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THE NATURE OF CAPITALISM. Def: an economic system that operates on the basis of profit and market exchange and in which the major means of production and distribution are in private hands. Or: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

Capitalism: an economic system in which there is private ownership of the major portion of production and distribution. Socialism: an economic system in which there is public ownership of property and a planned economy. The industry of the Soviet Union was usually divided into two major categories. Group A was "heavy industry," which included all goods that serve as an input required for the production of some other, final good. Group B was "Soviet consumer goods" (final goods used for consumption), including food, clothing and shoes, housing, and such heavy-industry products as appliances and fuels that are used by individual consumers. From the early days of the Stalin era, Group A received top priority in economic planning and allocation. The nation was among the world's three top manufacturers of a large number of basic and heavy industrial products, but it tended to lag behind in the output of light industrial production and consumer durables. One result of this was that consumer demand was only partially satisfied. Wages were good, but there was nothing to buy, so there was no incentive for workers to work hard. Also the problem of Shturmovshchina (last-minute rush, storming) with planned economies in general and the USSR in particular: Products produced at the end of the month were often woefully inadequate, and savvy Soviet consumers would look carefully at the date of production to make sure they bought something made earlier in the month, when there was enough time to focus on a making a reliable product that actually worked, rather than fulfilling the quota. Also: Soviet planners tried to find the best way to frame production targets to avoid workers doing the least amount of work possible, but didn’t succeed: If they specified the number of goods produced, e.g. hay bales for the state farms, farmers would produce tiny hay bales in order to meet this numerical quota. If planners switched to specify tonnage or weight of a particular item, e.g. tons of hay produced, workers would switch the machinery on the combined harvesters to produce a few, massive bales, that were impossibly unwieldy to use and difficult to transport or sell.

Worker control socialism: individual firms run as they typically do in a capitalist society, except that the workforce decides how to proceed and get the profits; also the capital assets of each enterprise are owned by society as a whole and not by private individuals. All of the profits, none of the dangers, of free enterprise! Similar to worker cooperatives, except that in these capitalist enterprises, workers own the capital assets as well as run the company. Mixed Economy: economic system in which both features of capitalism and socialism exist: U.S economy is closer to the capitalism system, China is closer to the ideal socialist system, Canada is between capitalism and socialism.

HISTORICAL BACKGROUND OF CAPITALISM. The origins of capitalism: 13th - 16th century. The underlying theme of capitalism is the use of wealth to create more wealth. The simplest form of this is lending money at interest, reviled in the Middle Ages as the sin of usury. This was deliberately pushed off onto those of the Jewish faith, because it was not against the tenets of Judaism, unlike Christianity. At a more sophisticated level capitalism involves investing money in a project in return for a share of the profit. In the case of a single owner of an industrial enterprise (such as a factory), the system reveals a characteristic distinction. All the profits go to one man, though many others share the work. Full-scale capitalism results in an inevitable divide between employer and employed, or capital and labour.

In the Middle Ages the attitude of the church to usury means that capitalism had little chance of developing. Even so, this is the period in which its roots lie. With the rapid development of European trade and prosperity in the 13th century, cities in Italy and the Netherlands witness a creation of wealth which is capitalist in kind – because any merchant is in essence a capitalist, risking his pot of money each time he buys in one place to sell in another. Florence in the 14th century demonstrates more familiar indications of capitalism. It has its great banking families, engaging in transactions across the breadth of Europe. It even has a successful strike, by underpaid day workers in the cloth industry who want a share in the benefits enjoyed by their employers.

In the following century, in 15th century France, the story of Jacques Coeur provides an astonishing individual example of the rapid creation of wealth through skilful investment in foreign merchandise. Became too rich and powerful: accused of poisoning the king’s mistress – by aristocrats who owed him money – and had all of his assets forfeited. At his trial, the judges were either debtors or were supervising his forfeited estates. Sentenced to imprisonment, the loss of all of his property, and a fine of $1 million in today’s money, payable to the king.

Such cases contain elements of later capitalism, but their limited scale makes them in a certain way different. There have always been markets, and no doubt in every civilization canny individuals have been able to use the markets to amass a quick fortune. The essential characteristics of capitalism only become evident with an increase in scale - in two quite separate contexts. One is the formation of joint-stock companies, in which investors pool their resources for a major commercial undertaking. The other, not evident until the Industrial Revolution, is the development of factories in which large numbers of workers are employed in a single private enterprise.

Chartered companies and joint stock: 16th-17th c. Speculative trading enterprises in the Middle Ages were undertaken by individual merchants, operating in family groups or partnerships but acting essentially on their own behalf. Some, such as the Polo family (Marco Polo, who went to China to trade), were entirely independent. Others bound themselves voluntarily into trading guilds, such as the Hanseatic League, accepting certain regulations on their trade, and fees, in return for the support of a powerful organization: A Hanse is a guild of merchants. It suits these German merchant to form mutual alliances to further the flow of trade: Safe passage for everyone's goods is essential. The control of pirates becomes a prime reason for cooperation, together with other measures (such as lighthouses and trained pilots) to improve the safety of shipping.

