Capitalism Is An Economic and Social System in Which Trad1

AHMAD MUSTANIR BIN HADADAK
CAPITALISM
i. Capitalism is an economic and social system In which trade, industry and the
means of production (also known as capital) are privately controlled (either
singly or jointly) and operated for a profit. Capital is vendible, which means it can be
owned, operated, and bought and sold for the purpose of generating profits for
private owners, either singly or jointly.
ii. In a capitalist system, investments, distribution, income, production, pricing and
supply of goods, commodities and services are determined by private decisions,
usually within the context of markets. In a capitalist state, private property rights are
protected by the rule of law of a government through a limited regulatory
framework.
iii. Although the role of government has varied widely in capitalist systems, the term
"capitalism" is often used to refer specifically to free market capitalism. In a free-
market capitalist state, legislative action is confined to defining and enforcing the
basic rules of the market,although the government may provide some goods and
infrastructure.
iv. This contrasts with economic planning, in which the state directs what shall be
produced based on rational economic planning. This also contrasts with
decentralized economic planning and democratic worker management.
v. Capitalists believe that the privatization of state-provided services can achieve
more efficient outcomes by enabling them to better respond to market forces. Free-
market capitalists usually support free trade and the abolition of subsidies.
vi. Some consider laissez-faire to be pure capitalism, although it has never existed in
practice.Laissez-faire signifies minimizing or eliminating state interference in
economic affairs, allowing the free play of supply and demand.
vii. All large economies today have a mixture of private and public ownership and
control, so some feel that the term mixed economy describes most contemporary
economies.In the capitalist mixed economy, the state intervenes in market activity
and provides many services.
1|Page
THE HISTORY OF CAPITALISM

