrid Economic System/ Worker Control Socialism

y Firms respond to a market in acquiring the necessary

factors of production and in deciding what to produce (based on what the market wants).
y The workforce of each enterprise controls the

enterprise, and the profits accrue to the workers.

y Although the workers manage their factories, the

capital assets of each enterprise are owned by the government (society) and not by private individuals.

KEY FEATURES OF CAPITALISM (1) Companies y The existence of companies or business separate from the human beings who work for and within them. y Treat as a separate and distinct entity. y A corporation may enter into contracts and may sue or be sued in courts of law. (2) Profit Motive

y Self-interest

Human beings are economic creatures who recognize and are motivated by their own economic self-interests.

(3)

Competition

y Economic competition steers individuals pursuing

self-interest in a socially beneficial direction. (4) Private Property

y Private ownership of the major means of

production and distribution which include factories, warehouses, offices, machines, computer systems, trucking fleets, agricultural land.

MORAL JUSTIFICATIONS OF CAPITALISM (1)

The Natural Right to Property natural right.

y Fundamental moral right to property

(2)

Adam Smith s Concept of the Invisible Hands

y A free and unrestrained market system (no government intervention) is efficient and productive (because there is competition therefore firms will find the best combination of production techniques that could minimize the cost). y Invisible forces will determine the type, quantity and price of product or services produced. y Law of supply and demand.

CRITICISMS OF CAPITALISM (1) Inequality

y The difference in personal incomes is huge; a small minority of the

population owns the majority of the country s productive assets. Example: Amount of money in the bank and interest earned Human Nature and Capitalism

(2)

Assumption: y Consumers have full knowledge of the various choices available to them in the marketplace. y They know the price structures of similar products, fully aware of product differences and able to make optimal choice regarding price and quality.
y However, in reality, consumers do not have much awareness of

competitive pricing of various products and are easily influence by advertising and promotion.

(3)

There is not much of Competition

(i) Capitalism Creates Oligopolies y A small number of companies conspire to set prices, eliminate competition and monopolize an industry. (ii) Waste of Resources

y Producers seek government protection from influx of lower

prices imported products. Example: quota and import duties.

y Consumers pay more for goods.

(iii) Competition is not a good.

y Competition may not persist, rivals driven out that will lead to

monopoly. Smaller companies may be taken over by bigger firms.

(4)

Capitalism results in Exploitation and Alienation

y Exploitation

Example: Companies in an industry offer fixed wages to workers and curb the rights of the workers.
y Alienation

Example: Worker belongs to the company. His life does not belong to himself but the company.

TODAY S ECONOMIC CHALLENGES

(1) Slow Growth in Productivity
y Corporations obsessed with short-term performance and govern themselves by short-term indicators such as share price (stock market performance) and quarterly profits. y Less willing to invest in long-term research and development or to sacrifice current profits for benefits ten or fifteen years into the future.

(2) Declining Interest in Production y Outsourcing buying parts or whole products from other producers, both at home and overseas. y Increase in corporate mergers and acquisitions directed toward making money.

(3) Changing Attitudes Toward Work

y People become less optimistic about the future and doubt that their hard work for the company will pay off, they become less interested in work. y Workers are willing to work hard on a job they find interesting and rewarding. y They have a growing expectation that work should provide self-respect, nonmaterial rewards and substantial opportunities for personal growth. And they have a growing willingness to demand individual rights, justice, and equality on the job.

Discussion Questions:

(1) Capitalist or Free Market allocate goods and services in the most socially beneficial way . Explain what is a capitalist market and what are the moral justifications of capitalism.

(2)

(a)

What are the main features of Capitalism?

(b) Name and explain THREE (3) main criticisms of Capitalism. (3) Capitalist or Free Market allocate goods and services in the most socially beneficial way. (a) (b) What are the key features of capitalism? What are the advantages and disadvantages of capitalism?

(4) Free markets allocate economic goods and services in the most socially beneficial way. To what extent is this statement true? (5) Utilitarian defence of capitalism is associated with the classical economic argument of Adam Smith. However, there are strengths and weaknesses in the capitalism concepts on the moral right to property. (a) Discuss Smith s concept of invisible hand.

(b) What have been the good and ill effects of capitalism?