Thursday, 6 August 2009

Features of Capitalist economics: trade and specialization, money and capital.

This article presents the three distinct features of any capitalist economy. Furthermore it explains the role of government in capitalist economies, which can be considered to be either fiscal policy or monetary policy.

Trade and specialization

  • specialization occurs, when people and countries concentrate their efforts on a particular set of tasks – it permits each person and country to use its best advantage its specific skills and resources
  • division of labor – dividing the production into a number of small specialized steps or tasks, this leads to division of labor and specialization which increases productivity
  • Individuals and countries then voluntarily trade goods in which they specialize for others’ products. This increases the range and quantity of consumption and has the potential to raise everyone’s living standards.
  • is the medium of exchange; proper management of the money supply is one of the major issues for government macroeconomic policy in all countries
  • specialization permits people to concentrate on particular tasks; money allows people to trade their specialized outputs
  • Capital is a produced factor of production, a durable input which is itself an output of the economy
  • Capital is major factor of production; land and labor also called primary factors of production; their supply is mostly determined by noneconomic factors. It is important to note that capital itself has to be produced, before using it!
  • Economic activity involves forgoing current consumption to increase our capital; every time an investment is made, the future productivity and consumption is enhanced. By sacrificing current consumption, a society can push its PPF outward
  • Market economy , capital is typically privately owned; income from capital goes to individuals à the ability of individuals to own and profit from capital is what gives capitalism its name!
    • Property rights define the ability of individuals or firms to own, buy, sell and use the capital goods and other property in a market economy; these rights are enforced through the legal framework
The economic role of government
  1. Governments increase efficiency by promoting competition (imperfect competition, Monopolies, Market power), curbing externalities (involuntary imposition of costs and benefits on others outside an exchange relationship) and providing public goods.
    • Extreme example of positive externality is a public good
      Private provision of public goods will be insufficient; government is necessary to produce sufficient quantities
    • Public goods are commodities for which the cost of extending the service to an additional person is zero and which is impossible to exclude individuals from enjoying.
      Private goods: exclusion and competition from/in consumption
      Common good: competition but no exclusion from consumption
      Club goods (e.g. tollbridge): exclusion but no competition
      Public good: no competition no exclusion
    • Public goods are paid for by taxes; taxes are not prices, since everybody has to pay them, even if one cares about that good or not!
    • A public good is hard or impossible to produce for a private profit
  2. Governments promote equity, by using tax and expenditure programs to redistribute income toward particular groups.
    à markets do not necessarily produce a fair distribution of income; it might produce inequalities in the “for whom”, that are not acceptable
    • Progressive taxation
    • Transfer payments
  3. Governments foster macroeconomic stability and growth through fiscal policy and monetary regulation.
    • Fiscal policy: power to tax and the power to spend
    • Monetary policy: determining the supply of money and interest rates; these affect investment in capital goods

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