ORIGINS
Ψ According to some historians, the modern capitalist system has its origin in the
European "crisis of the fourteenth century," a conflict between the land-owning
aristocracy and the agricultural producers, the serfs.
Ψ Feudal arrangements inhibited the development of capitalism in a number of ways
for both the serfs and the lords. Serfs were forced to produce for lords, enervating
interest in technological innovation. Similarly, cooperation was discouraged by each
serf's preoccupation with sustaining their own families.
Ψ For their part, the lords used force to ensure they received sufficient food, and with
no market or competition, felt little pressure to innovate.
Ψ Finally, because lords expanded their power and wealth through military means,
they spent their wealth on military equipment or on conspicuous consumption that
helped foster alliances with other lords; there was no incentive to invest in
developing new, productive technologies
Ψ This arrangement was shaken by the demographic crisis of the fourteenth century.
This crisis had several causes: agricultural productivity reached its technological
limitations and stopped growing; bad weather led to the Great Famine of 1315-
1317; the Black Death in 1348-1350 led to a population crash.
Ψ These factors led to a decline in agricultural production. In response feudal lords
sought to expand agricultural production by expanding their domains through
warfare; they therefore demanded more tribute from their serfs to pay for military
expenses. In England, many serfs rebelled.
Ψ Some moved to towns, some purchased land, and some entered into favorable
contracts to rent lands, from lords desperate to repopulate their estates.
Ψ Marx labeled this period the "pre-history of capitalism" It was, in effect, feudalism
that began to lay some of the foundations necessary for the development of
mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe
and lasted from the medieval period up through the 16th century. Feudal manors
IDEAL MARKET CAPITALISM
were almost entirely self-sufficient, and therefore limited the role of the market.
2|Page
In a market capitalist system, capital and land are private property. Enterprises may
be formed by individuals who can get access to land and equipment, either because
they own it or can rent or borrow to get it, and who can hire labor or employ themselves.
i. Enterprises organize and direct production, and they are operated for the private
benefit of the person who organizes the enterprise. Private benefit is interpreted as
profit, so we say that the enterprises maximize profits.
ii. In a capitalist economy or in any economy, production is limited by existing
resources and technology. We can express this limit with a concept from
neoclassical economics:
iii. The production possibility frontier. Once again, we will use the simplified production
possibility frontier for Economia , which produces only machinery and food. Here
it is, to help jog your memory. The idea is that economia can produce any
combination of food and machinery on or below the curve.
Figure 1
⊗ The economy can produce only combinations on or below the curve. But what
combination of goods will be produced? Of course, that will be determined by and
equilibrium of supply and demand, but we can skip over a many of the details from
chapters 3-14 above. In an ideal market, production at market equilibrium will give
the highest possible market value
3|Page
Figure 2
⊗ The result is shown in Figure 2. In the Figure, the line indicated by Y1 shows all
combinations of food and machinery that add up to the same market value a value of
Y1. Similarly, line Y2 shows all combinations that add up to a market value of Y2,
and line Y3 shows all combinations that add up to a market value of Y3. The slope of
all three lines is the same, and it is the relative price of food and machinery -- the
amount of machinery we have to give up in the marketplace to get one more unit of
food. We see that Y2 is the highest market value that can be produced, and it can be
produced only if the combination of food and machinery is on the production
possibility frontier at point *. And it makes sense that an economic system based on
profit would produce that amount. If it did not, some enterprise would be able to
increase its profits by shifting its production toward a higher market value.
⊗ But combination * is not just the greatest market value. In the ideal market capitalist
system, the prices reflect consumers' "marginal benefits," and that means that the
combination of outputs at * is efficient.
⊗ Of course, there may be other things about capitalism that are more important than
this. Some economists would argue that it is the creative act of forming enterprises
and discovering new technologies that is most important, especially in the long run,
and that even a capitalism that departs quite far from this ideal could still have great
advantages.
⊗ But this discussion summarizes the argument for market economies in neoclassical
economics, and thus it summarizes the neoclassical ideal conception of capitalism.
4|Page
KINDS OF CAPITALISM
 Enterprises in capitalism as Adam Smith and Karl Marx knew it were typically
individual proprietorships. There were few corporations, and probably none in the
modern sense, in Smith's time. Smith regarded corporations as hangovers from
feudal times, and saw no future for them.
 This early form of capitalism was proprietary capitalism. One problem for
proprietary capitalism is that these individual enterprises seldom got very large,
by modern standards.
 This meant that many projects that could have been useful and profitable could not
be undertaken by capitalist firms, because the projects were too large -- there were
no enterprises large enough to afford them. Modern corporations came into
existence to finance and administer these huge projects -- canals, railways,
telegraph and telephone systems, gas and electric power distribution.
(Nevertheless, government carried out the large-scale projects in many
capitalist countries). The corporations became more predominant, transforming
proprietary capitalism into corporate capitalism.
 The collapse of world markets in the period 1930-1940 threatened to destroy
capitalism entirely. After some delay (and in the context of world war)
governments stepped in to support capitalism by various means of regulation,
controlling money supplies, and government expenditure.
 Thus, market capitalism was transformed into government-managed capitalism.
Sometimes called a "mixed economy," because it relies largely on markets but
partly also on government to direct the economy, this system has been predominant
during the second half of the twentieth century.
 Conservatives deplore this, and there have been conservative governments
pledged to return to pure market capitalism, from time to time, in most major
capitalist countries. But they have been unable or, perhaps, finally unwilling to do it.
No matter how ideologically committed, governments have not yet been willing to let
markets find the way, fail if they would, and let capitalism be destroyed by the failure.
5|Page
PROBLEMS OF CAPITALISM
PROBLEMS OF CAPATALISM
 In ideal market capitalism, the equilibrium outputs are efficient. Efficiency is
important, but there are some criticisms even of ideal capitalism.
 Most fundamentally, the prices in the marketplace reflect consumer preferences.
Thus, in ideal market capitalism, production is directed by consumer
preferences. It is not clear that production should be directed by consumer
preference, though. To say that production ought to be directed by consumer
preferences (called "consumer sovereignty") is a value judgement , not a law of
nature, and some people may disagree with it.
 So even an ideal capitalism might have some shortcomings, depending on one's
value judgements. But any real capitalism will fall short of the ideal, and real
capitalisms have fallen short in several predictable ways:
a) Monopoly and restricted competition may cause prices and output to deviate
from the efficient ones, and they are likely also to increase inequality, especially if
competition for labor is limited.
b) Markets may not respond efficiently to cases where costs and benefits are
"external," and public goods may not be produced in efficient quantities.
c) Real-world markets may not move toward an equilibrium of supply and demand.
Perhaps for some of the reasons discussed by Keynesian economics, or for
other reasons, markets may settle into stable conditions quite unlike the
equilibrium of supply and demand, and quite inefficient and non-optimal.
 One response to these criticisms is that government can step in and correct the
failure of the market to provide the desired and (in some cases) efficient
outcome.
 But this is rather a long list of jobs for government, and if government does any large
fraction of them, we no longer have market capitalism but government-managed
capitalism.
6|Page
CHALLENGES OF CAPITALISM
 Ideal market capitalism says nothing about social classes. In principle, it might
be a classless society -- that is, a society with only one class, without class
divisions . The one class might be a class of yeoman market farmers. But, in
practice, market capitalist societies have been divided between two classes with
quite different conditions: employers and employees.
 The revolutions and gradual changes of the two centuries before 1800 had
eliminated the special role of the old aristocracy and transformed them (at best)
into capitalist land-renters.
 The socialists looked forward to a future in which the class of capitalist
employers would also be eliminated as a class, with the former employer class or
their descendants having to work for a living as the vast majority already do.
 This would be a society with only one class, the working class; a society without
class distinctions and thus a classless society. In the words of W. Arthur Lewis, a
spokesman for the Fabian Socialist Society in the 1940's socialism is "democracy
and a classless society."
 Perhaps we should treat "democracy and a classless society" as a definition of
democratic socialism. Then socialism means just a society with only one class, the
working class, regardless of the system of government.
 Certainly there were people who favored a dictatorial socialism, "dictatorship and a
classless society." Nicolai Lenin, the founder of the Soviet Union, was one of
them. Their idea was that the dictator would be the voice by which the working class
would express its government of society. There were also libertarian socialists, that
is, people who favored a classless society with the maximum of possible political
liberty. Some of the libertarian socialists were anarchists, who wanted a classless
society with no government at all.
 When it is put that way, perhaps the terms "democratic socialist," "libertarian
socialist," and "anarchist socialist" may not seem so strange. Is there
something about a classless society that requires the existence of a
government? The only balanced answer is "maybe."
7|Page
 All of these socialist ideas have been controversial from the beginning, and have
been critical of one another. For example, the libertarian and democratic socialists
often argued that a dictatorship could not co-exist with socialism, since the
bureaucracy and political groups surrounding the dictator would eventually form a
new exploiting class, and re-establish capitalism with themselves as the capitalists
 This is probably what Lewis had in mind when he included democracy in his
definition of socialism.
 There have always been several schools of thought on this, among socialists. Karl
Marx and Friedrich Engels, the major theorists of socialism in the 1800's, were
careful not to describe a "socialist economic system" (though they clearly had
their own opinions of what it was likely to be). Instead, their position was that the
economic system of a socialist society should be decided democratically by the
workers themselves.
 Another element in this mix was communism. Originally separate from socialism, the
communism saw competition as the root of all evils. In the communist society, the
economic rule would be "from each according to his ability, and to each
according to his need." But that rule could not be applied in a capitalist society,
because of the defective human character capitalism produces.
 Communists believed that human character is formed by the environment. A
competitive environment would cause people to grow up greedy and aggressive.
But, in turn, a population of greedy, aggressive people would create a highly
competitive society, so that their children, too, would be greedy and aggressive.
 Thus, the communists saw the social evils of aggression and competition as the
result of a vicious circle. To break the vicious circle, the communists felt that the
small, intelligent minority who understood this truth should take power as a
dictatorship, an "educational dictatorship," and ruthlessly suppress competition,
and direct the allocation of resources "from each according to his ability, and to each
according to his need."
 Thus, over a few generations, a new virtuous circle might be set in motion, in which
sharing and action on behalf of the whole population would replace greed and
aggression as the basis of society and human character.
8|Page
CENTRAL PLANNING
1
 Once again, how can the planners get the information they need?
 One possibility is to ask the enterprise managers how much they can produce. Let's make
the optimistic assumption that the enterprise managers will tell the truth -- either because
they are nice guys or because the planning bureau has found some costless way of giving
them an incentive to tell the truth. The planning bureau could start out by sending the
enterprise managers a tentative list of outputs to produce, and ask the enterprise managers
how much resources they would need to produce that list. Then add up the resource
demands and compare them with the resources available. Adjust the tentative plan
accordingly, and try again. Keep trying until the plan is (pretty close to) optimal. Each of
these tentative lists of outputs is called an "iteration" of the plan.
Figure 3
 Figure 3 shows one possible series of iterations of the plan. The bureau starts out
optimistically with a tentative plan at A. Looking at the diagram, we know that A is
infeasible. That means the enterprises' resource requirements will add up to more
resources than are available. Adjusting, the planning bureau folows up with B. That doesn't
really help -- B is infeasible, too -- but with the information they have gotten from the
enterprises on these two attempts, the plan bureau is able to make its third iteration C. That
is an improvement -- C is feasible -- but C is not efficient, since enterprises are capable of
producing more than C with available resources. On the next round, then, the planning
bureau scales up the production amounts to D.
9|Page
 This is better still -- D is efficient, that is, on the production possibility frontier -- but it is not
optimal. With the available resources, the planning bureau would prefer to see more
machines and less food produced. By now, however, the planning bureau has gotten the
information they need, and on the next iteration they move up the production possibility
frontier to *, the optimal plan. This is the plan they direct the enterprises to carry out.
 This is a very optimistic story. There are many pitfalls that could make it difficult to move
to an optimal plan, and further problems in making the plan work even if it were optimal.
Even if the enterprise managers tell the truth, it might take many costly iterations of the plan
to get to the optimum at *. Worse, the enterprise managers have strong incentives to lie and
distort their productive potential and resource needs. Suppose that I am an enterprise
manager, and I guess wrong, thinking that I can produce 2000 with 500 of resources. In
reality, I can only produce 1000.
 So the planners send me 500 of resources, and an order for 2000 olf output, and when I try
to do it, I find I cannot produce what I have been ordered to produce. By the time I have
found out, I'm in trouble. On the other hand, if I had lied, telling the planning bureau that I
could only produce 500, then the 1000 actual production would leave me in very good
shape. I would probably only send in 700 or 800 of my production, hiding the rest in case I
should have some problems next year. On the other hand, the planning bureau may have
other information. In most cases, they can take it for granted that the quantities produced in
earlier years are feasible, and they may be able to use statistical, engineering and
computational techniques to fill in the information they don't get from the enterprise
managers.
 Then again, even if the plan is optimal -- by the preferences of the planners -- the
consumers may not be very happy with it. If the planning bureau tells the enterprises to
produce one finger brush per person, the chances are that the consumers won't buy them all
at any price, nor use them even if they are free.
 Nevertheless, we cannot rule out the possibility that an optimal planning system might be
set up, might be successful, and might improve human life from many points of view. The
problems that would have to be overcome are difficult ones, and no-one knows now how to
resolve them.
 But human beings are inventive, creative beings, and it may be that future generations will
come up with solutions that we cannot now conceive.
10 | P a g e
S.O.C.I.A.L.I.S.M
CHINA??? RUSSIA???
Socialism refers to any one of various theories of economic organization advocating