In the 16th century, with the expanding energies of the Atlantic kingdoms in a new era of ocean voyages, the situation changes. In long expeditions to distant and dangerous places, both the risk and the potential profit are greatly increased. A new system is called for: Merchantile Capitalism. Merchants risking their fortunes in these unpredictable adventures need a special level of support. Equally it suits governments to encourage their endeavours, for the sake of increasing trade but also to extend the nation's reach through settlements and colonies overseas. There is mutual dependence between state and commercial interests. A sensible or prudent nation should strive to be economically self-sufficient while using sea power, if it can, to control foreign markets and establish colonies for the benefit of the mother country. The result is the chartered company. A charter, granted by the crown, gives the merchants in a company the monopoly on trade with a specific region for a given number of years – together with strong legal powers to enforce order in distant places while carrying out its business. Such undertakings tie up large sums for money for long periods before any profit can be realized, in the capital cost of ships and the expense of their crews on journeys lasting months and sometimes years. A large number of speculators need to be persuaded to share the risk. The resulting organization is the joint-stock company, in which investors can contribute variable sums of money to fund the venture. In doing so they become joint holders of the trading stock of the company, with a right to share in any profits in proportion to the size of their holding. The best known are the East India Company (1600), the Hudson's Bay Company (1670) and the South Sea Company (1711).

The joint-stock principle can equally well be applied to unincorporated companies (trading without a royal charter), many of which were set up in the 17th century. Investors can buy into a company even if they have no personal link with its trading activities. By the same token an investor's share in the company's stock can be sold at whatever price buyer and seller may agree upon. With this concept, one of the basic elements of capitalism evolves. A natural next step is the emergence of specialist brokers, willing to arrange deals between buyers and sellers of shares in return for a cut on each transaction. In London the brokers gather at first in Jonathan's coffee house:

Calvinism and capitalism: 17th century. The development of capitalism in northern Protestant countries, such as the Netherlands and England, has prompted the theory that the Reformation is a cause of capitalism. Protestant Reformation: was a schism from the Roman Catholic Church initiated by Martin Luther and continued by John Calvin, Huldrych Zwingli, and other early Protestant Reformers in 16th century Europe. But this states the case rather too strongly, particularly since the beginnings of capitalism can be seen far earlier. The most immediate way in which the Reformation aids the capitalist is by removing the stigma which the Catholic Church has traditionally attached to money-lending - or usury, in the pejorative Biblical term. Calvinism positively encourages the purposeful investment of money, by presenting luxury and self-indulgence as vices and thrift as a virtue. It even subtly contrives to suggest that wealth may itself be a sign of virtue. This useful sleight of hand is contrived with the help of the Calvinist doctrine of predestination. If certain virtuous people are predestined to be saved in the next world, then perhaps success in this one is an advance indication of God's favour.

Speculation: from the 17th century. Speculation is an intrinsic part of capitalism, since the capitalist must risk money in the hope of making more. When the risk is undertaken as a direct part of a productive enterprise, such as buying a machine to make something with, or a ship with which to trade overseas, it is easily recognizable as a straightforward business activity. But once a system of stockbroking is in place, enabling people to buy and sell a share in an enterprise or commodity with which they have no direct connection, the procedure becomes much closer to gambling – with all its attendant excitements and dangers.

History's first example of a speculative run on the market is the famous Dutch tulip mania of 1633-7. Tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. In the early 17th century a single bulb of a new species is recorded as constituting a bride's entire dowry. In 1633 the tulip market in Holland went into a speculative spasm. In a craze lasting four years, precious objects were pawned and houses and estates were mortgaged to buy rare tulip bulbs – not to grow them or enjoy the flowers, but to sell them on unseen at a higher price. Fortunes were made until the market crashed, in the spring of 1637, whereupon equivalent fortunes were lost. Tulip mania is like a satirical parody of a stock-market boom and bust. The term "tulip mania" is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.

Mercantile Capitalism continued: South Sea Bubble – 1720. The price of the shares begins to rise, in a self-perpetuating frenzy of excitement which takes no account of any underlying value. By August the price is eight times higher than in January, but the slump once it begins is even more rapid. In December the shares are back to their January level, representing a fall of nearly 90% in a few months . Meanwhile the investment frenzy made possible the launch of a great many other speculative schemes, the majority of which (unlike the South Sea Company itself) were fraudulent. In these cases fortunes passed directly from the gullible to the criminal. The bad taste left by these experiences led to the rapid passing of the Bubble Act before the end of the year. For a little over a century, until repealed in 1825, it restricted the forming of joint-stock companies, harming the honest entrepreneur as much as deterring the confidence trickster. In practice legal loopholes were found. The Bubble Act was repealed in England in 1825 because it was a time of economic boom and there was increasing public pressure to invest. But the act was repealed without any alternative regulation to replace it. The public was exposed anew to the dangers inherent in fraudulent schemes, particularly with the Industrial Revolution gathering pace and requiring ever more capital. Not until the Joint-Stock Companies Act of 1844 were effective regulations introduced.

