What is Capitalism?
UNIT 1: CAPITALISM DEFINED The 17 th and 18 th centuries introduced a new economic system called capitalism characterized by a new combination of institutions. Most economies today are capitalist, which means private property, markets and firms are the key institutions. There is not an exact definition of capitalism which is widely agreed upon. What are some examples of non-capitalist economic systems?
UNIT 1: CAPITALISM DEFINED Private property is the way in which our laws and institutions decide who owns what What does it mean to own something? Property rights are not natural, but rather are socially constructed
UNIT 1: CAPITALISM DEFINED Markets are a way of connecting people who mutually benefit by exchanging goods and services through a process of buying and selling Markets allow for increased specialization What other ways are there to transfer goods and services from one person to another? Markets differ from other ways in two key respects: 1. They are reciprocated 2. They are voluntary
UNIT 1: CAPITALISM DEFINED Firms are a way of organizing production with the following characteristics: One or more individuals own a set of capital goods that are used in production They pay wages and salaries to employees They direct the employees (through the managers they also employ) in the production of goods and services The goods and services are the property of the owners Final products are sold with the intention of making a profit Firms are not the only productive organizations in an economy As firms became more common, they created a labor market
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM Capitalism is an economic system that combines decentralization with centralization How does capitalism centralize power? How does it decentralize power?
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM Both the richest and poorest countries in the world are capitalist Two sets of conditions contribute to the dynamism of a capitalist system: economic and political. The lagging performances of some capitalist economies, highlight the following problems: Private property may not be secure Markets may not be competitive Firms may be owned and managed by people who survive because of their connections or their privileged birth
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM Government policy is critical Markets, private property and firms are all shaped and created by laws and policies. Innovators depend on their ownership of the resulting profits being protected from theft by a well-functioning legal system.
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM By creating or allowing monopolies or oligopolies, governments may also take the teeth out of competition. Governments adjudicate disputes over ownership and enforce property rights Government provides essential goods and services Question: Given the importance of government in maintaining a functioning market, what could it mean to have a free market?
UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM There really is no such thing as a free market. Consider five areas where the rules/laws of the market have to be set in order for a market to function at all: Property Monopoly Contracts Bankruptcy Enforcement the traditional libertarian argument that the state should simply stop interfering with the economy is misguided: it is like saying that the commissioner of baseball should stop interfering with the game by promulgating its rules. - Elizabeth Anderson
UNIT 1: VARIETIES OF CAPITALISM So when is capitalism dynamic, broadly speaking? When it combines: Private incentives for cost-reducing innovation Firms led by those with proven ability Public policy supporting these conditions Public policy that supplies essential goods and services Given all the different ways of succeeding or failing at this, no surprise that capitalist economies have coexisted with many political systems.
UNIT 1: SPECIALIZATION Animal fat lamps produced 20 lm-hr for an hour of work. In Babylonian times the invention of a lamp using sesame oil meant that an hour of work produced 24 lm-hr. This improvement took 7,000 years. 3000 years later, the most efficient forms of lighting provided about nine times as much light per hour of work. Compact fluorescent bulbs introduced in 1992 are about 45,000 times more efficient, in terms of labor time expended, than lights were 200 years ago. The productivity of labour in producing light: Lumen-hours per hour of labour (100,000 years ago to the present).
UNIT 1: SPECIALIZATION Specialization : when a person or group of people produces a more narrow range of goods and services than it consumes, acquiring what it does not produce by trade. Why does specialization lead to better and more efficient production? 1. Learning by doing 2. Reduction in transition costs 3. Automation and economies of scale 4. Difference in ability Capitalism enhanced opportunities for specialization by expanding the importance of both markets and firms.
UNIT 1: SPECIALIZATION Specialization exists within governments, firms, and in families. What usually determines how household production is divvied up? Firms employ thousands or even hundreds of thousands of individuals, most of them working at specialized tasks Firms thus facilitate a kind of cooperation among specialized producers that increases productivity.
UNIT 1: SPECIALIZATION When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men s labor as he has occasion for. - Adam Smith Markets are both competitive and cooperative. How do markets create cooperation? Markets accomplish an extraordinary result: unintended cooperation on a global scale.
UNIT 1: SPECIALIZATION Specialization, though, results not just from people s differing abilities, but also because people differ in their power and resources. Does the House of Saud control the oil because of its abilities? Do those who control the tungsten supply out of the Congo do so because they are better at mining it? Are Bangladeshi textile workers inherently any better at sewing and stitching than anyone else? The answer, in all of these cases, is pretty obviously, No.
UNIT 1: SPECIALIZATION