Political Theories for Students. Editor: Matthew Miskelly & Jaime Noce. Volume 1. Detroit: Gale, 2002.
Capitalism is more than an economic system. It’s an entire ideology centered around the idea of the individual’s right to choose his work, his goals, and his life’s details. Capitalism is based on the relationships between the capitalists, the consumers, and the laborers. Capitalists essentially acquire or create goods for less than they sell them. Capitalism has dominated the Western Hemisphere since the Roman Empire began to tumble and, following that, the feudal system disintegrated. Markets determine the production and distribution without government involvement, and the economy and the government remain separate. Its development began, officially, in the 16th century, but the idea started in the ancient world and there have been healthy capitalistic niches ever since. The first major work on capitalism was written by Adam Smith in 1776, Inquiry into the Nature and Causes of the Wealth of Nations, and along with his detailed analysis of capitalistic theory began a more structured and formally recognized ideology.
Capitalism could not exist without the presence of a market. Marketplaces have existed for several thousand years. There are documented markets and trading relationships between the pharaohs of Egypt and the ancient Levantine kingdoms around 1400 B.C. In 400 B.C., there are records of a rich trading network and commodity exchange in addition to a complicated market in classical Greece and Rome.
These healthy market and trading systems show the historical basis of money, mercantile groups and the idea of profit, but there was not a market system like exists today. Markets joined suppliers and demanders but what was supplied did not change based on the details of demand. Markets existed to provide luxuries to those who wanted them but did not satisfy the essential needs of society. The essentials were taken care of according to tradition, with slavery as the labor source. Living one’s life to benefit another was looked down upon for the free man, however, as articulated by the philosopher Aristotle.
Capitalism as it is today is relatively new, but the ideas of markets and profits have been in place for thousands of years. Formally, capitalism began during the Middle Ages with the mercantilist period. The ideology has been around since before the philosophers Aristotle and Plato, however. Plato (428-348 B.C.) began to outline some of the structural ideas of capitalism in terms of freedom and liberty, but subscribed more to communist and community based ideology then to the individualism that defines capitalism. Plato argued that guardians were needed to protect people from injustice and from invasion. He felt that they should share the state’s wealth by keeping properties public to ensure equality. He also thought that by allowing people to privately own their own homes and properties they would necessarily become enemies rather than neighbors in mutual protection of one another. The theory of communal living continued but the beginnings of individualistic capitalism were sprouting as well, growing with along the ideas of freedom and liberty.
The idea of capitalism grew from individualistic notions. In religion, this led to the Reformation. In politics, this led to democracy, and with the economy, this led to the capitalistic system. Capitalism has its origins in Rome, in the Middle East, and in Europe in the Middle Ages. Its earliest organized form was called mercantilism, the production and distribution of goods to make a profit.
Mercantilism began in Rome in its simplest form. The merchants bought goods for less than they sold them. The Roman Empire expanded, and mercantilism grew along with it. As the empire began to shrink in the fifth century, however, so too did mercantilism. By the 700s it was only a small slice of the culture of Europe. During this same period, though, capitalistic practices were thriving in Arabia. The Arab culture existed in the trade routes between three empires: Egypt, Persia, and later, the Byzantium. Islam spread across the Middle East, Asia, Spain, and North Africa in the 700s. Mercantilism spread along with Islam, and its success is evidenced by the number of economic words derived from Islam such as traffic and tariff.
In Europe, the medieval culture relearned the ideas of mercantilism and capitalism from its Arabic neighbors. By the 1300s, Europe had fully absorbed mercantilism and was starting to expand through mobility and mercantilism. Europeans and Arabs alike began to explore the globe. These voyages were inspired by mercantilist thoughts and dreams.
St. Thomas Aquinas
St. Thomas Aquinas (1226-1274), one of the most important writers and theorists of the Middle Ages, believed in individuality more than his predecessors. The Reformation was beginning. The Catholic Church was very powerful and equally corrupt. People wanted change and were calling for reform. His economic notions accompanied a new wave of thinking that remained until the Mercantilist time in 1600. Aquinas thought that it was natural for men to hold private property. He argued that there were three reasons for this to be the case, rather than public ownership. His first point was that men will more reliably attempt to secure something for themselves than they would for the public use. Secondly, people conduct themselves more orderly and responsibly when it concerns their personal effects and properties. Thirdly, if everyone is happy with his own lot that he’s gotten for himself, peace will ensue much more securely than it would were everyone sharing and feeling, possibly, a lack given their inability to have power over their acquisitions.
St. Thomas Aquinas also argued that when things are in private hands they are easier to share with those who have less. He thought that private property was just and advantageous, provided it was shared with those who didn’t have it. This belief made it acceptable for men to be richer than others and to separate their wealth. It became acceptable and even respectable to have things. Aquinas even said that there should be a limit to the amount that any one person should have to give to the poor so as to ensure that one may live as necessary for one’s status. He thought that wealth was wonderful if it helped one to live a virtuous life. He also felt that poverty was equally desirable if it was the lack of wealth that helped one to live virtuously. His idea that it was natural for men to have different status levels in life was new, and allowed an individualistic branch of thought to take root.
Aquinas also wrote about more detailed economic ideas. The clergy writers who preceded him had written that a “just” price was that at which the buyer and seller benefited equally. Aquinas said that the “just” price was actually a price range, within which both parties would benefit but allowing for external details to be included in price. He said when figuring the price of an item, the seller should take into account his amount of loss. For example, if the seller had a personal attachment to something that he was going to sell, he could charge more than expected for it for this reason. This opened the door to a lot of subjective reasoning, a door which is still open.
Aquinas’ ideas about wages were based on the same principles. A worker’s wage should be enough to allow him to live decently without raising the cost of labor enough to raise the price past a “just” level. The cost of labor was very important in determining an object’s cost. Aquinas’ ideas have become widely used in price determination.
Aquinas touched on money lending as well. He anticipated the idea of interest payments by stating that if a lender could prove that he had missed another financial opportunity because he hadn’t had the money that he had lent to someone else, he could charge interest rates for the money that he had lent. He could also charge interest if the borrower was late in his repayment, and he could charge a compensation fee if he could show that he had suffered a loss of some kind.
St. Thomas Aquinas also wrote about the state’s needs. He said that in order for a state to have what it needed, it could either produce everything for itself or it could trade. To trade, he realized that merchants were needed and this paved the way for exploration through searches for trading partners and resource suppliers. It was only two hundred years after St. Thomas Aquinas’ death that Christopher Columbus set sail to the Indies.
During this same period (roughly 1215 to 1545), the Reformation was gathering speed. Europe went through many artistic, political and social changes resulting from opposition to the Catholic Church. The Church had become very powerful and very corrupt. The official Reformation began in 1517 when Martin Luther, a German Augustinian friar, posted his “Ninety-Five Theses,” a list of criticisms against the Catholic Church. People began to take charge of their own salvation since they couldn’t trust the Church. Individualism swelled.
