“Free-Market: Achieving Equilibrium” (2010)

Update:

This essay was written as one of the requirements in my SocSci II class (best GE subject ever) during my sophomore year in the University of the Philippines. It is also my first year as an Economics student, in which I transferred from the Management program a few months prior. My viewpoints have been tweaked since then (laissez-faire no longer) - but the core ideas remain. The market system, while imperfect, is the better alternative over the socialist central planning system in which the fear of the whip/bullet is the only incentive. 

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“Reflect on the realities, advantages and/or perils, of capitalism and its attributes (e.g., free market/liberalization, globalization, privatization) as reflected in the current economic system.”

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When you hear or read the word “capitalism”, what usually comes to your mind? Is it the oppression of the labor force? The materialism? The evil bourgeoisie? Have you also thought that capitalism breeds evil through private property and money? If you have said yes to these questions (or at least most of them), your affirmation could be attributed to famous philosopher and economist Karl Marx, who “demonized” the system.

But what is capitalism to start with? Capitalism is usually associated with terms like privatization, competition free market, free trade, and the supply and demand to name a few. The name obviously stems from the word “capital”, which is one of the triad of productive inputs (along with land and labor) consisting of durable produced goods that are in turn used in production. Furthermore, it is defined as “the economic system in which most property (land and capital) is privately owned.” (Samuelson)

It is hard to deny the positive effects that capitalism has brought to the table. It is under this system that the forces of supply and demand in the market determine investments, incomes, and production of the consumers and producers. First, it promotes economic growth by encouraging competition in markets, which results to innovation and better quality of products and services. A common example would be the competition between fast-food franchises. The constant rivalry among these establishments results to the addition of choices in the menu, the improvement of its services and with changes in prices. Without these driving forces in competition, the establishment is not pushed to improve its products hence, the products and services tend to be mediocre (or even worse) at best.

Second, capitalism motivates people to “work hard”. It gives the individual merits for hard work and is rewarded by profits, enabling him/her to gain access to leisure and luxury. In the process, people who are lazy and dependent on others will most likely suffer under this system. Adam Smith, one of the proponents of the free market and the founding father of economics, had stated that the person’s own interests are in line with those of the community. He argued that the person is led by an invisible hand in which “by pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.” (qtd. in Samuelson 30)

Third, the production output has increased exponentially in the capitalist system. The division of labor has paved way for the people to produce more, and consequently, consume more. The things that we enjoy today are all thanks to capitalism. International trade has also made both countries better off to an extent in which its citizens can consume a particular product more than it can produce due to specialization. Innovations in technology also enabled us to “live a better life” – by better life, I mean food surpluses, and the increasing variety of products to name a few.

But the advantages offered by Capitalism can be a double-edged sword. While competition may motivate people to innovate and provide better services, history has shown that competition has not been so kind towards the people who have been unable to keep up with the times such as the artisans, blacksmiths, and to some extent, the manual laborers of the old days. Critics have pointed out on how the ownership of private property had made people greedy and selfish. Such ideas can be traced to Karl Marx, a name most associated with the ideologies of “Socialism” and “Communism”. Marx also pointed out on how the system has exploited the masses by compelling them to work in factories with low wages. To remedy this, he proposed the overthrow of the bourgeoisie, abolition of private property and social classes as means to achieve “equality”. (Curtis)

Now, the abolition of private property, one of the distinguishing factors of Capitalism, might seem to be a good solution in achieving equality and happiness among us as the socialists suggest, but I beg to differ on the same reason Aristotle opposed Plato’s idea of abolishing of private property:

“For that which is common to the greatest number has the least care bestowed upon it. Everyone thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual. For besides other considerations, everybody is more inclined to neglect the duty which he expects another to fulfill; as in families many attendants are often less useful than a few.” (qtd. in Schmitt)

For one, it deprives people of any sort of motivation to work hard. Second, it puts progress into stagnation since people do not receive incentives in attempting to “improve” our quality of life. Third, as this is the most important, it is not private property that causes evil, but it is the wickedness of the nature of human beings (as what I have argued in the third paper).

Critics would point out that the current financial crisis had proved Capitalism to be a failure. However, there are too many factors to consider on why the crisis occurred in the first place. Government policies, “the war on terror”, and the “real estate boom” are just some (but sort of the primary) of the reasons that caused the financial crisis. The latter, with the matter being too complicated to be explained in this paper, can be simplified by saying that too many people invested in the real-estate business but a few only wants to buy it, and since the banks are the ones lending these investors, this lead to bankruptcies and the rest is history. Therefore, it was not really Capitalism that is the failure here, but poor US government policies that caused a chain reaction to the rest of the world.

Socialism, on the other hand, abhors competition and private property. But while eradicating competition and private property might be “pleasing” since competition allegedly makes people’s lives worse off and private ownership of property breeding greed, the fall of the USSR and the Iron Curtain reinforces the notion that Socialism only looks good on paper, and is never feasible to be implemented. After the fall of the Soviet Union, former Communist countries then scrapped the concept of a centralized economy, switched to a market economy and have since enjoyed economic prosperity (Samuelson 25). What’s more, the failure of Chairman Mao’s “Great Leap Forward” policy eventually allowed foreign companies and enterprises to operate and invest within China. Again, this just goes to show that a state in which government have too much power in meddling with economic affairs, tend to worsen the situation rather than fix it. There are numerous “rags to riches” stories to know about that shows Capitalism has been a successful economic system. Even my grandfather (on my father’s side) escaped “Communist China” and started a family here in the islands. Doesn’t that tell you something? History have shown us that Socialism is a failure no matter how socialist theorists say that it has never been done right by the ones practicing it. The idea itself is never compatible with human beings; we are too “selfish” to achieve such utopian concept. Russia has tried it, China has tried it, some countries in Latin America have tried it, but look at them now. Even North Korea’s “Juche” ideology is a failure.

Since humans have this tendency to be selfish (admit it), it is of no doubt that Capitalism, while not a perfect system, has been a successful economic system. Why? Because besides being compatible with the “wicked” nature of human beings, it also values production and output by giving incentives. These incentives have paved way for modernization, improvement, and originality through human motivation and wit. From cars, ipods, and even this laptop that I am using to encode this essay can be attributed to Capitalism. While it may be true that Capitalism has its cons, there is no such thing as a free lunch, for there will always be trade-offs not just in the economic sense but life in general. You cannot eat your cake, and have it too.

References:

Curtis, Michael. The Great Political Theories, New York: Avon Books

Samuelson, Paul A., and William D. Norhaus. Economics. 18th ed. New York: McGraw-Hill,

2007. Print.

Schmitt, Gavin C., “Plato and Aristotle on Private Property.” The Framing Business, 12 Jan. 2010. Web. 08 Oct. 2010.

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