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“Capitalism is efficient in production but ineffective in ensuring equality ” BY VIKAS, ARJUN & NAMAN What is CAPITALISM ? Adam Smith – Father of Capitalism Capitalism is an economic system and an ideology based on private ownership of the means of production and their operation for profit. OR An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. Characteristics private property, capital accumulation, wage labour, voluntary exchange, a price system and competitive markets.
PRODUCTION IN TERM OF ECONOMICS
Production is an activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital, and goods and services to produce outputs of goods or services. The factors of production are land, labour, capital, and entrepreneurship. They are the inputs needed for supply. How capitalism should work Capitalism is a market structure that follows principles: Freedom of access to markets, so that everyone can be equally a buyer and seller on said market for the purpose to exchange value within the market. Freedom of exchange, so that Buyers and Sellers on the market can freely agree on the conditions of the exchange, for the purpose to have Sup ply and Demand determine the value of the exchange. Reinvestment of profits for the purpose to create greater access to markets and have more exchanges Few Requirements needed.
Capacity must exist so you have something of value to exchange (or, your ability to be a Buyer or Seller). Incentive must exist to engage in in the exchange of value (is your value in demand or does the value you seek in supply). A legal framewor k which legally binds exchanges and gives certainty to the Buyer and Seller that the conditions of the exchange are enforced. Access to markets must be secure and stable (risk is a cost and can decrease incentive). This can refer to political, social, legal or even physical stability. The advantages of capitalism. Consumer choice – Individuals choose what to consume, and this choice leads to more competition and better products and services.
Efficiency of economics – Goods and services produced based on demand create incentives to cut costs and avoid waste. Economic growth and expansion (which is possible in the capitalist economy system) – This increases the gross national product and leads to improved living standards. The disa dvantages of capitalism. A chance of a monopoly of power – Firms with monopoly power (when a specific person or enterprise is the o nly supplier of a particular commodity) can abuse their position by charging higher prices. Inequality – A capitalist society is based on the right to pass wealth down to future generations. If a small group of people hold all the wealth and that wealth continues to be passed down to the same groups of people, inequality and social division occur. Recession and unemployment – An economy based on the market of consumers and producers is invariably going to experience growth and decline THE CAPITALIST MODE OF PRODUCTION IN THE THEORY OF KARL MARX
In his work, especially the Grundrisse (1857 –1858) and the first volume of Capital (1867), Marx defined capitalism as a mode of production characterized by the separation of the direct producers, the working class, from the means of production or the productive assets, which are controlled by the bourgeoisie as pr ivate property. Ownership of the means of production enables the bourgeoisie to organize the industrial labor process, where individual workers are driven to seek employment by the needs of their own reproduction. Contrary to previous modes of production s uch as slavery and feudalism, the laborer is compelled to enter an employment relation not by external compulsion, but by economic necessity .As a result, the employment relation is formally an individual contractual transaction between bourgeois capitalis ts and workers, who are juridically free. Once they enter the capitalist labor process, workers are remunerated with a wage, a monetary sum representing the “exchange value ” with which the capitalist purchases the worker ’s labor power.
The wage is expresse d in terms of the duration of the working day, and is calculated on the basis of the goods that workers need to reproduce their ability to work. Therefore, the wage does not recognize specific forms of labor or skills, it only compensates “abstract ” labor power. In the productive process, workers operate machines and other means of production with which they create commodities whose values exceed workers ’ remunerations. When capitalists sell commodities on the market, “realizing ” their value, they therefor e appropriate the difference between the value of such goods and the value of the labor power used to produce them. Marx calls this difference “surplus value, ” which for him is the defining feature of the exploitative nature of capitalism. The money capita lists earn from realizing their surplus value contains a profit, which capitalists reinvest to restart the productive cycle in what Marx calls “extended reproduction ” of capital. Marx saw the origins of profit and surplus extraction in the very process of production, not in market dynamics of supply and demand , as in the “bourgeois ” political economy of Adam Smith (1723 –1790) and David Ricardo (1772 –1823).