Industrial capitalism & The Wealth of Nations: 1776. During the second half of the 18th century visible changes were occurring in Britain as a result of the developing Industrial Revolution. Where previously land had been the traditional source of wealth, and the purchase of land the natural investment for anyone with a spare fortune, money was now being put into manufacturing enterprises. The wealth of the nation is being diverted into new and productive channels, in a process which will lead eventually to the emergence of a society organized on capitalist principles. In the five books of his Inquiry into the Nature and Causes of the Wealth of Nations (1776) Smith ranges over many of the basic concerns of political economy: The first book points to labour rather than land as the source of a nation's productive wealth, and pinpoints two other elements which affect prices in a developed society – rent and profit. The second book analyzes the role of capital in enabling labour to be productive. The remaining three books discuss broader issues of the proper role of government in an economy. Smith comes down strongly against the prevailing theory of mercantilism, which takes for granted that there is an economic advantage in protecting one's own trade by restrictive measures against other nations' goods or merchant ships. Smith argues instead that economic benefit derives from the natural competition of the market place, where people should be free to follow their own best interests without government interference. He believes that public good will follow naturally from the untrammelled pursuit of private interest. Smith recognizes the necessary role of government in many fields – defence, justice, and the infrastructure of canals and roads. His arguments against interference relate to the economic sphere, where the government should merely prevent monopolies (which distort the market). His treatise profoundly influences the laissez faire economic policies of the 19th-century and its revival in the Thatcher-Reagan era. Laissez-faire is a term used to describe a policy of allowing events to take their own course with minimal intervention. The term is a French phrase meaning Let do ('allow to do'). Generally it means an aversion to any infringement of the right to buy and sell ( today also called 'market fundamentalism' ). The 18th and 19th centuries – the heyday of industrial capitalism - were the period of the Robber Barons or Captains of Industry: Vanderbilt, Carnegie, Rockefeller, etc. Industrialists replaced merchants as the dominant power in a capitalist economy.

Financial Capitalism: As industrialization increased, so did the size and power of business. The private fortunes of a few individuals could no longer underwrite the accelerated growth of business activity. The large sums of capital necessary could be raised only through a corporate form of business, in which risk and potential profit were distributed among numerous investors. The success of a business enterprise came to depend on its having the financial wherewithal to reduce prices while expanding production and either eliminating or absorbing competition. As various industries strove to strengthen their financing and shore up their assets, what is called financial capitalism emerged, characterized by investment pools, trusts, holding companies, and the interpenetration of banking, insurance, and industrial interests. The trend continued towards larger and larger corporations, controlling more and more of the country’s economic capacity.

Patterns of Boom and bust: The pattern of boom and bust in the 19th and 20th-century is a dramatic example of what has since come to seem an endemic aspect of capitalism. This pattern is different from speculative mania of a purely financial kind (as in the South Sea Bubble, where investors were the only losers). An almost invariable ingredient in each cycle is too much credit extended by banks. A boom and bust cycle is a process of economic expansion and contraction that occurs repeatedly. The boom and bust cycle is a key characteristic of today’s capitalist economies. During the boom the economy grows, jobs are plentiful and the market brings high returns to investors. In the subsequent bust the economy shrinks, people lose their jobs and investors lose money. Boom-bust cycles last for varying lengths of time; they also vary in severity. Since the mid-1940s, the United States has experienced 12 boom-bust cycles. During a boom, the central bank makes it easier to obtain credit by lending money at low interest rates. Individuals and businesses can then borrow money easily and cheaply and invest it in, say, technology stocks or houses. Many people earn high returns on their investments, and the economy grows. A boom refers to a period of increased commercial activity within either a business, market, industry or economy as a whole. For an individual company, a boom means rapid and significant sales growth, while a boom for a country is marked by significant GDP growth. In the stock market, booms are associated with bull markets, whereas busts are associated with bear markets. The problem is that when credit is too easy to obtain and interest rates are too low, people will overinvest. There won’t be enough demand for, say, all the homes that have been built, and the bust cycle will set in. Things that have been overinvested in will decline in value. Investors lose money, consumers cut spending and companies cut jobs. Credit becomes more difficult to obtain as boom-time borrowers become unable to make their loan payments. The bust periods are referred to as recessions; if the recession is particularly severe, it is called a depression.

State Welfare Capitalism: The economic and political challenges of the Great Depression of the 1930’s helped usher in another phase of capitalism, in which government plays an active role in the economy, attempting to smooth out the boom and bust pattern of the business cycle through its fiscal and monetary policies. In addition, government programmes like Social Security and unemployment insurance try to enhance the welfare of the workforce, and legislation legitimizes the existence of trade unions. Conservative politicians sometimes advocate less government control of business, but in reality the governments of all capitalist countries are deeply involved in the management of their economies.

