Research Paper on Capitalism

Introduction

The idea that capitalism implies a simple and uniformly characterized economic organisation is wrong and misleading. The organization of the economy and government interferences among other characteristics vary from one market to the other. Therefore, considering the differences, the economies of capitalist states can be classified into four; state-guided capitalism, oligarchic capitalism, big-firm capitalism, and entrepreneurial capitalism (). A common denominator across these categories is that they all recognize the private ownership of property. Also, it is essential to note that no type of capitalism dominates within and across the economies (). There is always a mix of these classes of capitalism at various phases of the economies' history. The categorization and description of these economies are majorly based on the output rather than the effort required to produce these results.

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State-Guided Capitalism

In these economies, governments decide which sectors and even specific firms should grow. The chosen industries and companies are protected by the government economic policies. Nonetheless, the state's economic system remains capitalistic. The prices of products and the wages of workers are dictated by the market. Also, the private citizens have a right to own a property as well as the right of contract. A government might employ this capitalistic economy in order to protect profitable industries from powerful individuals such as politicians. The idea of state capitalism is mainly influenced by socialism (). In some countries, the operation of large commercial state enterprises that work in accordance with the laws of capitalism has become very common (). Central planning should be equated to state-driven capitalism. In contrast, central planning involves ownership of the means of production, control of prices and wages and provides no incentive to privately owned businesses ().

A government can guide its country's economic growth by either through direct ownership of the major companies or indirectly through favourable legislation and advice to the chosen "winners". The banking system in many countries is state-owned. Singapore and India are good examples of countries that pursue state-owned capitalism. In India, state ownership accounts for 75 percent of all bank assets (). The country nationalized many large privately owned companies after its independence. However, it did not abolish the ownership of private properties. Singapore, on the other side, was initially a member of socialist international. Singapore's economy is made up of many government-owned enterprises and additional companies that can be linked to it through the Temasek Holding (). These enterprises account for 60% of Singapore's GDP ().

Even without any direct involvement, a country's administration can still guide capitalism. Through directive given to banks, a government may achieve its economic goals. Furthermore, a government can shield the favoured companies from competitions through protective measures such as tariffs. Additionally, a government can protect its local producers by allowing foreign investors in specified sectors under certain conditions.

Advantages of state-owned capitalism. It is highly successful and can last for a long time. This is evident in the Asian economies. By successfully transferring technology through foreign investment and utilizing the readily available cheap labour, the state economies can produce products which perform well in international market. As a result, significant growth is experienced. The main target of these economies is to avoid a situation of brain-drain that is the emigration of the workforce to the technologically advanced state.

Disadvantages of state-owned capitalism. There have been many cases of excessive investment by the state in the past. For example, the 1997 financial crisis in Southeast Asia almost crippled South Korea's economy due to the extension of loans in excess to its semiconductors, steels and chemical company (). Other than that, this capitalist archetype is very susceptible to corruption as businesses might attempt to bribe the state in order to receive favour. Corruption might, therefore, lead to another drawback which is the selection of a wrong winner or loser in the economy.

Oligarchic Capitalism

The state is also involved in guiding the economy of this capitalist economy. However, unlike in the state-guided economy, the government policies are tailored to promote the interest of the few rich or the ruling autocrats and those in their favour (). This is widely predominant in Latin America, some of the former Soviet Union states and the Arabic Middle East.

In this capitalist paradigm, the economic development is not the primary agenda of the government. Instead, the main of objective of these administrations is to protect and enhance the position of the oligarchic few who own most of the country's properties. Development activities in this economies are only a mean to blind other members of the society in a quest to maintain power within the elite. The elimination of this type of capitalism can only be achieved through a revolution.

Disadvantages of oligarchic capitalism. There are quite a number of downsides that are characteristic of oligarchic capitalism. Since the growth of the economy is not the primary target of the government, the society might experience some difficulties as discussed below.

Inequality and Sluggish Growth. The capitalistic economy is characterized by unequal distribution of resources as well as the wealth. While the few rich individuals control the economy, the majority of the population live in deplorable conditions. As seen in Latin America, the governments employed import protections in order to benefit companies that are owned by the rich ().

Informality. The operation of illegal entities is very common in such economies. Informality is used instead of criminality to the extralegal nature of the activities. They are only illegal because they go against the moral standards set by the society. Although these enterprises contribute to the economic growth, they could perform better if legal ().

