Future of Capitalism Essay Paper 11 pages

Future of Capitalism

Current Economic Crisis according to Schumpeter and Keynes

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A justification of the economic crisis can be precisely explained by shedding light on the perspectives of famous economists. The information gained through this method will not only be informative but will also motivate further research. The two economic theorists chosen are Joseph Schumpeter and John Maynard Keynes (Blankenburg & Palma, 2009). Their thoughts appear to be most pertinent to this crisis. Keynes presents a very keen insight into the crisis through his rationalization of market psychology and concentration on cumulative demand. On the other hand, Schumpeter’s thought on improvement and business cycle offers a different informative justification.

The existing economic crisis has its origin rooted in the assumption about the real estate sector. The review of the incidents that have happened, began with the permission of quite low interest rates to financial institutions for borrowing. By a small Federal Funds Rate, financial institutions were capable of presenting credits on smaller rates of interest, which raised the demand for houses. As a result, this boosted the real estate prices (Foster & Magdoff, 2009). With the extensive securitizing, banks were currently capable of presenting mortgages that they considered almost ‘free of risk’ (Krugman, 2009). This was in view of the fact that they would end up selling it via securitization and gaining the transactions costs. This led banks to look for techniques for offering more credit options. The reason behind it was that they were gaining from the transaction costs instead of the interest fees. They achieved this by presenting highly uncertain ‘sub-prime’ mortgages to individuals who would not have been eligible for conventional mortgages.

As interest rates started to go up again, huge totals of mortgage non-payments took place. This caused not only big failures in the banks that credited the initial investments, but also in financial institutions that acquired securities financed by these mortgages (Ingham, 2003). As failures and losses went up, banks rejected requests for any additional amount for loans. This resulted in the incapacitation of the credit market. With no access to credit, every sector of the financial system would start to decline, and the financial system would move in the direction of recession (Dillard, 2005).

From the start of the existing financial crisis, no economist’s name has been stated more in comparison to John Maynard Keynes. Keynes is acknowledged for bringing out the ideas that would assist in the restoration of the global financial system from the Great Depression. His ideas also aided in eternally transforming the method adopted by the governments regarding economic strategy (Dabic et al., 2011). If Keynes were writing now, his analysis of the economic crisis would be divided in three components. The first component would be the way psychology of the monetary markets created the economic crisis. The second component would be the way financial collapse manifested itself through lack of aggregate demand. The third and final component would be the extent of the economic crisis in addition to uselessness of financial strategy to be sourced by a liquidity trap (Bezemer, 2009).

As mentioned previously, when the housing real estate bubble burst, it caused losses all over the economic structure and brought the credit market to a standstill. This created a number of the actual outcomes of depression to be observed, sluggish increase in gross domestic product and rise in the rate of unemployment. According to Keynes evaluation, what had taken place was a drop within aggregate demand. Future prospects for jobs are automatically restricted by the level of aggregate demand. Aggregate demand can be originated simply from existing usage or from existing opportunity for potential usage (Bibow, 2009). With the drop of the real estate sector, customer demand reduced. This was due to the lack of demand for new housing units. In addition, that home values went down. Hence, individuals could not get a loan against the equity in their house in addition to common restrains in expenditure because of their apparent lower assets. Simultaneously, with the standstill situation of the credit markets it became more trickier for businesses to get loans for starting up and/or for spreading out their operations, causing a decline in investment. Reduced customer consumption as well as investment caused a drop in cumulative demand and dragged the financial system farther from complete employment.

According to Keynes, there is the likelihood that, after the rate of interest has dropped to a particular level; the liquidity inclination may become “nearly absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest” (Gregg, 2010). In this occurrence, the economic power would have lost efficient control on the rate of interest. At this point, he assumed a condition where interest rates were so small that any further decrease in the interest rate would be unsuccessful to fuel the financial system. This is because there is an inclination to “holding cash over lending it out” (Gregg, 2010, p. 443). This is what appeared to take place within the credit market during the existing economic crisis.

The Federal Reserve decreased interest rates to the minimum level that it could. However, it did not witness the outcomes. Keynes advice at this point would be that since financial policy cannot be successful, economic policy must be employed. The government will have to raise its expenditure to compensate the deficit in consumption as well as in investment. As a result, they will have to get the financial system back to full employment (Leijonhufvud, 2009).

Schumpeter’s evaluation of the economic crisis is one that is a lot more unconventional. According to Schumpeter’s opinion, the key to economic development is the capitalist. He innovates as well as drives the financial system ahead. Any existing formation and situation of doing business are constantly modifying. All conditions are being disturbed earlier than “it has had time to work itself out” (Audretsch & Link, 2012, p. 9).

