capitalism

1. capitalism The variants Where have we come from the theory of capitalism?

2. -CAPITALISM-WHAT IS IT? • CAPITALISM USUALLY REFERS TO AN ECONOMIC SYSTEM • AN ECONOMIC SYSTEM WHERE THE MEANS OF PRODUCTION (CAPITAL) ARE PRIVATELY CONTROLLED • LABOR, GOODS AND CAPITAL ARE TRADED IN A MARKET • PROFITS ARE DISTRIBUTED TO OWNERS OR INVESTED IN NEW PRODUCTION

3. DIFFERENCES IN CAPITALISM STEM FROM: • THE EXTENT TO WHICH DIFFERENT MARKETS ARE FREE • RULES DETERMINING WHAT IS PRIVATE PROPERTY • RULES DETERMING OWNERSHIP RIGHT AND USE RIGHTS • THE RIGHT TO FIRE AND THEREFORE THE RIGHT TO HIRE • THE EXTENT THAT MONOPOLY, BOTH PRIVATE AND GOVERNMENTAL ARE EXERCISED IN THE MARKET

4. CAPITALISM AS A SOCIAL SYSTEM • A SOCIAL SYSTEM CENTERED AROUND PRIVATE RIGHTS, OPERATING MARKETS, PRIVATE PROPERTY OF SOME SORT • SOMETIMES ASSOCIATED WITH DEMOCRACY OF VARIOUS FREE AND REGULATED / CENTRALIZED FORMS

5. “CAPITALIST” • THE TERM CAPITALIST REFERS TO AN OWNER OF CAPITAL • A DEFENDER OF THE OWNERSHIP OF CAPITAL --- THE MEANS OF PRODUCTION • THE INVESTER IN THE MEANS OF PRODUCTION – CAPITAL • THE CLAIMENT OF THE PROFITS AND THE CAPITAL INVESTED

6. EARLY CAPTALISM • CHINA --- THE FISHING EXPLORATION • ISLAMIC CAPITALISM – 8TH – 12TH • CENTURIES • MERCANTILISM IN THE 16TH – 18TH CENTURIES - BUT FILLED WITH GOVERNMENT ( THE KING AHD THE KING’S COURT) INTERFERENCE • THE PRE-CLASSICAL PERIOD OF THE 1700’S

7. ANCIENT CHINESE TRADE Guan Zhong and the book Guan Zi (725-645 BC) The light heavy idea of the operation of markets Guan Zhong argued that when a good was abundant, it became light, and its price would fall--- when the good was “locked away”, it became heavy, and the good’s price would rise There are movements of goods into and out of markets based on their lightness and heaviness, with a tendency toward one price– equilibrium --- hence a statement of the law of supply & demand The movement “IN and OUT” of markets was trade

8. A TRANSELATED QUOTEGuan Zhong “INDEED, IT IS THE NATURE OF MEN THAT WHENEVER THEY SEE PROFIT, THEY CANNOT HELP CHASING AFTER IT, AND WHENEVER THEY SEE HARM, THEY CANNOT HELP RUNNING AWAY. WHEN THE MERCHANT ENGAGES IN TRADE AND TRAVELS TWICE THE ORDINARY DISTANCE IN A DAY, USES THE NIGHT TO EXTEND THE DAY, AND COVERS A THOUSAND LI WITHOUT CONSIDERING IT TOO FAR, IT IS BECAUSE PROFIT LIES AHEAD. WHEN THE FISHERMAN PUTS OUT TO SEA, THE SEA MAY BE TEN THOUSAND-REN DEEP, AND WHEN HE HEADS INTO ITS WAVES AND STRUGGLES AGAINST ITS TIDES, RAISES HIS SMALL MAST AND SAILS OUT A HUNDRED LI, NEVER LEAVING THE WATER FROM MORNING TO NIGHT, IT IS BECAUSE PROFIT LIES IN THE WATER. THUS, WHEREVER PROFIT LIES, EVEN THOUGH IT BE ATOP A THOUSAND-REN PEAK, THERE IS NO PLACE PEOPLE WILL NOT CLIMB. EVEN THOUGH IT IS AT THE BOTTOM OF THE DEEPEST DEPTHS, THERE IS NO PLACE PEOPLE WILL NOT ENTER.

