TOPIC 2

THE UNSUCCESSFUL
SYSTEMS
The weaknesses of capitalism, socialism and
the crisis of welfare nation.

Part 1
CAPITALIST ECONOMIC SYSTEM

Capitalist economic system

Five main features;
1. A major factor is human life satisfaction
through quick wealth and maximum
production.
2. Individuals are free to pursue self-interest
for the sake of money, through individual
ownership where they are free to own and
manage private properties
3. Individual initiatives, in addition to the
decentralization process result in a free

4. Not recognizing the important role of

government in optimization, efficiency and
equal distribution of resources and wealth
5. Serving for yourself first, when practiced by
everyone would automatically generate the
interest of society as a whole

The logical foundations of the

capitalist system
Market
Assuming that public interest and private interest
will move in tandem if market forces were allowed
to operate freely
Consumer
An individual working as a rational user
Where he will maximize his utility by purchase
goods with the lowest price
A variety of individuals choices will be identified
through demand or willingness to pay market prices
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Producers
Individuals as producers, will respond
rationally when they produce at the lowest
price, which will maximize their profit
The will show the supply made in the
economy

Supply = demand
The interaction of supply and demand in this market
will determine the wholesale price on the market
It is said to be a fair price for the production of goods
and services in accordance with user preferences in
general
The prices will also automatically switch the use of
resources from a less demanded goods to goods with
high demand. (Example?)
This will ultimately result in the most efficient
distribution or use of resources, without any
government intervention.
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 It can be seen that the system is able to;

1. Determining the best use of resources
"efficiently"
2. Generate income distribution is the most
"fair" and
without consideration of value
judgement

Concepts that can not be

uphold
1. Economic laws
2. Rational economic man
3. Positivism
4. Says Law
5. Social Darwinism

1. Economic laws
It is believed that the knowledge in the social
sciences is the same as knowledge in
physical sciences
Thus human behavior can be predicted and
controlled just like the physical world
Adam Smith borrowed a review of
Newtonian physics, that the social and
economic life, is a life that is beautiful,
systematic and harmonized, which will be
dominated by "the invisible hand"
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2. Rational economic man

Economic man is the most important component
in the modern economy
Its main property is selfishness
This property is considered to be rational and be
the basis for every modern economic model
When the individual selfish, maximum gain will
be obtained, which in the end will benefit the
community
When viewed from an angle other than financial
gain, other motivation in life that can not be
assigned a value (such as social responsibility or
humanitarian) will not be included in the study
of the capitalist economy
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3. Positivism
Or also known as positive economic
It is defined as "free from any considerations
of ethics and " values "
What is introduced is the concept of "Pareto
optimal" (definition?)
The concept of Pareto optimality has been
used misused to oppose reform
Policy making has failed because it did not
involve value judgments.

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4. Says Law
Saying that the economy will run smoothly if
it is left alone
Production will create its own demand and
there will be no overproduction or
unemployment
Any imbalance will be corrected
automatically
The government can not do anything and
has no right to intervene
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5. Social Darwinism
It teaches that unlimited competition
between individuals in a free market would
be the best guarantee for public welfare
it will
1. control selfish desires within the acceptable
limits
2. Minimize costs and prices
.The result is maximum efficiency and
happiness would be achieved
.People's interest can be fully protected

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Capitalist system malfunction

(failure)
Even though capitalist society has reached a
high level of luxury and comfort that has
never been seen before, the goal of
eliminating poverty or meeting the needs of
every individual still can not be reached
The problem of inequality of income and
wealth is increasing.

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The unrealistic assumptions

1. Individual preferences imply social
priorities
2. Equitable distribution
3. Price reflects the immediate want
4. perfect competition

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1. Individual preferences imply social priorities

This assumption is proved to be false, based on at
least 3 of the following reasons;
(i) Without moral values and religious beliefs, people
who have the money do not control his will. It is
rational to continue to buy to maximize their
satisfaction. The result?
(ii) It is difficult to distinguish between needs and
wants. Without consideration or control by the
government, the rich will not know what effect
their actions to fulfill their satisfaction would be to
the poor people. Examples?
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(iii) Producers who simply wishes to

maximize their profits will do everything to
attract consumers to buy the products. This
includes advertising through mass media.
in the end the purchase is triggered not
by necessity but by status symbols, and
distorted the use of resources. (Example?)

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2. Equitable distribution
In the capitalist system, it will not be possible to have an
equitable distribution, because of the nature of inheritance
and the right to private property holdings.
The ability of individuals to dominate the resources is
always influenced by their family background (examples?)
For rich families, price mechanism will not affect their
demand
This encourages the production of goods that are not
needed by the community
And poor families are often blamed for not working hard
enough or efficient enough to achieve a higher level of
income, thus resulting in unequal distribution of income and
wealth
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3. Price reflects the

immediate want
The system considers prices in the market can be
said to represent the willingness of individuals to
pay for an item
But is this price reflects the same willingness of a
wealthy family and a poor family?
For example, baby milk prices.
For rich families, whatever the price of the milk is
(which are usually expensive and having highstatus) should be no problem,
but for the poor, even the lowest priced milk is still
a burden
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4. Perfect competition
What are the features of the perfect
competition market?
Does this situation really exist?
Imperfect market conditions have led to a
higher market price than the opportunity
cost and the use of resources

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The end of the capitalism

superiority
Two events that led people to lose
confidence in the capitalist economic system
are;
1. Great Depression (1930s)
2. The emergence of socialist ideology

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The Great Depression

The great recession has proved that the
economy can not be expected to improve the
situation of excess or shortage automatically
Keynes proposed a new theory to replace the
classical economic theory
This new theory gives an important role to
the government, this is the beginning of a
welfare state system

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The emergence of socialist

ideology
Through the capitalist economy, poverty has
increased
individuals who cannot control their
resources well will fall into poverty
Humans naturally like kindness and unable
to accept hardship and suffering caused by
poverty
Socialist system attempts to provide an
alternative to the capitalist system.
Next we will discuss the socialist system

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