capitalismcapitalism

The variantsThe variants

Where have we come from the Where have we come from the theory of capitalism?theory of capitalism?

-CAPITALISM-WHAT IS IT?

• CAPITALISM USUALLY REFERS TO AN CAPITALISM USUALLY REFERS TO AN ECONOMIC SYSTEMECONOMIC SYSTEM

• AN ECONOMIC SYSTEM WHERE THE AN ECONOMIC SYSTEM WHERE THE MEANS OF PRODUCTION (CAPITAL) ARE MEANS OF PRODUCTION (CAPITAL) ARE PRIVATELY CONTROLLEDPRIVATELY CONTROLLED

• LABOR, GOODS AND CAPITAL ARE LABOR, GOODS AND CAPITAL ARE TRADED IN A MARKETTRADED IN A MARKET

• PROFITS ARE DISTRIBUTED TO OWNERS PROFITS ARE DISTRIBUTED TO OWNERS OR INVESTED IN NEW PRODUCTIONOR INVESTED IN NEW PRODUCTION

• DIFFERENCES IN CAPITALISM STEM FROM:DIFFERENCES IN CAPITALISM STEM FROM:– THE EXTENT TO WHICH DIFFERENT MARKETS THE EXTENT TO WHICH DIFFERENT MARKETS

ARE FREEARE FREE– RULES DETERMINING WHAT IS PRIVATE RULES DETERMINING WHAT IS PRIVATE

PROPERTYPROPERTY– RULES DETERMING OWNERSHIP RIGHT AND RULES DETERMING OWNERSHIP RIGHT AND

USE RIGHTSUSE RIGHTS– THE RIGHT TO FIRE AND THEREFORE THE THE RIGHT TO FIRE AND THEREFORE THE

RIGHT TO HIRERIGHT TO HIRE– THE EXTENT THAT MONOPOLY, BOTH PRIVATE THE EXTENT THAT MONOPOLY, BOTH PRIVATE

AND GOVERNMENTAL ARE EXERCISED IN THE AND GOVERNMENTAL ARE EXERCISED IN THE MARKETMARKET

CAPITALISM AS A SOCIAL CAPITALISM AS A SOCIAL SYSTEMSYSTEM

• A SOCIAL SYSTEM CENTERED A SOCIAL SYSTEM CENTERED AROUND PRIVATE RIGHTS, AROUND PRIVATE RIGHTS, OPERATING MARKETS, PRIVATE OPERATING MARKETS, PRIVATE PROPERTY OF SOME SORTPROPERTY OF SOME SORT

• SOMETIMES ASSOCIATED WITH SOMETIMES ASSOCIATED WITH DEMOCRACY OF VARIOUS FREE AND DEMOCRACY OF VARIOUS FREE AND REGULATED / CENTRALIZED FORMSREGULATED / CENTRALIZED FORMS

“CAPITALIST”

• THE TERM CAPITALIST REFERS TO AN THE TERM CAPITALIST REFERS TO AN OWNER OF CAPITALOWNER OF CAPITAL

• A DEFENDER OF THE OWNERSHIP OF A DEFENDER OF THE OWNERSHIP OF CAPITAL --- THE MEANS OF PRODUCTIONCAPITAL --- THE MEANS OF PRODUCTION

• THE INVESTER IN THE MEANS OF THE INVESTER IN THE MEANS OF PRODUCTION – CAPITALPRODUCTION – CAPITAL

• THE CLAIMENT OF THE PROFITS AND THE THE CLAIMENT OF THE PROFITS AND THE CAPITAL INVESTEDCAPITAL INVESTED

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

ANCIENT CHINESE TRADE

Guan Zhongand the book

Guan Zi(725-645 BC)

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

The light heavy idea of the The light heavy idea of the operation of marketsoperation of markets

A TRANSELATED QUOTE Guan 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.

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.