Boom & Bust cycles, the New Deal, and the financial crisis of 2008. The roaring 1920's: Deregulation in the 1920's allowed for heavy concentration of large corporations. About 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry. Even child labour regulations and minimum wage regulations for women were abolished. There was a massive stock market boom in the US from about 1924, when the stock market begins its spectacular rise: Bears little relation to the rest of the economy. 600 banks failed in this decade. More than half of all Americans were living below the minimum subsistence rates. Between May 1928 and September 1929, the average prices of stocks rose 40 percent. The boom is largely artificial, however. A recession began in August 1929, two months before the stock market crash. During this two month period, production declined at an annual rate of 20 percent. This decline resulted in the stock market crash which began October 24, followed by Black Tuesday on October 29. Losses for the month amounted to $16 billion, an astronomical sum in those days. The Depression of the 1930's. 1932 and 1933 were the worst years of the Great Depression. Industrial stocks lost 80 percent of their value since 1930. 10,000 banks failed , or 40 percent of the 1929 total. GNP fell 31 percent since 1929 and over 13 million Americans lost their jobs between 1929 and 1932. In 1933 unemployment did rise to 24.9 percent.

Remedies: Keynesian Economics: The most famous remedy to overcome such economic paralysis was proposed by the English economist J. M. Keynes. Keynes maintained that government must not be run like a business, because the rational thing for business to do in the midst of an economic downturn is to cut costs, but this is the worst thing to do from the point of view of the national economy as whole as it further reduces spending, resulting in a further spiral into decline. Instead Keynes proposed increased government spending for such things as relief payments and public works projects during a depression to get the economy rolling again. After a depression ends and prosperity returns deficit spending should then be reversed. Keynesian economists felt that in order to avoid serious depressions we must avoid extremes in the economic system during prosperity periods. This means that the quantity of money available – i.e. credit - should not be permitted to increase in a runaway fashion during prosperity.

The New Deal 1933 – 1945. The Roosevelt administration acted on this idea in an attempt to lift the United States out of the Great Depression of the 1930's. Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt's average growth of 5.2 percent during the Great Depression is even higher than Reagan's 3.7 percent growth during his so-called 'Seven Fat Years!') When 1936 saw a phenomenal record of 14 percent growth, Roosevelt rejected Keynes' advice for heavy deficit spending, instead he eased back on the deficit spending, worried about balancing the budget. But this only caused the economy to slip back into a recession in 1938. ( Note: In 1934 Sweden followed a policy of Keynesian deficit spending and became the first nation to recover fully from the Great Depression ). The United States began emerging from the Depression as it borrows and spends 1 billion dollars to build its armed forces. Despite resistance from the business community, most of the New Deal reforms became a permanent part of the U.S.A. The social safety net of the New Deal has since cushioned the severity of the cyclical business downturns and prevented a repetition of a full-scale depression. In order to pay for the New Deal programs Roosevelt raised the top tax rate, and to finance the war economy the top tax rate was raised even more. It remained at 88 percent until 1963, by which time the entire war debt was paid down. At that time the top tax rate could be lowered to 70 percent. During this period, America experienced the greatest economic boom it had ever known until that time. General income for everybody rose dramatically. The Keynesian economic model helped to level valleys and peaks of business cycles for more than fifty years. During those years cyclical depressions were much less extreme and were therefore called recessions.

1980's – Reaganomics. In the 1980's a renewed scepticism of large-scale government intervention led once more to far reaching deregulations. Keynesian concepts got rejected and his warning about runaway money supply got dismissed. In a repeat of the 1920's the top tax rate was lowered and the slogan became once again : 'Government is dumb, markets are smart'. The stock market saw again a spectacular rise and for a time the less regulated market forces led to considerable economic successes. (example: the hightech bubble in the 1990's). Blinded by success the money supply got even more increased by derivatives - a development which alarmed some economists. But such warnings got curtly dismissed by most experts of the time as ‘old-fashioned Keynesian politics.’ Derivatives are contracts between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties. The assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation. From the economic point of view, financial derivatives are cash flows. The market risk inherent in the underlying asset is attached to the financial derivative through contractual agreements and hence can be traded separately. The underlying asset does not have to be acquired. Derivatives therefore allow the breakup of ownership and participation in the market value of an asset.

Towards the crisis of 2008. In contrast to Roosevelt's tax increases during World War II, the Bush administration tried to ' finance' the Iraq war with tax cuts resulting in a trillion dollar debt. At the same time the middle class income remained stagnant, which meant that people amassed huge credit debts in order to keep up their expected lifestiles. Eventually, the high-tech bubble burst, and then the housing market collapsed. Unregulated credit availabilities had induced more and more people to get into unsustainable debts. The journalist Fareed Zakaria wrote that "Household debt had ballooned from $ 680 billion in 1974 to $14 trillion today." A typical instrument for enticing credit in the 1990's was the subprime mortgage, ostensibly to make credit available to people who could not get a mortgage otherwise. Many banks, freed from the strict regulations of earlier times, offered loans and mortgages to people who could not afford repayments during an economic downturn. Unpayable loans became bad assets for banks and when such bad assets accumulated rapidly many banks were unable to offer any credit which led to a credit freeze in the fall of 2008 and severe economic difficulties. Since most of the world had adopted the American economic model the financial melt-down of assets-poor banks led in October 2008 to a repeat of a depression-type financial panic. The sudden intrusion of reality led economists of all stripes to repudiate the economic philosophy of the last 25 years calling for a return to large government intervention and much tougher regulations.

