The political system and the economic system of the United States have been intertwined since the very founding of our country. Although there are many different views on how well the systems work or how they function, this has been a common thought shared by all different sides. Some have an optimistic view of capitalism, while others feel as though capitalism favors too few people. Two major points of view, the conservative and the “reform” liberal, describe how capitalism works, and the role for the government in managing the marketplace, in two similar, yet very different ways.
First, we look at the thoughts of Milton Friedman, of the conservative point of view. According to Friedman, capitalism is a free market system that is driven from the bottom up, starting with individuals who make voluntary choices to purchase goods and services and hold jobs. Having a free marketplace gives every individual the power to create their own economic destiny, from what food they eat, to what car they drive, to what career they choose. Friedman also describes capitalism as “self-correcting”, that if left alone, the market place will inevitably fix any problems it creates.
According to Friedman, capitalism follows a cycle, consisting of ups and downs in the economy that will eventually work themselves out over time. It begins with a future expectation of profit, and people with money to invest. As more people begin to invest their money, the demand for labor and materials increases, leading to economic expansion and more people spending money. As demand continues to increase, supply begins to decrease, causing inflation and increasing product prices. At this stage, future expectations of profit are bad.
As prices rise, people can’t afford to buy things, so they start to pull their money out of the market and investments. With fewer investments comes less demand, causing people to lose their jobs, prices to drop, and consumers to buy fewer goods. This ultimately leads to a recession, where demand for products is very low and often the unemployment rate is high. Then the cycle starts over again, cost conditions are recreated and people begin to invest money again, and the cycle continues.
Another benefit of capitalism is that it allows for healthy economic competition, which not only gives individuals a larger variety of products, but also enables the marketplace to regulate its own prices. This also causes power to be widespread, and keeps people satisfied by being able to purchase what they like. For example, a consumer voluntarily goes to a grocery store. As they walk down the beverage aisle, they see a large selection of drinks to choose from, this is because of competition. Since there are various products to choose from, every consumer can decide to buy what type of beverage they like, making the consumers happy.
Friedman also argues that capitalism is rational and efficient. The marketplace constantly finds a way to do more with less, and with every economic decision made, the costs and benefits are weighed first. In a capitalist economy, no one is going to do business unless they gain more than they lose. For example, if a person wants to start a business baking cakes, they would first determine how much money they need to invest to be able to make the cake, and compare it to how much they could sell each cake for.
If it costs more to make the cake than they would be able to sell it for, then of course the person isn’t going to do it. The whole point of investing and even purchasing with capitalism is to make a profit, or somehow gain from the exchange. Nobody enters into a business contract knowing they are going to lose money. This is why Friedman claims that one’s standard of living should be based on what they can afford. Even basic necessities of life, such as food and shelter, are not rights of an individual, but a result of the economic decisions they make.
Someone who works hard and has a better job can afford a nice house over an apartment, or to eat lobster instead of chicken. With capitalism, everyone has the right to pursue the things they want or need, but they do not have the right to just have them. This ensures that everyone has the freedom of choice in the marketplace, and the liberty to make a successful life for themselves, for Friedman believes conducting the economy in a voluntary manner is better for the social fabric of society. Milton Friedman believes there is a role for the government in economic affairs, but that role is very limited.
The government’s purpose is to protect the rights and liberties of its citizens, and to be free politically, we must be free economically. He claims that the only time the government should step in is when “market failure” occurs, or when the market can’t or we don’t want it to do something. The federal government should only involve itself in economic affairs to enforce the rules set by and agreed upon by the people, mediate differences among citizens on the meaning of the rules, and allow a way for the rules to be modified if necessary.
For example, printing currency should be a federal government function, to allow a fair and uniform payment method throughout the country. The government should also be in charge of regulating monopolies, where the freedom to make choices is compromised by the fact that there is no competition. Another instance would be in situations where there is a “neighborhood effect”, or when a third party is affected by a decision that they were not a part of, such as pollution. If a farmer were to dump waste into a stream and pollute it, that would violate the rights of other people who use the stream to have clean water.
It would also be the function of the government to regulate “public goods”, or something where it is difficult or impossible to determine the particular user or the amount used. For example, a lighthouse is a public good, because it is almost impossible to identify who uses the light to guide them or how often they use it. Friedman ultimately believes that the government should stay out of economic affairs as much as possible, for every time the government acts the freedom of the people shrinks, and all government interventions have more costs then they do benefits.
When the government regulates the way a business operates, for example, requiring steel plants to put filters on their smoke stacks, it increases the cost of doing business, which increases prices and decreases sales, production, jobs and wages. Capitalism, according to Friedman, has a way of efficiently working things out on its own, and needs very little government intervention. Many programs we have today, such as social security, Medicare, and welfare to name a few, Friedman would do away with, as they are the responsibility of the individual, not the government.
