The case for capitalism

Capitalism has been vilified by various groups in recent times. But while it is not perfect, there are some positive aspects that have made important impacts on the lives of millions.

Capitalism has had numerous critics, now and in the past. Karl Marx and Friedrich Engels vilified capitalism and its harmful impact on the masses in their work, The Manifesto of the Communist League. Otherwise known as The Communist Manifesto, along with Marx and Engels’ Das Kapital, it attempts to offer an alternative to capitalism while promising the same result: economic growth.

The problem is that The Communist Manifesto, Das Kapital, and the promises of economic growth under communism are all on the scrap heap of history. Communism never worked and while capitalism has had its faults, it still survives. Russia and China are attempting to become capitalistic societies. But even the Russian and Chinese leaders know that going from one system to another is difficult. However, they would rather experience capitalism than the economic stagnation of communism. Capitalism for all of its faults is still preferred by multiple nations in order to better provide economic stability, growth, and a chance for their people to improve their financial position.

Capitalism’s bad side

Capitalism is not perfect. Taken to its extreme, capitalism can actually place massive number of people into poverty and make a minority extremely wealthy. Under capitalism, to be able to leave the bounds of poverty can be very difficult and entrap future generations. The wealthy minority can become wealthier as time goes by due to their repressive means upon the poor majority. Through capitalism, the wealthy seek to maintain their position of power and reward only those who can help increase their wealth. The poor can try to rebel against their wealthy tyrants, but rarely with any success.

Capitalism, in its purest form, can set an economy to experience periods of extremes. This can include periods when the macroeconomy is at full employment, net worth is high, and financial markets are doing very well. Because the macroeconomy is booming, very few members of society will complain and only enjoy the great time. The problem is that the wealthy members of a society will only become wealthier and that this boom period cannot last forever.

When the macroeconomy takes a serious decline, then the poor will get hurt the worst while some of the wealthy will lose their financial base and become poor themselves. It is not unusual under a pure form of capitalism that the macroeconomy will go from one extreme, prosperity, to the other, economic depression and financial collapse.

It has occurred in the United States whether in the Great Depression of the 1930’s or the Financial Crisis of 2008-2009. Both periods, in different centuries, saw the macroeconomy enjoying significant economic growth categorized as boom times. The gross domestic product (GDP) of the United States was growing at a fantastic rate, the financial markets were enjoying phenomenal returns, businesses had substantial profits, and people, in general, saw their wealth grow by leaps and bounds.

The problem was that the good times could not last forever and a steep economic and financial decline was inevitable. The Roaring 1920’s with its huge economic expansion was followed by the Great Depression of the 1930’s. This was an economic depression unprecedented in the history of the United States in that it lasted a decade, saw the extensive loss of jobs, wipe out the fortunes of millions of people, and that it took a world war to get the nation’s economy back on its feet.

The time preceding the Financial Crisis of 2008-2009 also saw a period of economic growth in which the stock market was at a record high, people became wealthy just by staying at home and watching residential real estate values skyrocket, and these same homeowners used their houses as an automatic teller machine where they could literally take out home equity loans and get money whenever they needed it. This boom period resulted in the stock market declining to half its value, banks and investment companies either collapsing or needing to be rescued by the American taxpayer through the United States Federal Government, and the residential real estate market declined to such a level that 13 years later it still has not recovered.

In its purest form, capitalism experiences extremes in that when it is high no one wants the ride to end. And those enjoying the high feel it go on into perpetuity. But the problem is that the high must end at some point and that the low will be worse than they ever imagined. The poor will suffer the worst and actually see their numbers increase due to the aftermath of an economic downturn and financial collapse. The wealthy will either survive, become wealthier, or see their numbers decline due to a periodic shakeout. But despite this economic roller coaster, capitalism does have some positive attributes that have actually helped the American macroeconomy grow throughout the decades.