2008 - Reaction of the Bush administration. In 1929, during a similar panic, the US government had not reacted for three years resulting in the Great Depression of the 1930's. In 2008 the US government acted more quickly with large financial government cash infusions to failing banks, ostensibly in order to make credit available to both the public and businesses. Critics argued that more of the money should have been used to help struggling homeowners avoid losing their homes. To many people it seemed strange to supply money to the very institutions which had created the crisis in the first place, instead of using the funds for extended unemployment benefits and public works programs which would inject money immediately into the failing economy as had been done under the New Deal in the 1930's. Unsurprisingly it was soon revealed that some of the bail-out money was used to finance dividend payouts and bank mergers instead of easing credit availability.

2009 - Obama's stimulus proposal. The new President Obama proposed to stimulate the economy by spending large amounts of capital for infrastructure building (badly neglected since the 1980's) and to initiate a Green Revolution by financing alternative energy sources to reduce dependency from foreign oil supplies and to mitigate CO2 emissions which threatens a looming global climate crises.

The ideological split widens. As the U.S. Senate designed a bill to stimulate the economy it was revealed that most Democrats accept the Keynesian position that stimulus takes place by government spending replacing temporarily the spending that the private sector is not providing. But Republicans dislike Keynesian economics and think of stimulus more as tax cuts. Senator Mitch McConnell, Republican leader, says "we know for sure that the big spending programs of the New Deal did not work." What got the U.S. out of the Great Depression, he adds, "was the beginning of World War II." Conveniently left out is the fact that the biggest stimulus ever was the U.S. government spending for the war economy. It was the war which finally made the opponents of the New Deal accept large deficit spending - the resulting debt was completely payed down in 1963 on account of higher tax rates. During this period, America did experience the greatest economic boom it had ever known until the oil shock of 1974. In an attempt to receive Republican support Obama included several hundred billion dollars for tax cuts in his package. Critics charge that the Obama plan was at best a half measure and that stimulus funding should have been twice as much. (China for example injected enormous stimulus money into its economy as an attempt to minimize the impact of the global financial crises. The result was an astonishing growth of 7.2 % in 2009). In relation to the debate about taxes and spending it is interesting to note that the US economy grew fastest in the 1950s and 1960s when there was plenty of money for infrastructure and other public investments. Successive tax cuts, expenditures for several wars, reduced revenues on account of the recession and stimulus financing resulted in a crushing debt of over 14 trillion dollars by 2011. The enormous debt led to a demand for severe spending cuts, but the choice to increase taxes (which are the lowest since 1925) is off the table under the mistaken slogan that tax increases caused the Great Depression - which is a myth. Even the business magazine 'The Economist' (July 9th 2011) criticised the American reluctance for higher taxes thus: "The vast majority of Republicans, driven on by the cacophony of conservative media, cling to the position that not a single cent of deficit reduction must come from a higher tax rate. This is economically illiterate and disgracefully cynical".

Globalized Capitalism: Due to technological innovations such as computers, the Internet, satellites, cell phones, etc, the economies of most countries are becoming more and more integrated, a process labelled globalization. Definitions of globalization: 1. (Banking & Finance) the process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications. 2. (Commerce) the emergence since the 1980s of a single world market dominated by multinational companies, leading to a diminishing capacity for national governments to control their economies. 3. (Commerce) the process by which a company, etc, expands to operate internationally. Investment capital is extremely mobile and the currencies, stock exchanges, and economic fortunes of all capitalist countries are bound together in a single financial system. The business operations of a growing number of companies take place on a world stage. Capitalist enterprises are more likely than ever before to utilize foreign components and draw on foreign labour or services; to export products or provide services abroad; and to acquire or start foreign subsidiaries or engage in joint ventures with overseas companies. Many apparently national companies – e.g. IKEA, which is Swedish – produce one component in one country and another component in a different country, assemble them in a third country, and market them throughout the world.

Global capitalism is the fourth and current epoch of capitalism. What distinguishes it from earlier epochs of capitalism is that the system, which was previously administered by and within nations, now transcends nations, and thus is transnational, or global, in scope. In its global form, all aspects of the system, including production, accumulation, class relations, and governance, have been dis-embedded from the nation and reorganized in a globally integrated way that increases the freedom and flexibility with which corporations and financial institutions operate. In his book Latin America and Global Capitalism, sociologist William I. Robinson explains that today’s global capitalist economy is the result of “...worldwide market liberalization and the construction of a new legal and regulatory superstructure for the global economy... and the internal restructuring and global integration of each national economy. The combination of the two is intended to create a ‘liberal world order,’ an open global economy, and a global policy regime that breaks down all national barriers to the free movement of transnational capital between borders and the free operation of capital within borders in the search for new productive outlets for excess accumulated capital.” The process of globalizing the economy began in the mid-twentieth century.