9. INDEED, THOSE WHO ARE SKILLED IN GOVERNMENT CONTROL THE PRESENCE OF WEALTH SO THAT THE PEOPLE ARE NATURALLY CONTENT. WITHOUT PUSHING THEM, THEY GO; WITHOUT PULLING THEM, THEY COME. WITHOUT TROUBLE OR WORRY, THE PEOPLE ENRICH THEMSELVES. IT IS LIKE A BIRD SITTING ON ITS EGGS; THERE IS NEITHER SHAPE NOR SOUND, BUT THE YOUNG SUDDENLY APPEAR QUITE COMPLETE” GUAN ZHONG, GUAN ZI, VOL. II, TRANSELATED BY W. ALLYN RICKETT (PRINCETON, N.J.: PRINCETON UNIVERSITY PRESS, 1998), pp. 219-220.

10. Free markets are traced to the Islamic golden age and the Muslim agricultural revolution • Early forms of merchants markets • High value currency and monetary economy relative to barter

11. Anglo-Saxon model • Capitalist theory --- economy is based on the “invisible” hand idea of markets • Markets adjust according to the weight of supply and demand • Resources are allocated by the market ----- no single market participant administrates the market and its price • Property rights foundations – but has changed from time to time

12. Anglo-Saxon form is based in Great Britain tradition and law • Classical liberalism --- Adam Smith • Classical liberalism --- the law • ---- common law base of Great Britain • Lay Judges --- broad legal principles, court arguments are oral --- precedents --- social contract based on mutual delegation of powers to government (John Locke --- relative to Thomas Hobbes)

13. Limited intervention of government in the economy • --- Scottish law was more of Roman Law ---- but mixed with the Great Britain established law --- brought in property law and corporate organization • U.S. is an example of Anglo-Saxon capitalism--- but we have deviations from the theory of capitalism

14. The European Model • Based in German and French economies • Less faith in the “invisible” hand in the market • Constitutional order of socialism idea –(James Buchanan idea) • So the state has a higher order of activity in the economy and regulation

15. Here the Roman law rule of sovereignty and state head rule pervades the operation of the economy • Professional judges--- legal codes --- written records • More industrial state action and government ownership of industries • Examples are German, French, and Swedish economies

16. Roman law – Common Law– Napoleonic Law forms • --- common law --- consideration of common liability --- liable for negligence --- so you build to accommodate mistakes or safety problems --- Napoleonic law form has to have all the details of liability problems spelled out --- don’t have to build as safe as possible given current technology • Roman law sets up property as high form of ownership ---- protection for ownership even if won in battle or knavery!

17. Common vs civil law foundations • Common law --- Anglo-Saxon model • Custom, usage, court decisions, precedent • British, British Commonwealth, Israel, Hong Kong, and U.S. forms • Civil law--- (Roman law) • System of rules, codes, perhaps certain application • European, Argentina, Japan, South Korea

18. the Asian Model • The Asian model is more of a recent “experimentation” with capitalism • Most like the European model ---- state involvement in the economy • Intervention by government to form a high level of capital formation • The capital formation is a move to overcome the long backwardness of Asian economies over the centuries

19. Examples of the Asian model are the modern day • Japan • South Korea • Taiwan • “the so-called “miracle of the tigers” • China has moved to a market system, but with military state rule --- an experiment -- market socialism with market allocation

20. There are differences within these models --- Germany different than France --- a Polish European model and a Polish high state and union rule and intervention in the Polish economy • The Czech privatization --- now a highly monopoly industry type --- industrial state type of economy

21. Constitutional Foundations • The U.S. economy • James Madison concept --- rejects the “strong state” notions • Alexander Hamilton --- the strong state notion • So the constitution is set up to limit the powers of government p. 162 of Text • Separation of powers – broad outline