Nonetheless, Smith and Ricardo influenced Marx ’s concept of the division of labor and his “labor theory of value, ” respectively. Marx, however, regarded the market not as a realm of free individual initiative, but as an institution that materialize s human exploitation and alienation. For Marx, the CMP is a social process riddled with contradictions that originate from its own “laws of motion. ” The growing “concentration ” of accumulated capital is what ultimately allows individual capitalists to increase their profits and drive competitors out of the market. The elimination of uncompetitive capitals produces a centralization of ownership in a smaller number of large compan ies. But successful competition also requires increasing investment in machinery ( “constant capital ”). As a result, the surplus value extracted from human labor is eroded and, in the long term, the rate of profit for the CMP as a whole tends to fall. In th e process, masses of workers are expelled from the production process and end up swelling the unemployed “relative surplus population. ”
Marx described the laws of motion in the CMP far more precisely than in other modes of production. His aim was in fact t o scientifically demonstrate how the demands of the working class are ultimately incompatible with capital ’s exploitative nature. As the contradictions of the CMP manifest themselves in periodic crises, workers become conscious of their own exploitation as a class. Therefore they organize to accelerate capitalism ’s eventual demise and establish a socialist society where class domination is abolished. Marx tended to present the development of the CMP as a social dynamics whose general laws of motion could be scientifically ascertained. He was nonetheless quite aware that the process he described was historically specific and located largely in Western Europe . England had for him a prototypical CMP. There, the birth of a capitalist agriculture and the r ise of mechanized manufacturing in the late eighteenth and early nineteenth centuries enabled the Industrial Revolution , which benefited from world trade and technological innovation.
Marx associated the rise of capitalism with the establishment of a form of state whose laws and institutions protect private property, capital accumulation, and formal liberties that enable contractual relations b etween workers and capitalists. This stage of political development is represented by the liberal state, whose juridical and ideological “superstructure ” is functional to reproduce the “base ” of capitalist relations of exploitation.
CAPITALISM AND INEQUALITY
Why Inequality is an Essential ingredient of Capitalism Profit motive A basic principle of capitalism is that individuals are motivated by the profit incentive. For example, entrepreneurs undertake a risky venture to set up firms because they hope to make a substantial profit. If there was not this profit incentive, entrepreneurs would not undertake the risk of setting up a firm. Therefore, you can say the potential of reward makes inequality an essential ingredient of capitalism. You coul d argue people may have other motivations for setting up a business than just higher incomes, but most would agree higher income is an important consideration – if not overriding motive.
Work Incentive Inequality is also important to motivate workers. If every worker received the same wage regardless of skill and effort, there would be no incentive to learn new skills and work hard at the job. A firm in a capitalist society can pay successful workers a higher wage to reflect their higher productivity. This will lead to wage inequality, but without it it would be hard to motivate workers. Other Types of Inequality in Capitalism Monopoly Power The above types of inequality may seem ‘fair’ or justified. If you work hard, you get to benefit from your enterprise . However, capitalism can also lead to inequality which may be seen as unfair. For example, a firm may develop monopoly power. Then it is in a position to charge consumers artificially high prices and deter entry. If firms have monopsony power, they can get away with paying a wage much lower than the productivity of the worker. Workers have no choice but to work for a very low wage.
Therefore, capitalists with acce ss to private property can ‘exploit’ their monopoly power to make a much higher profit than other people in society. Inheritance Another aspect of capitalism is that private property can be passed on from one generation to another. Therefore those who inh erit capital can enjoy high income even without any effort. They have access to best private education and jobs. This creates inequality of opportunity as well as inequality of opportunity. These types of inequality mean that there isn’t a level playing fi eld; some in society get an unfair advantage, there isn’t equality of opportunity. It is hard to argue that capitalism won’t inevitably lead to inequality. A principle of capitalism is to allow income and wages to be distributed by the free market. The only way to ensure wage equality would be through government intervention. Some people who support a ‘capitalist system’ may argue there is also still necessary for the government to redress some of the inequalities of capitalist society. For example, regu late monopoly power, provide free education, so everyone has access to education and equ ality of opportunity .
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets . Famous Quotes About Capitalism “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” – Winston Churchill “Doing well is the result of doing good. That’s what capitalism is all about.” – Ralph Waldo Emerson “The problem of social organization i s how to set up an arrangement under which greed will do the least harm. Capitalism is that kind of a system.” – Milton Friedman “What makes the difference is whether the environment permits and encourages ideas and work, or instead puts obstacles in their way. That depends on whether people are free to explore their way ahead, to own property, to invest for the long term, to conclude private agreements, and to trade with others.
In short, it depends on whether or not the countries have capitalism.” – Johan Norberg, author of In Defense of Global Capitalism “America is the greatest engine of innovation that has ever existed, and it can’t be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis o n independent thinking, a steady immigration of new minds, a risk -taking culture with no stigma attached to trying and failing, a noncorrupt bureaucracy, and financial markets and a venture capital system that are unrivaled at taking new ideas and turning them into global products.” – Thomas L. Freidman, author of Hot, Flat and Crowded.