|← Unconventional Monetary Policies||Principles of Microeconomics →|
Capitalism is mostly defined as an economic system whereby the private actors are allowed to own as well as control the use of property in accordance with their interests. In addition, it is a system whereby the invisible hand of the pricing mechanism coordinates supply-demand in markets in a manner that is considered best for society. In this perspective, the government is regularly described as the party responsible for peace, tolerable taxes as well as justice. Most capitalist states are often described as free-market states but the reality is that the government is still involved in the workings of the private sector. This paper will look at the role of the government in regulating the environment and the reasons as to why government involvement is crucial for the success of a capitalist system.
Microeconomics could be defined as the study of how markets coordinate the decentralized decision-making through a pricing system in order to bring the forces of supply and demand into what is described as equilibrium. In this time-tested perspective, capitalism is seen as a largely self-regulating economic system whereby the correct role of government is limited to the provision of specific basic public goods or services at a relatively reduced cost.
However, if market prices are to coordinate the actions of all the economic actors in order for them to maximize the revenues spontaneously for entire society as well as for every single member, then these market prices ought to reflect all the societal costs or benefits. While the markets may reflect such kinds of costs or benefits, there exist certain well-known situations where they sometimes fail to do this. Externalities reflect some imperfections in the laws or regulations that make up the entire market framework. These imperfections cannot legitimately be corrected solely by the economic actors; the corrections should be drafted by a political authority such as a government.
Any regulatory framework ought to be changed or adjusted periodically. Then, there can be absolutely no assurance that the maximization of personal incomes approximates a very similar outcome for entire society. To state that nothing is required from the government but easy taxes, peace, as well as tolerable administration, is to overlook grossly the crucial role of government in the provision of the legal as well as regulatory framework that are needed by capitalism. Such a thought manages to reduce the study of capitalism to the mere analysis of how markets operate in a very static context that has managed to assume away the political and regulatory issues that are present.
The modern organized sports offer a very appropriate analogy that can help gain valuable insights into the system of capitalism. Such sports may be viewed as having three-way system of governance through which a ruling political authority mobilizes its resources to offer and administer the infrastructure that facilitates as well as structures a society's economic activity. Firms just like sports teams compete within this structure of rules and regulations.
What is a Capitalist system?
It is a system of governance for any economic affairs that has finally emerged in different settings and continues to develop. Due to its development, it has managed to evade a simple definition. Any austere definition identifies capitalism as a political, social, or economic system that came in to replace feudalism based on the express recognition of the rights of private individuals/parties to choose how and where to employ their labor or capital/resources as indicated by the prevailing market prices and not tradition. The system recognizes the pricing mechanism as its key coordinating device instead of a system of command and control. It also suggests that these capitalist systems are very distinguishable from one another mainly based on the extent or nature of governmental interventions and the markets’ competitiveness.
Governments are capable of intervening directly in their markets through various actions such as seizing land by what is referred to as eminent domain or nationalizing a company. Alternatively, the government may opt to intervene indirectly through altering the institutional foundations in which market transactions occur, for example, changing the shape, size, or even location of a particular market. It may also alter the responsibilities and rights of the various classes of its economic actors as well as the prevailing rules of accounting. To the untrained eye, the government's mode of intervention may be largely invisible.
Any price signals transmitted through these markets have the ability to coordinate the various actions of the economic actors without the need for orders or plans from the sovereign government. However, there does not exist any formal market without infrastructure and regulations. The government’s role of intervention in such a system is primarily indirect in nature; and the government legitimates, creates, periodically modernizes, and administers the existing market frameworks that spell out any conditions in which the economic players may get and deploy capital or labor in the production, distribution as well as selling of goods or services. Accordingly, the economic actors receive the right to use their overall power in competition with others as well, subject to any prevailing regulations and laws. The market frameworks may have very different policy priorities that range from safeguarding the status quo to promoting the growth or development of the economy. These interventions are also geared towards protecting any producers and the investors.
The government has a duty to specify the responsibilities of the available participants in all of these transactions, for example, for the safety or serviceability of the items produced that includes the conditions under which the items are produced and eventually distributed. This indirect system of government inevitably embodies a particular strategy, although it is often implicit and not in any way overt. The strategy is created gradually over a certain period of time as opposed to being a grand plan.
Although successful capitalistic systems depend upon the granting of significant power and leeway to the private actors to enter, compete in as well as exit the markets, it also largely depends upon the government's ability or power to restrain these private actors to ensure that they do not abuse the powers and freedoms that they have been granted. In order for them to be legitimate and, at the same, time productive, the private economic players ought to be bound by the prevailing legislations and regulations. The coercive powers of the state should back the rule of law in the implementation of the legislation.
It should, nevertheless, be noted that the state's monopoly of the above mentioned coercive powers suggests that it has the great potential of getting to tyrannize its subjects. Due to this aspect, the successful capitalism gets to depend largely on the development of the checks and the balances that are put in place through the great structuring of the constituent branches of the nation, for example, the judicial, the legislative, and the executive ones. The suitable levels of government also get to work in ensuring that the state does not at any point get to encroach on any private spaces that would be reserved for a prospering civil society. In the end, the attentiveness or civic consciousness of society is very critical if all its elected legislatures are to restrict the state's interferences in the capitalist marketplace. This civic realization generally gets to limit the temptations of any senior state administrators in claiming some excessive share of any of the gains that get to be privately earned.
Societies that have managed to adopt capitalism as their most preferred system, mostly by getting to rely on the government or even the state in making, make some direct requirements of some specific public goods that may include the schools, the highways, including the implementation of the law. In case the state fails to become a direct economic player, for example, as the majority owner of significantly large enterprises, it assumes the role of the player as well as the referee. These roles put the state agents in conflicting roles, for example, as a regulator and a player that need not be subjected to the market disciplines. There are situations whereby the state will play both of these roles, especially, in the event of a catastrophic national emergency. In cases whereby direct interventions are very widespread or last indefinitely, they tend to invite high levels of corruption and even distort the market frameworks for the benefit of very few government officials at the expense of wider society.
The government is, therefore, a crucial player in any capitalist system whose role cannot be understated. Its regulatory powers ensure there is a conducive environment for private entities to carry on with their businesses in a predictable and stable environment. The effectiveness of a government in ensuring the rule of law in its jurisdictions as regards to businesses is what brings about a difference between any two business environments. Therefore, the description of a capitalist state as a free-market economy may not be entirely correct since the government is involved in various ways in the regulation of the market.
- Principles of Microeconomics
- Economics: International Trade Policy
- Unconventional Monetary Policies
- Intermediate Economic Analysis