Capitalism As A Model For Global Economy

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Introduction

When thinking about the reason I chose this topic, it came to my attention that it might have been the fact that I actually believe that, with due time, capitalism will become the chosen model to steer the global economy, with some adaptations of course. This idea enticed me, as it opened an entire Pandora’s box of conclusions, that in turn needed a lot of definitions. It is important to know where this idea started and what led several nations to adopt it. Was it pure necessity, greed, the fruit of many reforms and movements like the enlightenment? We will look into that later.

It starts with this thought: up to 50 years ago, this economic and political system was only present in about a third of the world – Australia, Western Europe, the US and Canada. In present day, we can see that India, China and a big part of South-East Asia have joined. This is with the great help of globalization. This paper will analyze the reasons countries have gone with capitalist ideas, what would happen if the entire world turned capitalist, the pros and cons of the system, what has worked so far and also perhaps, a reformed system that may be the solution to all the questions brought up before.

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At the moment, there is no real capitalist country in that no country or nation in the world is fully capitalistic. Even the US, the country that symbolizes capitalism, has government intervention when it comes to lines of work such as agriculture, energy, transport and education.

What is Capitalism?

Capitalism is an economic and political system that is characterized by a couple of key words; supply and demand, freedom, choice, investment and incentive. The free market alone controls the production of goods and services and it is profit that is the real motivation for the venture. In this system, there is open competition among firms and rewards to the hardest workers and those who maximize profit. Property is privately owned and not by the state; property being any kind of factor of production, such as entrepreneurship, capital goods, labor and natural resources. It is the complete opposite of a government controlled economy.

Capitalism has been in existence as early as the 16th century, according to Immanuel Wallerstein, a famous American sociologist. Starting as early as the 16th century, it has been the longest surviving economic system and as of the last couple of decades (specifically after the end of the Cold War), the most widely accepted, even by nations formerly governed by communists, etc. The biggest advocate of this movement is of course Adam Smith. He truly believed that the profit motive benefitted society at large and that the entire system altogether is much more efficient than a centralized one.

What are the advantages of capitalism?

The competitive aspect of capitalism allows for the best products to be produced at the best prices. Competition is always healthy to have as it keeps companies in check and gives an equal chance to everyone. A free market works well in that it guarantees market equilibrium based on supply and demand. This is due to what Smith has coined the “Invisible Hand”. The invisible hand is the market force that allows for this equilibrium and is established from the idea that everyone will work for his or her interest.

Due to the little government intervention in a capitalist society, problems like corruption and poor circulation of information is limited. This gives more motivation to the worker or business owner, knowing that their hard work will be fruitful. Capitalism is also very attractive because there is no limit to the amount of money an individual can accrue.

What are the disadvantages of capitalism?

While there are many evident advantages to capitalism, the system also comes with several disadvantages. Capitalism is a model that prioritizes, and in many cases, only benefits those who are directly connected to the work force. If one does not have competitive skills, they can often be forgotten or abandoned. This can be summarized in one word; marginalization. In a true capitalist economy there is no space for the disabled, children or the elderly. Usually, the government only intervenes in these cases, cases where some people would not receive the same benefits as those more privileged, in forms of education and perhaps healthcare.

Another substantial disadvantage is the fact that capitalism ignores negative externalities. Firms don’t look much into the macro environment and ignore external costs produced as a side effect of their work. This can include anything from pollution and climate change to deforestation and damage to health.

Capitalism is a system that is fairly short-term oriented. It looks at gains in the near future rather than setting up an economy that can flourish for decades ahead. Firms work on the idea that there will be someone in the future to clean up all their wrongdoings or ignore it altogether.

One more byproduct of capitalism is the enabling of companies to gain monopoly power. While in most cases there is enough competition to combat this, the fact remains that firms and individuals have private ownership over their factors of production and this means they can exploit their position to charge more for goods. Since there is very little government intervention, it is very rare that these unfair monopolies are controlled.

When one thinks of capitalism, America comes to mind. A place where we see the biggest success stories, where the customer is always right and where the “American Dream” is still very much engrained into the culture. However, America only comes at 12th on the Index of Economic Freedom (The Heritage Foundation, 2019). Why is this? Well, this is because if we had to see capitalism as Adam Smith had described it in the “Wealth of Nations”, then there would be absolutely no government intervention and no monopolies, among other things. The evident government intervention in the US is their social services; policemen, social security, healthcare, public schools, etc. If America had to be running on a capitalism system, these services would be provided by the private sector. Therefore, America runs on a mixed economy, one where there is a high level of private ownership of the factors of production mentioned earlier, yet government intervention in the form of regulations, taxation and much more.