The marketplace is even more proportional to public demand than the political system is, and will constantly cycle through different phases and work itself out without the need of government regulation. Milton Friedman looks at capitalism as a free and voluntary system that should be driven by the consumer not the federal government. Another approach to the way capitalism works is that of the “reform” liberal, which has a few similarities to the conservative point of view, such as the belief that capitalism and democracy are interlocked, that aving capital or money to invest drives the market, that the government must intervene when the market “fails”, and on the general definition of property. The liberals also believe in the business cycle, with only one major difference. According to Kane and the liberals, the business cycle is not continuous and self-correcting, but gets stuck at the tail end of a recession. With so many people out of work, they begin to suffer and make drastic decisions. People don’t have time to just wait for the market to fix itself, it could take years and if they did, too much damage would have already been done.
The liberals believe that people have the right to basic needs, such as food and shelter, in which the marketplace will not provide. This is where the government must intervene, to ensure that all people have the resources they need to survive, and to correct the marketplace and pull the economy out of the recession. According to the liberals, the market is a prison, and it is not driven from the bottom up, but rather from the top down. They believe when it comes to purchasing power, there is no comparison.
Corporations have a much greater influence and power in the economy than the individual, which leads to a privileged position of business. The decisions we make to purchase things are not voluntary or mutually beneficial, because the corporations and business owners set the prices, and for things like housing, we as consumers don’t have the option to just not buy it. We are forced to pay for the things we need, and the prices are set by the business owners, in which the product may not even be worth.
Another problem they see with capitalism is that there is a “permanent shortfall in aggregate demand”, or that there are too many people with too little money to spend. With not enough money, the average individual doesn’t have the ability to make purchase, which leads to under consumption, and ultimately to a decline in the economy. With all of the power being held by the few in major corporations, this constantly widens the gap between the rich and the poor. In theory, capitalism gives all people equality in the marketplace, but in actuality, the liberals argue that this is not the case.
Since the rich and elite own the majority of things to own, their interests are honored first, making the interests of the common people unequal to that of the business leaders, and sometimes not served at all. Also, we face resource constraint, so all the people who have money continue to get more money than others. This separation will just continue to grow until the government intervenes, creating more problems and making it harder for the economy as a whole to pull out of hard times.
The liberals also argue that the way capitalism is designed, people only invest or produce things to make a profit, furthering their own interests, instead of doing it because people need it. If you can’t pay for your food, you go hungry, no one is going to simply give it to you because you are starving. With this, capitalism is a trap for those who can’t afford to survive, and the liberals believe that it is one’s right to have their basic needs met.
Their overall view of capitalism is a negative one, feeling that capitalism alone cannot provide adequately for the majority of the citizens of America. The liberals feel that the government should and needs to have a strong role in the economy in order for capitalism to serve the people. Programs such as Medicare, welfare, and government regulations are necessary to give people equality in our economic system. The government needs to be responsible for regulating monopolies, to ensure that prices can remain fair and citizens have options in the products they buy.
Also, minimum wages, working conditions and hours worked should be regulated to give people the opportunity to make a decent living, and not be taken advantage of by corporations and employers. The rights and definition of property need to be established politically to be fair across the board. To the liberals, the more government involvement there is in the economy, the more freedom the individual has to make good money and have a decent standard of living. Political power and economic power are not two separate entities, and leaving more power in the marketplace imprisons democracy.
More economic power and more capital translate directly into more political power. Major corporations and companies have much influence over what interests are met in the government, for example, anything that jeopardizes business confidence in society has immediate and harsh consequences politically, but something that violates and individual’s wealth may not be addressed at all. Money talks in America, and this contributes more to a corporations own needs, giving less and less attention to what is best for the average citizens.
Liberals like Lindblom, state that the market will not provide on its own, and things like food, clothing, shelter, education, health care, and transportation need to be taken care of by the government, rather than being left up to the marketplace. The government needs to be responsible for more than just market failure, currency, and public goods. It needs to protect the citizens of our country from the detrimental effects of capitalism, provide regulations, a way to keep the market prosperous, and keep us from getting stuck in a recession.
Democracy needs to be more powerful than the economic system, and make sure that everyone’s rights, as a corporation or an individual, are protected and that all of their interests are served with equal importance. Both the “reform” liberal and conservative points of view agree on some of the basic components of capitalism, but their opinion of the government’s role and how well capitalism works on its own couldn’t be more different.
Today, we favor the liberal view in actuality, with many government programs and regulations in place. However, it remains a controversial issue in politics today, as there is much debate on whether or not we should return to the original form of federalism and eliminate much of the current government intervention. Regardless, one thing all parties can agree on is that the economic and political systems of the United States are and forever will be interlocked with one another.
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