Today, global capitalism is defined by the following five characteristics: The production of goods is global in nature. Corporations can now disperse the production process around the world, so that components of products may be produced in a variety of places, final assembly done in another, none of which may be the country in which the business is incorporated. The relationship between capital and labor is global in scope, highly flexible, and thus very different from epochs past. Because corporations are no longer limited to producing within their home countries, they now, whether directly or indirectly through contractors, employ people around the world in all aspects of production and distribution. The financial system and circuits of accumulation operate on a global level. Wealth held and traded by corporations and individuals is scattered around the world in a variety of places, which has made taxing wealth very difficult. There is now a transnational class of capitalists (owners of the means of production and high level financiers and investors) whose shared interests shape the policies and practices of global production, trade, and finance. The policies of global production, trade, and finance are created and administered by a variety of institutions that, together, compose a transnational state. The epoch of global capitalism has ushered in a new global system of governance and authority that impacts what happens within nations and communities around the world. The core institutions of the transnational state are the United Nations, the World Trade Organization, the Group of 20, the World Economic Forum, the International Monetary Fund, and the World Bank. Because it has freed corporations from national constraints in highly developed nations like labor laws, environmental regulations, corporate taxes on accumulated wealth, and import and export tariffs, this new phase of capitalism has fostered unprecedented levels of wealth accumulation, and has expanded the power and influence that corporations hold in society. Some philosophers, sociologists and economists believe the level of wealth and power amassed by corporations during the epoch of global capitalism is a problem with negative implications for many.

KEY FEATURES OF CAPITALISM: Companies; profit motive; competition; private property. Companies exist as a separate legal identity: Companies exist beyond the lives of their owners and workers. Companies also have the rights which a person has under law, and most companies have limited liabilities. Companies are motivated by profits: The entrepreneurs initiate production with a view to maximize profits. And there is also competition between companies to earn profits: Companies will compete with one another for customers to increase their sales volume, thus increasing their profits. Competition is the most important feature of the capitalist economy. It means the existence of large number of buyers and sellers in the market who are motivated by their self-interest but cannot influence market decisions by their individual actions. Lastly, companies have the means of production and distribution that can be privately owned.

TWO ARGUMENTS FOR CAPITALISM: Moral and Pragmatic. The Right to Property: moral. The moral defense of capitalism is usually associated with Libertarianism: Individual freedom is the paramount social value, where freedom is mainly understood in terms of what is sometimes called “negative freedom,” the freedom from coercion by other persons or organizations. Unfettered markets are thus morally good things because in a market buyers and sellers meet and voluntarily make exchanges without coercion. The moral defense of capitalism is simply a logical extension of these arguments about voluntary exchange on free markets. If people are free, then they should be allowed to use their property however they like so long as this does not interfere with anyone else’s property rights. The Pragmatic Argument for capitalism: Adam Smith and ‘the invisible hand’. It is argued that capitalism is simply the most efficient and productive economic system. This is basically a utilitarian consideration. The first pragmatic argument for capitalism centers on a crucial problem faced by any complex economic system: how to effectively coordinate the economic activities of widely dispersed people in such a way that their activities fit together reasonably well. The most basic defense of capitalism as an economic system says that a market economy based on decentralized privately owned firms is the best way to solve this problem. In a planning model, activities of individuals and firms are coordinated by a planning authority telling people what to do. Authoritative command works reasonably well in some contexts, but it has proven very problematic when applied to large and complex systems. Even apart from the problem that a system of comprehensive planning and control of a complex economy seems to violate the values of individual freedom and autonomy, the task seems impossibly complex and likely to produce massive inefficiencies. Decentralized markets with privately owned enterprises is the principle alternative to centralized planning as a way of solving this massive coordination problem. The story about how this coordination is accomplished was first systematically elaborated by Adam Smith in his famous account of the “invisible hand” of the market. The key idea in the theory of the invisible hand of market coordination is the notion of “prices” as a mechanism for supplying both information and incentives to people in such a way that their activities can be coordinated. This interplay of supply and demand through the mechanism of price this leads to what economists call allocative efficiency: resources and activity are allocated to different purposes in such a way that the amount of different sorts of things that get produced is exactly the right amount given what people want and how much money they have. Defenders of capitalism emphasize two important implications of the way capitalist markets accomplish this broad economic coordination. First, if capitalist markets work this way, then the underlying dynamics of the economy are driven by the preferences and behaviors of consumers. Consumers are really running the economy. The idea is referred to as “consumer sovereignty”. Producers – whether they be giant multinational corporations or small firms – have powerful incentives to respond to information given them by the consumers of their products. If they fail to respond to that information, they lose money and eventually go out of business. The second implication is a particular sense in which capitalist markets do not simply do a pretty good job in coordinating a complex system of economic activity, but they do so in a way that is “optimal”. To say that a particular way of doing things is optimal is to say that it is as good as possible, that any other alternative would produce worse results. If you let everyone freely make exchanges, then eventually you will reach an “equilibrium” in which no further exchanges happen. This is a situation in which no one can improve without someone else being worse off. This kind of situation has a special name in economics: “Pareto optimality”, named after the Italian Wilfredo Pareto. The claim of defenders of the free market is that if the market is allowed to work freely it will generate a distribution of goods that satisfies this condition of Pareto optimality.