governmental or whole community ownership, and administration of the means of
production and distribution of goods, and a society characterized by equal access to
resources for all individuals with a more egalitarian method of compensation.Modern
socialism originated in the late 18th-century intellectual and working class political
movement that criticized the effects of industrialization and private ownership on
society. Karl Marx posited that socialism would be achieved via class struggle and a
proletarian revolution and become the transitional stage from capitalism to
communism.
The utopian socialists, including Robert Owen, tried to found self-sustaining

socialist communities within a capitalist society. Henri de Saint Simon, the first
individual to coin the term socialism, was the original thinker who advocated
technocracy and industrial planning. The first socialists predicted a world improved by
harnessing technology and combining it with better social organization, and many
contemporary socialists share this belief. Early socialist thinkers tended to favor an
authentic meritocracy combined with rational social planning, while many modern
socialists have a more egalitarian approach.
Socialists inspired by the Soviet model of economic development have

advocated the creation of centrally planned economies directed by a state that owns
all the means of production. Others, including Yugoslavian, Hungarian, German and
Chinese Communists in the 1970s and 1980s, instituted various forms of market
socialism, combining co-operative and state ownership models with the free market
exchange and free price system (but not free prices for the means of production)
11 | P a g e
 Social democrats propose selective nationalization of key national industries in