Corruption. By making it difficult for citizens to acquire licenses or approval, the Government contributes to the formation of informalities which give bribes from one time to another in order to remain in business (). Corruption diverts the entrepreneurial energy away from productive activities and into socially wasteful ventures. Moreover, such a vice detracts foreign investment.

Big-Firm Capitalism

Big-firm capitalism is used to describe economies dominated by well-established companies that are owned by shareholders (). The professional managers, who work in shareholders' best interest, are principal agents that represent the owners that are mostly not involved in the economic activities of the firm. In spite of this dominance, the economy still accommodates other forms of capitalism. However, the corporates are huge and powerful enough to squash any kind of competition from the small entrepreneurs. Additionally, on some occasions, these companies are selected as "winners" in a state-guided economy, and as a result, they are subjected to favourable government policies ().

Disadvantages of big-firm oligopolistic capitalism. In most cases, big-firm capitalism is oligopolistic (). When a few competitive companies dominate and control the market resources, they tend to become oligopolistic. In some cases, these firms might accumulate a lot of funds and power to the extent of having control of the market prices (). When big firms are able to differentiate their products from the other in the market, they can overprice these goods and services and in the event, hurting the consumers. This market situation is often referred to as monopolistic competition.

Furthermore, due to the constant cash-flow, the firms may become lazy in developing new innovative products (). Instead, they acquire government and legislative protection from the court to weakness its competitors.

Advantages of big-firm oligopolistic capitalism. In markets that can only support a few companies, having an oligopolistic economy is an advantage. These firms have the financial power to continually improve on their existing technologies. For instance, in Japan, the automobile industry is dominated by Toyota and Honda. There has been continuous innovation and improvement on these firms' products due to the continuous competition. The consumers, therefore, enjoy quality products.

Big firms are crucial in taking up the production of inventions by entrepreneurs who failed to commercialize their innovation in a cost-effective (). In most cases, the original innovations are in their primitive state, limited in capacity and face a number of inefficiencies. However, a big-firm, having enough staff, fund and technology, can refine these innovations and produce goods or services that can be affordable to the customers (). These incremental refinements are essential to the development of an economy. In other instances, these companies' offers support to radical innovations that would otherwise not survive. Still, instead of doing their own innovation, the big firms tend to buy radical innovation from small entrepreneur. In short, the big firms are important instruments that bridge innovations and final products.

Entrepreneurial Capitalism

This capitalist system is characterized by a significant number of its key players having the motivation and ability to innovate and also commercialize their breakthrough innovations (). The inventors, with or without help, take up their initial design and continuously refine them. Among the products of this capitalistic paradigm include automobiles, telegraph and aeroplanes among others (). Economies that are driven by entrepreneurship and radical innovation experience a more efficient production and a significant growth. Additionally, knowledge which can be commercialized is shared among the actors in the economy. Innovative entrepreneurs are in most cases, if not all, found in capitalist economies (). This is because their risks and inputs, in term of time and money, can be generously rewarded.

According to Baumol (), radical innovation are characteristic to entrepreneurs for one main reason; A successful radical innovation by entrepreneurs as compared to an innovator in big firms has a more attractive return. Unlike in a big firm, where innovation will just attract a one-time recognition award, the small entrepreneurs treat such opportunities as lucrative chances to earn millions. However, this does not mean that there is no radical innovation taking place in large firms.

Radical innovators are main faced by two drawbacks; lack of enough money and the strenuous cumulative incremental improvements. Whereas large firms have a vast amount of resources and research team that can be used in incremental improvements, entrepreneurs lack the time and technology that can be used productively to this effect. In most instances, after the development of a simple prototype, radical innovators would need financial aid to advance the original design. A good example is a vast gap between the complexities of the plane that was invented by the Wright brothers when compared with the Boeing that flies today ().

The Transition from Communism to Capitalism in Russia

Between 1964 and 1982, Russia underwent a period of stagnation. Although the country's economy was not doing badly, it was really underperforming when compared to other western nations (). Therefore, when Mikhail Gorbachev was elected General Secretary of the CPSU in 1985, his aim was to reform the economic system which has been underperforming since the era of stagnation (). His programme, dubbed perestroika aimed to integrate market e...