Capitalism: Great but Not Perfect, Research Paper Example

Capitalism involves ownership of factors of production by private citizens (Clore, 2008). In contrast, socialism refers to ownership of factors of production by the state (Thompson, 1993). Another way to understand the difference between capitalism and socialism is that the economic activity is undertaken by the private sector in capitalism while government controls the economic activity in socialism. The government’s role in capitalism is usually limited to creating and enforcing laws as well as ensuring fair competition. Capitalism may be the best market system but it is not perfect.

The economic progress by capitalist countries over the last two centuries is a historical fact (Thompson, 1993). It is reasonable to conclude that capitalism has triumphed over socialism because it brings greater overall economic prosperity to the nations. The globalization trend has lend further credibility to capitalism because the free flow of capital has helped improved the quality of lives in many emerging economies including China, India, Brazil, and Vietnam. Thus, there is a tendency in capitalism supporters to assume that capitalist principles are perfect and a country should adopt capitalist ideas without any compromise.

While historical evidence proves capitalism has indeed been superior to socialism in terms of economic progress, it will be a mistake to assume that capitalism is perfect and has no shortcomings. One of the earliest events in America to expose the shortcomings of the capitalist system was the Great Depression of the 1930s. The Great Depression started during the presidency of Herbert Hoover. President Hoover believed that the government has no role to play in the economy and the market forces will take actions to correct themselves without the government needing to do anything. In other words, President Hoover believed that the capitalist system is capable of correcting itself and getting the nation out of the crisis. Thus, it is not a surprise that President Hoover’s administration refused to authorize government relief programs as well as financial aid to recover the nation’s struggling economy (United States History). The failure of President Hoover’s approach demonstrates that capitalism is not capable of functioning effectively on its own and its assumptions do not always materialize in the real world.

President Hoover’s successor President Franklin D. Roosevelt held exactly opposite beliefs regarding government’s role in the economy. President Roosevelt was of the opinion that government has a role to play in managing the nation’s economy and the market forces by themselves are not capable of lifting the nation out of the Great Depression. In other words, President Roosevelt believed that capitalism requires government support to function properly (Foner, 2010, P. 172-173). This is why President Roosevelt didn’t hesitate in challenging the conventional wisdom at the time. He authorized several large-scale government programs to lower unemployment rate and boost economic productivity as well as financial regulations to restore public confidence in the markets. Some of the agencies, programs and regulations introduced by President Roosevelt’s Administration include Agricultural Adjustment Administration (AAA), Securities and Exchnage Commission, the Glass-Steagall Act, and the National Industrial Recovery Act (NIRA) (Miller Center, University of Virginia). The success of President Roosevelt’s initiatives proved that capitalism may be the best system but it is not as perfect as the economic theories may have led us to believe.

If the Great Depression was not enough to convince ardent supporters of capitalism that even capitalism has shortcomings, the recent financial crisis should be sufficient to do so. The financial crisis of 2007 has been called the worst crisis since the Great Depression (Paletta, Ng, & Hilsenrath, 2008). Both the Great Depression and the 2007 Financial Crisis have proven that some of the assumptions underlying capitalism do not hold true in the real world. Capitalist theory also assumes that markets are rational, thus, they will quickly correct any inefficiencies. It also states that capitalism makes markets more efficient through competition and letting failed businesses go out of operations improve the overall efficiency of the system. In this regard, capitalism has some similarities to the biological concept of evolution in which only the fittest survive. But the causes of both the Great Depression and the 2007 Financial Crisis prove that some of the ideas underlying capitalism either do not hold true or may not be practical in real world conditions.

Speculation was one of the primary factors behind both the Great Depression and the 2007 Financial Crisis. In case of the Great Depression, it was speculation in the stock market (Romer, 2003) while the 2007 Financial Crisis was preceded by rampant speculation in the subprime mortgage market (Paletta, Ng, & Hilsenrath, 2008). Speculative investments are not the result of informed decisions and careful analysis of available data as the capitalist ideas may influence us to believe but simply the result of following the crowd. Speculative investments are influenced by emotions such as greed and unrealistic optimism. This is why we witness economic bubbles in which stock prices do not accurately reflect the overall value of the underlying companies. The historical observations prove that investment decisions are not always informed but also the outcome of prevalent emotions in the market. The Great Depression and the 2007 Financial Crisis should convince us that markets do not always act logically. They are influenced by emotions and crowd behavior.

Capitalist theory also proposes that markets can monitor themselves. If it were true, President Hoover’s approach should have worked during the Great Depression but instead his policies only worsened the situation. It only took President Roosevelt’s wisdom and extensive government involvement to recover the nation from the Great Depression. Similarly, many large banks and companies would have failed if it were not for the actions of the federal government during the recent financial crisis such as the Troubled Asset Relief Program (TARP) 2009 (The Department of the Treasury, 2012). According to capitalist ideas, the government should have let them failed because the failure of inefficient companies improves overall efficiency of the economic system. But if the government had not bailed out banks and large organizations like AIG, it would have led to a series of bank runs and possibly the collapse of the entire financial system. This once again proves that certain ideas of the capitalist theory may be impractical under certain circumstances. It’s not a surprise that the events of the 2007 Financial Crisis even persuaded U.S. Treasury Secretary in President Bush’s Administration, Hank Paulson to declare that raw capitalism is dead (Sloan & Serwer, 2008). It was admission on his part that capitalism has certain shortcomings and is incapable of functioning effectively on its own.

