Question

In: Economics

What are the core problems confronting the capitalist economic system? How do the alternative economic systems...

What are the core problems confronting the capitalist economic system? How do the alternative economic systems discussed in class attempt to address these core concerns?

Solutions

Expert Solution

Capitalism is an economic system based on free markets and limited government intervention. Proponents argue that capitalism is the most efficient economic system, enabling improved living standards. Advocates of capitalism such as Milton Friedman argue capitalism and the economic freedoms it embodies is also essential for the promotion of political freedoms.

However, despite its ubiquity, many economists criticise aspects of capitalism and point out is many flaws and problems. In short, capitalism can cause inequality, market failure, and boom and bust economic cycles.

Problems of Capitalism

1. Inequality

The benefits of Capitalism are rarely equitably distributed. Wealth tends to accrue to a small % of the population. This means that demand for luxury goods is often limited to a small % of the workforce. The nature of capitalism can cause this inequality to keep increasing. This occurs for a few reasons

Inherited wealth. Capitalists can pass on their assets to their children. Therefore, capitalism doesn’t cause equality of opportunity, but those born in privilege are much more likely to do well because of better education, upbringing and inherited wealth.

Interest from assets. If capitalists are able to purchase assets – bonds, house prices, shares, they gain interest, rent and dividends. They can use these proceeds to buy more assets and wealth – creating a wealth multiplier effect. Those without wealth get left behind and may see house prices rise faster than inflation.

The economist Thomas Piketty wrote an influential book Capital in the Twenty-First Century, which emphasised this element of capitalism to increase inequality. As a general rule, Picketty argues wealth grows faster than economic output. He uses expression r > g (where r is the rate of return to wealth and g is the economic growth rate.)

2. Financial instability/economic cycle

Capitalism relies on financial markets – shares, bonds and money markets but financial markets have a tendency to cause booms and busts. In a boom period, lending and confidence rise, but frequently markets get carried away by ‘irrational exuberance’ causing assets to the spike in value. But, this boom can quickly turn to a crash when market sentiment changes. These market crashes can cause economic downturns, recession and unemployment. At various times, capitalism has suffered prolonged recessions (the 1930s), periods of mass unemployment and decline in living standards.

3. Monopoly Power

In a free market, successful firms can gain monopoly power. This enables them to charge higher prices to consumers. Supporters of capitalism argue only capitalism enables economic freedom. But, the freedom of a monopoly can be abused and consumers lose out because they have no choice. For example, in industries like tap water or electricity supply, which are a natural monopoly, consumers have no alternative but to pay the prices charged by consumers. In the Nineteenth Century, monopolies like Standard Oil bought our rivals (often with unfair competitive practices) and then became very profitable.

4. Monopsony

Monopsony is market power in employing factors of production. For example, firms can have monopsony power in employing workers and paying lower wages. This enables firms to be more profitable but can mean workers don’t share from the same level of proceeds as the owners of capital. It explains why with increasing monopsony power we have seen periods of stagnant real wage growth while firms profitability has increased (2007-17 in UK and US)

5. Immobilities

In a free market, factors of production are supposed to be able to easily move from an unprofitable sector to a new profitable industry. However, in practice, this is much more difficult. E.g. a farm worker who is made unemployed cannot just fly off to a big city and find a new job. He has geographical ties to his birthplace; he may not have the right skills for the job. Therefore, in capitalist societies, we often see long periods of structural unemployment.

6. Environmental costs and externalities

In capitalist economies, there is limited government intervention and reliance on free markets. However, market forces ignore external costs and external benefits. Therefore, we may get over-production and over-consumption of goods that cause harmful effects to third parties. This can lead to serious economic costs – pollution, global warming, acid rain, loss of rare species; external costs that damage future generations.


Related Solutions

compare and contrast the command and capitalist economic systems
compare and contrast the command and capitalist economic systems
Economic Issues Confronting Our Economy. What are the fundamental economic issues confronting our economy? Please provide...
Economic Issues Confronting Our Economy. What are the fundamental economic issues confronting our economy? Please provide examples
In what ways is the EU a unique RTA? What are some of the problems confronting...
In what ways is the EU a unique RTA? What are some of the problems confronting the EU today?
1 briefly discuss alternative economic system how are resources allocated under each system? 2 what is...
1 briefly discuss alternative economic system how are resources allocated under each system? 2 what is agricultural economic? what are the main economic sector of agriculture? what is accomplished 3 what is indifference curve? what is inferred by an outward shift of the curve? what do the slope and curve? what do the slope and the curvature of an indifference curve imply?
Identify the three types of economic systems. How do these three types of economic systems differ...
Identify the three types of economic systems. How do these three types of economic systems differ from each other? How are they the same? (
a. ) Why do you think that by comparing cooperative companies and capitalist companies, this alternative...
a. ) Why do you think that by comparing cooperative companies and capitalist companies, this alternative structure may be ideal for both workers and society? b. ) If so, please explain whether the reason is more common?
The economic system of the United States is best described as: market or capitalist . command...
The economic system of the United States is best described as: market or capitalist . command . socialist. centrally planned.
Discuss the differences in allocative efficiency between a capitalist and a socialist economic system as they...
Discuss the differences in allocative efficiency between a capitalist and a socialist economic system as they relate to the price mechanism in each system.
Briefly describe the types of economic systems. What is the United States’ economic system and what...
Briefly describe the types of economic systems. What is the United States’ economic system and what are the characteristics of this economy? What economic role or functions does the U.S. government conduct regularly? Why is the U.S. government’s economic role important or unimportant for the U.S. economy? Discuss whether you favor a larger or smaller government role in the economy.
What is the concept of the capitalist market system or price system? What is the concept...
What is the concept of the capitalist market system or price system? What is the concept of the central planning system or command system?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT