The traditional view held is that, mainly because of the American model, enterprise capitalism and the policies that come with it are a good way to shape a state. However, we often tend to overlook some of the key economic and social disadvantages of such a system and therefore often regard it as the 'perfect' system.
Enterprise Capitalism revolves around the central idea of competition and minimal government intervention. Capitalist are often adherents to the idea of the "invisible hand" developed by Adam Smith, who argued that markets are their most efficient when no intervention takes place. However, what this idea fails to take into account are the externalities generated by private activity.
First of all, private firms seldom take into account environmental effects of their activities therefore this can lead to a lot of ills like pollution. Secondly, in such societies, because efficiency is of paramount importance, many inefficient workers are laid off by companies leading to widespread unemployment and social consequences. Under a socialist structure, the government would have provided such people with jobs
Secondly, competition is not always healthy. Companies may grow into monopolies and posses unfair advantages over others. Also, because such states allow for free trade, foreign competition often prevents local new firms from growing because they have not yet reached the point where they benefit from economies of scale. This has been the case in USA where a lot of start-up business failed to survive.
Finally, as the rich get richer, we experience what is referred to as the diminishing marginal utility of wealth. When a billionaire earns an extra 10 million, the utility he gains will not be that high because this amount is not that significant for him. However, if the state earns an extra 10 million dollars and then invests this into welfare programmes such as social benefits then, through the government multiplier, this will have a significant effect on the economy.
Although enterprise capitalism does have its advantages and may be regarded as a preferable option over the alternatives, it does have some inherent problems which can be better addressed with some government intervention .
Enterprise Capitalism revolves around the central idea of competition and minimal government intervention. Capitalist are often adherents to the idea of the "invisible hand" developed by Adam Smith, who argued that markets are their most efficient when no intervention takes place. However, what this idea fails to take into account are the externalities generated by private activity.
First of all, private firms seldom take into account environmental effects of their activities therefore this can lead to a lot of ills like pollution. Secondly, in such societies, because efficiency is of paramount importance, many inefficient workers are laid off by companies leading to widespread unemployment and social consequences. Under a socialist structure, the government would have provided such people with jobs
Secondly, competition is not always healthy. Companies may grow into monopolies and posses unfair advantages over others. Also, because such states allow for free trade, foreign competition often prevents local new firms from growing because they have not yet reached the point where they benefit from economies of scale. This has been the case in USA where a lot of start-up business failed to survive.
Finally, as the rich get richer, we experience what is referred to as the diminishing marginal utility of wealth. When a billionaire earns an extra 10 million, the utility he gains will not be that high because this amount is not that significant for him. However, if the state earns an extra 10 million dollars and then invests this into welfare programmes such as social benefits then, through the government multiplier, this will have a significant effect on the economy.
Although enterprise capitalism does have its advantages and may be regarded as a preferable option over the alternatives, it does have some inherent problems which can be better addressed with some government intervention .
1 comment:
Excellent post Adam. Really well thought out and argued. I agree, government intervention to some extent is necessary to ameliorate the negative aspects of pure enterprise capitalism.
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