A market economy is an economic system that allows the aggregate interaction of enterprises and citizens in the country to influence the setting of pricing for products and services, as well as the making of economic decisions. Capitalism, on the other hand, is an economic system that promotes the ownership of capital assets by private enterprises and individuals. Over the years, there have been heated disputes about whether the market economy leads to economic stability or whether the capitalist system is a vessel for the world's recurring economic crises. As a result of the debates, two schools of economic thought have emerged with one supporting the feasibility of the market economy while another one warming up to the idea of capitalism.
The argument for the occasional attainment of equilibrium due to the implementation of the market economy is supported by theories of classical economists (Richard 112). The proposers of the market economy system believed that the government intervention that was required for the economy to remain in a state of equilibrium was minimal. The renowned economists who supported the school of thought were Adam Smith, David Ricardo, Jean- Baptiste Say, John Stuart Mill, and Thomas Robert Malthus (Richard 114). These economists were of the opinion that the economy could adjust itself to the market forces of supply and demand to achieve equilibrium. They also believed that the intervention from the government through the use of barriers such as tariffs would hinder the trade of goods and services freely thus derail the economy.
Adam Smith’s contribution was viewed as the basis of the classical enthusiasts’ theories. In his book, An Inquiry into the Wealth of Nations, Adam emphasized on the laissez-faire approach of the economy (Smith 67). The book provided positive criticism to the mercantilism system that dominated the economy during his time. The system of mercantilism promoted the exportation of more goods and services while it discouraged imports.
According to Smith, a lot of benefits would have accrued to people if tariffs and related barriers to trade were to be abolished. The notion behind this argument was that an increase in demand would have led to an increase in production due to the market forces of supply and demand (Stackelberg et al. 211). The increase in demand would, therefore, imply that non-existent job opportunities would arise and new industries would mushroom to meet the stretched demand.
Smith’s convictions were that achievement of development, reduction in social conflicts, better standards of living, political stability, and peace could be easily achieved by the use of the free market system (Werhane 302). He also argued that a common ground had to be established so that it could level the existence of self-interest and sympathy. In this regard, self-interest was to be overlooked for compassion. As a result, there would be competitive markets that would ensure inappropriate profit maximization would be curbed.
Another classical economist in support of the free market system was Jean-Baptiste Say. He agreed with Smith’s propositions on the abolishment of trade barriers, the idea of free trade and the promotion of a competitive market. However, he was not convinced by Smith’s value labor theory. The theory stated that the value derived from a commodity depended on the units of labor that were used to produce the product. Says disputed this argument through his assertion that the value of a product was to be derived from the utility that a consumer would enjoy from it.
On the other hand, a theory in support of capitalism was brought by Joseph Schumpeter The theory stated that creations are mostly man made which do the engineers and scientist not closely link with recent discoveries (Marx 200). The theory emphasized on the on the aspect of profitability and commercial application in entrepreneurial activities. The ideology seemed to be useful in a small sector of the economy which was not primarily diversified. However, the theory was criticized since it was not applicable in the major capitalist economies like these of the modern days.
Another theory that explains and supports capitalism is the Marx theory. Other economists such as Say and Malthus have come up with ideas which support Karl Marx ideologies regarding ownership and production of goods and services (Marx and Engels 202). Marx explained that capitalism dictates the social relationships among workers in the manufacturing process. Marx described the possibility of an individual to give up one’s ability to transform the economy as commodity fetishism. Further, the economist emphasized the importance of capital accumulation. Accumulated capital determines the level of investments that takes place in the economy. In many cases, individuals are unable to put their entrepreneurial skills into practice because of insufficient capital. Marx explained that the organization set up of a society is determined by the methodologies used in the production process. Marx emphasized on efficiency in which the factors of production was combined such as technology and land.
The impact of the capitalist innovations was fully implemented and felt during the inter-war period (Eisner 60). During the period most entrepreneurs were driven and aided by their visions. As a result, many economists especially who believed in Keynesian economics embraced that capitalism drives the economy closer to riches and more knowledge compared to any other central planning would. After the post-war period, John Maynard Keynes argued that many entrepreneurs were faced with difficulties in determining macroeconomic variables. Many faced difficulties in determining investments decisions. However, economists such as Michael Poranyi explained that many business owners used their personal knowledge in making decisions which helped to boost the economy after the war (Eisner 62).
The post-war economic period was a period after the end of the Second World War. There was economic prosperity in many parts of the world. The war had begun in 1945 until the end of 1970.The collapsing of the Bretton monetary system and the 1970 oil crisis had contributed to economic depression. However, after the end of the war, there was an overall growth which lasted until the 1990s. During this period, countries recorded high rate of economic growth. For example, the East Asian countries and the Western Europe countries managed to attain full employment and sustained economic growth. The growth was controversial with the predictions that had been made before. Countries which were profoundly devastated by the war recorded the highest economic growth. They included Japan, Italy and the West Germany.