Economic Systems and why nations can’t always stick to one.

Reality is, every system has an ideology. In theory, everything is perfect and operations run smoothly. However, when put into practice, all systems have their flaws. Capitalism as Adam Smith had put it can never really work solitarily. The same goes for Socialism and Karl Marx. His manifest has many defects and one can see from the downfall of complete socialism, that with every economic system that fails emerges another economic system completely different.

Right when capitalism started, it was an economic model that grew and empowered people through private investment, it provided work for many, it boosted the economy, introduced choice to many that didn’t have that power before. It also grew competition, leading to better prices. The consumer was benefiting a lot from it as they had much more choice and more opportunities to grow their money. All of this with the help of globalization. But when you look at the actual structure of capitalism, you realize more and more that it is driven by profit only, so the social and environmental impact no one really took care of.

As I mentioned before, every system on its own tends to create imbalances. Capitalism, while favoring entrepreneurs, tends to overlook the needs of the socially disadvantaged, and anything that does not create direct and immediate profit.

Undoubtedly, this comes at a cost, as man does not live on money alone. So, although the way I see it, there is no going back on capitalism, as it is a system that actually creates wealth and opportunities, we are moving instead towards a redefinition of capitalism and warming up more towards sustainability. That is – making profit, conscious of the cause and effect of our actions. Try to create a system that continues to grow economies, with renewable energies for example. Also, one that generates maximum respect towards the environment, and protection towards workers, guaranteeing fair trade and welfare systems, where communities help themselves and society looks after the more socially fragile. This would be a system that maximizes the benefits of all the system the world has experienced so far.

The flaw in corporate capitalism

In common day, there is a problem with corporations being controlled by managers rather than shareholders themselves, a problem that had been brought up by Adam Smith himself. Managers of these corporations will never guard the money of stocks as if it was their own and it was for this that Smith said this: “… being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private partnership, frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” (Taken from the Wealth of Nations, 1776). According to the Financial Times, the global financial crisis of 2009 had its origins in the short-term ideals of today’s capitalism.

What changes can be made to make Capitalism an economic model that can be followed by the entire world

The best version of capitalism is what is called “Free-State” capitalism. It is currently not practiced as it relies highly on and requires true democracy. In a true democracy, people truly choose who is elected and therefore choose their form of trade, however this isn’t the case anywhere in the world. Government dictates the style of capitalism, and often has the power to pick what firms succeed and those that don’t. This comes via subsidies, grants, tax breaks, etc.

If the entire global system had to use capitalism as an economic model, the system would have to be adapted. An example would be to impose what we call “Pigouvian” tax. Pigouvian tax is a tax that charges every company, firm, individual on all negative and socially harmful externalities that their product or service is producing. Take France’s noise tax as an example. A tax is levied on all aircrafts, depending on their size and weight, at nine of their busiest airports. In this case, the money they make from taxation is used to soundproof houses affected by these negative side effects on the parameter.

In order for the entire world to be capitalist, the system would have to also adopt some socialist trends. By this I mean, that it should be a system that benefits everyone in the community, not only the ones thriving off business and more.

A set of model nations for this are the Nordic and Scandinavian countries. They have such a great balance of capitalism with a good dose of social welfare. A culture that includes great work-life balance, a high standard of living, among many other things. They have advanced clean technologies and massive privately owned firms that support them. They are highly paid, with a diverse workforce, concentrated on integration policies.

Conclusion

It is merely impossible to have a global capitalistic economy. The model essentially relies on cheap labor and if all the countries are capitalistic, then there will be no one to provide the cheap labor. Therefore, in my opinion, capitalism isn’t the best model for the global economy.

Faced with the damage done by capitalism , the system needs to be amended and restarted. At this point it is hardly reversible, but there is definitely a third way. Making the model more sustainable. Of course, you always need profit, but why not find a way to still gain profit but not at the cost of society and the environment around us. There needs to be a new world order that takes the best assets of all the economic and political system and merges them into one. That will be the best model for the global economy.

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