Economics 110
Theoretical Market Capitalism
1. Values
"Economic Man"
People are assumed to be rational, self-interested, maximizers. Consumers attempt
to maximize the satisfaction they get from their purchases, given their limited incomes.
Businesses attempt to maximize their profits. Workers attempt to maximize their wages
or other benefits of a job.
Individualism
The individual, not the group, is the center of society.
Social Darwinism
Life is seen as a competitive struggle in which those most fit for the environment
survive and prosper, while others are left behind. Great wealth is admired. Poverty is
condemned and often seen as the result of moral failings. Income is earned only by the
act of production.
Equality of opportunity
Each person has the right to succeed or fail on his or her own merits.
Poverty due to lack of opportunity is condemned.
The Protestant Ethic
Salvation, as well as prosperity, come to those who work hard, are thrifty, and seek
personal economic gain. Wealth is to be saved and reinvested, not to be used for
"conspicuous consumption".
Consumer Sovereignty ("the consumer is king"!)
According to Adam Smith, "the sole aim and purpose of production is consumption;
the interest of the producer ought to be attended to only as far as it is necessary for
promoting the interest of the consumer".
2. Institutions
Private Ownership of Property
Rights of ownership granted to a private citizen to acquire, use, profit from, give-away,
or sell property. This is a necessary condition for thrift or for individual initiative.
Ownership involves a series of rights; private owners may not be entitled to all of these
rights.
Free Enterprise
Each individual has the general right to engage in any type of economic activity, free
of government restriction. In this theory, "freedom" involves freedon from government
restrictions.
Free Competitive Markets
Decisions about what to produce, how to produce, and for whom to produce are
determined by the interactions of large numbers of buyers and sellers in markets.
Behavior in markets is not restricted by government. For markets to operate well, it is
important to have enough competition.
The Invisible Hand
If markets work properly, prices guide resources toward their most desired uses
(measured by consumer tastes backed up by income). Prices also guide consumers to
economize on relatively scarce resources. People pursuing their own self-interest will
best serve society's interest, even though serving society is not their intention!
Limited Government (Laissez Faire)
Government should be limited to promoting and maintaining effective competition,
providing information where it is too costly for the market to do so, providing public
goods (those that, if provided at all, must be provided for everyone, such as defense),
controlling both positive and negative externalities (effects on others not considered by
the parties to a market transaction, such as education or pollution). Government may
redistribute income to those who are elderly, disabled, etc. Most important, government
sets the rules by which market transactions take-place.
Full-employment
According to Say's Law, supply creates its own demand. Anything we are capable of
producing will be bought. There can be no situation where people are buying too
little. If, for some reason, buyers did not want to buy all of the goods and services that
were available, the prices of these goods would fall. Also, interest rates to borrow money
would fall. Buyers would respond to these changes by increasing their buying. If there
were workers who were involuntarily unemployed, wages would fall. With lower wages,
companies would hire these people. Except for the time this takes to occur, the only
unemployed people will be those searching for new jobs.
Distribution of Income
In a free market economy, workers are paid wages that reflect the value of the
goods or services they add to production. One earns income only by producing
wealth! If one person is paid more than another, either that person is more physically
productive or he or she produces goods or services of higher value.
Profits earned by owners of capital will be the minimum necessary to keep the
capital employed in that activity. If profits were above this minimum, new companies
would enter that activity, driving the price and profits down to the minimum.
International Trade
According to the Law of Comparative Advantage (David Ricardo), the wealth of all
countries in maximized when trade between countries is free of all restrictions. Each
country should specialize in those activities in which its comparative advantage is the
greatest and leave other activities to other countries. Comparative advantage is
determined mainly by a country's relative endowment of the factors of production and the
technology needed to produce given products. (While each country benefits from free
trade, not all members of each country benefit.)
Economic Growth
Economic growth requires investment in new capital, in new skills, and in new
technologies. Private property rights insure that the benefits of these investments go to
those who make them. The profit motive generates the incentives to make these
investments. These investments are financed by people's savings. Since the investments
are profitable, those making them will offer to pay high interest rates to borrow the
money; these high interest rates generate the incentives for people to save. The high
interest rates also assure that producers will allocate the borrowed funds to the highest
valued uses.
Some Weaknesses of Market Capitalism As It Has Evolved
1. Lack of Competition at Various Times
2. Economic Insecurity
3. Inability to Control Negative Externalities (Pollution, Worker and Product Safety)
4. Recessions and Depressions at Various Time 5. Poverty and Extreme
Inequality
6. The Ability of Certain People to Gain Income by Taking it Away From Others,
Rather
than Producing It, or to Use the Government For Their Own Purposes. (known as
"rent seeking")