Problems with Capitalism

Problems with Capitalism

Economics Notes, Module 3, Section 4

All capitalist economies are subject to what is known as the “business cycle”.  Here’s how it first reared its ugly head:

Robber barons, like J.D. Rockefeller and J.P. Morgan became very wealthy under American capitalism.  They ultimately developed monopolies on economic power.  (Does this remind you of mercantilism at all?)  Remember, that capitalism was supposed to decentralize economic decision making.

Poverty is a lack of money and possessions needed to supply life’s basic needs.  A  large number of people in the U.S. in the early 20^th Century were living in poverty while the robber barons did well.

In October of 1929, the North American stock market crashed, leaving many robber barons penniless, and not even Darwin’s “strongest” could survive.  The business cycle had let America down.

Economic “Boom” Characteristics:

-         Full employment

-         High inflation

-         High investment

-         High demand

Economic “Bust” Characterisitics:

-         High unemployment

-         Low inflation

-         Low investment

-         Low demand

As a result, Franklin D. Roosevelt, President of the United States, developed policies that would relieve personal misery due to the depression and potentially turn the American economy around.  The “New Deal” offered:

-         Federal aid to the 48 states

-         Social security in the form of unemployment benefits and sick pay

-         “Make Work” projects like irrigation projects and bridge construction

Keynesian Economics works very similarly to this.  John Maynard Keynes argued that when pure capitalist economy is working well, there is little need for the government to get involved.  However, in times of recession, according to Keynes, the government should take a more active, or interventionist role.

In order to stabilize an economy, Keynes recommended using monetary policy, or government control of how much money is available in an economy.  During times of inflation, governments should increase taxes to reduce consumer spending.  Conversely, during times of recession, governments should reduce taxes to encourage spending.  In addition, in order to discourage spending during economic boom, governments should increase interest rates to encourage saving and discourage spending or borrowing.  On the other hand, government should encourage spending during times of recession by reducing interest rates.

Debt:  The total amount of money owed by a country on any given day.

Deficit:  A period of debt within an economy in a specified period of time. 

Reaganomics:

Beginning in 1981, President Reagan decided that the U.S. national debt was too high.  In addition, he wanted to control inflation and bring in tax reform in order to stimulate the economy, while at the same time reducing the size of the national government.  He felt that if people were employed, they would have money to spend, which would keep the wheels of the economy rolling, so he increased defense and military spending.  He didn’t want to raise taxes in order to pay for this, because that would slow the economy.  Therefore, he ran consecutive annual deficits, increasing the overall U.S. debt.