Capitalism Is Not Dead Essay

1621 words - 6 pages

This essay shall illustrate the point that capitalism is not dead. Capitalism, indeed, has brought on successes, including market failures. A capitalist economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Centrally planned economies do not bring in decisions of firms and household, thus ignoring what many buyers demand and sellers want to sell. A centrally planned economy does not promote the efficiency of an economy, but tries to address the issue of equity. However, Adam Smith made an important observation which was illustrated in his book— An Inquiry into the Nature and Causes of Wealth of Nations. This observation is that “households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently.” The prices agreed upon by buyers and sellers leads to a more favorable outcome which is an increase in the well-being of a society (Mankiw 83-85).
Markets are usually a good way to organize economic activity, however, market failure may result if the market does not allocate resources efficiently, thus, leading to government intervention. The government enforces rules to help prevent market failure. A major impact the government plays in a market economy is enforcing property rights so an individual can own and control scarce resources. The government provides police and courts to enforce people’s rights on goods and services produced or owned by an individual. Market failure may be caused by an externality, which is the impact of one person or firm’s actions on the well-being of a bystander, or market power, which is the ability of a single person or firm to unduly influence market prices. When this occurs the government may intervene to promote both efficiency and equity. Market failure is inevitable in every economic system because economies fluctuate and growth rate will rise and fall overtime. In addition, private decisions can help prevent externalities by using the Coarse Theorem; merging companies so as to consider the uncompensated cost/benefit, or by basic moral sanctions. A capitalist system encourages competition, thereby leaving little room for companies with market power. The only essence of the government is to enforce necessary human rights. In summation, the invisible hand (capitalism) increases the market pie while the government tries to share it evenly.
The successes brought about by low taxation and minimal government intervention are evident. Taxes raise revenue for the governement but makes buyers and sellers worse off. The deadweight loss (D + E, from the figure below) exceeds the revenue raised by the government. Incentives motivate people to act. In this case, the tax levied gives an incentive to buyers to consume less (because of the higher prices), and sellers to produce less (because of the lower prices). The size of the...

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