Financial development, within an industrialist society, represents disorder. Schumpeter had recognized that for development to take place as contrasting to the financial system stuck at a “stationary point of equilibrium,” (Audretsch & Link, p. 10) transformation is required. This is for considering the rise in production. According to him, that essential transformation was the improvement from industrialists. This point of improvement would be the time of economic growth. Therefore, as others started to implement the advancements of successful industrialists, the revenues of those innovators will drop initiating economic crisis.

In accordance with the Schumpeterian view, the economic growth which “occurred leading up to the crisis was caused by innovation” (Kurz, 2010, p. 99). The single variation is rather better than collective technical improvements. The improvements took place within the financial structure. Rather than being done by industrialists, it was done by big financial institutions. The improvement of financial securitization stimulated obvious financial development by declaring to reduce risk to different sectors. As a result, it permitted additional resources for consumption and investment to be lent. The subsequent half of his evaluation- the reason behind the economic bust – is diverse. Then what would be considered in earlier economic crisis to some extent (Skidelsky, 2010). During the existing financial crisis, the modernization of monetary securitization was approved by other businesses. However, this did not result in a reduction in prices as well as economic recession similar to Schumpeter’s evaluation indicates. Instead, what occurred took place when the real estate bubble burst, it became unattainable to offer mortgages and securitize them to any further extent, at least at nowhere even near to the earlier rate. What had taken place was the improvement that had slowed the economic development was no longer there and with no fresh innovation to substitute it an economic bust happened (Whalen, 2012).

Keynes as well as Schumpeter provide quite interesting ideas regarding the economic crisis. Keynes’ analysis, concentrates more on aggregate demand, is a lot more conventional one, and is the leading perspective in economic thought. On the other hand, Schumpeter’s concentration on modernization, although not extensively argued, provides fine insight into the way economic booms and busts can take place. With analysis that appears almost contradictory with one another, it is possible that neither Keynes nor Schumpeter is very accurate, and a comprehensive account of the crisis should depend on the suggestions of both (Kurz, 2012).

Current Economic Crisis according to Adam Smith

During the year 2003, the World Bank estimated that there had been more than 115 systemic banking disasters during late 70s and mid of the twentieth century. All this happened earlier than the existing round of bank collapse. To have one crisis may have been a hard luck. However, to have had 117 was certainly the outcome of extreme negligence (Bortis, 2009). Nonetheless, the rate of these disasters indicates a structural concern within the international financial and banking structure.

Two important events occurred. One was the successful implementation of unchanging exchange rates within Europe during the end phase of 1950s. The second event was the increase of American balance of payment shortage. This payment shortage with Europe had previously weakened the structure. It was also affected by the resultant increase of a Euro-Dollar market. Regardless of its apparent idealistic demand, the period of the ‘gold standard’ did not prove to be steadier. In Europe, from the year 1873 to 1913, the country faced key banking crises during “1873, 1884, 1890, 1893, 1896, and 1907.” (Breser-Pereira, 2009) Every crisis clearly has its individual contiguous reasons, dynamics, and outcomes.

As mentioned by Smith, being the administrators of other individuals’ capital instead of their own can be intimidating. Moreover, they should keep an eye on it with the similar concerned observation with which the associates generally look after their own. Latest arguments on the subject of whether financial institutions should be private or public firms, show that the group ‘private’ is typically taken for a shareholder owned business. These shares are sold on an exchange. Nonetheless, the conflation of privatization with joint stock businesses hides a range of likely organizational types; for instance, partnerships, manufacturer cooperatives, not for profits firms, and of specific importance within the record of financial institutions as well as the banking sector, jointly owned firms by their subscribers (Kates, 2011).

The conflation of a private banking structure with shareholder-held banks is understandable simply when noticed within a wider rational framework that observes this specific business model above every other one. Specifically the preceding thirty years have observed a rise of the discussion of shareholder value as the most excellent approach among companies (Clary, 2011). This discourse states that the general competence of the financial system is enhanced when executives of businesses put into practice the strategies that make best use of stockholder return. On the other hand, it indicates strategies like employment and advantage cuts that are deduced as good in the thoughts of financiers. It also indicates that it will apparently acquire better potential dividends or capital increase for shareholders consequently.

Smith emphasized that the exclusive utilization of wealth is to maintain the flow of consumable commodities. Perhaps no other writer has made the case more powerful for the possibly dynamic part played by investors within business society as compared to Smith (Krugman, 2009). Smith supports two exploratory actions: first is forestalling and the second is engrossing. Both of these actions were common during the eighteenth century trade. Forestallers obtained goods on lesser prices to sell again during times of shortage whereas engrossers gained from geographic variations in the prices of the goods. Smith states that the common apprehension regarding engrossing as well as forestalling may be contrasted with the common fears and mistrusts of “witchcraft” (Dow, 2013). Actually, he argues that the benefits of these investors and that of the huge cluster of individuals are precisely identical. By taking a wider view, it is obvious that eighteenth century investors took rights of tangible goods. The existing investors cannot be the owner of what they are selling since it does not really exist or they do not own it.