mixed economies, with private ownership of property and of profit-making
business. Social democrats also promote tax-funded welfare programs and
regulation of markets. Many social democrats, particularly in European welfare
states, refer to themselves as "socialists", introducing a degree of ambiguity to the
understanding of what the term means.
 Libertarian socialism (including social anarchism and libertarian Marxism)
rejects state control and ownership of the economy altogether and advocates direct
collective ownership of the means of production via co-operative workers' councils
THE HISTORY OF
and workplace democracy.
SOCIALISM
Origins
Ψ The English word socialism (1839) derives from the French socialisme (1832), the
mainstream introduction of which usage is attributed, in France, to Pierre Leroux
and to Marie Roch Louis Reybaud; and in Britain to Robert Owen in 1827, father
of the cooperative movement.
Ψ Western European social critics, including Robert Owen, Charles Fourier, Pierre-
Joseph Proudhon, Louis Blanc, Charles Hall and Saint-Simon, were the first
modern socialists who criticised the excessive poverty and inequality of the
Industrial Revolution.
Ψ They advocated reform via the egalitarian distribution of wealth and the
transformation of society to small communities without private property. Saint-Simon
delineated collectivist principles to reorganize society and build socialism upon
planned, utopian communities.
Ψ Linguistically,the contemporary connotation of the words socialism and
communism accorded with the adherents' and opponents' cultural attitude towards
religion.
Ψ In Christian Europe, of the two, communism was believed the atheist way of life. In
Protestant England, the word communism was too culturally and aurally close to the
12 | P a g e
Papist Roman Catholic communion rite, hence English atheists denoted

themselves socialists
Ψ In 1847, Friedrich Engels said "socialism was respectable on the continent, while
communism was not." The Owenites in England and the Fourierists in France were
considered socialists, while working-class movements that "proclaimed the necessity
of total social change" denoted themselves communists.
Ψ This latter branch of socialism was powerful enough to produce the communisms of
Étienne Cabet in France and Wilhelm Weitling in Germany
SOCIALISM AND PLANNING

1) As we have seen, many socialists saw a planned economy as a means for the
economic organization of a classless society. Everyone would be of the same class
-- government employees.
2) One of the clearest and most complete proposals along these lines came from the
Fabian Socialist Society in Great Britain, under the leadership of Sidney Webb,
in the first half of the twentieth century. Webb envisioned a socialist country with
a democratic parliament, much like the British one in his time. Once the government
had taken over the control of production, the management of enterprises would
become part of the civil service.
3) That sort of "democratic socialism" has never been tried in an industrialized
country. Perhaps, if it had been tried, it might have worked -- though, as we have
seen, the obstacles are pretty discouraging, and no doubt that is one reason why it
has never been tried.
4) However, the Soviet Union adopted a system based on it, roughly from 1930 to
1989. The Soviet Union had come into existence in the Revolution of 1917 that
destroyed the Russian Empire. Nicolai Lenin (aka Vladimir Ilich Ulyanov) made
himself its dictator and was succeeded by Joseph Stalin.
5) Under Lenin's government there were a series of experiments in economic
organization; but Stalin adopted something like the system Webb had proposed. The
13 | P a g e
Soviet legislature was not the democratic parliament that Webb had in mind --
although at one point Webb managed to persuade himself that it was close enough.
6) However, in the context of a dictatorial political system, the Soviet Union did
organize its different branches of production into ministries, making the managers
part of the governmental "apparatus." They did also adopt a system of planning
that involved tentative plans and repeated iterations, along the lines described in the
last system. (In fact, that discussion was suggested partly by the historical
Soviet planning system.)
7) However, they never really tried to get to an optimal plan. Indeed, they don't even
seem to have tried to make the plan efficient. We should keep in mind that, at the
beginning of the Soviet planning system, there were no computers. The Soviet
civil service and business management were backward, even by noncomputerized
standards. In its earlier period, the Soviet government was quite terroristic, and in
the later period corruption became the major factor in the economy.
PROBLEMS OF MARKET SOCIALISM
⊗ A system of independently managed government-owned enterprises maximizing

profits at market prices would run into some of the same problems that market
capitalism would. Like market capitalism, the values it would realize would be
consumer preferences, not other kinds of values that some may feel are "higher."
Monopoly and externality could also be pro
⊗ . Thus, in practice it would be necessary for a market socialist society (like a market
capitalist society) to mix in a good deal of government control of the economy. On
the other hand, centrally planned economies always had some markets. Thus, it
might be hard, in practice, to find the boundary between real market socialism and
real government-controlled socialism.
⊗ During its period of communist government, the Hungarian Republic adopted
reforms that made it a fair approximation to "market socialism," and the
14 | P a g e
criticisms of market socialism in Hungary suggest a more general obstacle to market

socialism.
⊗ The technical term is "soft budget constraints." The meaning is simpler than the
term. If a government-owned enterprise should overspend its budget and lose
money, what would happen? In practice, government would not allow the enterprise
to fail, but would instead "prop it up" with subsidies and "bail it out" with more
wasteful government capital investments.
⊗ Thus, government-owned enterprises that really should be liquidated would never be
liquidated, but would continue to exist, eating up government subsidies. Perhaps
even worse, enterprises that could shape up and improve their efficiency would have
no incentive to do so.
⊗ As long as you can fall back on government subsidies to make up losses, why
go to the trouble to improve efficiency? (After all, one way to increase in labor
productivity is to eliminate your job).
⊗ But soft budget constraints are not a market socialist exclusive. Despite the
abolition of communism in eastern Europe, "soft budget constraints" are still a
problem there, according to many of the pro-market economic reformers.
⊗ And, indeed, governments have been known to "bail out" enterprises with
government investment and to "prop up" losing enterprises with subsidies even in
countries which have never been socialist in any sense.
⊗ Here in the United States, some losing Savings and Loan Companies were
"bailed out" with government investments in the 1980's, and some of the
beneficiaries were the relatives of prominent politicians of both major parties. The
problem seems to arise unless the control of enterprises is distinctly separated from
the control of government. When the government owns the enterprises, or the
owners of enterprises control the government, "soft budget constraints" become a
problem.
⊗ However, it is plausible that a real-world "market socialist" system would be
especially vulnerable to the "soft budget constraint" problem, since the enterprise
is government owned, the manager a political employee, and a separation between
15 | P a g e
the control of enterprises and the control of government is especially difficult to

