Economics and Capitalism
However, capitalism tends to incorporate a certain “way of thinking”, driven by greed, the search for ever-increasing profits, relied expansion, and internal development. Starting from the earliest origins of capitalism, only societies with the capabilities and the appropriate mindset could flourish amidst this period of economic, social, and religious dispersion. The earliest form of capitalism is seen in feudalism, the political and economic system based on the relation of lord to vassal held on conditions of homage and service.
The earliest establishment of capitalism originated in Rome through mercantilism. Mercantilism involves the distribution Capitalism, economic system in which private individuals ND business firms carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, capitalism spread throughout the world.
The term capitalism was first introduced in the mid-19th century by Karl Marx, the founder of communism. Free enterprise and market system are terms also frequently employed to describe modern non- Communist economies. Sometimes the term mixed economy is used to designate the kind of economic system most often found in Western nations. The individual who comes closest
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In his classic An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith sought to show how it was possible to pursue private gain in ways that would further not Just the interests of the individual but those of society as a whole. Society’s interests are met by maximum production of the things that people want. In a now famous phrase, Smith said that the combination of self- interest, private property, and competition among sellers in markets will lead producers “as by an invisible hand” to an end that they did not intend, namely, the well-being of society.
Philosophical Foundations of Capital system:
Materialism: Capitalism system has been derived from materialistic philosophy of life. The center and the focus of man’s struggle should be the satisfaction of material needs.
Liberalism: Thee individual have complete freedom of thoughts and action in every sphere of life. No higher authority has the power to impose any restriction on the liberty of individual. The function of the sovereignty of state is not to circumscribe, but to safeguard the liberty of the individual.
Hedonism: The entire struggle of the individual has only one goal personal interest. That thing attitude, behavior is right which brings profit, pleasure and happiness to the individual. That thing attitude or behavior is wrong, false and unacceptable which brings loss, grief or pain to the individual. A system of life raised on this philosophy of life will give rise to cut throat competition among individuals to gain economic means. Freedom of thought and action will not only intensify this competition but also tilt the balance in favor of dominant classes.
Moreover hedonism will provide moral Justification the exploitation of the upper classes. In the presence of these factors capitalism system can never be free of the evil of exploitation.
Characteristics of capitalist economies: A set of broad characteristics are generally agreed on by both advocates and critics of capitalism. These are a private sector, private property, free enterprise, profit, unequal distribution of wealth, competition, self organization, the existence of markets (including the labor market) and the capitalist class and the proletariat, and he pursuit of self-interest 1).
Private property rights An essential characteristic of capitalism is the institution of rule of law in establishing and protecting private property, including, most notably, private ownership of the systems such as in ancient Rome but protection of these rights was sometimes difficult, especially since Rome had no police. Such and other earlier system often forced the weak to accept the leadership of a strong patron or lord and pay him for protection. It has been argued that a strong formal property and legal system made possible
l. Greater independence;
II. Clear and provable protected ownership;
Ill. The standardization and integration of property rules and property information in the country as a whole;
‘V. Increased trust arising from a greater certainty of punishment for cheating in economic transactions;
V. More formal and complex written statements of ownership that permitted the easier assumption of shared risk and ownership in companies, and the insurance of risk;
VI . Greater availability of loans for new projects, since more things could be used as collateral for the loans;
VI’. Easier and more reliable information regarding such things as credit history and he worth of assets;
VIII . An increased fungible, standardization and transferability of statements documenting the ownership of property, which paved the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities. All of these things enhanced economic growth. Many governments extend the concept of private property to ideas, in the form of ” intellectual property.
- It has been argued that the introduction of the patent system was a crucial factor behind the rapid development and widespread use of new technology and mess ruing and following the industrial revolution. Some oppose the establishment of intellectual property as being counterproductive or coercive. Others argue that some intellectual property rights may be too rigid or constraining to innovation, favoring weaker protections.
2). Free market: Responsibility of Business is to Increase Profits, as he asserts that business has no social responsibility other than to increase profits and refrain from engaging in “deception or fraud. He maintains that when business seeks to maximize profits, while respecting the guidelines of a free market by not defrauding or deceiving, it almost always incidentally does what is good for society. Friedman does not argue that business should not help the community but that it may indeed be in the long- run self-interest of a business to “devote resources to providing amenities to community… ” In order to “generate goodwill” and thereby increase profits. Some, including some supporters of capitalism, dislike the focus oneself-interest.
For example, self-described “free market libertarian” founder and CEO of Whole Foods Market, John Mackey, claims in an article in Reason magazine that he is serving customers and society out of “love” rather than self-interest while he boasts the reparability of his company in that article. (Rethinking the Social Responsibility of
3). Free enterprise: In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. This include many forms of organizations that existed in earlier economic systems, such as sole proprietorships and partnerships. N-profit organizations existing in capitalism include cooperatives, credit unions and communes.