Smith also stated that wealth is neither “a material to work upon, nor a tool to work with” (Rahim, 2009, p. 72). A crisis only takes place when it attacks and terrorizes the permanence of standards as well as associations essential for a specific culture. What classifies as a crisis is not already provided in the incidents themselves. Instead, an incident materializes as a crisis since a culture infers it in this way. There is surely no deficiency of various incidents these days that might be labeled as crises: uninsured health care facilities worth of millions of dollars, ongoing ethnic separation, and persistent gerrymandering to mention few. Not even one of these, on the other hand, showed a reaction on the part of government, or upheaval from its population, as the present financial crisis (Pitelis, 2010).

In the United Kingdom, possibly more than in any other business culture, labor during the official segment uses a lot of people’s day-to-day life and intercedes their access to the safety of a capital income and if one is blessed, retirement fund as well as health care facilities. When the government magically generates two trillion USD without indication about this primary connection, one quite reasonably feels upset (Holloway & Sergi, 2010).

Adam Smith understood these feelings. As is recognized, Smith showed a difference among the market price of goods as decided by supply and demand, and their normal price, found out by the cost of their creation estimated by the labor time and effort they entailed (Rothschild, 2013). Smith tried to put to right these two powers of goods prices in emphasizing that, even though market prices might move away from expected price, the expected price was an arithmetical mean toward which market prices dropped during the long run.

Even though many attempts to connect normal prices with market prices have constantly failed to be pragmatically persuasive, this is possibly less an intellectual weakness instead of a communal one. For Smith supposed that individuals were and should be satisfied by their labor inputs. In the present day, on the other hand, it is obvious that capital and work are deeply decoupled. Various metrics indicate decreased if not totally cut off associations among labor efficiency gains and actual wage gains on the nationwide as well as state levels (Sen, 2010). The power of earning is the most significant officially authorized right. Money has not much to do with penny-pinching and labor as compared to what it does with advantaged access to initial public offerings and interest bearing economic securities, or, in recent times, governments rescue (Friedman, 2009).

Future of Capitalism

Capitalism is only a technique by which products and services are allocated. It takes place via the use of cash, which is obtained either via backing of government or charitable organization. It can also be gained through labor or investment (Castree, 2010). Needs usually prevail over wants and wants prevail over the inaccessibility. By itself, a number of commodities are additionally ‘elastic’ as compared to others and compliance to pay an additional amount relies on need being greater than the want. The labor market is supported by the attractiveness – demand – of the thing produced and how difficult it is to get someone with the necessary capability to generate the thing – supply (Bichler & Nitzan, 2010).

A number of economists examined the result of mechanization on the bigger financial system. United Kingdom, United States of America and a number of other formerly huge production centers, are currently in a post-engineering or service economy. Regardless of this evolution, various jobs are still there which need people such as “customer service, medicine, law, manufacturing, and transportation” (Pomfret, 2010, p. 28).

With the global expansion of capitalism, particularly after the second world imperialist war, democracies around the world, with the United States of America to the head swear to put every possible effort to stop using war as a means to resolve conflicts of interest between states. This is also resolve conflicts between peoples, and reduces damage to the whole society, to civilization, welfare, and prosperity. This solemn commitment was welcome received and approved by all republican constitutions worldwide.

The resumption of economic capitalism, always preceded by the inhuman war destructions carried at the bow of thirty years the most powerful capitalist accumulation to develop a huge imperialist states, but the more social wealth accumulated, the more factors are sharpened and contrast crisis: economic and commercial, first, then financial, tangentially to converge toward military conflict. War as a means to resolve conflicts of interest between states and peoples, instead of disappearing and replaced by negotiation, peaceful coexistence, the civic distribution of wealth and natural resources, has become increasingly in means allowing resolve differences and conflicts. And it has become increasingly global weight and the negative and positive effect of the expansion or the crisis of a country on the rest of the other countries.

The modified visions not only raised very specific world market, but the scientific forecast of the decline of the monopoly of one government ruling the world. It also resulted in the increasingly acute competitive struggle on the world market among the most powerful and warlike industrial countries, driven increasingly boost productivity and at the same time, inevitably enter into trade and economic crisis until the crisis of war.

