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Capitalism

The key question before societies is ‘’how to divide its resources among its citizens’’. This question has led to many concepts fundamental to modern society like welfare state, communism, socialism, capitalism etc. Today’s prominent global model is ‘’Capitalism’’ with the West is the icon and China and India are its eager followers.

Definition

Capitalism is a socio-economic system where private persons own and control capital assets, labor is purchased for money wages, capital gains and profit goes to private investors and price mechanism is used to allocate capital goods between users.

Critics of Capitalism

The German philosopher Karl Marx (1818-1883) founded the basis of ‘’communism’’ as an alternative to ‘’capitalism’’. Marxist book – ‘’Das Kapital’’ stressed upon three aspects:

Capitalism leads to social inequality.
It creates market monopolies.
It forms the basis of Imperialism

Thomas Piketty - Capitalist in 21st Century

In Western countries like US, UK, France the debate on rising inequality has assumed to be center stage. The fear is that very small segment of society – Plutocrats will own everything and everyone else will force to work for them or rent for them.

Piketty predicts that forces of capital accumulation will makes society less equal, less mobile and less democratic. He says that rich never have been the rich have today and he reaffirms the debate 1% v/s 99%. Using public data like tax records, inheritance records etc., he has analysed inequality. His key concept is R > G (Rate of return on capital > Growth rate of economy) or Income from investment will be greater than growth rate of salaries. Hence capital tends to grow faster than the economy and left unchecked the ratio of wealth to income will keep rising.

Many jobs have been automated by robots and search engines. The rise of India and China has added another 2 billion people to global workforce who are low wage workers.

Critics of Thomas Piketty

Even if R>G capital may not accumulate indefinitely. Capitalist can spend it, give it away or divide among heirs. Thus if cheap labor force willing to work on your new machinery found then return on investment will be good or else low. Hence robots!!

The Great Thinkers

Adam Smith (Scottish 1723-1790)

He opposed the Mercantilism thought and propounded the’’ Classical School of Economics’’.

His key books – Wealth of Nation (1776), Theory of Moral Sentiment (1759).

He is father of Modern Economics and Capitalism. He gives two theories as:

Comparative Advantage Theory : It is profitable for two nations to trade even if one of them is more efficient. This concept is the basis of all trade today. For example David Riccardo made law by this and formed WTO.

Invisible Hand Theory : The individual pursuit of profit and self-interest unintentionally produces collective goods for society.

John Maynard Keynes (British 1883-1946)

When things go bad like a world war or recession then capitalism takes a long time to recover. For example Great Depression (1930). Hence people stops spending, consumption decreases so production and jobs also decreases. Thus govt. needs to step in with a big ‘’Fiscal Stimulus and Pump-Priming’’ is required.

Keynesian economics- Promote demand, fight unemployment and fight deflation.

Milton Friedman (USA 1912-2006)

He is father of ‘’Neoclassical economics’’. He says that social responsibility of business is to use its resources and engage its actions that produced profits. He support the ‘’Privatisation’’. His key followers- President Donald Regan of USA and Prime Minister Margret Thatcher (UK).