CRITICISMS OF CAPITALISM. These two arguments have not persuaded everyone that it is a morally justifiable system and there are both theoretical and operational objections to it that need to be considered: Theoretical criticisms challenge capitalisms fundamental values, basic assumptions, or inherent economic tendencies. Operational criticisms focus more on its failure to live up to its own economic ideals. In combination, theoretical and operational concerns raise political, economic and philosophical issues.

Inequality: Critics argue that capitalism is associated with the unfair distribution of wealth and power. In the United States, the shares of earnings and wealth of the households in the top 1 percent of the corresponding distributions are 21 percent (in 2006) and 37 percent (in 2009), respectively. Critics such as Ravi Batra argue that the capitalist system has inherent biases favoring those who already possess greater resources. The inequality may be propagated through inheritance and economic policy. One study shows that in the U.S., 43.35% of the people in the Forbes magazine "400 richest individuals" list were already rich enough at birth to qualify. Another study indicated that in the US, wealth, race, and schooling are important to the inheritance of economic status, but that IQ is not a major contributor, and the genetic transmission of IQ is even less important.

Defender’s Responses against the inequality argument:

1.In Harper’s Magazine, Noble Prize-winning economist Joseph E. Stiglitz argues that growing inequality is NOT an inevitable outcome of capitalism. Our system produces such yawning gaps because it isn’t truly competitive the way a capitalist system should be — it has, in fact, been engineered by the wealthy to prevent competition and to protect their economic and political power. Capital accumulation leads to more accumulation, and capital is concentrated in fewer and fewer hands. Capitalism works best when there is a healthy (though not excessive) level of oversight to ensure the integrity of the system.

2.It is not capitalism that is the cause of inequality – it is government interference that is the root of the problem. Leave the market to itself, and problems of unemployment and poverty and inequality will go away. Neither theoretical economics nor history supports this reply, however. Activist government policies over the past century have done much, in all Western capitalist countries, to reduce poverty and inequality, not promote it.

3.While absolute levels of inequality may increase under capitalism, nonetheless the inherent benefits of capitalism outweigh this. If living standards are rising, and the poor have better lives than they did in previous times, it does not matter if they are more ‘unequal’. The diffusion of capitalism in the last decades has lowered poverty rates and created opportunities for individuals all over the world. Living standards and life expectancy has risen fast in most places. World hunger, infant mortality, and inequality have diminished. Therefore, we need more capitalism and globalisation if we want a better world, not less.

HUMAN NATURE ARGUMENT AGAINST CAPITALISM.

This argument for capitalism assumes that human beings are rational economic maximizers, individuals who recognize and are motivated largely by their own economic self-interest, and that well-being comes from ever greater material consumption. It is argued that this is not actually the case, since humans are often irrational and do not act so as to further their own long term self-interest. Furthermore, promoting this ideal robs humanity of any higher sense of human purpose that makes life meaningful and worthwhile, beyond .

IRRATIONALITY: consumers often do not have full knowledge of the diverse choices available to them in the marketplace, so there is a gap between economic theory and underlying reality: e.g. the price structures of similar products, a full understanding of product differences, which means that they cannot make the optimal choice regarding price and quality and allow the invisible hand to do its work. What the text calls the ‘cornucopia of products’ requires high levels of consumer literacy in order to make rational economic decisions. Consumers are rarely sufficiently well informed enough to best powerful industries that can influence prices, control product quality, and create and shape markets. Remember the case of the Pinto, where Ford actively kept consumers ignorant about the increased fire risk in rear end collisions, thus robbing consumers of the ability to make a truly rational decision as to whether to purchase one or not. Advertising too is extremely effective at exploiting human psychology to promote irrational economic choices. New research findings in psychology, biology, and neurology are providing counterarguments to economic theory to prove that, when it comes to making decisions, people are anything but rational: Making a choice is physically exhausting, literally, so that somebody forced to make a number of decisions in a row is likely to get lazy and stupid. Having too many choices can make us less likely to come to a decision concerning what to buy: In a famous study of the so-called "paradox of choice", psychologists found that customers presented with six jam varieties were more likely to buy one than customers offered a choice of 24. Our brains operate in a similar way to computers, and we like to access recently opened files, even though many decisions require a deep body of information that might require some searching. Example: We remember the first, last, and peak moments of certain experiences. So when we make a choice about how to spend a certain amount of time and money-- say, by going to Disneyland -- we forget that most of the time at an amusement park is spent waiting around doing nothing. Instead, we remember the thrill of the roller coaster, make the trip to Disneyland, and are disappointed with how we have utilized our economic resources. We're social animals. We let our friends and family and tribes do our thinking for us. One study shows that Korean peasant women within the same village tend to use the same form of contraception -- even though there is "substantial, persistent diversity across villages." This pattern could not be explained by income, education, effectiveness, or price. Word-of-mouth explained practically all the difference, which means that the decision to purchase a particular kind of contraception reflects not rationality, but rather going along with the crowd. The psychological theory of "hyperbolic discounting" says people don't properly evaluate rewards over time. The theory seeks to explain why many groups -- nappers, procrastinators, government -- take rewards now and pain later, over and over again. Neurology suggests that it hardly makes sense to speak of "the brain," in the singular, because it's two very different parts of the brain that process choices for now and later. The choice to delay gratification is mostly processed in the frontal system. But studies show that the choice to do something immediately gratifying is processed in a different system, the limbic system, which is more viscerally connected to our behavior, our "reward pathways," and our feelings of pain and pleasure. We often continue to prioritize our ancient processing pathways, where immediate gratification in an uncertain world was the best survival strategy, over informed rational strategies for the long-term.