The significant strengths of capitalism

Capitalism has made significant contributions to the wealth and betterment of society, whether the critics wish to admit it or not. A key contribution has been that it can encourage competition to the point that producers make better products and provide improved services. Capitalism needs competition because producers of goods more often than not have an inherent sense of wanting to make a better product than their competitors. Whether it is food, airplanes, automobiles, or a computer program, producers know that in a capitalistic society they will be rewarded for making the better product. The producer, acting as the seller, knows that if they can build a better mousetrap, buyers will flock to them in droves. This encourages producers to make cheaper, efficient, effective, and better products than the competition and reap the rewards. This could be regarded as the reason why Henry Ford produced the Model T automobile, Steve Jobs and Steve Wozniak introduced Apple Computers, and Bill Gates and Paul Allen came up with Microsoft.

It was competition that very often drove companies to improve their original product line and were able to retain or increase their customer base. Consumers have some loyalty to producers, but even these loyal customers know a better product or service when they see it. A producer or seller must do what it can to keep their customers or else fall behind the competition and eventually find themselves on the scrap heap of business history. Companies such as Sears Roebuck and K-Mart, once regarded as giants in the retail brick-and-mortar industry, are now just memories and case studies of how failing to keep up with the competition will run them out of business.

Capitalism is also key to improving a nation’s GDP in the long term. The United States has seen its macroeconomy grow over the decades and resulted in improved living standards for its people. These new products can help the GDP of the United States grow over a period of time and eventually spread to the rest of the world. These new products can be the basis of trade and help other goods to make their way into the American market and provide other benefits for consumers. The bottom line is that capitalism helps a nation’s GDP to grow and prosper over time and eventually help individuals live a better life.

Due to capitalism, the American people can enjoy a variety of products, goods, and services that are the envy of the rest of the world. Not only do American consumers have a variety of products and services, but they will flock to the best ones and avoid those of poor quality or being terribly overpriced. American consumers may tolerate low quality products or services for a short time, but will gravitate to better quality at a reasonable and affordable price. This allows for consumer sovereignty since they will ultimately dictate what will be produced by choosing what to purchase and what to avoid. There is no central plan that overall rules the consumer, but rather consumer tastes and preferences. Capitalism responds to these individual tastes and preferences and rewards those who do so effectively and efficiently.

Capitalism also allows individuals to improve their lives through new products. For example, products such as computers have allowed individuals to write news articles, short stories, and books at a faster speed and allow them more creativity by using the internet for information at their fingertips. Soon, consumers will be able to get into their automobile and tell it where to go without having to use a steering wheel to drive it. There are numerous automobile companies around the world that are in competition to build the best autonomous vehicles at a lower price which will be based on electric power. The technology is still in its infancy, but because of the competitive element of capitalism, in about ten years, autonomous vehicles will be commonplace and we will all wonder how we lived without them. Remember, it was competition between pharmaceutical companies that allowed them to find a vaccine for Covid-19 in record time.

What the future holds

Capitalism will more than likely survive well into the future. It has survived depressions, financial collapses, economic contractions, and has been declared dead on several occasions. But despite its critics and naysayers, capitalism bounces back after it has been knocked down. Franklin Roosevelt not only saved capitalism but made some changes to it in order that it would be more equitable. Theodore Roosevelt fought monopolies but he never had any intention of wiping out capitalism. Ronald Reagan espoused all the tenets of capitalism, but even he knew that it had its bad sides that had to be dealt with so that the economic gains could be shared by all Americans.

Capitalism should be understood for what it can do as far as building up a nation’s economic well-being. But it should also be understood for the potential problems it can create if allowed to run unchecked and unfettered.

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Arthur Guarino

Arthur Guarino is a finance professor at Rutgers University in New Jersey. Professor Guarino’s professional career has been deeply involved in the financial services industry with such corporations as TIAA-CREF, Met Life, and The Bank of New York Mellon. He has held various positions in the financial services field including sales, training and development, administration, product development, customer service and relationship, and management. His teaching experience as a full-time instructor has been at Stevens Institute of Technology in Hoboken, New Jersey, and currently at Rutgers University in Newark. His teaching background includes graduate and undergraduate courses in macroeconomics and microeconomics, as well as managerial accounting, financial management, corporate finance, portfolio theory, financial institutions and markets, and investment analysis. Professor Guarino received his B.A. in Political Science, M.B.A. in Finance as well as a graduate certificate in International Business all from Seton Hall University. He also has a Master’s degree in International Relations from the Maxwell School at Syracuse University and received his J.D. from Rutgers University School of Law in Newark.

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