Question

“Capitalism is a system of winners and losers both within nations and across the globe, and this, along with creative destruction, contributes to inequality. Today there are various forms of capitalism co-existing – some dynamic and some not, some alongside democratic governments others not”

b) Give an example of a capitalist system with a non-democratic form of government that exists today. Does capitalism when combined with democracy lead to higher GDP growth over time? Why/Why not? Does capitalism when combined with Democracy lead to less inequality? Why/Why not? c) Explain Joseph Schumpeter’s concept of creative destruction and how this is a central part of capitalist systems. Provide a real example of creative destruction at work over the past 100 years.

Answer 1

b) Capitalism refers to an economic system, where distribution of resources are taken place according to the private propery rights. Economic operations are mainly controlled by the corporates with minimal government intervention.  Corporations take independent decisions about the prices, resource allocation, production and investment.

An example of non democratic capitalist country is China. it is referred as authoritarian capitalist state or in other words, state capitalism exists in this country.

Capitalism and democracry can co exist in certain situation but not always. When the distribution of wealth and resources are concentrated and acumulated to a certain group of people or institutions through private property rights, the essence of democracy does not work their. Therefore, uncontrollable agglomeration of wealth, capital and concentration of economic power may lead to corruption and inequality in the society. Thus, if democracy coexists with soft form of capitalism, more specifically socially embedded capitalism, then a sustainable GDP growth can be experienced over the time.

When capitalism is combined with democracy such as interventionist welfare state, then the state acts to stabilise, regulate inequalities created due to unequal distribution of wealth under capitalism. A capitalist society functions well when investment and production are concerned. Efficient resource allocation thorugh market can bring eficiency in production. However, a welfare state can play an important role while distribution of goods and services are concerned. If monopoly power gives rise of unctrollable price hike, governmnet intervention in terms of price regulation such as price ceiling is beneficial for poor people. Social security is another welfare policy of state to remove inequalities.

c) Joseph Schumpeter’s concept of creative destruction :

Creative destruction refers to a porcess of new production units that replaces old production methods and units. Schumpeter considered creative destruction as an essential form of capitalism. Consumers generally see the benefits of new and improved product due to technological upgradation, better jobs and higher standard of livings. New products, new systems replace the old system. The reward of new system cannot be enjoyed without leaving some people worse off. This is the pain and gain of capitalism.

One example of creative destruction is evolution of digital transformation, which has destroyed many small businesses in last 100 years. Many jobs such as clerical, and othr manual jobs in small manufacturing industry has been destroyed in US due to diffussion of innovation in the form of digital transformation in the job market. IT sector has expanded and demand for labor intensive jobs has been contracted in the past 100 years. Bank tellers, secretaries, travel agents, taxi cab drivers have also lost their jobs over the years.