Aquinas’ ideas took hold and mercantilism was back with a passion in 1500 with continued popularity until the 1700s. The main belief was that a nation’s wealth could be expanded upon by exporting products which would bring in gold and silver. This monetary wealth could then be used to build up armies and armadas; the more gold one had, the more one could buy with it. It was this desire for gold that led to exploration on a global scale.
As an economic system, capitalism has had more recent success. The system’s development dates from the 1500s as the areas of mercantilist activity in Europe began to spread. The English clothing industry led a movement toward capitalism in the 16th, 17th, and 18th centuries. People began to realize that they could produce goods and sell them to gain a profit.
In the 16th century, the Protestant Reformation furthered the ideas of individualism. The distaste for material acquisition decreased as the desire to attain went up. Frugal behavior and hard work gained status, and the differences in distributions of wealth began to be justified by the idea that one earned as much as one deserved with the fruits of his labor.
Though there were many details of mercantilism that the philosophers and economists of the day did not agree upon, there were a few essentials that were universally accepted. All of the resources needed for the production of goods were to be created within the host country. If this proved impossible, then only the raw materials would be imported to allow the production to take place domestically. To further the political and economic benefit to a nation, the maximum amount of effort would take place within the borders rather than outside where added payment would be necessary.
Because of the state’s desire to provide for itself all of the needed materials both to exist and to export, colonization became increasingly attractive. Colonies could provide free resources for the colonizing country. The colonizer wouldn’t have to pay for them from another independent source. Exploration became more than just a search for trading partners; it became a chance to find new areas to exploit and claim for one’s own state.
Another effect of mercantilism was the improvement of technology and the need for mathematicians and engineers. In order to travel more successfully than the competitors, a nation needed more advanced navigational equipment. States began to create areas of study for cartographers and mathematicians. In addition to navigational equipment, weapons were improved to facilitate colonial take over. There grew an interdependence of mutual benefit between the state and the merchants, without the state controlling the actions of the merchants and their markets or the markets controlling the actions of the state. Thus, the seeds of capitalistic separation of state and market were planted.
Mercantilism as an idea began to drop in popularity as inflation rose. Given that the more gold a country has decreases the value of all of it, the acquisition of new gold did not necessarily create greater wealth. Since the value is lower, the prices increase. When these now more expensive goods are exported, they are rejected for the cheaper ones available from the other trading partners. This was perhaps best evidenced by the decline of the Spanish Empire, where inflation quadrupled prices in a century due to massive gold intake.
Mercantilism also declined because people began to feel that they were not being provided for adequately by the state. They wanted the state to withdraw further from their lives rather than remaining on top of them and, consequently, stifling their activities. People began to suspect that individual interests led to communal gain for many of the same reasons stated by St. Thomas Aquinas hundreds of years before.
The Rise of Individuality
From mercantilism until the time of Adam Smith (1723-1790), the founder of capitalistic theory, individuality continued to grow. The English philosopher John Locke (1632-1704) believed that a man’s place in society was not necessarily a struggle against his neighbors. He disagreed with Plato that private property would necessarily create enemies. Locke claimed that people are born with equality and freedom, and if this turns competitive and ugly, it is because of their actions. Governments form to ensure peace and freedom between people. This creates the possibility of economic freedom that is unregulated by the state, provided one does not harm one’s neighbor, people are at liberty to do as they please.
Locke felt that the government had no place in the economic sector. He also believed in private ownership. He believed that the world was created by God to be used by the people and that once one had labored to some end, the end was his to claim. If a man cultivated a field, the products from the cultivation were his. Locke went further to explain the use of money as a substitution for direct labor. He said that men have agreed to money as a means of exchange. Money is paid for something that one man has that another wants. If a man cultivates a field and has more than he needs for himself, since the products are his because he produced them, he may sell them to someone who has need for those products. This exchange allows the producer to earn money he can then use to buy goods he himself is not able to produce.
Locke said that men should be allowed to regulate their own commerce. Governments should exist only to protect people from injustice against the state and against the people, whether from outside sources or from threats within their borders. Locke also explained why some members of society were able to amass such a state of wealth; it was through their own labor that they were able to make enough to sell and, consequently, gather their money.
The Reformation also claimed that people were responsible for themselves and that if they did not reach salvation they had only themselves to blame. People did not necessarily have to go to the Catholic Church in order to have a relationship with God. Everyone was his own priest. These ideas became dominant in the Western world as feudalism collapsed. Much of the production was privately owned and markets began to dictate product and income distribution.
In addition to the mercantilist beginnings and the individualism of the Reformation, Europe’s increase of its supply of precious metals sparked a rise of capitalism. Prices inflated because of the supply, though wages did not rise at the same rate. The capitalists benefited greatly from this inflation. They also benefited from the increase of national states which occurred during the mercantilist era. The national policies created legal codes and a regulated monetary system which were necessary social conditions in order for the economic development to be such that a shift would result from public to private ownership and control.
As time went on, industry began to take the place of commerce. In the 18th century in England, the capital that had been building for centuries was used to develop technology. This in turn fueled the Industrial Revolution. Adam Smith (1723-1790), an early theorist of capitalism, wrote his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 which, though not immediately a success, became the first publication having to do with capitalistic theory. Smith recommended allowing the market to make economic decisions through self-regulation rather than allowing the government to control commerce and industry.
The main idea of his book was that there is a natural progression through four stages that humans follow, from the crude caveman to more organized agriculture, then to feudal farming and finally to capitalistic independence and commercial wealth. He explained the evolution of society into a market-determined existence free from government interference. Smith called this the system of perfect liberty. He wrote that “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” This phenomenon and the end result later became known as laissez-faire capitalism.
Smith also talked about the invisible hand, which works within the final stage of society. A system of complete freedom, given the drive and intellect of human kind, will create an organized society. He explained this with examples of individual commodity pricing and a regulated legal code. This order would be produced by the two pieces of human nature, the passionate and the impartial. The passions would keep morality up front while the sensibility and apathy would promote organization and cleanliness. Smith argued that competition would result from the marriage of these two bits of human nature. The passion and drive to improve one’s condition and the sensibility to do it by trying to get the market to work in one’s favor leads to a competitive arena.
According to Smith, the invisible hand regulates the economy through this competitive fight for self-improvement. Competition for consumer demand drives the prices down to levels that Smith deemed natural. These prices would be just about the cost of production; enough to make a profit and low enough to be affordable. Smith also theorized that competition creates frugality and efficiency. For the same reason that prices are kept at natural levels, Smith argued that so too will wages, profits, and rents.
Smith’s arguments for laissez-faire market freedom were as much against monopoly as they are against government. He wrote that competition is essential and he sited the dangers of a monopoly. In addition to that, though he spoke of a capitalistic ideal, he often referred to the actions of the capitalists with contempt and scorn. He did not necessarily approve of the nature of the system, but rather pointed out the benefits that make it so appealing. He also stated that the division of labor reduced the laborer to a robotic being, as he “becomes as stupid and ignorant as it is possible for a human being to become.”
A good portion of The Wealth of Nations centered around the idea of natural liberty. He points out that this system cannot work with the interference of government. He says that “the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind” cannot affect the government’s actions. If the government heeds the market and reacts to it, all will go sour.
Smith’s Wealth of Nations also spent a good deal of time analyzing economic growth. Smith thought that the market was self-repairing. Not only did he believe the market would adjust to the economy around it, he also thought that with a free market the national affluence would continually rise.
The backbone of his theory rests with the idea of the division of labor. The book begins with a passage describing a pin factory. Ten people could produce 48,000 pins a day because of the division of labor; if each were producing the entire pin himself, each worker could only produce a few pins a day. This division of labor can only occur, Smith said, after the acquisition of capital. This capital is in the form of machines and tools, and also includes the resulting profits used to pay the workers.
This dramatically improved production has results of its own. Since there is so much being produced, the manufacturer begins to build stock and therefore needs more workers to continue this trend. To attract them, he raises the wage offer. When he hires the workers, he ends up making a smaller profit proportionally. To counteract this, the employer may come up with a more intricate system of labor division in order to continually maximize profits. Smith’s growth predictions did not depend solely on human nature. They also included the necessary lack of government intervention and regulation which would temper the competition, thereby keeping everything as equal as it could be.
The French Revolution and the Napoleonic Wars effectively dissolved the remaining remnants of feudalism. Smith’s ideas were increasingly put into practice. In the 19th century, politics were liberal and began to include the gold standard, free trade, relief for the poor and balanced budgets.
Charles Darwin published his Origin of the Species in 1859. His ideas were directed toward science rather than toward economics, but were similar to capitalistic ideology. Darwin described the process of natural selection that occurs in evolution. Those who are able to adapt survive while those who cannot will expire. This idea was shared by capitalists. Those best adapted to their environment and market were the most likely to survive and make a profit. Though Darwin didn’t suggest or subscribe to the idea of social Darwinism, it became a way to explain why certain groups were less affluent than others; they simply hadn’t adapted as well as the upper class. This carried on to economics as well and, though Darwin never actually said “survival of the fittest,” the phrase became an accepted explanation of the distribution of wealth in the economy.
World War I, spanning the years 1914 to 1918, was another important time in the history of capitalism. When the war was over, the gold standard was discarded and replaced with separate national currencies. The banking hegemony switched from Europe to the United States, and the barriers to trade grew as the international markets shrank. In the 1930s, the Great Depression ended the laissez-faire (hands-off) policy of governments toward economy in many countries. These events cast a shadow on capitalism and people wondered if it could succeed as a system.
Despite these obstacles, capitalism has survived and continued to flourish in the United States, the United Kingdom, Germany, and Japan. It is beginning to gain stature in many other countries as well, and much of the first world subscribes to its belief in freedom from government control of the economy.
Theory in Depth
The two main ingredients of a capitalist society are the capitalists and the laborers. The capitalists are the people who are in control of the capital, or means of production. They cannot reach their end without productive labor, however, which brings in the rest of society. The human labor needed to produce goods from raw materials is paid labor. People work for money rather than for a part of the product. The workers are not invested in the product and are more detached than if they were receiving goods rather than wages. The work becomes more efficient because of the division of labor. Each worker has a specific job to do and may become very adept at it since his area of expertise is relatively small. This lowers the value of the individual worker, however, since his area of expertise is so specific.
Factors for a Capitalist Society
One of the most important traits of capitalism is individualism. Individuals, rather than the state, own the means of production such as land, machinery, natural resources and factories. Public ownership is possible, such as with the postal service and public utilities, but it is the exception rather than the rule. The state may own land as well. In the United States, for example, the government owns roughly one third of all land, mainly in the West and in Alaska.
This bias toward individualism is based on two things. First, ownership of production means having control over people’s lives, and it is preferable to have this power spread out amongst many players rather than concentrated in bulk with the government. The capitalists themselves may be regulated by the government, which provides added protection for the consumers and capitalists alike. If the government were in control of the capital, there would not be a second power to curb its actions. The second argument for individualism is that progress is more easily attained when people have personal incentives to reach their goals and the freedom to set the goals in the first place.
Another trait of capitalism is the market economy. Before capitalism, families were more self-sufficient they produced what they needed to exist, with any extras being bartered for any supplies they themselves could not produce. This was a sort of primitive market on a small scale. Families bartered with other families in their locality. There was no division of labor because the families took care of all of their needs themselves. In contrast to the time when these families generally produced everything for themselves, the capitalist system ensured that no one would have to master so many different tasks. In capitalism, each person specializes in one task.
Each person creates and supplies only a small portion of what they need to live, relying on others to produce what else they need. Wages earned from this labor goes toward the purchase of other necessities. Because of this difference in direction, a worker produces not for himself but for the market. Supply and demand determine the prices paid for the goods produced. The government may regulate to some extent; in the United States, the government intervenes to break up monopolies, promoting competition and lowering prices.
In contrast with other systems that are dictated by a central body that attempts to keep up with the economic and social intricacies, capitalism is broken into so many different pieces that, in theory, each piece is expertly managed by the person in charge of that slice of the pie.
This lack of central regulation is a very important ingredient of capitalism. The state does not tell people where and when to work, how much to charge for their labor, what to do with their money, and what they should be producing at their job. The government may direct the market subtly with its budget, interest rates, and taxes, and it may break monopolies into smaller pieces. However, the direct economic control remains in the hands of the masses and the government serves only as a referee to promote fair play in the game.
Links between supply and demand
Another feature of capitalism is the sovereignty enjoyed by the consumer. He chooses both what will be produced and how much of it will be available through his demand or lack thereof. The number of televisions produced, for example, is not a result of a government limit or quota but rather a direct result of how many televisions sold the year before and whether or not there was a surplus or a shortage. The government may increase interest rates to discourage borrowing for the purpose of business expansion, but the decision is ultimately up to the capitalist who is willing, or unwilling, to pay the price. United States President Richard Nixon (1913-1994), for example, set wage and price controls in his economic policy of 1971. He did not, however, forbid action of any kind; he encouraged the market to act in ways better for the consumer. Thus, the government may protect the consumer by creating standards for wages or by encouraging competition when a monopoly has formed.
Competition is another essential aspect of capitalism. Competition means that it is the interactions between the buyers and sellers that determines the price of goods and services rather than the state or a private monopoly. Research, for example, has become one of the largest competitive arenas. By performing research today, companies can anticipate the goods and services consumers will desire in the future. Research has become a very competitive area; when one company researches and then produces a product first, all of its competitors who were working on similar products have lost out. Their goal has been realized by someone else and all of the resources they have expended to that end have been, relatively speaking, wasted. For example, as soon as someone designs a smaller cell phone, the others working on a similar project must then think of something else to design. Competition creates fervent researchers. Research fuels competition not only between companies, but between entire economies. In the 1970s the United States began to relax its research endeavors both publicly and privately. Japan and Germany have since grown enormously in strength due to their research, taking part of the success away from the United States.