establish.
LABOR - MANAGEMENT 1
 What can we say about efficiency in a labor-managed socialist market
economy?
 Beginning in the late 1950's, a number of economists explored that question. As in
the neoclassical theory of capitalism, they began from the assumption that the
enterprise would maximize something. If it is managed in the interest of the
employees, the enterprise would not maximize profits, but it might maximize income
per employee. That is the assumption with which we begin. Next, we make the usual
assumptions of "perfect competition:" all inputs and outputs are homogenous,
including labor, and prices of all goods and services are determined by supply and
demand. Wages are not determined by supply and demand, however -- the
enterprise' wage is simply its average sales revenue per worker.
Figure 4
 We can visualize the difference between an ideal labor-managed enterprise and an

ideal market capitalist enterprise in Figure 4. The downward sloping line VMP is the
value of the marginal product curve -- the price of output times the marginal
product of labor. The curve AR is the average sales revenue per employee,
16 | P a g e
excluding the costs of inputs other than labor -- the price of output times the average
productivity of labor, net of the fixed costs of production. The line OC is the
opportunity cost of labor -- the market value of the marginal product of labor in other
industries. Thus, in an ideal market capitalist system, OC is the wage, and the
enterprise would employ N2 units of labor. By contrast, the labor-managed
enterprise will employ only N1, since income per employee is largest with N1. This is
inefficient. There has been a good deal of controversy about this analysis, but what it
seems fair to say is this: in at least some circumstances, a labor-managed enterprise
would have a motivation to restrict its hiring to a work force smaller than the efficient
size.
 This applies only in the short run. We know that this result would not be stable in the
long run, in an ideal market capitalism, since the enterprise is making an economic
profit. That is, there is revenue in excess of the labor cost and also in excess of the
nonhuman costs (because of the way the curve AR was constructed). Therefore,
with free entry, more companies will enter this industry and compete for some of
those profits. So the price will drop, and the AR will shift downward until we have the
situation shown in Figure 5:
Figure 5
 What we see in Figure 5 is that, in a long-run equilibrium, the capitalist firm and the
labor-managed enterprise employ the same labor force, N1. Since we know this is
efficient, we see that the labor-managed enterprise, like the market capitalist
enterprise, is efficient in long-run equilibrium.
PROBLEMS OF LABOR
MANAGEMENT 17 | P a g e
 In comparing ideals, then, we may say that the labor-managed enterprise may be
somewhat less efficient in the short run, but equally efficient in the long run. But
there are practical difficulties on both sides. In the labor-managed enterprise, we
may have higher labor productivity because the employees feel they are "working
for themselves." Many economists have expressed skepticism about that, but a
mind as great as that of John Stuart Mill accepted it. In any case, it is a question to
be decided by the evidence, and the evidence is that labor-managed enterprises do
attain higher labor productivity than capitalist-owned (or government-owned)
enterprises in comparable circumstances. Thus the inefficient labor-managed
enterprise may actually produce more than the efficient capitalist enterprise!
(With more output per worker, a smaller work force might produce a larger
output). This is not shown in the diagrams, of course. On the other hand, the actual
labor-managed enterprise may do less well than the ideal one in the long run. Long
run equilibrium comes about through free entry. The ideal labor-managed economy
would have free entry, in that new enterprises may be set up to compete for the
wages above the opportunity cost that we see in Figure 4.In addition to these
practical difficulties, a labor-managed market economy would face the problems of
any market economy: What some see as the tawdry values of the marketplace,
monopoly and externality, and possibly "Keynesian" unemployment. In addition,
the unclarity of the concept of social property has been a crucial difficulty.
Yugoslavia, which had labor-managed enterprises for several decades beginning in
the 1950's, never really decided this issue. At the beginning, the government was
the owner as the agent of society. Later on, attempts were made to modify this, but
no-one ever really knew what the rules of the game were.
CAPITALISM VS SOCIALISM
Context
 Capitalism is the world’s dominant economic system. Within it, the means
18 | P a g e
of production and distribution are owned by individuals: private ownership and

free enterprise are believed to lead to more efficiency, lower prices, better
products and rising prosperity.
 Socialism advocates the ownership and control of the means of

production and industry by the community as a whole: the community is
believed to be both more just and more efficient through central planning. In
Marxist theory Socialism represents the stage following capitalism in a state
transforming to communism; for many, however, it is a goal in itself.
ARGUMENTS
Pros Cons
 The right to own property is central to  The wealth of the earth belongs to all
man’s existence. Private ownership of men or to none. Under capitalism,
property (including land, businesses property is concentrated into the hands
and goods) gives individuals security of relatively few well-off people, leaving
and a means to control their own the many with nothing and at the mercy
affairs. Ownership brings responsibility of the rich for work, charity, etc. This
and allows individuals to plan for the leads to gross inequality, exploitation
future so as to provide for themselves and misery. Nor is it economically
and their families. For example, owning efficient, as the rich have so much
a house, a business or some land already they have no incentive to use
makes it possible to borrow against their land productively. Socialism seeks
that property so that individuals can to redistribute wealth and to ensure that
invest for the future. The lack of private the means of production are at the
property rights in much of Africa makes service of the whole of society, so that
such borrowing and investment all can benefit and none will go without.
impossible, and is one reason for the
continent's lack of economic growth.
 The drive to succeed as an individual is  Many could be motivated to work by a

the strongest motivating factor a wish to aid their fellow man. Over time,
19 | P a g e
human being can feel in their work. as the benefits of this better way of life
When work is uncoupled from reward, become obvious, all will. The impulse
or when an artificial safety net provides to share wealth and material amongst
a high standard of living for those who the community, to support all, leaving
don’t work hard, society suffers. The none behind, is one of the purest
fact that individuals are driven to mankind can experience. It is not
succeed is in all our interests. merely possible – it is a demonstration
of the progress of our species to a
finer, more humane state of being.
 In capitalism, the market determines  Capitalism rewards people in perverse

