THE NATURE OF

CAPITALISM
LEARNING OBJECTIVES:

1. DEFINE CAPITALISM;
2. IDENTIFY THE KEY FEATURES OF CAPITALISM;
3. EXAMINE THE MORAL JUSTIFICATION AND CRITICISM OF CAPITALISM.
CAPITALISM
 An economic system in which production and distribution is in private hands, operating for profit
(self-interest) and under market system (depends on demand and supply).
 
Socialism
 An economic system characterized by public ownership of property and a planned economy.
 Public ownership of property – not owned by individual but by government
 A planned economy – government set output target, income, price – does not allow complete
freedom of production.
Hybrid Economic System/ Worker Control Socialism
 Firms respond to a market in acquiring the necessary factors of production and in deciding what to
produce (based on what the market wants).
 The workforce of each enterprise controls the enterprise, and the profits accrue to the workers.
 Although the workers manage their factories, the capital assets of each enterprise are owned by the
government (society) and not by private individuals.

KEY FEATURES OF CAPITALISM

(1)Companies
  The existence of companies or business separate from the human beings who work for and within
them.
 Treat as a separate and distinct entity.
 A corporation may enter into contracts and may sue or be sued in courts of law. 
(2) Profit Motive
 Self-interest – Human beings are economic creatures who recognize and are motivated by their
own economic self-interests.

(3) Competition
 Economic competition steers individuals pursuing self-interest in a socially beneficial direction.

(4) Private Property

 Private ownership of the major means of production and distribution which include factories,
warehouses, offices, machines, computer systems, trucking fleets, agricultural land.
MORAL JUSTIFICATIONS OF CAPITALISM

(1) The Natural Right to Property

 Fundamental moral right to property – natural right.

(2) Adam Smith’s Concept of the Invisible Hands

 A free and unrestrained market system (no government intervention) is efficient and productive
(because there is competition therefore firms will find the best combination of production techniques
that could minimize the cost).
 Invisible forces will determine the type, quantity and price of product or services produced.
 Law of supply and demand.
CRITICISMS OF CAPITALISM
 
(1) Inequality
 The difference in personal incomes is huge; a small minority of the population owns the majority of the
country’s productive assets.
Example: Amount of money in the bank and interest earned
 
(2) Human Nature and Capitalism
 
Assumption:
 Consumers have full knowledge of the various choices available to them in the marketplace.
 They know the price structures of similar products, fully aware of product differences and able to make
optimal choice regarding price and quality.
 However, in reality, consumers do not have much awareness of competitive pricing of various products
and are easily influence by advertising and promotion.
(3) There is not much of Competition

(i) Capitalism Creates Oligopolies

 A small number of companies conspire to set prices, eliminate competition and monopolize an
industry.

(ii) Waste of Resources

 Producers seek government protection from influx of lower prices imported products. Example: quota
and import duties.
 Consumers pay more for goods.
 
(iii) Competition is not a good.
 Competition may not persist, rivals driven out that will lead to monopoly. Smaller companies may be
taken over by bigger firms.
(4) Capitalism results in Exploitation and Alienation
 Exploitation
Example: Companies in an industry offer fixed wages to workers and curb the rights
of the workers.
 Alienation
Example: Worker belongs to the company. His life does not belong to himself but the
company.
TODAY’S ECONOMIC CHALLENGES

(1) Slow Growth in Productivity

 Corporations obsessed with short-term performance and govern themselves by short-term
indicators such as share price (stock market performance) and quarterly profits.
 Less willing to invest in long-term research and development or to sacrifice current profits for
benefits ten or fifteen years into the future.

(2) Declining Interest in Production

 “Outsourcing” – buying parts or whole products from other producers, both at home and overseas.
 Increase in corporate mergers and acquisitions – directed toward making money.
(3) Changing Attitudes Toward Work

 People become less optimistic about the future and doubt that their hard work for the company will
pay off, they become less interested in work.
 Workers are willing to work hard on a job they find interesting and rewarding.
 They have a growing expectation that work should provide self-respect, nonmaterial rewards and
substantial opportunities for personal growth. And they have a growing willingness to demand
individual rights, justice, and equality on the job.