Another principle idea of capitalism is profit. A special level of freedom is created in capitalism that is not found in other systems. It guarantees freedom in several important areas: contract, property, trade, and occupation. In contrast, when prices are established by the state, there is a limited amount of profit to be made and, therefore, less incentive to enter the market.
Capitalism is a system based on profits and, consequently, on losses. When one person, company, or state makes an enormous profit, there is always someone who has lost out. In any given year, forty percent of corporations will report losses. Fifty percent of firms close down within two years of opening, and eighty percent close within ten years of opening. The closures are usually due to continual financial losses.
Theory in Action
There are many examples of capitalism. Germany, the United States, and Japan are countries where capitalism is the driving economic force but which are, at the same time, very different from one another. While Japan is more specifically designed like itself, both the United States and Germany are universalistic. Germany is community oriented and the United States revolves around individualism. The United States is analytical and Germany integrative.
Before World War II, which lasted from 1939 to 1945, the capitalist economies were plagued by dips and swings, depressions and peaks. There has been a huge change since the Great Depression of the 1930s, however. Welfare policies and available aid have curbed the slumps. The economy has also changed from an industrial economy to a service economy which has created greater stability in supply, demand, and in the job market.
Capitalism in practice was very much like capitalism in theory through the mid-nineteenth century until the Great Depression. One thing that has happened is a change in proportion of the population in the labor force. With technological development, under capitalism or any other economic system, the industrial working class increases constantly at the expense of the tradesmen: carpenters, blacksmiths, bakers, and plumbers, for example. These potential tradesmen choose jobs in factories instead. As time progresses in industrial development, however, the numbers working in industry begin to go down again in proportion to the population. Their absolute numbers keep growing, but proportionally the numbers are shrinking.
The United States
Since the advent of the twentieth century, the technological working class in the United States has consistently grown while the proportion of people working in industry has steadily gone down. This has occurred for two reasons. The first reason is the switch from blue collar work to white collar work. There has been a steady shift as technology increases. Automation and machinery do the work that the blue collar workers used to do. There are more white collar workers needed to manage the technology, but the overall number of workers goes down.
Rise of the service economy
The second reason for the steady decline in workers proportional to the population is the growth of companies to provide service rather than goods. From 1950 to 1985, the number of people employed more than doubled from 60 million. The number of white collar workers rose from 22 to 53 million. The new white collar workers were employed in government, retail and wholesale trade, schools, insurance, communications, entertainment, health services, finance, and real estate. Government in particular has grown enormously.
The change from producing goods to providing services has led to a shift in the nature of most employment. In 1950, more than half of the labor force was blue collar. Today, white collar workers outnumber blue collar workers by more than two to one. The production line has given way to the office and the product has become a service. This is called the service economy to prevent confusion with the industrial economy that it replaced.
The two-tier labor market has largely been created by the advent of improved technology which separates white collar and blue collar workers more distinctly. Generally speaking, blue collar workers lack the education, pay raises, health insurance and other benefits that common in the white collar sector. In fact, since 1975, the majority of the household income gains have gone to the upper 20 percent. From 1994 to 1999, inflation was low and unemployment fell to below 5 percent. In 2001, the economy moved into a downswing, however, and the long term troubles with a lack of economic investment, medical cost increases with the aging population, trade deficits, and family income stagnation for the lower income families became problematic.
An important year in American capitalism history related to the rise in the service economy was 1956. For the first time in world history, the number of people performing services was greater than the number producing goods. The same change has since occurred in Sweden, Great Britain, and Canada. This switch has been significant politically because the salaried members of society identify more strongly with the upper and middle classes than with the working class. This white collar group generally produces children who continue in this social stature. The new members of society are better educated and more wealthy than their blue collar counterparts, and because of this, they’re better suited to remain in that position.
In comparison, Russia saw a huge increase in industrial workers, both skilled and unskilled. As its industrialism increased, however, the same phenomenon occurred and there were increasing numbers of white collar members of society. Class lines have become defined despite the communist ideology. The social status of the blue collar worker is distinctly different than that of the white collar worker. These new upper classes are rising at the expense of the lower. In communism as well as capitalism, industrialism breeds this shift in the populous.
The new service economy has greatly affected the strength of the capitalist economies. In a goods- producing sector of the economy there are large shifts of employment and of demand. When there is excess supply, it can usually be stockpiled and the surplus saved. With the service economy, however, the services cannot be saved if there is a surplus in supply. There is necessarily a better balance between supply and demand for this reason and this in turn creates a more reliable and predictable job market.
In countries that practice capitalism, the economic levels are high enough to allow for welfare policies and payment. With other economic systems, however, though there are often welfare policies existing in theory, there is often not enough money to pay for them and they become obsolete. Under capitalism the constant increase of goods and services allows for enough wealth to be able to be distributed to the people who are struggling. Since the market is permitted to adjust to itself and is in control of all of its own intricacies, it is able to be much more efficient than if the state tried to regulate all of the details.
It is interesting to note, however, that despite the success of capitalism and the relative economic boom in the United States, there is still a poverty problem and an uneven distribution of wealth. Many people are in debt, and the United States itself has a huge debt to repay to its lenders.
Another change in the structure of capitalism has been the increase in the non-profit sector. In the United States, the non-profit sector is made up of private not-for-profit organizations and the government. This section of the economy is growing at a faster rate than the for-profit sector in the United States. Non-profit means that there is a direct, or indirect, contribution back to society. Since the non-profit sector doesn’t invest their earnings in themselves, what would have been profit goes back into circulation.
The non-profit sector has grown for several reasons. The government has continued to expand in the areas of defense, health, education and welfare. Private non-profits have also grown in both health and education. The service economy has helped the non-profit growth as well. As the industrial economy advances and grows, a service economy slowly replaces the industrial economy. When this happens, the production of goods is replaced by services for both for profits and non-profits, such as health, community, welfare and education services.
Finally, as a nation’s economy advances and evolves, there is a greater demand for provision of services that not everyone is getting. Health insurance, educational aid and transportation are considered essential but unobtainable. More socialist governments like those in Scandinavia and Britain have concentrated their socialization programs on service areas like health and education rather than controlling economic activity.
The government steps in
There have been many successes with capitalism, but there have also been many problems as well. Capitalism has not always gone according to the theory. The Great Depression was an unexpected event. It was responsible for the welfare system which has come to characterize so many capitalist countries, including the United States, Canada, the United Kingdom, and much of mainland Europe. The population believed that laissez-faire economics was ideal and that even when the market plunged it would be able to fix itself again without outside influence. When the economy dipped to the point where one quarter of the population was out of work, enterprises were going bankrupt and couldn’t pay their employees, and farmers couldn’t sell their products without taking a loss, something had to give. The welfare state was created. While not an entirely natural step in the progression of capitalism, it became necessary for the crippled economy.
