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”

a) Discuss the statement by explaining what a capitalist system is and how it contributes to the levels of inequality we can observe both within and across countries.

b) 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

(A)Capitalism:

Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market—known as a market economy—rather than through central planning—known as a planned economy or command economy.

Inequality is an essential ingredient of Capitalism

They are two types.

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.

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.

Some global perspectives

1. The United States has more inequality than any other advanced country
2. Not all countries have been experiencing an increase in inequality—some have had a decrease
3. Globally, wealth inequality is worse than income inequality

B) Definition

Creative destruction can be defined as the decay of long-standing practices, procedures, products or services followed by more innovative, disruptive ones. It is based on the principle that old assumptions need to be broken so that new innovations can benefit from existing resources and energy.

This refers to the process of how capitalism leads to a constantly changing structure of the economy. Old industries and firms, which are no longer profitable, close down enabling the resources (capital and labour) to move into more productive processes.

A real example of creative destruction at work over the past 100 years:

Henry Ford's assembly line and how it revolutionized the automobile manufacturing industry. However, it also displaced older markets and forced many laborers out of work. The Internet is perhaps the most all-encompassing example of creative destruction, where the losers were not only retail clerks and their employers but also bank tellers, secretaries, and travel agents. The mobile Internet added many more losers, from taxi cab drivers to mapmakers.

The winners, beyond the obvious example of programmers, might be just as numerous. The entertainment industry was turned upside down by the internet, but its need for creative talent and product remains the same or greater. The Internet destroyed many small businesses but created many new ones online.