price, including pay - the price of ways. Some footballers or company
labour. If some people are paid huge chief executives earn a thousand times
sums, that is because other people more than nurses. Wealth is
believe they have unique talents which concentrated in the hands of the few.
are worth paying for. If they fail to The rich get richer, the poor get poorer.
perform, then they will stop being The poor are fooled into thinking that
rewarded so highly. This is all part of a they can gain in capitalism, when really
dynamic capitalist system which values all their wages do is hold them in place
individuality and rewards ability and – their savings are swept away in the
risk-taking. first moments of unemployment, a
In any case capitalism isn't a monolithic concept central to capitalism but one
system - capitalism can have elements that socialism destroys.
of control in it. After all, taxation is a
capitalist creation and almost all
capitalists accept a role for state
regulation to prevent market rigging
and to help those in absolute poverty.
 The guiding hand of government is too  Economies in capitalist systems are

strong in a socialist system; it means essentially unplanned, so they often
that change is slow – which means that crash, producing depressions that
innovation is missed. This isn’t just pro- damage the lives of millions. Socialist
20 | P a g e
business, it has real effects on the lives economies are planned, which means
of citizens - people are poorer because that problems can be foreseen and
of it. In a capitalist system, economies prevented. Ultimately, socialism guides
are diverse enough that when with the aim of human happiness in
problems happen in one sector, others mind, rather than the glorification or
are often insulated by their differences. gratification of a particular individual or
In a socialist system, where everything class. To gain this for all rather than
is centrally controlled and diversity is just for some requires an element of
non-existent, when government gets social control – the excesses of
things wrong, everyone suffers. capitalism will forever mean that too
Ultimately, socialist systems are so many fall by the wayside as the strong
inefficient and corrupt that labour has profit, and the weak are left behind.
to be forced for the state to continue Critics who point to the failure of the
functioning (though this may also. be a soviet bloc don't understand that this
logical outcome of thinking less of the was not true socialism, which has
importance of individual freedoms never been properly tried, but a corrupt
compared to some abstract communal version of central planning which
good). served selfish elites rather than the
The failure of the USSR and other good of the people as a whole.
command economies shows the Examples such as Britain's National
poverty of socialism and the failure of Health Service, or the European social
central planning, as on a smaller scale model of welfare provision show the
does the failure of nationalised strengths of a socialist approach. In
industries in many western countries In socialist systems, society is ruled by
capitalist systems, society is ruled by the people. Who would want to live any
the individual. Who would want to live other way? In capitalist systems,
any other way? In socialist systems, society is ruled by money. Why would
society is ruled by the state. Why would one want to live like that?
one want to live like that?.
 Competition yields better products and  It is false to say that capitalism secures
more efficient processes in all fields of competition automatically. As everyone
21 | P a g e
man's activity. Whilst it is true that knows, monopolies are often formed
monopolies sometimes form, these are under capitalist systems. Capitalist
combated by regulatory methods like monopolies are pernicious - they mean
monopolies commissions (witness that individuals profit obscenely as they
attempts to break up Microsoft, or can charge exorbitant costs, since
regulators forbidding the merger of citizens cannot obtain services
some airlines on competition grounds). anywhere else. On the other hand,
So capitalism actively tries to stop socialist monopolies are benign since
monopolies. On the other hand, the state has the interests of citizens at
monopolies are inevitably a part of heart, rather than the enrichment of a
every aspect of activity in socialist particular person.
systems - the monopoly of the state.
 Socialism cannot protect human rights  Capitalism may use the language of
because it seeks the good of human rights, but it only really respects
the right of the weak to starve in the
gutter, and the right of the strong to
keep them there. Socialism
understands rights more widely and
fully, and provides for the right to work,
the right to an education, and to health
care free at the point of use. It cannot
be right for a few individuals to block
the progress of all towards these great
goals.
MIXED
ECONOMY
 A "mixed" economy is a mix between socialism and capitalism. It is a
hodgepodge of freedoms and regulations, constantly changing because of the
lack of principles involved. A mixed-economy is a sign of intellectual chaos. It is
22 | P a g e
the attempt to gain the advantages of freedom without government having to

give up its power.
 A mixed-economy is always in flux. The regulations never produce positive
results, because they always force people to act against their own interests.
When a particular policy fails, it is propped up by other regulations in the hopes
that more control will produce better results. Sometimes the results are so
destructive they must either be removed, or the people must be violently
oppressed to make them accept it.
 In practice, most economies blend some elements of both market and command
economies in answering the three fundamental economic questions:
 What and how much will be produced?
 How will it be produced?
 For whom will it be produced?
 Furthermore, within any economy, the degree of the mix will vary.The economy
of the United States is generally considered to be a free market or capitalist
economic system.
 All of these detract from the essential nature of a capitalist economy. However,
most decisions continue to be left to free markets, leaving the United States as a
mixed economy that leans heavily toward the capitalist economic system.
 In contrast, the economy of the former Soviet Union is generally considered to be
communist. However, the strict controls of the central planning unit of the country
tended to be more intensely focused on heavy industry, including the defense
and aerospace industries, than on agricultural industries. Farmers often had
significant freedom to produce and sell (or barter) what they wished.
THE HISTORY MIXED

ECONOMY
ORIGINS
23 | P a g e
 The term "mixed economy" arose in the context of political debate in the united
kingdom in the postwar period, although the set of policies later associated with
the term had been advocated from at least the 1930s.Supporters of the mixed
economy, including R.H. Tawney , Anthony Crosland and Andrew Shonfield
were mostly associated with the British Labour Party, although similar views
were expressed by Conservatives including Harold Macmillan
 Critics of the British mixed economy, including Ludwig von Mises and Friedrich
von Hayek, argued that what is called a mixed economy is a move toward
socialism and increasing the influence of the state
PHILOSOPY
 The term mixed economy was coined to describe economic systems which stray
from the ideals of either the free market, or various planned economies, and
"mix" with elements of each other. As most political-economic ideologies are
defined in an idealized sense, what is described rarely if ever exists in practice.
 Most would not consider it unreasonable to label an economy that, while not
being a perfect representation, very closely resembles an ideal by applying the
rubric that denominates that ideal. However, when a system in question diverges
to a significant extent from an idealized economic model or ideology, the task
of identifying it can become problematic.
 Hence, the term "mixed economy" was coined. As it is unlikely that an economy
will contain a perfectly even mix, mixed economies are usually noted as being
skewed towards either private ownership or public ownership, toward
capitalism or socialism, or toward a market economy or command economy
in varying degrees.
Which economies are mixed?
24 | P a g e
 There is not a consensus on which economies are capitalist, socialist, or mixed.