U.S. President Franklin Roosevelt began the New Deal in 1933. It outlined emergency measures to help people back onto their feet after the Great Depression. The Agricultural Act (May 12, 1933) provided aid for farmers in return for lowered production, thus raising prices due to a decrease in supply. This allowed them to buy the industrial products to which they had become accustomed.
The National Labor Relations Act (July 5, 1935), also known as the Wagner Act, changed the nature of relations between employers and employees. Before the act, employers had been at liberty to recognize, or to ignore, unions in their midst. They often fired workers for being involved in union activities and the workers had no means of protection from this. The Wagner Act promoted bargaining between the unions and the employers. It could not force the two sides to agree, but it prohibited both strikes and lockouts, the scare tactics of both sides. The result was a distinct decline in violent labor disputes.
The Social Security Act (August 14, 1935) was another major step in the welfare system’s creation. Private efforts to protect individuals from poverty in old age had proved largely ineffective and the Social Security Act sought to create a public provision for everyone through taxation of wages. This act was of particular importance because it showed the United States’ belief that it was partly responsible for the monetary security of its citizens.
In 1947, The Labor-Management Relations Act, also known as the Taft-Hartley Act, replaced the Wagner Act. Some provisions of the Wagner Act were altered for the Taft-Hartley Act, but the principle upon which it was founded, bargaining between the two sides, remained unchanged.
In 1965, Congress took the Social Security Act even further to include health care for people over the age of 65. The health insurance covered both doctors’ bills and hospitalization. Medicare, the insurance program, existed for senior citizens, but the government also gave grants to the states to provide aid to families unable to cover their medical costs. Many states followed suit by setting up Medicaid, programs set up to deal with federal grants and distribution of money to the families it was designed to reach.
The Elementary and Secondary Education Act in 1965 was another important step. The government made grants directly to school districts with families with low incomes. The Higher Education Act from that same year gave both grants and loans to institutions to improve their facilities. It also gave aid to millions of students in the form of federal loans, federally guaranteed private loans, work-study aid, and grants for students with disadvantages.
The main mechanism for funding the social welfare systems is taxation. Through federal taxation the income is more evenly distributed than it would be if the economy was entirely laissez-faire. This distribution of wealth has led to a higher minimum allowance for many. This allows a greater proportion of the population to remain active economic players which ultimately keeps the economy more stable than it would be if the wealth were more distinctly separated. Government taxation is structured to compensate for economic dips and swings. The government has stores of money from taxation from which to continue its welfare programs regardless of the state’s economy. Through social welfare, the government is able to retain relative stability.
The debate over public vs. private
With his New Deal, Roosevelt essentially changed the relationship between the public and private sectors. He supported farmers and farm prices, protected unions, created a social security system for the elderly and retired, gave aid to the unemployed, and regulated the market. His advocates called him a savior, while his opposition labeled him a traitor.
Initially, everyone seemed in favor of the welfare state in the United States. President Lyndon Johnson (1908-1973) proposed “the Great Society” to this end. This trend continued with Democrats and Republicans alike. The conservatives tried to buff up the existing programs, and President Nixon did just this with welfare and education. With his “New Economic Policy,” Nixon also set up price and wage controls.
After 1970, however, attacks on the welfare system became more direct and biting. As time went on, opposition of the welfare system grew. Support and dissent split onto different sides of the fence. Liberals argued that the government should be expanded even further, wrapping its protective, paternal arms even more tightly around its citizens. Two important political changes occurred in the Western world. Margaret Thatcher was elected as the Conservative Prime Minister of Great Britain in 1979, and Ronald Reagan (born 1911) was elected as the Republican President of the United States the next year. Both administrations held strong opposition to the welfare state. Policy shifted and challenged the existing system. Margaret Thatcher privatized even more of Britain’s functions including the post office, and she became known as “Maggie Thatcher, the milk snatcher” for revoking free school lunches.
The conservatives had several gripes. They emphasized decentralization of the government, deregulation of the economy and privatization of public entities. After Adam Smith in 1776, capitalism promised free market growth uninhibited by government regulation. The economic advances were coupled with problems, however, such as monopolies, swings of booms and recessions that affected the economy’s growth, disregard for the environment by the companies producing waste, and an uneven distribution of wealth, which left many without the means to provide health care, retirement funds and other needs for themselves. These troubles led to government aid and action. Governments began regulating the economy and disbanding monopolies, providing social welfare through taxation, and creating restrictions and guidelines for company waste production.
The conservatives believed that the market economy would correct itself and that government should step back. Distribution of wealth would be unchecked, branches of the government such as the U.S. Environmental Protection Agency wouldn’t be able to monitor and control emissions of various kinds and people would be entirely responsible for their own livelihood. The conservatives believed that the economic differences are justified; people reap what they sow and create their own wealth or their own poverty.
The decentralization of government is another concern of the conservative opposition. They argue that national policies are less effective than local policies because the localities are better suited to address specific needs. A national minimum wage, for example, ignores the differences in cost of living between New York City and rural Wisconsin. The concentration of power also means more bureaucrats in the capital, which raises the cost of running the government, which in turn raises taxes. As economies encounter problems, the trend is to deal with them on a national scale if they are affecting the entire country. The right wing feels this is a poor remedy, however, and argues that government should be broken up into smaller bits and pieces.
They also contend that the conditions that spurred much of the governmental growth and attention to social welfare are different than they were when the changes occurred. The Great Depression was seventy years ago. There was an economic crisis. John Maynard Keynes’ (1883-1946) ideas of necessary government aid were adopted and Franklin Delano Roosevelt’s New Deal began a wave of change. There are problems with social welfare; the people meant to receive the aid don’t always get it.
Another contention is the belief in the need for privatization of public functions. The United Kingdom did a lot of privatization under Margaret Thatcher, but the United States has shown more resistance and continues to have many large public arenas. Liberals advocate public welfare for the poor while conservatives want taxes lowered and programs cancelled. The right wing feels that public functions do not operate under market pressures and have no drive to be efficient and successful. The same argument goes for social welfare; the conservative viewpoint is that the allocation of aid prevents self-help and, through apathetic acceptance, promotes long-term poverty and complacency.
The conservatives also feel that the publicity of functions deters the freedom of those functions. Churches, schools, and museums should be private to protect their individuality. In regard to schools, both the United States and United Kingdom have the option of state funded or privately funded schooling.
There are now two sides of the fence. Views on capitalism have split with the liberals on the left, the conservatives on the right, and many stages in between the two. The liberals support increased government spending and centralization, social welfare and national regulation of the economy. The conservatives want to decrease the size and budget of the federal government, distribute power on a local level, and leave the market to its own devices.