• 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

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

Anglo-Saxon form is based in Anglo-Saxon form is based in Great Britain tradition and lawGreat Britain tradition and law

• Classical liberalism --- Adam SmithClassical liberalism --- Adam Smith• Classical liberalism --- the lawClassical liberalism --- the law• ---- common law base of Great Britain---- common law base of Great Britain• Lay Judges --- broad legal principles, Lay Judges --- broad legal principles,

court arguments are oral --- precedents court arguments are oral --- precedents --- social contract based on mutual --- social contract based on mutual delegation of powers to government delegation of powers to government (John Locke --- relative to Thomas (John Locke --- relative to Thomas Hobbes)Hobbes)

• Limited intervention of government in Limited intervention of government in the economythe economy

• --- Scottish law was more of Roman --- Scottish law was more of Roman Law ---- but mixed with the Great Britain Law ---- but mixed with the Great Britain established law --- brought in property established law --- brought in property law and corporate organizationlaw and corporate organization

• U.S. is an example of Anglo-Saxon U.S. is an example of Anglo-Saxon capitalism--- but we have deviations capitalism--- but we have deviations from the theory of capitalismfrom the theory of capitalism

The European ModelThe European Model

• Based in German and French Based in German and French economieseconomies

• Less faith in the “invisible” hand in the Less faith in the “invisible” hand in the marketmarket

• Constitutional order of socialism idea –Constitutional order of socialism idea –(James Buchanan idea)(James Buchanan idea)

• So the state has a higher order of So the state has a higher order of activity in the economy and regulationactivity in the economy and regulation

• Here the Roman law rule of sovereignty Here the Roman law rule of sovereignty and state head rule pervades the and state head rule pervades the operation of the economyoperation of the economy

• Professional judges--- legal codes --- Professional judges--- legal codes --- written recordswritten records

• More industrial state action and More industrial state action and government ownership of industriesgovernment ownership of industries

• Examples are German, French, and Examples are German, French, and Swedish economiesSwedish economies

• Roman law – Common Law– Napoleonic Law Roman law – Common Law– Napoleonic Law formsforms

• --- common law --- consideration of common --- common law --- consideration of common liability --- liable for negligence --- so you liability --- liable for negligence --- so you build to accommodate mistakes or safety build to accommodate mistakes or safety problems --- Napoleonic law form has to problems --- Napoleonic law form has to have all the details of liability problems have all the details of liability problems spelled out --- don’t have to build as safe as spelled out --- don’t have to build as safe as possible given current technologypossible given current technology

• Roman law sets up property as high form of Roman law sets up property as high form of ownership ---- protection for ownership even ownership ---- protection for ownership even if won in battle or knavery!if won in battle or knavery!

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

the Asian Modelthe Asian Model

• The Asian model is more of a recent The Asian model is more of a recent “experimentation” with capitalism“experimentation” with capitalism

• Most like the European model ---- state Most like the European model ---- state involvement in the economyinvolvement in the economy

• Intervention by government to form a Intervention by government to form a high level of capital formation high level of capital formation

• The capital formation is a move to The capital formation is a move to overcome the long backwardness of overcome the long backwardness of Asian economies over the centuriesAsian economies over the centuries

• Examples of the Asian model are the Examples of the Asian model are the modern daymodern day

• JapanJapan• South KoreaSouth Korea• TaiwanTaiwan• ““the so-called “miracle of the tigers”the so-called “miracle of the tigers”• China has moved to a market system, China has moved to a market system,

but with military state rule --- an but with military state rule --- an experiment -- experiment -- market socialism with market socialism with market allocationmarket allocation

• There are differences within these There are differences within these models --- Germany different than models --- Germany different than France --- a Polish European model France --- a Polish European model and a Polish high state and union rule and a Polish high state and union rule and intervention in the Polish economyand intervention in the Polish economy

• The Czech privatization --- now a highly The Czech privatization --- now a highly monopoly industry type --- industrial monopoly industry type --- industrial state type of economystate type of economy

Constitutional FoundationsConstitutional Foundations

• The U.S. economyThe U.S. economyJames Madison concept --- rejects the James Madison concept --- rejects the

“strong state” notions“strong state” notionsAlexander Hamilton --- the strong state Alexander Hamilton --- the strong state

notionnotionSo the constitution is set up to limit the So the constitution is set up to limit the

powers of government p. 162 of Textpowers of government p. 162 of TextSeparation of powers – broad outlineSeparation of powers – broad outline

• The worry about majority rule --- The worry about majority rule --- majority would vote to redistribute majority would vote to redistribute property --- the overbearing majority – property --- the overbearing majority – in the mind of Madison p. 163 of Textin the mind of Madison p. 163 of Text

• Or the fear of jealous minorities Or the fear of jealous minorities passing laws against minorities passing laws against minorities

• Constitution is set up to prevent Constitution is set up to prevent domination by factionsdomination by factions

Private vs public sectorsPrivate vs public sectors

Private sector = business sector == Private sector = business sector == private ownership prevails ---- but we private ownership prevails ---- but we have 25% +- state ownership/operated in have 25% +- state ownership/operated in the U.S. ---- maybe 17% of GNP is the U.S. ---- maybe 17% of GNP is produced by fully regulated industries --- produced by fully regulated industries --- today probably 80% of the economy is today probably 80% of the economy is privateprivate

Government in the U.S. employs Government in the U.S. employs 16% of 16% of labor force ---- government employment labor force ---- government employment has grown --- vendors to government has grown --- vendors to government have increasedhave increased

Business organization in U.S.Business organization in U.S.