Even the experiences of our close ally, U.K. reflect the dangers of minimum government role in the economy, especially during struggling times. Unlike the U.S., British Prime Minister David Cameron’s Administration cut back government spending which some believes has worsened the economic situation (O’Connor & Cohen, 2012). Some British economists even fear the longest double-dip recession in half a century later this year (Wearden, 2012). Unlike U.S., British government has shown greater confidence in the markets to deal with the crisis but the approach has been backfiring, forcing some economists to predict even more difficult economic climate ahead. Thus, the experiences of two countries following different approach to the crisis proves that government’s intervention improves the functioning of capitalism.

The recent healthcare law in the U.S. has also been dubbed a socialist measure by the critics. The critics tend to forget that even the most capitalist economies are not entirely capitalist in nature and may have certain economic characteristics that are socialist in nature. Just as capitalism is not perfect, not every single element in socialism is incompatible with the capitalist economies. Free market systems often done a poor job of allocating resources to needs that are essential rights of citizens but may not yield the highest profit. This is because capitalism strives for profit maximization. This is why public education is free for everyone even in capitalist countries irrespective of the economic status of individual citizens. Education sector shaped by capitalist principles may exclude a significant proportion of the population because they may not be able to pay for it. Similarly, healthcare is also a basic right that should be available to everyone irrespective of their ability to pay for it. Countries such as Australia, Canada, Ireland, and U.K. have universal healthcare systems (Gold, 2011) but no one would consider them socialist countries if asked to classify the market structure prevalent in these respective countries. In addition, the healthcare statistics in the U.S. lags behind many industrialized countries which again demonstrates that sometimes capitalist market structures do have serious shortcomings in terms of performance. The U.S. has the highest infant mortality rate among industrialized nations and the average life expectancy is even lower than the countries like Chile and Cuba (Gold, 2011). Healthcare system in the U.S. has lower government involvement as compared to many industrialized countries yet the overall health standards lag behind even socialist countries. This is a proof that capitalism doesn’t always lead to the greatest welfare of the society, especially when it involves essential goods and services such as education and healthcare.

One could also argue that the healthcare services such as Medicare and Medicaid are socialist in nature and similarly, the food stamp program. But if the society doesn’t provide safety net to the least advantaged members of the society, the social unrest may cripple the whole economy. One of the shortcomings of the capitalist system is its usual focus on apparent rewards such as profits and its ignorance of implicit benefits such as more healthy workers and greater economic productivity due to fewer missed workdays.

Capitalism has proven its economic superiority over socialism on the basis of historical facts but a blind faith in capitalist principles could have negative consequences. Capitalist system is the best but being the best doesn’t equate to perfect. The Great Depression and the recent financial crisis have proven that the government plays an important role in the efficient functioning of the economy. Similarly, certain goods and services should be provided by the government because they are essential rights of the citizens and many would be excluded if the distribution of certain essential goods and services is left to the private sector.

References

Clore, D. (2008, July 15). Socialism and Capitalism. Retrieved September 14, 2012, from http://www.nolanchart.com/article4246-socialism-and-capitalism.html

Foner, E. (2010). Franklin D. Roosevelt, “Greater Security for the Average Man” (1934). In Voices of Freedom (pp. 172-173). W.W. Norton Company, Inc.

Gold, S. (2011, June 7). Four healthcare systems divided by the English language. Retrieved September 14, 2012, from http://www.guardian.co.uk/healthcare-network/2011/jun/07/healthcare-systems-australia-medicare-canada-saskatchewan

Miller Center, University of Virginia. (n.d.). Franklin Delano Roosevelt: Domestic Affairs. Retrieved September 14, 2012, from http://millercenter.org/president/fdroosevelt/essays/biography/4

O’Connor, S., & Cohen, N. (2012, July 25). UK economy smaller than when Cameron took office. Retrieved September 14, 2012, from http://www.ft.com/intl/cms/s/0/4d4586da-d634-11e1-ba60-00144feabdc0.html#axzz21gAO305C

Paletta, D., Ng, S., & Hilsenrath, J. (2008, September 18). Worst Crisis Since ’30s, With No End Yet in Sight. Retrieved September 14, 2012, from http://online.wsj.com/article/SB122169431617549947.html

Romer, C. D. (2003, December 20). Great Depression. Encyclopaedia Britannica.

Sloan, A., & Serwer, A. (2008, September 18). How Financial Madness Overtook Wall Street. Retrieved September 14, 2012, from http://www.time.com/time/printout/0,8816,1842123,00.html

The Department of the Treasury. (2012, April). The Financial Crisis Response in Charts. Retrieved September 14, 2012, from http://www.treasury.gov/resource-center/data-chart-center/Documents/20120413_FinancialCrisisResponse.pdf

Thompson, C. B. (1993, October). Socialism vs. Capitalism: Which is the Moral System. Retrieved September 14, 2012, from http://ashbrook.org/publications/onprin-v1n3-thompson/

United States History. (n.d.). Herbert Hoover. Retrieved September 14, 2012, from http://www.u-s-history.com/pages/h1580.html

Wearden, G. (2012, July 25). Shock figures show UK economy plunged 0.7% in second quarter –. Retrieved September 14, 2012, from http://www.guardian.co.uk/business/2012/jul/25/eurozone-crisis-uk-gdp-recession#block-500fa00b95cbf53ae8fb1395