Thursday, 31 May 2007

Why we love capitalism.

Adam Smith

This section very quickly defines some terms and looks at the benefits, according to advocates, of markets and capitalism.

Globalisation, capitalism and the arguments for neo-liberalism
It is important to define the key terms and to explore, albeit briefly, the arguments used to defend economic orthodoxy. Supporters of capitalist globalisation are most commonly termed 'neo-liberals' because of their renewed faith in the 'liberal' unconstrained free market. Globalisation is a much debated term but can defined straightforwardly by the decline in the power of nation states and the growing flow of resources on a planetary scale. While technology, culture and other factors come into play, globalisation is first and foremost an economic process driven by market forces. The market is a system where we buy and sell items. In theory the market is made up of thousands of competiting firms, whose desire for profit means they provide goods and services. Even some supposed 'anti-capitalists' such as David Korten, author of When Corporations Rule the World, view the market as a positive and practical way of organising economic activity. However, the market tends to evolve into capitalism. Capitalism is, essentially, a system where profits are made within a market based context and reinvested in new capital equipment, i.e. machines and IT used to produce more goods and services. Some theorists have suggested that forms of 'state capitalism’ can also be identified, where the state rather than private companies exploits workers and the environment.

Capitalism is based not on the intense competition of thousands of companies but the creation of markets dominated by just a handful of enormous firms. Food retailing is a good example of the process. In Britain thousands of bakers, green grocers and corner stores have disappeared and four or five large supermarkets control much of the market. To survive a firm must, generally, make profit. Profit is reinvested to expand the size of the firm; if profit was frittered away rather than reinvested, the firm would risk being put out of business by more efficient rivals. Investment allows a firm to expand its market share and as it sells more items it can exploit economies of scale. This concept is based on the idea that as a firm becomes bigger, production costs fall per item produced. Such economies occur because larger firms can bulk buy raw materials more cheaply than smaller firms, larger firms can make more efficient use of machinery, employ specialist staff and gain funds for expansion in the form of bank loans more easily. Smaller firms generally have higher costs and tend to be pushed out of business. There are numerous linked process that help explain the evolution of markets into capitalist systems. The creation of public limited companies, allows firms to borrow money in return for giving others a 'share', such share ownership allows swift expansion but aids the process of replacing small businesses owned by individual entrepreneurs with faceless corporations. Public companies gain an institutional existence, have the legal status of individuals and like all good bureaucracies grow tend to be self-perpetuating.

The capitalist system, as we shall see in successive chapters is a complex one, workers have to be made to work and consumers to consume to sustain the growth of companies. Ever more complex financial instruments are used to allow capitalism to grow and change in order to survive. Banks to cut a long story short lend money from depositors to borrowers and create more money in the process. Banking has been one target of anti-capitalist concern because of banks ability to make money out of money and use this power to shape society. Share ownership and the basic banking functions are the first steps on a ladder of increasing financial abstraction with ever more esoteric devices being used to make money out of money and, at the same time, to support capitalist growth. The drive for profit fuels globalisation as firms seek new markets to sell their products and new sources of cheap raw materials and labour. The creation of global markets is also strongly conditioned by the financial side of capitalist growth. 'Hot money' so called because it moves from one country to another and is transformed from one currency to another and then back again, erodes the barrier between nations. If a country introduces policies hostile to capitalism, currency tends to flow out, creating economic crisis. To maintain a strong exchange rate, pro-capitalist policies are often a necessity.

Hedge funds are an increasingly important financial institution. Hedging started by meeting a practical need but soon changes into something much more complex. Hedging is a way of providing security as in the phrase 'hedging a bet'. For example, an investor concerned that the exchange rate for £ will fall, can buy the right to sell £s in three months time at the present value, so if the currency crashes losses will be prevented. For a fee, risk is removed. Various forms of right to buy such a right to hedge are bought and sold including varied financial 'options' and 'derivatives'. Essentially, mathematically complex forms of betting have become an increasingly important global economic activity.

Supporters of the market are confident that the pursuit of financial gain, the accumulation of private property and the race for personal wealth are to be welcomed (Bhagwati 2004; Wolf 2004). They believe that capitalism is the road to prosperity, pleasure, freedom, justice and all that is beneficial. Capitalism because it is based on market forces is both natural and good. For the advocates of unrestrained capitalism the only alternative to market forces is government planning and control. They consider intervention inefficient because government planners cannot take into account all the thousands of pieces of information necessary for an economy to function well. In the Soviet Union planning did not meet the needs of consumers and provided no incentive for workers to work hard so as to raise production.

In contrast to bureaucratic planning, the market regulates the economy via forces of demand and supply. Adam Smith, whose book The Wealth of Nations launched market based economics in 1776 believed that these market forces acted like a giant invisible hand managing wealth for the good of the community. If consumers demand goods and are prepared to back up their desire with hard cash, firms will supply their wants so as to make a profit. Competition between firms means that neither consumers nor workers will be exploited. If a firm cuts its wages workers will sell their labour to a rival and maintain their standard of living. Wage rises can be used to encourage workers to retrain, work harder and raise production through greater participation. Likewise, market forces benefit shoppers: if a firm provides shoddy or expensive goods consumers will go elsewhere. The market is freedom. It is a tool of liberation for workers, who can chose to work for the firm that pays the highest wage.
The market system leads to capitalism because firms have an incentive to invest in new technology to produce cheaper goods to undercut rivals and maintain profits. The market system is based on greed but greed fuels the common good and drives progress forward as industrialists strive to create new products and new production techniques. Such growth tends to spread prosperity to the entire community via a process of ‘trickle down’. Even if a wealthy minority do exist, they have to use their wealth to purchase goods and services from others. In doing so they create jobs and the basis for growing prosperity.

The market is seen as a force for democracy because it breaks up the power of the old feudal elements of society. Kings lose their power and companies have to respect the rest of the community if they wish to gain customers and to attract staff. Money is profoundly democratic because whatever the social rank, gender or ethnicity of the person spending it, it still has the same value for firms seeking profit. The notion of private property, a precondition for and goal of the market makes it difficult for the state to control private citizens.
The pro-capitalist messengers believe that the system brings ever greater benefits. The classic free market is decentralised with economic decisions being taken at a grassroots level. The market also provides a cleaner environment because consumers can purchase greener goods and as levels of prosperity rise societies generally become more environmentally aware. Bjorn Lomborg, the Danish statistician has argued at great length that information showing declining environmental quality is distorted and entering the third millennium resources such as oil and fish are increasing in quantity, while pollution is being defeated by prosperity (Lomborg 2001).

Globalisation brings the benefits of capitalism to all, according to the author Johan Norberg,

The statistics speak for themselves. Over the past 40 years, average life expectancy in the developing countries has risen from 46 to 64 years. Since 1950, infant mortality has fallen from 18 to 8 per cent. The proportion of illiterates has fallen from 70 per cent to about 25. Since 1970 child labour and the proportion of people in the world who have to go hungry has fallen by more than half. Since 1980 the number of people in absolute poverty was reduced by more than 200 million. The number of states which are democratically governed and respect human rights is increasing all the time. Today there are 120 democratic states with a combined population of 3.5 billion people (roughly 60 per cent of the world population), more than ever before in world history. There are still enormous problems in the world, but to anyone who cares to look it is obvious that the world, in most ways, has become a better and a fairer place (

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