Capitalism is a system of economic enterprise based on market exchange, an economy in which is private and where profit-seeking companies undertake production with wage-earning employees carrying out most of the work (Stanford,2008). Advocators of capitalism are those who support an economic system based on the freedom of private ownership (Amadeo, 2018). It would be a task to find a pure capitalist country currently as similarly like a number of other system capitalism can’t be pronounced as a system which is perfect, due the weaknesses that come attached. However, it still functions in our society due to its capability of changing and enhancing countries (Mankiw,2003). In a relatively capitalist society, it is likely there will still be criticism due to the indifference between the unfortunate and the domination the fortunate employ as wage labour occurs (Stanford,2008).
History suggests only that capitalism is a necessary condition for political freedom (Friedman,2002). Throughout this essay I will be discussing and analysing capitalism through the key thinkers Adam Smith, John Manyard Keynes and Karl Marx’s beliefs to make a judgement on their ideas to decide which is more realistic in terms of running a successful economy. I also aim to evaluate if the ‘economic freedom’ capitalism is deemed to provide is equally apportioned between those who are fortunate and those who are not within a capitalist economy.
In order to succeed, capitalism must have a free market economy, promoting freedom and democracy, distributing goods and services according to the laws of supply and demand which directs the production of goods and services. A free market economy also ensures that all factors of production are used. Supply comprises natural resources, capital, enterprise and labour. Demand consist of purchases by customers, businesses, as well as the government (Amadeo, 2018). A supporter of this was Adam Smith who celebrated capitalist society.
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Smith believed that the manufacturing and exchanging of goods could be encouraged and proclaimed that division of labour doesn’t depend solely on technological practicality, but also depends heavily on the market’s extent. He believed that the market economy he defined could only operate and deliver benefits when its guidelines are followed. This highlights that Smith believed the preservation of justice as well as what law dictates is therefore vital if it is to thrive in a capitalist economy (Smith,1789.) Technological progression within a country, in turn, pivots based on the division of labour which has an impact on productivity of labour as this is based upon economic growth. Adam Smith’s theory of growth is based around the fact that division of labour is a dynamic force (Viner, 1927).
As these reasons stand, Smith felt that a limited government would work best, which implies the idea of ‘Laissez-Faire’ requiring that government shouldn’t place any restriction on an individuals freedom, as this then ensures that producers are able to yield as much produce as they desire, earn as much coinage as they like and save what they require to live a fulfilled life (Duignan, 2018). Smith thought that it would be a sensible idea to leave the economy to be controlled, driven and steered by a force known as the “invisible hand”, so should have a market economy that is open and free, and prevent measures in any way that may distort it (Smith, 1789), thus allowing the economy to grow.The “invisible hand” theory states that in a free market enterprise, the exchanging of products in return for money or a price is determined based on the consent of both buyers and sellers of the goods (Hill,1990).
Having the government following certain principles within a free market, involved allowing free flowing trade between borders and facilitated keeping taxes relatively low. This diminished tariffs which was favoured by Smith due to the fact placing taxes on goods made them more expensive for consumers along with hampering trade abroad and negatively effecting industry. To ensure consumers can buy goods they must have the funds to do so- with some capitalist firms using credit from central banks unproductively with little economic output, this negatively effects the economy with households taking on credit to subside lifestyles more than their income permits. From this lending can also be important for the economy as it adds to the growing capacity of the economy which increases GDP as they fund investment. Capitalists will usually push government to alter and implement navigation in their favour showing disproportionate power.
In addition, high levels of inequality still exists and there is an ongoing conflict of interest between those who are in possession of wealthy companies and the rest of ‘us’ (Stanford,2008.) From Karl Marx’s perspective, capitalism is organised around the perception of capitol meaning that the control and ownership of production is by those wealthy enough to hire employees to produce goods and services for them and in return will receive a wage.
He saw that there was the chance that the wealthy capitalist leaders would use their buying power to exploit his own workers for profit and this showed this exploitation did not benefit everyone as it was down to the fact there were some winners and numerous losers (Biernat, 2017). However, some may say in theory, everyone is able to reap the advantages in terms of money from a capitalist system because the money gradually “trickles downwards” from the top to the bottom, known as rich to poor (Donlan, 2008). The main motive within capitalism is to produce goods and provide a service in order to exchange them to make a profit, as oppose to satisfying people’s needs. Deriving their income from ownership, gives the incentive to maximise profits and is why many capitalists say “Greed is good.” (Amadeo, 2018).
It could be said that socialism is for the wealthy and capitalism is for the poor as the government usually protect the needs of large capitalist firms as governments and central banks act to provide stability in macroeconomic environments. Marx thought of socialism as a lower form of communism so rightly held the judgement that socialism was a transitional movement stepping towards communism from capitalism (Woods, 2013). He argued that alienation occurred within a capitalist economy as workers are alienated from what they are producing, as they are only seeing one stage of production due to the production process going through many workers as it apportioned to workers completing different stages across the production process. He developed this alienation theory in order to reveal the idea that impersonal forces are governing society which human activity is in front of (Cox,1998).
Marx was one of the first people to come forward and realise the importance of limited liability in a capitalist market and during the late nineteenth and moving into the start of the twentieth century, it is notable that limited liability had a great impact on accelerated capital accumulation and progression of technology (Chang,2010). During the Great Depression of the 1930s, capitalism was fading out and liberal economists claimed that the recovery of capitalism would quickly occur after the depression without innervation from the government. In light of this, the government were urged by these economists to sit back and virtually do nothing to encourage economic recovery.
However, with the economy remaining the same and no noticeable signs of progressing on its own, people begun to think that a permanent slump might occur if the lack of market demand was permanent. This lead to the Marxist ideas becoming more popular to many people. At this point it did seem likely soon that there would be a replacement of capitalism by socialism. However, it was thought by John Maynard Keynes, that with the new conditions that capitalism could last open-endedly providing changes were made to certain polices of capitalist governments as well as central banks (Williams,2013).
The Great Depression was resolved by the second world war as unemployment rates lowered due to people selling their labour for wages in factories. This lead to economic growth with GDP more than doubling as standard of living as well as wages doubled, the process of recovery lead to the ‘Golden Age’ of capitalism. Although, the freedom this system provides may be abused by the most powerful individuals and companies. As a result, they can build monopolies, control wages and prohibit unions (Weir, 2007).
Smaller firms are pushed out from entering the market due to the high level of competition they face from firms able to gain monopolies early on within market development meaning they are less likely to be able to produce effectively as economies of scale will act as an issue, putting prices of production up per unit for smaller firms. Keynes wanted capitalism without its contradictions, the problem didn’t lie with capitalism, but the “laissez-faire” approach capitalism took. Meaning that investors were then left and enable to pursue their own individual profit at the expense of the rest of society, without a care (Booth, 2012). Keynes’ solution to this was to encourage investment and consumption through the State intervening.
If the state increased their spending this would mean investment would be increased, if the incomes of the rich were taxed this would allow for consumption to be raised by giving some to the poor as it is based around the theory that as a consumer, the poor as a collective will spend more than a few people that are rich (The Socialist Party,1979).
Capitalism is a system that is based on production powers and ownership inequality but may lead to innovation in the market. An economic structure such as capitalism is known for wealth inequality and distribution being unequal of resources (Clarke, 2012) but in order for the proper functioning of capitalism, within the working class there must be people willing to sell their labour-power to capitalists for money, a wage and in return the capitalist class gets a commodity.
