Let’s recap the content of module 9 and I’ll add some insights that I found interesting about the content of these weeks.
- Ch. 1 of Baumol’s The Free-market Innovation Machine
Capitalism is an economic system that has as one of its main principles competitions, especially among companies in the technology sector. Innovation, rather than the press, is the central force behind growth, where companies constantly try to introduce new services and products to remain competitive.
Innovation is an important tool for the survival of a company within the system. There is oligopolistic competition, where a number of small but giant companies drive towards innovation using their technological apparatus to remain competitive instead of competing on price.
Competition ultimately benefits society by promoting better products and services.
- Karl Marx (1848) Communist Manifesto
The Manifesto of the Communist Party was a document written in the mid-19th century, but it provides some insights into understanding capitalism (the defense of communism is based on criticism of capitalism). The authors defend the idea that in capitalism there is the oppressor and the oppressed, that in capitalism the workers (the proletariat) are oppressed by the bourgeoisie (the capitalists).
The bourgeoisie emerges from the ruins of the bankruptcy of the feudal system, establishing capitalism as the dominant economic system. The bourgeoisie’s wealth comes from the exploitation of wage labor.
To survive, the proletariat needs to sell its labor force. The system dehumanizes people, turning them into a kind of commodity that can be easily replaced. The wealth of industry generated by workers remains in the hands of a few people.
The intention of Engel and Marx’s work was to show workers their working conditions, so that they can revolt against the system and establish a classless society, thus ending the exploitation of labor. It was a work that generated many ideas and influenced many parts of the world.
- Undemanding Ethics of Capitalism – Cato Journal 2009
The text was written in 2009, very recently after the 2008 financial crisis, which had a major global impact. The author says that the crisis is not the fault of greed or self-interest, since this is a human trait and has always existed. Instead, the crisis was caused by the failure of public and private institutions to monitor and regulate economic activities. Niskanen categorizes human interaction into three forms: caring, exchange, and threat. Capitalism is based on consensual exchanges. Capitalism can involve more caring in large corporations because companies spend other people’s money. The author criticizes Pope Benedict XVI for maintaining more ethics in the global economic system, which he says is an unrealistic expectation. Niskanen reiterates Adam Smith’s ideas, saying that it is not benevolence but self-interest that drives the economy. The role of the sovereign is primarily to reinforce the right to property and contracts. While government can provide benefits from regulation, its coercive power to impose taxes and laws is a potential disadvantage.
- Wikipedia Article on Economic Systems
An economic system is how society organizes the production, allocation, and distribution of goods and services. It encompasses institutions, decision-making processes, and consumption patterns. The economic system addresses fundamental questions about how products are produced and distributed.
Market economy (capitalism): Decisions are driven by supply and demand, with private property as one of the foundations.
Planned economy (socialism): The government controls resources and production.
Mixed economy: Combines the free market with government regulations.
Traditional economies: Based on customs and traditions.
Each system raises questions such as what to produce, how to produce it, and for whom to produce it.
- Buchunan and Tullock’s Calculus of Consent’s Collected Works at Liberty Fund
The book shows how individual rationality can change group decisions. Individuals with self-interest will agree to certain institutional rules to ensure mutual benefit. Main ideals:
Individualism: Collective actions are based on individual choices.
Constitutional Decision-Making: rules must take into account long-term benefits and the costs of decision-making.
Costs of Collective Decision-Making: it is very difficult to achieve unanimity, so methods such as majority voting are used.
Public Choice: politicians make decisions in self-interest.
Majority Rule and Pareto Optimality: The majority does not always lead to socially optimal results.
- Henry Hazlitt Economics in One Lesson
It is a classic book that talks about the free market. Economic policies should seek long-term growth. Some ideas from the book:
The Broken Window Fallacy: If a window pane breaks, resources will be used to repair it, but the money used for this could be used for other things and in the end, the repair does not create any benefit.
Public Spending: There is a criticism of the money that is spent by the government. Higher taxation takes away resources from the private sector that could be used for consumption. The author does not see any sense in the government spending to create jobs, when the extra money in the private sector could create jobs.
Taxation and Production: High taxation reduces the incentive to invest and take risks. Decreasing economic growth and prosperity.
Government Credit: The author argues that intervention in the credit market causes a misallocation of resources. The government reduces efficiency.
