How does capitalism impact people?

 

How does capitalism impact people?

The kind of impact that capitalism has on your life depends on whether you’re a worker or a boss. For someone who owns a company and employs other workers, capitalism may make sense: The more profits your company brings in, the more resources you have to share with your workers, which theoretically improves everyone’s standard of living. It’s all based on the principle of supply and demand, and in capitalism, consumption is king. The problem is that many capitalist bosses aren’t great at sharing the wealth, which is why one of the major critiques of capitalism is that it is a huge driver of inequality, both social and economic.

Capitalism takes the position that “greed is good,” which its supporters say is a positive thing — greed drives profits and profits drive innovation and product development, which means there are more choices available for those who can afford them. Its opponents say that capitalism is, by nature, exploitative, and leads to a brutally divided society that tramples the working classes in favor of fattening the rich’s wallets. The Occupy Wall Street movement, for example, began as an anti-capitalist protest against “the 1%” — the richest of the rich of the capitalist class — and asked why they are allowed to grow fat and happy while 20% of all American children live in poverty.

Capitalism and Its Impact on Global Living Standards

Fundamentally, it must be said straight away that capitalism has been, and still is, an incredibly overwhelming positive force for the world and is easily the most successful economic system that has ever been produced. Since the time of Karl Marx, the embourgeoisement of populations has led to greater financial and social security, as well as, fulfilling careers that were once reserved for the elite. With the right saving plan, many will buy their own home, start their own business, save for their pension and enjoy unprecedented levels of leisure time. Just in case you are still not convinced why this is the single greatest economic system ever invented, let us examine the past. Technology has created more jobs than it has destroyed in the colossal world population boom in the last 144 years. Work is more fulfilling as dull jobs have been automated and creative careers becoming more numerous. Incredible advanced in medicine, accountancy and professional services were made under capitalism, and essential products like the television have seen a 98% fall in real-price since 1950.

Other areas of living standards have skyrocketed such as education (and female education), skills, information and social mobility. But most of all, capitalism as a form of trade and enterprise has been the engine in the immense reduction of world absolute poverty as The Guardian writes “In the past 200 years, extreme poverty has collapsed from a whopping 94% of the entire world population to less than 10% today”. 60,000 people are escaping extreme poverty every day because of trade. But if capitalism is so good, why are there huge swathes of populations still poor and suffering today? Capitalism isn’t the cause of this poverty but rather that there is a lack of capitalism that affects these areas. Government corruption, war, political instability and other structural problems prevent power being placed into the markets and operating efficiently in these areas.

The argument that the above graph has nothing to do with capitalism is nonsense. If you look at the graph below you will also see an exponential rise in GDP per head which is attributed to a huge increase in global wealth as countries industrialised and traded. After colonialism ended in the 20th century, there was an acceleration in GDP per head occurred as many countries became independent, based their currencies on the Gold Standard and then later the principles of the Washington Consensus.

Problems of Capitalism

Capitalism is an economic system based on free markets and limited government intervention. Proponents argue that capitalism is the most efficient economic system, enabling improved living standards. However, despite its ubiquity, many economists criticise aspects of capitalism and point out is many flaws and problems. In short, capitalism can cause – inequality, market failure, damage to the environment, short-termism, excess materialism and boom and bust economic cycles.

1. Inequality

The benefits of capitalism are rarely equitably distributed. Wealth tends to accrue to a small % of the population. This means that demand for luxury goods is often limited to a small % of the workforce. The nature of capitalism can cause this inequality to keep increasing. This occurs for a few reasons

• Inherited wealth. Capitalists can pass on their assets to their children. Therefore, capitalism doesn’t cause equality of opportunity, but those born in privilege are much more likely to do well because of better education, upbringing and inherited wealth.
• Interest from assets. If capitalists are able to purchase assets – bonds, house prices, shares, they gain interest, rent and dividends. They can use these proceeds to buy more assets and wealth – creating a wealth multiplier effect. Those without wealth get left behind and may see house prices rise faster than inflation.
• The economist Thomas Piketty wrote an influential book Capital in the Twenty-First Century, which emphasised this element of capitalism to increase inequality. As a general rule, Picketty argues wealth grows faster than economic output. He uses expression r > g (where r is the rate of return to wealth and g is the economic growth rate.)

2. Financial instability/economic cycle

Capitalism relies on financial markets – shares, bonds and money markets but financial markets have a tendency to cause booms and busts. In a boom period, lending and confidence rise, but frequently markets get carried away by ‘irrational exuberance‘ causing assets to the spike in value. But, this boom can quickly turn to a crash when market sentiment changes. These market crashes can cause economic downturns, recession and unemployment. At various times, capitalism has suffered prolonged recessions (the 1930s), periods of mass unemployment and a decline in living standards.

3. Monopoly Power

In a free market, successful firms can gain monopoly power. This enables them to charge higher prices to consumers. Supporters of capitalism argue only capitalism enables economic freedom. But, the freedom of a monopoly can be abused and consumers lose out because they have no choice. For example, in industries like tap water or electricity supply, which are a natural monopoly, consumers have no alternative but to pay the prices charged by consumers. In the Nineteenth Century, monopolies like Standard Oil bought our rivals (often with unfair competitive practices) and then became very profitable.

4. Monopsony

Monopsony is market power in employing factors of production. For example, firms can have monopsony power in employing workers and paying lower wages. This enables firms to be more profitable but can mean workers don’t share from the same level of proceeds as the owners of capital. It explains why with increasing monopsony power we have seen periods of stagnant real wage growth while firms profitability has increased (2007-17 in UK and US)

5. Immobilities 

In a free market, factors of production are supposed to be able to easily move from an unprofitable sector to a new profitable industry. However, in practice, this is much more difficult. E.g. a farmworker who is made unemployed cannot just fly off to a big city and find a new job. He has geographical ties to his birthplace; he may not have the right skills for the job. Therefore, in capitalist societies, we often see long periods of structural unemployment.

6. Environmental costs and externalities

In capitalist economies, there is limited government intervention and reliance on free markets. However, market forces ignore external costs and external benefits. Therefore, we may get over-production and over-consumption of goods that cause harmful effects to third parties. This can lead to serious economic costs – pollution, global warming, acid rain, loss of rare species; external costs that damage future generations.

7. Encourages greed/materialism.

 The nature of capitalism is to reward profit. The capitalist system can create incentives for managers to pursue profit over decisions which would maximise social welfare. For example, firms are using theories of price discrimination to charge higher prices to consumers who want to jump the queue. This makes sense from the perspective of maximising profit. However, if we have a society, where the rich can pay to jump a queue at a Fairground – or pay to see Congressman quicker – it erodes social norms and a sense of ‘fair-play’