Sole proprietorshipSole proprietorship Partnership --- now LLC, LLP, PCPartnership --- now LLC, LLP, PC Corporation --- we get this from the Corporation --- we get this from the

Romans actually--- ‘an organization as an Romans actually--- ‘an organization as an entity different than its owners”entity different than its owners”

Business revenues higher in the LLC, Business revenues higher in the LLC, partnership, corporation organizations but partnership, corporation organizations but most businesses are sole proprietorshipsmost businesses are sole proprietorships

Bulk of output by the corporationBulk of output by the corporation

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

The corporation is set up to maximize The corporation is set up to maximize shareholder value --- not to maximize stakeholder shareholder value --- not to maximize stakeholder value (the European model)value (the European model)

Control the share --- control the valueControl the share --- control the value European model of capitalism protects the stake European model of capitalism protects the stake

holder ---- the stake holder may be the holder ---- the stake holder may be the government or be an administrative agency for government or be an administrative agency for the government that maximizes the government the government that maximizes the government stake holding sharestake holding share

But we have the TVA, the Army Corps of But we have the TVA, the Army Corps of Engineers, SEPA, government athletic teams, Engineers, SEPA, government athletic teams, Bureau of ReclamationBureau of Reclamation

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)

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

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

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

The labor marketThe labor market

The stakeholders of a corporation The stakeholders of a corporation are the managers, employees, are the managers, employees, agentsagents

But the interests of these But the interests of these stakeholders is of less importance stakeholders is of less importance than staying on the job in Anglo-than staying on the job in Anglo-Saxon form model --- different than Saxon form model --- different than in stakeholder protection mode of in stakeholder protection mode of the European capitalism modelthe European capitalism model

Labor unions are formed to attempt to Labor unions are formed to attempt to balance or bring about countervailing balance or bring about countervailing power to change or transfer power to power to change or transfer power to the stakeholder, particularly laborthe stakeholder, particularly labor

Labor is allocated via labor markets in Labor is allocated via labor markets in the U.S.the U.S.

Government intervention has Government intervention has increased --- base is increased --- base is fair labor and fair labor and standards act of 1938standards act of 1938 – to establish – to establish standards, minimum wage, basis for standards, minimum wage, basis for overtime pay, child labor issuesovertime pay, child labor issues

Occupational Safety and Health ActOccupational Safety and Health Act of 1970 --- OSHA ---- job safetyof 1970 --- OSHA ---- job safety

European model brings in elements European model brings in elements of “life time sinecure” in job statusof “life time sinecure” in job status

Anglo-Saxon rule maintains right to Anglo-Saxon rule maintains right to fire --- if not allowed, then there is fire --- if not allowed, then there is less hiringless hiring

We still have not solved the gender We still have not solved the gender wage & income issuewage & income issue

The safety net --- The safety net --- welfare– income welfare– income distributiondistribution

Pure Anglo-Saxon ---- self reliancePure Anglo-Saxon ---- self reliance But the U.S. moves to Social Security But the U.S. moves to Social Security

--- it is a part of the latter portions of --- it is a part of the latter portions of Adam Smith’s Adam Smith’s Wealth of Nations!!Wealth of Nations!!

Now becomes an entitlement in the Now becomes an entitlement in the nation’s budget --- other forms and nation’s budget --- other forms and safety nets become entitlements --- safety nets become entitlements --- less flexibility in the budgetless flexibility in the budget

Income redistribution --- what percent of the Income redistribution --- what percent of the population has what percent of the income population has what percent of the income --- the Lorenz Curve --- see p. 102 of the text--- the Lorenz Curve --- see p. 102 of the text

Redistribution is less a force in Anglo-Redistribution is less a force in Anglo-Saxon capitalism --- but is more of a Saxon capitalism --- but is more of a sentiment and in law in European sentiment and in law in European capitalism --- comes from Judaic tradition capitalism --- comes from Judaic tradition of steward of the land – so we see it in of steward of the land – so we see it in Europe, Mexico, Latin America – land Europe, Mexico, Latin America – land reformreform