Inflation and Wage Controls: Inflation and price controls cause distortions in the market and reduce workers’ income. Government interventions can cause problems in the supply and demand balance.
The Importance of Profits: Hazlitt is in favor of profit; it is healthy for the economy for companies to make a profit. He does not believe that profit is something of exploitation, profit is fundamental to efficiency and innovation.
Contribution Points Considering the learning from this week’s reading and materials. I would like to share some insights:
Market competition and trade
Competition is currently very important for us to have better products and services, but there is a trade-off between competition and the development of national markets. Would it be better to have better competition only in the national market, excluding foreign competitors? Well, we can think of the case of China, which is an economy that has many conditions for producing on a large scale and reducing costs because of this. When Chinese products reach the market, many producers from various countries want to prevent the entry of Chinese products. Another classic case is food production. Many underdeveloped and developing countries have more power of scale, have a more devalued currency and lower wages, because of this they are able to deliver a cheaper product to the market. Producers from rich countries such as Europe are unable to compete because they have a more valued currency, higher wages and more regulations. There are always reports of agricultural producers protesting and being outraged in Europe.
I see that many developed countries, when they benefit most from an economic sector, adopt a free market discourse, but when the scenario changes and they are no longer benefited, the political discourse changes and they call for customs barriers and state protection.
The Communist Manifesto
Engel and Marx were able to identify that the living conditions of the proletariat at the beginning of industrial capitalism in Europe were unhealthy, with long working hours, child labor, many people in poverty, many work accidents, etc. So it is natural for some people to be against the system and create movements to change the situation. Over time, the situation in capitalism in some economies improved, while other regions of the world decided to adopt communism. It was a new system that was tested and we all know that it did not work. Perhaps the most viable path was to improve capitalism from within, creating laws that protect workers, a society that guarantees better wages and better living conditions, but this struggle is ongoing.
Post-2008 crisis world
I sense a conflicting idea between Niskanen and Hazlitt, while Niskanen said that the problem of the crisis was not greed, but rather the lack of regulation, while Hazlitt believes that the government should not interfere in the credit market.
In my opinion, yes, it was a question of greed, the powerful in the financial market knew the trajectory of the decisions taken, but they did not care because they were making a lot of money in this time of easy credit. The American government saved many companies so that the damage of the crisis would not be greater, if it were a true market economy, there would be no government interference and solid companies and banks would survive on their own without government help.
I think so, the government has to pay very close attention and create heavy regulations for the financial market, creating strict rules to prevent collapse due to very risky actions by banks.
Taxation and economic exchanges
In economics, the Laffer curve is well-known. If the government starts to tax heavily, economic activity falls to a level that even the amount collected by the government falls.
The ideal situation is for the state to be smaller so that it generates less spending and thus leaves more money available for the private sector.
References
Bankrate. (2024, September 30). What is a bank bailout? Retrieved from https://www.bankrate.com/banking/what-is-a-bank-bailout/#:~:text=Through%20TARP%2C%20around%20%24245%20billion,Mellon%20and%20State%20Street%20Bank.
Euronews. (2023, November 27). Grapes of wrath: French winemakers protest government minimum pricing proposal. Retrieved from https://www.euronews.com/culture/2023/11/27/grapes-of-wrath-french-winemakers-protest-government-minimum-pricing-proposal#:~:text=French%20vineyards%20are%20in%20crisis,threatens%20to%20make%20things%20worse.&text=Thousands%20of%20winemakers%20gathered%20in,for%20minimum%20pricing%20on%20alcohol.
Hespress. (2024, May 1). Protests reemerge as French farmers target Moroccan products in European markets. Retrieved from https://en.hespress.com/84341-protests-remerge-as-french-farmers-target-moroccan-products-in-european-markets.html
Investopedia. (2024, September 23). Government financial bailout. Retrieved from https://www.investopedia.com/articles/economics/08/government-financial-bailout.asp
Investopedia. (2024, May 31). Laffer Curve. Retrieved from https://www.investopedia.com/terms/l/laffercurve.asp
ThinkChina. (2024, July 16). Chinese tomato paste imports stir debate in Italy. Retrieved from https://www.thinkchina.sg/economy/chinese-tomato-paste-imports-stir-debate-italy
World Trade Organization. (n.d.). DS250: European Communities—Measures affecting imports of canned tuna from Thailand. Retrieved from https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds250_e.htm