22. The worry about majority rule --- majority would vote to redistribute property --- the overbearing majority – in the mind of Madison p. 163 of Text • Or the fear of jealous minorities passing laws against minorities • Constitution is set up to prevent domination by factions

23. Private vs public sectors • Private sector = business sector == private ownership prevails ---- but we have 25% +- state ownership/operated in the U.S. ---- maybe 17% of GNP is produced by fully regulated industries --- today probably 80% of the economy is private • Government in the U.S. employs  16% of labor force ---- government employment has grown --- vendors to government have increased

24. Business organization in U.S. • Sole proprietorship • Partnership --- now LLC, LLP, PC • Corporation --- we get this from the Romans actually--- ‘an organization as an entity different than its owners” • Business revenues higher in the LLC, partnership, corporation organizations but most businesses are sole proprietorships • Bulk of output by the corporation

25. U.S. has an ongoing market for corporate control --- buy control of shares--- control the corporation ---- the corporate raiders • CEO’s receive fixed salaries, commissioned salaries, incentive salaries and stock options or warrants --- severance bonuses or “golden parachutes • Wait for weakness --- buy up and change management- then sell for a gain --- tradeoffs of gains relative to loss of trust, employees, suppliers, customers

26. The corporation is set up to maximize shareholder value --- not to maximize stakeholder value (the European model) • Control the share --- control the value • European model of capitalism protects the stake holder ---- the stake holder may be the government or be an administrative agency for the government that maximizes the government stake holding share • But we have the TVA, the Army Corps of Engineers, SEPA, government athletic teams, Bureau of Reclamation

27. Capital market – market for raising investment finance or capital --- primary the issuance of equities , the IPO--- secondary market is where the issued bonds & equities are exchanged • Shares are sold by underwriters who organize the initial sale of shares and operate via the Exchanges • More investment in the U.S. via issuance of stocks than through banks (the European model)

28. Opponents of the U.S. style argue that stock markets are too volatile ---- the Keynesian argument that real capital is investment and not the speculation of the exchanges --- arguing as a pseudo “European model” defender in his criticism of the Anglo-Saxon model • Concentration issues in the product market --- antitrust legislation and regulation of monopoly and breaches of competition

29. State right to tax • The U.S. constitution allows for the right of eminent domain --- the right to take property for public interest --- this forms the right to tax owners of property • Constitution contract clause – protection of contracts from state laws --- John Marshall as the guardian of constitutional protection of contracts --- courts are tribunals to protect property (a Roman concept actually) and to decide human rights

30. We generally have turned to administrative regulation by authority of a governor or other appointee to regulate in various areas of concern --- we have been going through some transitions on regulation as a result of authority of a budget agency , OMB rulings --- deregulation era as of 1970’s 1980’s in the U.S.

31. The labor market • The stakeholders of a corporation are the managers, employees, agents • But the interests of these stakeholders is of less importance than staying on the job in Anglo-Saxon form model --- different than in stakeholder protection mode of the European capitalism model

32. Labor unions are formed to attempt to balance or bring about countervailing power to change or transfer power to the stakeholder, particularly labor • Labor is allocated via labor markets in the U.S. • Government intervention has increased --- base is fair labor and standards act of 1938 – to establish standards, minimum wage, basis for overtime pay, child labor issues

33. Occupational Safety and Health Act of 1970 --- OSHA ---- job safety • European model brings in elements of “life time sinecure” in job status • Anglo-Saxon rule maintains right to fire --- if not allowed, then there is less hiring • We still have not solved the gender wage & income issue

34. The safety net --- welfare– income distribution • Pure Anglo-Saxon ---- self reliance • But the U.S. moves to Social Security --- it is a part of the latter portions of Adam Smith’s Wealth of Nations!! • Now becomes an entitlement in the nation’s budget --- other forms and safety nets become entitlements --- less flexibility in the budget

35. Income redistribution --- what percent of the population has what percent of the income --- the Lorenz Curve --- see p. 102 of the text • Redistribution is less a force in Anglo-Saxon capitalism --- but is more of a sentiment and in law in European capitalism --- comes from Judaic tradition of steward of the land – so we see it in Europe, Mexico, Latin America – land reform