HIGHER PURPOSE: by its very nature, capitalism breeds discontent by focusing on continuous consumption. If we ever became happy with what we have – the system would fail! We are continually exposed to new fashions, and new versions of items, so that we will be dissatisfied with what we have, and go on to buy more ‘stuff’ that supposedly will remedy that dissatisfaction and make us ‘happy’. This is why the shape of heels on shoes, and collar on shirts, change every year – so that people who have perfectly good shoes and shirts from last year will nonetheless buy new ‘improved’ versions of the same. “Compared with their grandparents, today's young adults have grown up with much more affluence, slightly less happiness and much greater risk of depression and assorted social pathology….Our becoming much better off over the last four decades has not been accompanied by one iota of increased subjective well-being." David G. Myers, PhD, American Psychologist (Vol. 55, No. 1). The theoretical model of Homo economicus is of an individual, not a member of a group in a particular place and time. Committed capitalists don't seem to recognize that people depend on each other, and that individual success is a result of collaborative effort, usually over a long period of time, not the survival of the most fit individual, economically speaking. As such, it is a weak theoretical model. Economic markets and consumption can fulfil some of our basic needs – including areas such as food and shelter - but there are other important things they simply cannot provide - ‘non-market goods’: “There is little wrong with Faberge or Furbys. It is what [they are] failing to give us: companionship, time for reflection, spirituality, security, intellectual development and joy in our children.” The problem is that consumerism often claims that it can provide us with these things: Firstly, advertisers link their products to real human needs. An example of this cited by Reeves is an advertising campaign for Doritos tortilla chips that linked the product to the idea of friends and companionship. Secondly, advertisements will suggest (or at least, strongly imply) that the product can help to fulfil these real human needs. In the Doritos example, the advertisement seems to suggest that “buying their tortilla chips is one way to boost companionship, styling them ‘friend-chips’”. So, consumerism pretends to be able to meet our real needs – but it cannot. This process of misleading people about critically important human needs represents one of the saddest aspects of consumerism’s manipulative power.

It affects our worldviews and characters: Not only does capitalism rest on the premise that people are basically acquisitive, individualistic, and materialistic, but in practice capitalism strongly reinforces those human tendencies. It presents no higher sense of human mission or purpose, whereas other views of society and human nature do: religion, spirituality, love of nature. These have been shown to promote life satisfaction, wellbeing, and longevity. JFK famously stated: do not ask what your country can do for YOU  rather, ask what you can do for your country. This is turned on its head by modern consumerism. If we are spending much of our time and energy seeking the next product or activity to consume then we have less time and enthusiasm to learn about the world or broaden our horizons. Also, consumerism is unlikely to prompt us (or make it easy for us) to question important things such as the availability of the resources that maintain our lifestyles, the capacity of the planet to hold the waste we generate or the vulnerability of the centralized, import-reliant food supply systems we currently use.

OTHER CRITICISMS: Unfettered capitalism promotes the formation of oligopolies and monopolies, which restrict competition: A concentration of property and resources, and thus economic power, in the hands of a few. High costs, complex and expensive machinery, intense competition, and the advantages of large-scale production all work against the survival of small firms. There is law on the books that is intended to restrain mergers and acquisitions that are conducive to the formation of oligopolies and monopolies, which are sometimes still used, e.g. The US Justice Department challenged a $37 billion merger between the giant Humana and Aetna health insurance companies, which the Justice Department alleges "would lead to higher health-insurance prices, reduced benefits, less innovation, and worse service for over a million Americans." However, since the 1980’s under Reagan they have not been enforced, and we essentially now live in a system where there is no real competition, despite the cornucopia of products on the shelves: E.g. Tom’s of Maine toothpaste – actually owned by Colgate-Palmolive; Burts’ Bees – Clorox Co.; Johnson & Johnson owns Aveeno; L’Oreal owns The Body Shop.

Read the following sections of the chapter: Corporate Welfare Programmes Protect Businesses. The US government spends more on promoting and subsidizing corporations than it does on either homeland security or on social welfare programmes for the poor.

Competition is NOT a good if it interferes with profits. And anyway, cooperation works better.

Exploitation and Alienation.

Read up to p. 167 for the test.