Today, the United States has, arguably, the most diverse and technologically powerful economy in the world with a per capita gross domestic product of $33,900. Private individuals and businesses make the economic decisions with little guidance from the state and the government spends an large sums buying its supplies from private American corporations. Business firms in the United States have much greater freedom to make their own decisions than do their competitors in Japan and Western Europe. They may expand capital, lay off large numbers of workers, and create new products. They do, however, face more obstacles in exporting their goods than do outside firms when exporting to the United States. U.S. firms are technologically competitive and are leaders in computing, aerospace, military equipment and medicine. The technological advantage has continued to narrow since the end of World War II, however.
The German model of capitalism is somewhat different from that of its Western siblings. Because of the discrepancy between the United States, Britain, and France’s definition of democracy and that of the Soviet Union, when the Allies invaded Germany and set up democracy after World War II, there was some debate over which model to install.
Both “democracy” and “capitalism” are ambiguous words and have different meanings for different people and for different countries. The United States, Britain and France have a different meaning of democracy then do the Soviets and Chinese. The former associate democracy with freedom of press and speech, free elections, equality, the right to choose one’s job and to criticize the government, the right to travel within one’s country as well as internationally, and the right to create trade unions to protects one’s rights in the work place. Russia and China, however, consider that version the formal definition. In their view, democracy under communism is the true democracy, with freedom of everything with certain provisions; freedom of speech so long as it is in favor of communist theory and freedom of the press provided the writing is in favor of the government. To clarify, it seems that capitalism and the democracy favored by the Western world go in tandem.
This western view of democracy includes several themes which are used as a basis for reality, whether or not it lives up to them. Individualism, rationality, voluntary choice, the law, means, consent, and equality are the standards behind the democratic machine. The government is by and of the people.
After World War II, the two definitions caused trouble within the Allied Powers. What resulted was the split of Germany down the middle. West Germany was set up with a western idea of democracy and East Germany with that of the Soviets and communism. Since the Berlin Wall came down in 1989, the two halves of Germany reunified, and Germany has emerged as an economic leader with stability that is envied.
Germany has become a model for much of the European Union’s development. Like the European Union, Germany’s states unified through the Zollverein, the customs union, before there was political unity. The German bank, separate from the woes of politics, is a model for the economics of the European Union. The state and private corporations create business regulations together in a way which would not be possible in the United States due to the individualistic attitude. Germany is more community oriented than the United States. Decisions are made at levels of interaction between the labor, industrial, government, and financial groups.
The German system is almost a merger between the democratic and communist ideals that split the country for so long. Though its politics are not utopian, its economics are almost that. West Germany was able to attain the same Gross National Product (GNP) that she had before World War II by 1950, just five years after the installation of democracy. Germany has trade surpluses today and is in a good position to buffer the collapse of the communist states which border it.
As the United States and Russia distance themselves from Europe, Germany fills the void. Companies like Volkswagen are able to expand, provide more jobs, and produce more cars in order to meet increasing demand. Germany has come from behind and may be winning the race.
Historically, Germany got a late start, about thirty-five years after the United States and seventy-five years after Great Britain. Though the states had begun economic unity in Germany by the mid 1830s, the revolutions of 1848 failed in Germany and, twenty years later, Germany was still in economic chaos. Budding capitalism was intertwined with feudalism. There were not entrepreneurial notions or free markets as there were in Great Britain and the United States. In 1871, the Franco-Prussian War and France’s defeat gave rise to the creation of one Germany. Thus, Germany joined the race during the second industrial Revolution: machinery making and steel. Germany’s chancellor Otto Von Bismarck, after having banned the Social Democratic Party, began an early model of welfare in the 1870s. His “marriage of iron with rye” was designed to bring German produce to his armies by train and, ultimately, to unite Germany. His workers were well-provided for, and after Germany had become industrialized, its economy fell into place. Though it was still politically and militarily confused, its economics were beginning to stabilize.
Germany surpassed Great Britain economically in the beginning of the twentieth century, but plummeted again due to high inflation and occupation of the Ruhr. Germany had a brief recovery before the Great Depression and rose again before the complete crumble that happened during World War II. Once she was reestablished, however, Germany rose again and, in the early 1950s, grew by eight percent annually economically.
After the United States and Japan, Germany has the third most technologically powerful economy. Its capitalism has begun to struggle, however, due to its welfare system. There is a high social contribution on wages, which has raised unemployment levels. Taxes may be too high and unemployment benefits too tempting to encourage many to work. At the same time, Germany’s population has grown older, using the resources set aside from social security while fewer in the younger generations are working and contributing to the bank of funds. There is also a continued integration of East Germany which is very costly for the country as a whole. There are annual transfers of roughly one hundred billion dollars. In 1999, growth slowed to 1.5 percent economically, due to lowered export and even lower confidence in the business sector.
New business, combined with tax cuts and increased Asian demand, may boost the growth higher again but the future of Germany is more uncertain than is has been for many years. The adoption of a common currency for the European Union and other communal integrations have affected Germany as well, though the specifics of the effects are still too young to analyze accurately.
The Japanese idea of capitalism is rather different than that of either the United States or Germany. The Japanese view capitalism as a way that communities can serve their customers, rather than a system to enable individuals to make a profit. This community logic has created a different, and equally successful, example of capitalism.
Companies in Japan not only take responsibility for their employees but also for the way its employees behave toward others. If an employee and his family had a fire, for example, their relatives and coworkers would help them rebuild what they had lost. In the United States, the family would be more likely to take a loan from the bank or to collect insurance money than to ask for collective help. In Japan, employees are paid more if they have larger families, whereas in the United States the size of someone’s family is irrelevant.
The Japanese subscribe to amae (indulgent love), meaning that they treat their best customers as royalty. Giving can become intensely competitive. The idea of sempai-gohai is also popular: elder brother, younger brother relationships played out in the work place in the form of mentors and apprentices. A manager in Japan is likely to help his employees with their work lives and home lives. Work is all-encompassing rather than just time in an office where one spends part of each day.
Japan is a different kind of capitalist country. There is strong cooperation between industry and the government. There is also a very strong work ethic, an excellent technological sector of creation and research, and a relatively small defense spending allocation, as specified by rules set up after World War II. Japan only spends one percent of her Gross Do mestic Product (GDP) on defense. The combination of qualities have helped Japan compete strongly with China and the United States for the largest economy on the planet and have given it a second place slot in the most technologically advanced category of economics.
An important asset that Japan has is its Keiretsu, a philosophy of a tightly knit working unit made up of manufactures, suppliers, and distributors. Another ingredient is the guarantee of lifetime employment that Japan gives to much of its urban work force. Both of these assets are beginning to wane, however. There are several reasons for this. Industry is the most important sector of the Japanese economy, and industry is extremely dependent on imports of fuels and materials. The agricultural sector is much smaller and heavily protected and subsidized by the government. Japan is usually self-sufficient in rice but must import half of its grain and fodder needs. Japanese fishing makes up about fifteen percent of the world’s catch.