It may be argued that the historical tendency of power holders in all times and
places to limit the activities of market actors combined with the natural
impossibility of monitoring and constraining all market actors has resulted in the
fact that, as we understand a "mixed economy" being a combination of
governmental enterprise and free-enterprise, nearly every economy to develop in
human history meets this definition.
ELEMENTS OF MIXED
ECONOMY
The elements of a mixed economy typically include a variety of freedoms:
• to possess means of production (farms, factories, stores, etc.)

• to participate in managerial decisions (cooperative and participatory
economics)
• to travel (needed to transport all the items in commerce, to make deals in
person, for workers and owners to go to where needed)
• to buy (items for personal use, for resale; buy whole enterprises to make the
organization that creates wealth a form of wealth itself)
• to sell (same as buy)
• to hire (to create organizations that create wealth)
• to fire (to maintain organizations that create wealth)
• to organize (private enterprise for profit, labor unions, workers' and professional
associations, non-profit groups, religions, etc.)
• to communicate (free speech, newspapers, books, advertisements, make deals,
create business partners, create markets)
• to protest peacefully (marches, petitions, sue the government, make laws
friendly to profit making and workers alike, remove pointless inefficiencies to
maximize wealth creation)
25 | P a g e
with tax-funded, subsidized, or state-owned factors of production, infrastructure,

and services:
• libraries and other information services

• roads and other transportation services
• schools and other education services
• hospitals and other health services
• banks and other financial services
• telephone, mail and other communication services
• electricity and other energy services (eg oil, gas)
• water systems for drinking, agriculture, and waste disposal
• subsidies to agriculture and other businesses
• government-granted monopolies to otherwise private businesses
• legal assistance
and providing some autonomy over personal finances but including involuntary
spending and investments such as transfer payments and other cash benefits
such as:
• welfare for the poor

• social security for the aged and infirm
• government subsidies to business
• mandatory insurance (example: automobile)
and restricted by various laws, regulations:
• environmental regulation (example: toxins in land, water, air)

• labor regulation including minimum wage laws
• consumer regulation (example: product safety)
• antitrust laws
• intellectual property laws
• incorporation laws
• protectionism
26 | P a g e
• import and export controls, such as tariffs and quotas
and taxes and fees written or enforced with manipulation of the economy in mind.
Relation to form of government

 The mixed economy is most commonly associated with social democratic forms of
government. However, given the broad range of economic systems that can be
described by the term, most forms of government are consistent with some form of
mixed economy.
CHARACTERISTICS OF MIXED ECONOMY
 Co-existence of the public and private sectors

Both public and private sectors work together to ensure growth of the country.
 Government helps to reduce income inequalitiy

In mixed economy,the government will try to reduce the income inequality
through taxes, welfare payments or direct controls over wages, profits , rents
etc.in this way,the gap between the rich and the poor will be narrowed
 Role of price system,government directives

Economic decisions pertaining to public sector are made by the government or
authorities appointed by the government.The role of the government is not to
compete with but to complement the private sector byproviding the
infrasturucture so that economic activities can br carried out effectively and
efficiently.
Control of monopoly
The government tries to regulate monopolies in order to remove some economic

evils like misallocation of the resources,excessive profits etc.
27 | P a g e
MERITS AND DEMERITS OF MIXED SYSTEM
MERITS DEMERITS
Problems of corruption,
Provision of the public good cronosim may creep in
economic activities
Economic stability and growth
Social benefits vs. Private benefit
Consumer sovereignty protected
Though there aresome restrictions imposed by the government, the

consumer still has the right choose the goods they prefer
The cooperation between private and public sector will ensure economic
stability and growth in the economy
Economic decisions arebeing made to fulfill the social benefits rather than
the private benefits
28 | P a g e
Public goods is defined as goods and services provided by the government

for communal use. Nobody is probihited for using these goods,regardless of
whether he is taxpayer or not , therefore, in mixed economy government will
provide these good which could be under produced or not produced at all
under capitalism
SUMMARY
In the mixed system, the basic problems are answered by both parties,
Market systems have been predominant in most of the world, but the ideal of a
government and public sectors
market system has become politically dominant only late in the century. The timing is
wrong. The centrally planned countries had economic problems from the start, in fields
such as agriculture, and their performance deteriorated steadily in some other areas;
but despite this they were able to keep up economic growth at a more rapid rate than
the capitalist and less developed nations until the collapse of their political systems. It
was this political collapse that caused their transformation, and it came about because
the ruling groups themselves lost confidence in the political system they led. But a more
detailed look at the performance of these countries is not encouraging. They did fail in
many ways, long before their political collapse. But from the point of view of the values
that led socialists to support economic planning, the failures of the Soviet-type
economies were damning. They did not support human services and substitute human
values for the tawdry values of the marketplace. They did not build socialism nor
communism. They simply made themselves the new exploiting class, and, finally, the
new capitalist class. And even that they have done badly, so far. The other practitioners
of economic planning, the fascists and "socialist" emerging nations, did even worse
from the neoclassical point of view. So, while we must admit that some future society
may make an all-around success of economic planning, since it is hard to judge what
may happen hundreds and thousands of years in the future, there is good reason to
doubt that people now living will see successful economic planning.The other ideal
systems, market socialism and labor management, have been given less complete
trials. By the same token, they remain somewhat abstract and incomplete in their
conception. If we are to see successful systems of market socialism or labor
management or some combination of both in the future, there are still details to be
29 | P a g e
worked out. How can enterprises be government-owned and the government not "bail
them out" with subsidies if they fail? And if labor-managed enterprises are not to be
government-owned, who shall own them? What can "social property" mean? For those
who want to see a class-less society, those will be difficult problems to solve, requiring a
good deal of thought, trial and error. For those who see no need for a class-less society,
REFERENCES
they will seem to be fatal flaws in socialist thinking. Time will tell the answer, and
perhaps some of us will live to see i
• NA (2007). "economic systems," The New Encyclopædia Britannica, v. 4, p. 357.
• NA (2007). "economic systems," The New Encyclopædia Britannica, v. 4, pp. 357-58.