4). Economic growth: One of the primary objectives in a social system in which commerce and property eave a central role is to promote the growth of capital. The standard measures of growth are Gross Domestic Product or GAP, capacity utilization, and ‘standard of living. The ability of capitalist economies to sustainable increase and improve their stock of capital was central to the argument which Adam Smith advanced for a free market setting production, price and resource allocation
6). Economic mobility: One of the key markers of entrepreneurial economies and ‘growth’ in a society is its economic mobility, defined as the existence of large changes in the make-up of its socio-economic strata. This is manifested as the occurrence of large fluctuations in the various deciles or quintiles of income and wealth among the population, and the existence of large changes over a person’s lifetime in relation to their real earning power. In standard economics, a capitalist system provides more opportunities for an individual to rise faster in the world by entering new professions or establishing a business venture.
The instability of economic strata is contrasted with traditional feudal or tribal societies, which are considered to have more stable wealth legislations, and with the egalitarianism that exists in socialist societies, which distribute more of their wealth in the form of social benefits and therefore reduce income mobility, particularly among those who own capital and wish to trade it.
Merits: Maximum utilization of resources: Private ownership, profit motive and economic freedom force individuals to exercise their God gifted talent to the full and in the best possible manner.
This lead to the maximum utilization of human and natural resources. Goods and services are produces in large quantity to satisfy consumer needs.
Inventions and Technical Advances: In the presence of profit motivate and competition the entrepreneurs are forever seeking better techniques of production. This motive leads to new inventions and development of new techniques of work and business management which are calculated to facilitate and increase production at reduced cost.
Demerits: Materialism gives rise to selfishness in the society which eliminates sympathy and kindles the fire of mutual conflict in the society.
Makes individual indifferent to collective interest. They indulge in nepotism and become slaves of pleasure. Man loss the ability to see beyond the self interest. A society whose members are self seeking, selfish and self centered can never be free of economic hardship and misery.
Callous Competition: Competition and conflict hold great importance in the capitalist system. The expectations attached to competition are based on a supposition which does not exist in practical life.
Competition can deliver well only when all parties in competition is equal in power and strength. But in the capitalist system power and strength is concentrated in the hands of big capitalists.
Class Struggle: The capitalist system divides the society in cases: the employer and worker. This hinge shatters peace and harmony in the society. Injustice distribution of Wealth: The capitalist utilize their wealth to earn more wealth so that gradually the bulk of national resources is concentrated in the hands of a few big capitalists.
Economic Crises: In the consequences of the concentration of wealth under this system the purchasing power the masses diminishes leading to reduction in the demand of produced goods. The sale of goods stopped. Large Scale production heaps up stock unsold goods. This creates serious economic crises.
Disaster of Interest base Trade: Interest is the backbone of capitalist system. Under this system, interest is the chief means providing finance for the brink of economic disaster. Interest is the major cause of the concentration of wealth.
By increasing the inequality of distribution of wealth it creates an atmosphere of class conflict. It increases the cost of production, raises the prices, weakens the purchasing power of the people and discourages the investments.
Flow of Economic Resources in the wrong Direction: Under this economic system resources flow in the direction of vocations which promise maximum profit, even if they are inferior on the social scale and spread chief. Corrupt Business Practices: This philosophy behind this system is devoid of moral values.
Businessmen feel no hesitation in resorting to fair or foul means in order to earn maximum profit. The consumers are exploited by creating artificial monopolies and small businessmen are squeezed out of the sector of production.
Economic Rivalries and Wars: When due to over production demand decreases then capitalists look to foreign markets. This conflict sometime escalates into wars. Economic rivalries were the main cause of two world wars in the twentieth century.
Shadows of Poverty:
In this system easy methods of mass production creates an environment of economic prosperity, but the fruits of this prosperity are enjoyed only by a tiny wealthy class. The large majority of people live in the dark shadow of poverty. Unemployment: Unemployment becomes an integral part of this system. To gain maximum profit the entrepreneurs prefer to use capital intensive technology leading to large scale retrenchment of workers. The capitalist utilize their wealth to earn more wealth so that gradually the bulk of national resources is concentrated in the hands of a few big capitalists. Odds.
This creates serious economic crises Critical Analysis of Capitalism: Interest is prohibited in all monotheist religions (See Exodus 22:25, Leviticus 25:35-36, Deuteron 23:20, Psalms 15:5, Proverbs 28:8, Inhumane 5:7 and Ezekiel 18:8,13,17 & 22:12). However, interest is pervasive in capitalism. “Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, Just as the owner of land can obtain rent because land is scarce.
But whilst there may be intrinsic reasons for the scarcity of and, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant.
But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which ill allow the growth of capital up to the point where it ceases to be scarce”. Among Muslim Economists, Squid (2002) criticized interest stating that even in commercial loans, the borrower may suffer a loss, yet interest based lending obliges him/her to repay the principal plus compound interest. Conversely, the borrower may reap huge profits, yet the lender gets only the stipulated rate of interest which may likely turn out to be small part of the actual profits.
