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Essentials of Capitalism

[Preamble | Manifesto | Agenda]

("borrowed" fromhttp://www.ndsu.nodak.edu/instruct/dooley/AE110/chapter4.htm )

CAPITALIST IDEOLOGY

The framework for capitalism depends on understanding six assumptions

1. Private property

2. Freedom of enterprise & choice

3. Role of se lf-interest

4. Competition

5. Reliance on the price or market system

6. A limited role for government

1. Private Property

In general, property belongs to individuals, not the stateIndividuals include businessesWe still have public (or government) ownership of some property

Individuals can:Negotiate contracts to use their private property as they see fit.

This leads to exchange of property.Have the right to bequeath or designate who receives property whenthey die.

Property rights act as an incentive to:Invest and innovateExchange and economic growth

Property rights extend to intellectual property.E.g., patents, copyrightsMany differences around the world

Nevertheless, there are some legal limits to the use of private property.E.g., zoning laws

2. Freedom of Enterprise and Choice

Firms, owners of capi tal, workers, and consumers make choices aboutresource allocation.

Freedom of Enterprise - means that producers are free to chooseWhat economic resources they wish to use,What goods or services they wish to produce, andWhat markets they wish to sell to.

Freedom of Choice means for:property owners can use their property as they wish.

workers can work at jobs they choose (assuming they are

qualified).consumers can buy the goods and services that satisfy their 

wants, subject to their income.Consumer is king in the economy as they determinewhat the businesses will ultimately produce.

3. Role of self-interest

Each economic unit does what is best for itOwners of property try to maximize their profit.

Workers try to maximize their income

Consumers try to maximize their utility [or satisfaction]

4. Competition

Large numbers of buyers and sellers Acts to spread economic power within businesses and householdsIndividual households or firms are a small part of the total. Their actions do not affect the market as a whole.

Entry & exit

Flexibility to adjust to changes in consumer tastes, technology,resource supplies.

5. Markets & Prices

Market is a mechanism to bring buyers and sellers of a good or servicetogether.

 Acts as a communication system which tracks and balances

individual choices. Allows the various players in the system to make informeddecisions.

6. Limited Government

Capitalism leads to an efficient use of resources.Some believe that the market is self-regulating and government shouldlimit its involvement.InChapter 5, we will study some limitations of capitalism that lead to a rolefor government.

OTHER CHARACTERISTICS

Capitalism is marked by three other characteristics:

1. Extensive use of capital  goods

2. Specialization and efficiency

3. Use of money

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1. Extensive use of capital goods

State-of-the-art technologyThink of changes in farmingLook at the computer center 

Extensive use of technology and capitalThis means capitalism favors large scale production, complexequipment

Simply put, those who effectively use technology, tend to make moremoney.

2. Specialization and efficiency

Specialization allows for efficiencies in productionConsider your professors, they all have an area of expertise

Division of labor 

This means human resources specializationTake advantage of individual differencesLearning curve effects - we learn by doing Avoid time lost in shifting tasks

Geographic Specialization - (land)Concept of specialization extends to land.

Wheat, coal, orangesComputers, medical devices?

Comparative AdvantageSpecialization and trade can increase overall position of bothparties if comparative costs for two products differs.Concentrate on what you do bestTrade for other items with someone else

3. Use of Money

Medium of exchange Acceptable by buyers and sellersFacilitates trade in more itemsToday it is paper 

Tomorrow will it be e-money

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