Understanding Capitalism: Key Features and Arguments

1. Professional and Business Ethics Prof. Peter Hadreas Spring, 2014 Course Website: http://www.sjsu.edu/people/peter.hadreas/courses/ProfandBusEthics/ 1

2. ANSWER KEY FOR MIDTERM 2

3. LETTER GRADE EQUIVAlENCE FOR MIDTERM SCORES 3

4. GRADING ON EXTRA-CREDIT ASSIGNMENT(S) 4

5. Review from last class What is Capitalism? An economic system in which capital goods are owned, for the most part, (>50%) by private parties.1 Privates parties may be individual people, companies or corporations. 1. Samuelson, Paul E. and Nordhaus, William D., Economics, 13th edition, (New York: McGraw Hill, 1989), p. 967. 5

6. What are capital goods? Definition: Goods and services, which are not land or labor, and which produce other goods or services. For example: A steel mill or ‘Facebook’ 6

7. SUMMARY • All Five Epochs of Capitalism: • Manufacturing • Machinofacturing • Financial • State-Welfare • Informational • may be still encapsulated by the basic formula: • M ➔ C ➔ M’ 7

8. Key features of capitalism • Private property • Profit motive • Competition • Companies or firms separate from the people who work for them 8

9. Arguments for Capitalism • Capitalism greatly accelerates economic growth. • Private Property is a Right. • An Economy that is Market-based is the Most Efficient Way to Distribute Goods and Services. • Democracy and capitalism support each other. 9

10. Argument I for capitalism: Capitalism greatly accelerates economic growth From 1000 to 1820 A. C. E. there was an average per capita growth world-wide of 50 %. When capitalism began to prevail world-wide, between 1820 – 1998, there was an average per capita growth world-wide of 900%.1 1. Martin Wolf, Why Globalization Works, pp. 43-45. 10

11. Argument I: Capitalism greatly accelerates economic growth World GDP per capita between 1500 and 1998 expressed in 1990's international dollars. Graph is derived from data in Table B-18. (World GDP) and Table B-10. (World Population) published in The World Economy: A Millennial Perspective by Angus Maddison, OECD, Paris 2001 ISBN 92-64-18998-X 11

12. Question: Is there a downside to the massive economic growth, and population growth, that the development of capitalism produced? 12

13. Argument II for capitalism  Private Property is a Right. Recall: Capitalism is an economic system in which capital goods are owned, for the most part, (>50%) by private parties.1 1. Samuelson, Paul E. and Nordhaus, William D., Economics, 13th edition, (New York: McGraw Hill, 1989), p. 967. 13

14. So what’s so good about private property? 14

15. \ Chapter V, “Of Property.” John Locke (1632-1704) 15

16. Argument II: Private Property is a Natural Right “Every man has a property of his own person: This nobody has a right to but himself. The labor of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature has left it in, he has mixed his labor with, and joined to it something that is his own, and thereby makes it his property.” John Locke (1632-1704), Second Treatise on Government, Chapter V, “Of Property.” 16

17.  QUESTION It’s often stated that native Americans had no concept of private property. Native Americans practiced communal ownership. The entire tribe owned the land on which they lived. Can we put John Locke’s ‘natural right’ to private property in a historical context that explains its importance? 17

18.  QUESTION If you accept that, at least legally, there is a right to private property, is there ever absolute ownership of property – that is ownership that is in no way restricted, legally, by somebody else’s interests? Can you have absolute ownership of A house? A car? A bottle of beer? 18

19.  QUESTION What then does the legal right to private property amount to? 19

20. Argument III for capitalism: The social usefulness of markets. Market-based economies are especially socially useful in the manner they distribute good and services. 20

21. Adam Smith (1723-1790) 21

22. There is an ‘Invisible Hand’ that serves society through markets “By directing [his] industry in such a manner as its produce may be of the greatest value, [the individual] intends only his gain, and he is in this, as in many other cases, led by an invisible hand that was not part of his intention.” Adam Smith, An Inquiry into the Nature and Causes of Wealth of Nations [1776]. New York: The Modern Library, n. d.), p. 423. 22

23. QUESTION For Smith’s Invisible Hand to do its work, what legally enforced institutions need to be operating? Legally enforced Institutions. 23

24. “It is not from the benevolence of the butcher, the baker, and the brewer that we expect our dinner, but from regard for their own self-interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.” Adam Smith, An Inquiry into the Nature and Causes of Wealth of Nations [1776]. New York: The Modern Library, n. d.), p. 14. 24

25. QUESTION It’s often not appreciated how revolutionary was Adam Smith’s idea of the ‘Invisible Hand.’ It shifted moral right and wrong from the actions and feelings of individuals to an economic system. How is that revolutionary? 25

26. Argument III continued • So why is an Economy that is Market-based • the Most Efficient Way to • Distribute Goods and Services? • It serves the buyers’ needs. • It uses resources efficiently. • It establishes a fair price. 26

27. Argument IV for capitalism: Democratic governments are correlated with capitalism. 27

28. Argument IV: One longstanding explanation of how capitalism and democracy are connected: Markets develop individualism. 28