It results in inefficient allocation of society resources and increases the inequality in the distribution of income and wealth as it remunerates a continuous increase in the monies lent out, mostly by the wealthy, and puts the burden of bearing the losses on entrepreneurs and through loss of Jobs on Growth Vs. Development:
Growth is important but development is pivotal. Growth that does not result in development is less desirable. Reducing inequality is more important than increasing the growth rate.
Profit Optimization Vs. Social Optimization: Social Optimization is more important than Profit Optimization.
Achievement of social optimization if not possible through the private sector, it must be brought about through government intervention. What goes around comes around! Reducing trade barriers is said to benefit consumers as they will have range of competitive products at their disposal. But, consumers earn through factor payments that come through producers. If domestic producers will be crowded out of the market in a no-trade barrier regime; then, consumers will lose Jobs and their purchasing power will decrease subsequently. Therefore, in the long run, it merely becomes a zero sum game.
Summarily, as a capitalist, one even with the knowledge that weapons one sells will kill millions in Africa, would not bother as that’s what he goes for profits as a capitalist. Though, one may favor democracy in principle, but if nationalistic interests are better served by dictators, one will bear them as a head of state of a country in a developed world. Though, one may favor progressive taxation in principle, but if indirect taxes can pay back loans smoothly, one may direct imposition of indirect taxes in developing countries as a chairman of MIFF or World Bank.
Socialism and communism means an economic system in which the means of production are owned by the state. A central Directorate the production of goods and services. The Directorate decides the nature, quality and mode I of production of goods. The distribution of goods is also directed by this central body. Philosophical Foundations: Materialistic Interruption of History: The evaluation of human history takes place due to material and economic factors. Changes in the social relations and contact follow the changes in the means and modes of production.
The large scale mode of production and factory system created by modern capitalism has led to the formation of labor unions and increase the collective strength of workers. This strength of the workers will strike death blow to capitalism and establish socialism. In the capitalism system a large portion of profit is expropriated by the capitalist. The wage pays to the worker far less than the real value of work. This injustice can only be removed in the system of collective ownership. Class War: The war between rich and poor always exist in the society.
In modern capitalist economy this conflict rages between the capitalist and the worker. Under this system the number of capitalists in constantly decreasing while that of the workers is increasing and unity among the workers is growing strong day by day. Hence It is the errors who will be victorious in this war and a classless society dominated by workers will replace the modern capitalist system. Dictatorship of the Proletariat: With the end of capitalist system the supreme power in the state will come into the hands of the workers. They will have the authority to exercise the power of the state.
Anti-Religion: Religion makes man forget material facts and entangles him in metaphysical issues.
Characteristics of Socialism: Abolition of Private property:
An individual can own nothing expect necessaries of life. No one can run private business.
Collective ownership of Means of Production:
All the means of production such as factories, farms, land, trade mines and means of transport and communication are under state ownership and control. Central Planning: The forces of demand and supply are balances by central planning and a balance is not affected by price mechanism.
Elimination of Unfair Gaps in Incomes: Each person is paid compensation according to his needs. This eliminates unfair gaps in incomes. The system of distribution of wealth based on fair basis.
Provision of Necessaries of Life: In this system state ensure that work is extracted from each individual according to is capacity and compensation is given to him to supply all his needs. The state guarantees economic security to every citizen. Merits: Elimination of Wastage of Resources: Goods and services are produce according to needs.
This eliminates large scale wastage of resources which is an essential feature of competition under capitalist system. Cost of advertisement and businesses are entirely eliminated. Since there is no opportunity to earn private profit in this system, the exploitation and economic plundering of the weak is eradicated.
Elimination of concentration of wealth: There is no possibility of national wealth accumulating in a few hands. Eradication of Unequal Distribution of Wealth: In this system there is no scope of gaining wealth through rent, interest or private profit.
Every member of the society is the worker and receives the fixed wage. So unfair gap in the distribution of wealth do not take place at all. And economic plundering of the weak is eradicated. Elimination of concentration of wealth: There is a opportunity of equal distribution of wealth Critical Analysis of Socialism: On the economic criticism of Socialism, Maude (1970) analyzed that socialism in its guest to tame capitalists brought one big capitalist in the form of government
I. E. Unionism party accredited with the responsibility to operate, manage and administer the overall economy without giving society and individuals any recourse to challenge the government. In such a case, no government, consisting of human after all can keep itself Judiciously pursuing common goals than individual goals. Susan’ (2003) reasoned that socialism kills the self motive which drives individuals to excel and be efficient. The predictions of Marx about Capitalism also did not trivialize and his Theory of Surplus Value was also criticized later on.
The problem in distribution of income in Capitalism from an Islamic perspective was only with interest. Land has an intrinsic value and its owners receive rent on land. Labor also earns wages even when the entrepreneur suffers loss.
Value of production I. E. Prices of goods is not always sufficient to create surplus after paying wages, rent and interest. While laborer earns wages for work it renders and the land owner earns rent for the use of land, money cannot have a separate compensation of its own until t transforms itself as capital and take the risk of entrepreneurship along with an entrepreneur.