• David W. Conklin (1991), Comparative Economic Systems, Cambridge University Press,
• Samuelson, Paul A. (1947, 1983). Foundations of Economic Analysis, Enlarged Edition.
• Blaug, Mark (2007). "The Social Sciences: Economics" ( Methods of inference and Testing
theories), The New Encyclopædia Britannica, v. 27, p. 347.
• McCullough, B.D. (2007). "Got Replicability". The Journal of Money, Banking and Credit
Archive. Econ Journal Watch 4 (3): 326-337. Retrieved on 2008-06-07.
• Kennedy, Peter (2003). A Guide to Econometrics, 5th ed., "21.2 The Ten Commandments
of Applied Econometrics," pp. 390-96 (excerpts).
• McCloskey, Deirdre N. and Stephen T. Ziliak (1996). "The Standard Error of Regressions,"
Journal of Economic Literature, 34(1), pp. 97-114.
• Coelho, P.R.P.; De Worken-eley Iii, F.; McClure, J.E. (2005). "Decline in Critical
Commentary, 1963-2004". Econ Journal Watch 2 (2): 355-361. Retrieved on 2008-06-10.
• Whaples, R. (2006). "The Costs of Critical Commentary in Economics Journals". Econ
Journal Watch 3 (2): 275-282. Retrieved on 2008-06-10.
• Smith, Vernon L. (1987), "experimental methods in economics," ii. The New Palgrave: A
Dictionary of Economics, v. 2, pp. 241-42.
• Fehr, Ernst, and Urs Fischbacher (2003). "The Nature of Human Altruism," Nature 425,
• Sigmund, Karl, Ernst Fehr, and Martin A. Nowak (2002),"The Economics of Fair Play,"
Scientific American, 286(1) January, pp. 82-87.
• ^ Lazear, Edward P. (2000). "Economic Imperialism". American Economic Review 115 (1):
Further reading
30 | P a g e
• Richard Bonney (1995), Economic Systems and State Finance, 680 pp.
• David W. Conklin (1991), Comparative Economic Systems, Cambridge University Press,
427
• George Sylvester Counts (1970), Bolshevism, Fascism, and Capitalism: An Account of the
Three Economic Systems.
• Robert L. Heilbroner and Peter J. Boettke (2007). "Economic Systems". The New
Encyclopædia Britannica, v. 17, pp. 908–15.
• Harold Glenn Moulton, Financial Organization and the Economic System, 515 pp.
• Jacques Jacobus Polak (2003), An International Economic System, 179 pp.
• Frederic L. Pryor (1996), Economic Evolution and Structure: 384 pp.
31 | P a g e

Capitalism Is An Economic and Social System in Which Trad1

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Capitalism Is An Economic and Social System in Which Trad1

Enviado por

Direitos autorais:

Formatos disponíveis

AHMAD MUSTANIR BIN HADADAK

THE HISTORY OF CAPITALISM

Socialism refers to any one of various theories of economic organization advocating

The utopian socialists, including Robert Owen, tried to found self-sustaining

Socialists inspired by the Soviet model of economic development have

 Social democrats propose selective nationalization of key national industries in

Papist Roman Catholic communion rite, hence English atheists denoted

SOCIALISM AND PLANNING

PROBLEMS OF MARKET SOCIALISM

⊗ A system of independently managed government-owned enterprises maximizing

criticisms of market socialism in Hungary suggest a more general obstacle to market

the control of enterprises and the control of government is especially difficult to

 We can visualize the difference between an ideal labor-managed enterprise and an

of production and distribution are owned by individuals: private ownership and

 Socialism advocates the ownership and control of the means of

 The drive to succeed as an individual is  Many could be motivated to work by a

 In capitalism, the market determines  Capitalism rewards people in perverse

 The guiding hand of government is too  Economies in capitalist systems are

the attempt to gain the advantages of freedom without government having to

THE HISTORY MIXED

Which economies are mixed?

 There is not a consensus on which economies are capitalist, socialist, or mixed.

• to possess means of production (farms, factories, stores, etc.)

with tax-funded, subsidized, or state-owned factors of production, infrastructure,

• libraries and other information services

• welfare for the poor

and restricted by various laws, regulations:

• environmental regulation (example: toxins in land, water, air)

• import and export controls, such as tariffs and quotas

Relation to form of government

CHARACTERISTICS OF MIXED ECONOMY

 Co-existence of the public and private sectors

 Government helps to reduce income inequalitiy

 Role of price system,government directives

The government tries to regulate monopolies in order to remove some economic

MERITS AND DEMERITS OF MIXED SYSTEM

Though there aresome restrictions imposed by the government, the

Public goods is defined as goods and services provided by the government

• NA (2007). "economic systems," The New Encyclopædia Britannica, v. 4, p. 357.

• NA (2007). "economic systems," The New Encyclopædia Britannica, v. 4, pp. 357-58.

Você também pode gostar