For thirty years, Japanese economic growth had been outstanding. It has boasted a ten percent average in the 1960s, a five percent average in the 1970s, and a four percent average in the 1980s. In the 1990s, economic growth slowed remarkably. By 1995, the effects of over-investing and contradictory domestic policies which were meant to bring excess from the markets caused enormous economic shrinkage instead. In 1996, growth picked up a bit to under four percent due to stimulating monetary and fiscal policies and low inflation rates, but by 1998 Japan was in the middle of a taxing recession created by real estate, rigid corporate structure, labor markets, and trouble with the banking system. In 1999 the output began to correct itself with emergency government measures and an improvement in business confidence from increased government spending. The overcrowding of livable land continues to be a burden, however, and the relative aging of the populous is another concern, similar to the social security troubles in Germany and the United States.
Germany and Japan are similar in many ways, though as a group are very different from the United States and the United Kingdom. The latter two were early industrializers and they developed their economies through entrepreneurship. Their governments have only interfered after the fact, to curb adversarial wealth holders. Germany and Japan, however, were late bloomers and have played “catch-up” in the sectors of technology that they deemed most valuable. Their governments are up to date on the strengths of other economies and cooperate constructively with industrialization before the fact.
The United States and United Kingdom have very broad and sweeping education strategies which stress science and management. Their economics are split between macro (the entire economy) and micro (individual firms). Their social policies have been somewhat left behind and the governments may try to impose social burdens on businesses. Germany and Japan, in comparison, focus their education on technology and science. Their economic system is mainly meso, focusing on the dynamics of specific sectors of industry. The social policies are involved in industrialization efforts and the government considers social benefit crucial to its longevity.
The labor relations in the United States and United Kingdom are generally poor due to pressure on labor costs. In Japan and Germany, relations are still good because wages continue to rise. The American and British development philosophy is laissez-faire, free trade, whereas in Germany and Japan it is managed, protected, and targeted.
Historically, the western transition from feudalism was slow and complete. Industry was built on the values of individualism. In Japan and Germany, the conversion is still in progress. Industry is built on communal ideas of reciprocity. The countries differ in ideas of industry financing as well. While the United States and United Kingdom have short term equity markets and many risk takers in the stock market, the markets in Germany and Japan are dominated by banks and low-risk industrial institutions.
The many countries that are capitalistic are very different in their details and, though they share the capitalistic ideals on some level, what that means from border to border varies quite a bit.
Analysis and Critical Response
There is a notable relationship between capitalism and democracy. Throughout the world, the successful capitalistic countries tend to be democratic. Great Britain is a good example of this relationship given the fact it is the birth place of both capitalism and democracy. Through the majority of the nineteenth century, Britain kept its international leadership role as a politically democratic and economically capitalistic nation. These qualities transferred to the United States in the twentieth century.
An absolute democracy which entails unlimited rule by the majority is not compatible with freedom and, likewise, with capitalism. Rights would be arbitrary because they could be voted away with the next meeting of leaders. The accepted definition of democracy has come to mean a democracy that is constitutionally limited in its power. The idea behind this kind of democracy is to choose who is in power and how that power is used, but exactly what power the leaders will have remains unchanged because it is outlined in the constitution. A bill of individual rights is also necessary.
An interesting development in capitalism is that of materialism. The main object of capitalism is just that, an object. Capitalism relies upon consumers and their every whim, a majority who consumes without producing. Capitalism is based on distributing these goods, though the consumers have no relationship with the producers or the distributors other than meeting eyes with someone at the counter as they purchase their item. In the internet age, however, the middle man is cut out altogether and people order goods with a click of the mouse.
The only relationship consumers have is with the object itself. This gives the objects more relative importance. Part of capitalism is the mind set of these consumers, that they begin to identify themselves in terms of the objects they have purchased rather than by things that they have themselves produced.
Regarding morality, there is some debate about capitalistic virtues. Some argue that a capitalist nation is just because everyone is considered equal. Possessions are earned and the distribution of wealth is, in theory, fair. In the 1980s, Reaganomics, United States President Ronald Reagan’s trickle down theory of economics, became popular. President Reagan predicted that even though much of the wealth was in the hands of few, through their spending and existence as people of their stature, their wealth would trickle down through society, remain in circulation and reach the less wealthy. What actually happened was financial investment rather than trickle down economics. Money was put in the bank and in stocks where it could not be reached by the rest of society. Trickle down economics did not work.
Many argue that capitalism is functional but not fair, and others feel that the opposite is true; capitalism is the only fair system to choose. Capitalism allows a division of wealth that would not be possible under communism where everything is communal and personal properties are limited. Because of the economic freedom, wealth is unevenly distributed among the players. So perhaps capitalism is practical, but if this is the case, why is the state increasingly involving itself in the market details? Federal taxes are proportionately higher than they have been since the Second World War, and federal regulations on the register are expanding by 60,000 pages each year. Even the recent tax cut will only have a small effect on the government revenue.
Advocates on both sides, the left and the right, seem to agree that capitalism is immoral but practical. They agree that the free market be kept in some sort of check by the government; it is only in the scope of that check that they differ. Is capitalism moral? Immoral? It allows for great discrepancies in the distribution of wealth, and depending on the explanation, whether one earns one’s due or lucks into it, the feelings of fairness differ. In Capitalism: Opposing Viewpoints, Michael Parenti argues that capitalism is immoral and quite exploitative:
The apologists for capitalism argue that the accumulation of great fortunes is a necessary condition for economic growth, for only the wealthy can provide the huge sums needed for the capitalization of new enterprises. Yet a closer look at many important industries, from railroads to atomic energy, would suggest that much of the funding has come from the public treasury—that is, from the taxpayer—and that most of the growth has come from increased sales to the public—from the pockets of consumers. It is one thing to say that large-scale production requires capital accumulation but something else to presume that the source of accumulation must be the purses of the rich.
Some argue that capitalism, however, is very moral indeed. Because of capitalism, we have all the products that are available today. There is an abundance of food, whether it reaches the corners of the earth or not. The life expectancy has doubled because of capitalistic driven research. We have air travel, air conditioning, aerospace technology and computers. It is the capitalist who envisions a product, researches it, and turns it into a saleable product.
Capitalism allows people to think freely and enables them to work out their thoughts. If the businessman cannot act on his own volition, his decisions will be limited as may his production and success. An important idea of capitalism is that everyone has the fundamental right to do with their life and property as they please. A government rampant with regulations can thwart this development, as evidenced by the many third-world nations and the fall of the Soviet Union. The free market drives the community to succeed by way of personal ambition. Adam Smith touched on this in his philosophy by saying that capitalism necessarily meant mutual agreement and mutual benefit.
The advocates of the moral defense of capitalism ask if capitalism is selfish, if it is selfish to take one’s own lives seriously and to pursue happiness. A system that revoked some of the personal freedoms would take away some of this liberty and the option to follow a dream, however fantastic. Perhaps for these reasons capitalism is on higher moral ground than it gets credit for.