29. Argument IV: Democracy correlates with capitalism. Declarations of human rights occurs at the same time as the development of Industrial Capitalism 1. The U. S. Constitution: Bill of Rights (1791) 2. French Declaration of the Rights of Man and the Citizen (1789) 3. British Reform Act extended voting rights and made trade unions legal (1832) 4. The abolition of serfdom and slavery, in Britain (1833), in France (1848), in the Netherlands (1863), in all of U. S. (1865). 29

30. Argument IV: Democracy correlates with capitalism Free markets coordinate economic activities through voluntary co-operation. This depletes authoritarian political power. “By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.”1 Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), Chapter 1, "The Relation Between Economic Freedom and Political Freedom.” 30

31. Argument IV: Democracy correlates with capitalism. PROBLEM The correlation seems to be true in the past but it may not be in the future: In the past two decades the private capitalistic sector has grown exponentially in Far East nations, especially China. 31

32. China: Authoritarian, ‘Market Leninism’ 32

33. Viet Nam: Authoritarian, (Market Leninism) 33

34. Singapore: "hybrid" country, with authoritarian and democratic elements. 34

35. QUESTION So the argument is that capitalism thrives on economic freedom and that freedom depletes the power of authoritarian regimes. Then, how can we explain the enormous capitalistic growth in China, Viet Nam and Singapore? They are not democracies. 35

36. slide 33, information about Khaled Mohamed Saeed: downloaded from http://en.wikipedia.org/wiki/Khaled_Saeed on February 5, 2013. slide 33, picture of Khaled Mohamed Saeed: http://en.wikipedia.org/wiki/File:Khaled_Mohamed_Saeed.jpg slide 33, picture of Wael Ghonim: http://en.wikipedia.org/wiki/Wael_Ghonim 36

37. Arguments for Capitalism • Capitalism greatly accelerates economic growth. • Private Property is a Right. • An Economy that is Market-based is the Most Efficient Way to Distribute Goods and Services. • Democracy and capitalism support each other. 37

38. Arguments Against Capitalism 38

39. Arguments Against Capitalism • Capitalism fosters income inequality. • The efficiency of markets fails under specific conditions. • Capitalism causes the exploitation and alienation of workers without capital. 39

40. Capitalism fosters income inequality. • Even without taking into account that some buyers are discerning and more patient, market transactions over time will increasingly lead few to have nearly all the wealth and the great majority to have nearly none. 40

41. The Yard Sale Model • Image a ‘yard sale’ exchange where 1000 buyers and sellers are selected randomly and the people who make the better (or worse) bargain are also selected randomly. Add only one restricting condition: no person can spend more than he or she has. • What do you think the result will be? 41

42. The Yard Sale Model • Amazingly, in the ‘yard sale’ exchange model, given enough transactions, all the money will eventually go to ONE seller and the remaining 999 sellers lose all their money! • It will take many transactions – roughly 107 – but the arrival at one person having all the money will be inevitable. • Slava Ispolatov, Paul L. Krapivsky, Sidney Redner, “Wealth Distributions in Asset Exchange Models, (1998), The European Physical Journal B 2, pp. 267–76.” 42

43. ⬅start of random market transactions – continuation of random transactions ➜  The horizontal channels represent individual traders and vertical channels show the gain or loss in transactions between traders. In this model who gains or loses is selected randomly, as is the amount of gain or loss. The only limit is that poorer trading partner cannot lose more than s/he has. All traders start out equal at the top of the diagram, but wealth becomes more and more concentrated as transactions continue. Brian Hayes, “Follow the Money,”Group Theory in the Bedroom and Other Mathematical Diversions, p. 42. 43

44. Capitalism fosters income inequality continued. • Wealth Condensation • Newly-created wealth concentrates in the possession of already-wealthy individuals. Why? • Savings from the upper-income groups accumulate faster than savings from the lower-income groups, who frequently only make enough to cover their consumption. • The rich tend to provide their children with a better education, increasing their chances of achieving a high income. • The wealthy often leave their children with a greater inheritance, continuing the process of wealth condensation for the next generation. 44

45. Leaving aside its causes, there is little question wealth inequality exists throughout the world. 45

46. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income) You obtain the Gini coefficient by picking randomly any two people in a society, computing their difference in incomes and average this difference. Then to relate it to the particular society, divide the amount by the average income in the society. https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html Gini Coefficient World CIA Report 2009. 46

47. Capitalism fosters income inequality. • According to statistics from the 2010 Census Bureau, the top 20% of America's highest earners received 49.4% of the country's total income. Those living below the poverty line earned 3.4% of the total income. The ratio is 14.5:1, nearly double the low of 7.69:1 recorded in 1968. • http://www2.census.gov/census_2010/01-Redistricting_File--PL_94-171/> 47

48. Capitalism fosters income inequality. • According to statistics from the 2010 Census Bureau, the top 20% of America's highest earners received 49.4% of the country's total income. Those living below the poverty line earned 3.4% of the total income. The ratio is 14.5:1, nearly double the low of 7.69:1 recorded in 1968. • http://www2.census.gov/census_2010/01-Redistricting_File--PL_94-171/> 48

49. If a market system does by its nature develop economic inequalities – a split between the rich and the poor -- then some degree of a ‘mixed economy’ would seem to follow, that is mixed between private-owned and government-owned. The question is what kind of mix? Typical controls of income inequality: 1. Public education. 2. Progressive taxation. 3. Minimum wage legislation. 4. Government programs that enable the poor to obtain goods and services that everyone needs: food, healthcare, and housing. 49