comparative economic systems - intro to capitalism

Comparative Economic Systems

CAPITALISM

Definitions of CapitalismG.D.H. Cole has defined capitalism as a “system of production for profit under which instruments and materials of production are privately owned and the work is done mainly by hired labour, the product belonging to the capitalist owner or owners” In the words of Loucks, “Capitalism is a system of economic organization featured by the private ownership and use for private profit for man-made and nature-made capital”


CAPITALISMWithout critically going into the merits of these definitions, we may say that capitalism is an economic system in which land and other productive resources are mostly owned by the private individuals and are operated to earn profit, in which in spite of a degree of State intervention, economic activities are mostly unplanned and uncoordinated. From our point of view, we shall not only designate the American economy as capitalistic but shall bring the economies of Canada, England, Australia, Japan and France etc also under contemporary capitalism. This is, notwithstanding the fact that the term “capitalistic” has become untouchable to many in the modern international community and each would rather prefer to be designated as a “mixed economy”


INSTITUTIONS OF CAPITALISMPrivate Property and its Functions1. Gross has observed, “Private enrichment has a

social function, it is the incentive for productive activity. To discourage it unduly is to undermine the economic order.”

2. The second function that private property performs in a capitalist economy is to promote saving and capital formation.

3. The third function of the right to property is to ensure liberty.


INSTITUTIONS OF CAPITALISMI. Private Property and its Functions

1. Gross has observed, “Private enrichment has a social function, it is the incentive for productive activity. To discourage it unduly is to undermine the economic order.”

2. The second function that private property performs in a capitalist economy is to promote saving and capital formation.

3. The third function of the right to property is to ensure liberty.


INSTITUTIONS OF CAPITALISMDisadvantages of Private Property First, the unit of ownership may be too small. Secondly, the private owner holds the future at

a discount. Thirdly, Grossman remarks, “It creates

powerful vested interests that are at times hard to control and regulate by democratic processes even if the general welfare would seem to require.”

Fourthly, private production has a bias in favour of the production of private goods rather than public services. This does not promote the general social welfare.


INSTITUTIONS OF CAPITALISM

II.The Right of Inheritance Loucks, however, is of the view that the institution of inheritance is separate from the institution of private property. Social restriction of the one does not necessarily imply the restriction of the one does not necessarily imply the restriction of the other.III. Competition Competition is one of the vital pillars of capitalism. In a capitalist system competition means “economic rivalry”.


INSTITUTIONS OF CAPITALISMAdvantages of Competition Competition under capitalism has certain special functions and advantages as well as disadvantages.Completion tends to promote economic efficiency and economic progress. Competition tends to assure that goods and services will be produced at the lowest possible cost of production. As Seligman pointed out long ago, “if completion in biology leads only indirectly progress, competition in economics is the very secret of progress”. Competition is said to be the indispensable displinarian of the market economy. Under competitive conditions only efficient firms will remain in the line, others would be automatically eliminated. Competition compels the firms to use the least cost combination of factors. They must use the most efficient productive technology. Competition promotes scientific research and inventions.


INSTITUTIONS OF CAPITALISMAdvantages of Competition Salvadori has quoted certain other advantages of competition.1. Competition tends to assure that profits will be held to

the minimum, because prices have to be kept down:2. Tends to assure that the energy and raw materials and

productive capacity of the nations will be used for providing those goods and services which public wants and in proportion to the relative demands of the public as reflected in the market place;

3. Tends to assure that each factor of production will be paid through wages, rent, interest or profits in harmony with the public estimate of the contribution it makes;

4. Assure that a constant effort will be made to widen the choice of goods and services offered for sale.


INSTITUTIONS OF CAPITALISMAdvantages of Competition 5. Assure that a constant effort will be made to improve

the attractiveness of goods offered for sale.6. Assure freedom of opportunity, by making it possible

for any one at any time, to enter any line of business he desires, for which he has the necessary capital, and

7. assure free and continuous progress and a gradually improving scale of living, through the production of more and more kinds of goods, of better and better quality, at prices which a larger proportion of the public can afford to pay.

To summarize the benefits of competition to the capitalistic society, Salvadori again observes, “In a word, from the point of the public welfare, completion serves as a regulator and reducer of prices, an incentive to improved production efficiency, as a guarantor that we shall get what we want, and protector of the freedom of opportunity”.


INSTITUTIONS OF CAPITALISMDisadvantages of Competition1. Extreme competition makes the sellers depreciate the quality of

the products. It is done in such a subtle and clever way that the consumers cannot easily recognize it. By reducing the quality of the product the producers may reduce the cost of production of the product and sell it at a competitive price no doubt. But the consumers get an inferior article without realizing it.

2. Competition may lead to overcrowding in an industry than what can be profitably supported by the existing demand conditions. This led Prof. Ely to remark, “Competition is wasteful”. This ultimately paves the way for the growth of monopoly.

3. Sometimes fierce competition leads to deliberate obsolescence of commodities. For example, in the U.S. an endless stream of ‘revolutionary improvement’ is advertised in an effort to persuade the customer discard his current motor car. To present a more prosperous appearance to the world the consumers opt for the latest model. Although these so called changes may be meaningless or at best superficial, such changes involve staggering expenses and constitute an waste from the social point of view.

Comparative Economic SystemsDisadvantages of Competition4. Competition also leads to maintenance of secrecy in matter

relating to production process etc. this leads to duplication of energy in research and waste of resource.

5. Sometime due to cut-throat competition the firm may offer the wholesalers and the middlemen higher margins of profit, so that they would be interested to push the sale of that particular brand over the others. This will have a tendency to push up the prices.

6. Competition sometimes compels the competing firms to resort to competitive advertisement. This is a social waste.

7. Due to severe competition some inefficient firms will have to close down. This will lead to unemployment of the workers who were working therein. This will lead to distress and misery on the port of the unemployed workers – at least temporarily.

8. A large number of small firms are not suitable to promote research and technological development. Modern research is highly expensive. A large firm with adequate resources is in a position to finance research expenditure. This progressiveness of pure competition has been a matter of long debate

Comparative Economic SystemsDisadvantages of Competition9. Normally by competition we understand fair competition. But if the

businessmen are corrupt, dishonest and unscrupulous, this spirit of fair competition may be absent. Hence vicious, unethical methods may be adopted to curse one’s rival in a ruthless manner. Here competition becomes undignified and unethical.

10. So far we have discussed completion in the traditional sense. But with the technological growth I the U.S.A. another type of competition arose. This was within a few. The big firms very often overbuilt. Competition not only became severe buts also proved expensive. There was competition among the giants in each field. But such cut-throat competition although for some time was favorable to the consumers, yet, as Heilbroner say, it led to “bankruptcy on a multimillion dollar scale”.

11. Besides, as pointed out be Bye and Hewitt, “free competition is not necessarily equal completion. Under capitalism a person with wealth, proper education and right connections is definitely in a better position than his unfortunate counterpart. Obviously, he has greater chances to come out victorious in the race of competition. Competition bestows its prices upon the strong and luck at the expense of the weak and unlucky. Under pure capitalism competition is the touchstone, the regulator, the mechanism by means of which maximization of national income and public welfare is brought. From the point of view of public welfare, competition serves as a regulator of prices, as an incentive to improved productive efficiency”.

comparative economic systems - intro to capitalism

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