In the material world, there are a lot of problems with modern capitalism. The reality of capitalism was the closest to its theoretical self during its classical period from the middle of the 1700s to the end of the 1800s. Since 1900, capitalism has changed in several ways.
The corporate role
The corporate form of business is partly to blame. This form allows for the separation of the ownership of a business from its management and financial control; a company sells its stock and becomes public. The shareholders are only liable for the company in so far as the number of shares that they own. Before the corporation, partnerships involved the complete responsibility of the partners for business operations. Partnerships were small and each member had a sense of moral, financial, and personal involvement with the company.
In the modern world, 100 million shareholders may jointly own a corporation. The connection between these owners and the managers is thin. The corporation may or may not even be in the same country as its owners, and generally less than one percent of the shareholders attend the annual business meetings to elect officers and managers.
Management, rather than owners, decides who runs the elections, who is up for election, what policy proposals are needed, and how salaries should be altered. When these propositions are put to a vote the result is usually over ninety-five percent in favor of the recommendations of management. In political elections, in comparison, the majority usually wins with fifty-two percent. The other forty-eight percent of the population votes the other direction. For this reason, there is a lot of skepticism about the level of democracy within corporate management.
With the government, the people who hold power are accountable to those who gave them this power through elections, assuming the country is relatively democratic and holds elections. The government is the agent of the people, created by and from the population. In theory, political power is in the interest of the people rather than based on what politicians want. With corporations, however, the management makes continual decisions which affect the shareholders. The management is not accountable to them, however, nor does it have any obligation to seek their approval beforehand.
Like other forms of empires, industrial empires fall prey to the same fate. They become increasingly conformist and bureaucratic, leaving the ideology and spirit of capitalistic competition and freedom in their wake as they forge ahead into impersonal rules and enterprises. In many ways, large-scale capitalist enterprise is similar to large-scale socialized enterprise. As corporations become bigger and bigger, they swallow the smaller businesses and the populous is left with fewer and fewer choices.
This has happened in the United States. When on the outskirts of a city it is difficult to tell what city one is in because the surroundings are the same. There will be a Walmart and a Target, a McDonalds, a Taco Bell, a Bed Bath & Beyond and a local State Farm Agent. Free-enterprise is changing to become safe enterprise and the corporate giants are sweeping the country and leaving their mark across the planet. It is difficult to drive fifty miles without seeing the telltale blue roof of an International House of Pancakes or a Perkins flag.
The same phenomenon has occurred with personal individuals. Fewer than one tenth of a percent of the population own one fifth of all the stock, and though the number of persons owning stock has been increasing, this is still quite a discrepancy in wealth distribution, paralleling the big business ingestion of the smaller.
There is another side to the coin, however. There are still many opportunities for small businesses, provided they aren’t in competition with large corporations; quite often, the existence of big business creates opportunities for small businesses. General Motors, for example, produces half of the passenger cars in the United States. Their domination of the market, however, creates opportunities for small mechanic shops, parts stores, dealerships, and gas stations. The corporations are still in some amount of competition amongst themselves as well. Target is pitted against Walmart. Linens & Things competes with Bed Bath & Beyond. General Motors competes with Ford, and there is also competition between its various divisions: Chevrolet, Pontiac, Buick and Oldsmobile. There is some debate, however, on the compatibility of competition and big business. It is less difficult, for example, to compete with one other company rather than having to compete with thousands of other companies who offer similar products. The drive to produce superior products may decrease.
Given the rapid change of technology and, likewise, people’s desires and wants, there is a continual opportunity for new business. However, there is also a continual failure of businesses that are no longer relevant in the marketplace. Arguments for big business include greater stability for the employees due to less risk. Labor rights are safeguarded by the labor unions.
In big business, however, the profits need not be shared with the shareholders or with the consumer. If two companies merge, their combined assets may be profitable for management only. There are not regulations for this sort of wealth distribution, and monopolies benefit the owners at the expense of the consumer.
Structurally, there are some problems with capitalism. Because growth is driven by the desire for profit, it fluctuates according to the number of opportunities and openings. When an opportunity appears, capitalists hurry to take advantage of it and, consequently, there is an economic boom. Eventually, however, the market will be saturated and the boom will end, beginning a recession. Investment ends and the economy takes a dive.
Karl Marx published his criticisms of the ups and downs of the market in his 1867 work Das Kapital. Marx said that the growth was not only unsteady because of opportunities seized and missed, but also because of the natural progression toward industrialization and big business which, as explained earlier, makes the booms and recessions of the market more stark and profitable or, in the case of a recession, painful. Big business is not only encouraged by the advent of technologies which allow improved efficiency, but with recessions as well. When the market goes down, some firms will do better than others. The companies that have fared well usually swallow those that have not and become even larger and more successful than they were before.
John Maynard Keynes, an English economist, published The General Theory of Employment, Interest and Money in 1936. In his book, Keynes not only agrees with Marx that the ups and downs of a market economy are problematic, but goes further to say that it is possible for an economy to remain in a recession without periodic booms to balance it out. In terms of unemployment, Keynes felt that communal investment was the best way to fight this stagnation.
Another criticism of market-driven growth is the products produced by the capitalists can cause as much harm as good. Since the products are generally regulated only by customer demand, negative side effects often go hand in hand with production of goods. Toxic waste, unnecessary products, wasteful packaging, and poor working conditions are all side effects that accompany the products consumers demand.
There is heavy debate on how to deal with the apparent evils of capitalism. Some argue that the problems are not with capitalism but are actually lodged in the attempts to fix it. Well-meaning measures to curtail the market may lead to problems. The market should be left as independent as possible to ensure optimal operation. On the other hand, others advocates intervention and social welfare to distribute wealth more fairly, promote competition and deal with undesirable products of the market such as pollutants. Today, there are no advanced capitalistic countries that allow complete market freedom without social welfare to compensate for pockets of poverty. In the United States, these transfer payments for health benefits and pensions comprise ten percent of the total consumer income. In Europe the percentage is much higher.
In making his case for capitalism in Capitalism: Opposing Viewpoints, Howard Baetjer Jr. writes:
This is the virtue of the free economy. The whole fabric of economic interactions is freely chosen, cooperative, and generally beneficial. Each party to an exchange believes he is benefiting. This point bears emphasis because so many believe that in capitalism the rich get richer at the expense of the poor or that the seller of a good exploits the buyer, or vice versa, so that one is better off and the other worse off. When one is free to exchange in a transaction or not, he does so only when he believes he will be better off for it. Think about your trips to the ice cream shop: you put your money down for the ice cream; they put down the ice cream for the money. You care for the ice cream more than the money at that point, and they don’t want the ice cream, they want the money. Everybody goes away content. There is a mutual ‘thank you’ as you exchange goods and money, because you both are better off…
People ought to be free economically as well as every other way. Laissez-faire is a great system, both practically, because it works to the increasing, as well as the well-being of all, and ethically, because it suits basic principles of decent interpersonal behavior. It is a system that deserves our hearty support.