Machines are now leaving production as well as other sectors which were once considered to be unaffected by mechanization. Customer service is being substituted by self-checks as well as by online shopping. Distribution chains “run through intricate algorithms gathering, specifying, and transporting packages devoid of any human interface” (Lin, 2011). Transportation is done by means of mechanized automobiles. In the future, human labor might become superflous for the most part. No manual labor indicates any cash for a huge chunk of individuals and no cash indicates that capitalism, as a successful circulation of goods and services, falls down (Schumpeter, 2009).

Regardless of being drastically different from time to time in their understanding of the current economic crisis and what steps should be taken to avoid it, these three perspectives discussed in the essay do recognize quite a lot of interconnected themes. Capitalism and peoples’ approach to it shows what they are and form where they are coming. There is not a single person, regardless of how much qualified he or she is, who can check every possible occurrence, stay resistant from self-centeredness, forecast each twist of incidents, and manage the structure so that it can avoid any disaster (Harvey, 2011).

References

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Bezemer, D.J. (2009). “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models. Routledge.

Bibow, J. (2009). Keynes on monetary policy, finance and uncertainty: Liquidity preference theory and the global financial crisis. Routledge.

Bichler, S., & Nitzan, J. (2010). Systemic fear, modern finance and the future of capitalism.

Blankenburg, S., & Palma, J.G. (2009). Introduction: the global financial crisis. Cambridge Journal of Economics, 33(4), 531-538.

Bortis, H. (2009). From neo-liberal Capitalism to Social Liberalism on the basis of Classical-Keynesian Political Economy. World Bank.

Breser-Pereira, L.C. (2009). The two methods and the hard core of economics. Journal of Post Keynesian Economics, 31(3), 493-522.

Castree, N. (2010). Crisis, continuity and change: Neoliberalism, the left and the future of capitalism. Antipode, 41(s1), 185-213.

Clary, B.J. (2011). Institutional Usury and the Banks. Review of Social Economy, 69(4), 419-438.

Dabic, M., Cvijanovic, V., & Gonzalez-Loureiro, M. (2011). Keynesian, post-Keynesian vs. Schumpeterian, neo-Schumpeterian: an integrated approach to the innovation theory. Management Decision, 49(2), 195-207.

Dillard, D. (2005). The Economics of John Maynard Keynes: The Theory of a Monetary Economy. Kessinger Publishing.

Dow, S. (2010). 13 The psychology of financial markets: Keynes, Minsky and emotional finance. The Elgar Companion to Hyman Minsky, 246.

Foster, J.B., & Magdoff, F. (2009). The great financial crisis: Causes and consequences. NYU Press.

Friedman, M. (2009). Capitalism and freedom. University of Chicago press.

Gregg, S. (2010). Smith vs. Keynes: Economics and Political Economy in the Post-Crisis Era. The Harvard Journal of Law & Public Policy, 33, 443.

Harvey, D. (2011). The enigma of capital: and the crises of capitalism. Profile Books.

Holloway, J., & Sergi, V. (2010). Crack capitalism (p. 227). London: Pluto Press.

Ingham, G. (2013). Capitalism: With a New Postscript on the Financial Crisis and Its Aftermath. Polity.

Kates, S. (Ed.). (2011). The Global Financial Crisis: What Have We Learnt?. Edward Elgar Publishing.

Krugman, P. (2009). How did economists get it so wrong?. New York Times,2(9), 2009.

Krugman, P. (2009). The return of depression economics and the crisis of 2008. WW Norton & Company.

Kurz, H.D. (2010). The Beat of the Economic Heart: Joseph Schumpeter and Arthur Spiethoff on Business Cycles. Routledge.

Kurz, H.D. (2012). Schumpeter’s new combinations. Journal of Evolutionary Economics, 22(5), 871-899.

Leijonhufvud, A. (2009). Out of the corridor: Keynes and the crisis. Cambridge Journal of Economics, 33(4), 741-757.

Lin, N. (2011). Capitalism in China: A centrally managed capitalism (CMC) and its future. Management and Organization Review, 7(1), 63-96.

Pitelis, C.N. (2010). From bust to boom: an introduction. Contributions to Political Economy, 29(1), 1-8.

Pomfret, R. (2010). The financial sector and the future of capitalism. Economic Systems, 34(1), 22-37.

Rahim, E. (2009). Marx and Schumpeter: a comparison of their theories of development. Review of Political Economy, 21(1), 51-83.

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Schumpeter, J.A. (2009). Can Capitalism Survive? Creative Destruction and the Future of the Global Economy. Harper Perennial Modern Classics.

Sen, A. (2010). Adam Smith and the contemporary world. Erasmus Journal for Philosophy and Economics, 3(1), 50-67.

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