The post-war economic period is closely related to capitalist since most of the economic activities were linked with innovation in the field of technology which as a result promoted many business activities. Capitalism mainly focused on the empowerment of firms to expand their operations. Economies in many countries achieved full employment and sustained economic growth because many jobs opportunities were created. Capitalism emphasized on the accumulation of wealth among the investors. The government had a little intervention to the activities that most of the investors were engaging in. In addition to that, the government encouraged many entrepreneurs to start the business by giving subsidies. Arthur Spiethoff related innovations with technological developments (Werhane 112). He explained that a capitalist form of the economy creates market opportunities for both raw materials and finished goods and services.
The 2007-2008 crisis is a financial crisis which is regarded by many economists as the worst depression after the great depression (Erkens et al. 400). The financial crisis began in the United States in the subprime mortgage. Further, the crisis extended in banking sectors which led to collapsing of the Lehman Brothers which are an investment bank. Massive bailouts were made to the financial institutions to prevent further worsening of the financial system. The government started to employ both fiscal and monetary policies. As a result of the government intervention, there was the liquidity crisis all over the world. The World Investment Bank stated that for the economy to achieve recovery, it would take at least two years to overcome the recession. Some of the intervention measures that the government set in lace include lowering the interest rates to allow more people to borrow for investments purposes.
A close evaluation of the 2007-2008 financial crisis was caused by policies that the government implemented. The introduction of the monetary policies caused inflation in many countries. The lowering of the interest rates encouraged many people to borrower money from the financial institutions which led to increased money supply in the market. Since the interests rates were very low, the introduction of the monetary policies did not affect the interest rates since the economy was already suffering from liquidity trap. In many developing countries, financial system collapsed. To finance their expenditures many of them were forced to take debt from the international monetary funds. For example, in Iceland the banking sector collapsed. Further, the introduction of the fiscal policies such as increasing government expenditure to increase the aggregate demand failed since inflation rates were very high and most of the civil servants were fighting for high wages because of increased prices of goods and services.
Market economy resulted in2007-2008 financial crisis. In the United States where the crisis began, the country was reluctant to employ both fiscal and monetary measures to curb the situation. Some economists in the country argued that the economy could have attained equilibrium through forces of demand and supply.
Capitalism is more effective in helping to achieve full employment than develop market economy. First, capitalism allows efficient allocation of resources in a country. In many cases, the firms are not awarded for the goods and services which do not meet the taste of the consumer. In a capitalist economy, individuals are motivated to work hard since properties are individually owned; therefore, individuals are motivated to work hard to earn more.
Secondly, capitalism allows efficient production of goods and services. In a competitive market, firms are motivated to produce more effective (Girdzijauskas 111). In a competitive market, firms are faced with two main economic flows. One of them is to maximize profits. The second one is to minimize cost by cutting cost the production cost. A capitalist form of economy prevents companies from going out of business.
In the capitalistic form of economy there is financial incentive. In this case, entrepreneurs work hard when there is personal financial reward. Further, there is high competition since more private investors are highly attracted by the profit motive. Unlike in other form of economies, the government intervenes through fiscal and monetary forms to protect private investor’s properties. Such intervention programs help the government to have funds to provide public goods and redistribute wealth in a society through taxation programs.
Further, in a capitalist economy, there is dynamic efficiency when the firms adjust to various changes in consumer taste and preference (Bresser and Carlos 20). Consumers taste and preference are not static. They keep on changing, and the adoption of modern technology in the production process helps to suit all the consumers wants. Further, the new technology helps to minimize the cost of production which is one of the firm’s objectives.
On the other hand, a market economy is faced with some limitations which as a result fail to attain full employment in the economy. One of the major weaknesses of the market economy is that there is an overproduction of goods and services. In this form of economy, the workers are poorly remunerated so that they can play the role of the consumer. Therefore, in many cases, some of the produced goods end up not being consumed. Further, in a market economy there, is a high disparity between the poor and the rich. In many cases, the rich in the society continues to accumulate wealth while on the other side the poor end up being more miserable.
In conclusion, it is not adequate to affirm that capitalism leads to a series of crises while market economy results in the achievement of a state of equilibrium. Capitalism is more effective more than a market economy. A capitalist economy is closely associate with sustained economy growth and full employment. Capitalism allows government intervention which helps to protect private investors. Further, it induces competition in the market since more investors are attracted to start their own business. Unlike in a market economy, the government helps to solve macro-economic problems such as unemployment and high prices levels and imbalance of payments. Capitalism motivates individuals to work hard since the properties are individually owned.
Classical economists such as Adam Smith developed theories which explain the importance of capitalism in a country. Adam Smith believed that economic growth would only be achieved when a country has political stability, the living standards of the people is improved, and social conflicts among the people are reduced. The market economy is firmly attributed to the 2007-2008 financial crisis that resulted to collapsing of many banks and financial systems in many countries such as Iceland. The post-war period when the world recorded the highest growth rate in many unpredicted countries which were profoundly affected by the Second World War was attributed to the capitalism form of economy where individuals and private firms were allowed to own properties.
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