CAPITALIST IDEOLOGY

• The framework for capitalism depends on understanding six assumptions

1. Private property

2. Freedom of enterprise & choice

3. Role of self-interest

4. Competition

5. Reliance on the price or market system

6. A limited role for government

1. Private Property

• In general, property belongs to individuals, not the state
• Individuals include businesses
• We still have public (or government) ownership of some property
• Individuals can:
• Negotiate contracts to use their private property as they see fit.
• This leads to exchange of property.
• Have the right to bequeath or designate who receives property when they die.
• Property rights act as an incentive to:
• Invest and innovate
• Exchange and economic growth
• Property rights extend to intellectual property.
• E.g., patents, copyrights
• Many differences around the world
• Nevertheless, there are some legal limits to the use of private property.
• E.g., zoning laws

2. Freedom of Enterprise and Choice

• Firms, owners of capital, workers, and consumers make choices about resource allocation.
• Freedom of Enterprise - means that producers are free to choose
• What economic resources they wish to use,
• What goods or services they wish to produce, and
• What markets they wish to sell to.
• Freedom of Choice means for:
• property owners can use their property as they wish.
• workers can work at jobs they choose (assuming they are qualified).
• consumers can buy the goods and services that satisfy their wants, subject to their income.
• Consumer is king in the economy as they determine what the businesses will ultimately produce.

3. Role of self-interest

• Each economic unit does what is best for it
• Owners of property try to maximize their profit.
• Workers try to maximize their income
• Consumers try to maximize their utility [or satisfaction]

4. Competition

• Large numbers of buyers and sellers
• Acts to spread economic power within businesses and households
• Individual households or firms are a small part of the total. Their actions do not affect the market as a whole.
• Entry & exit
• Flexibility to adjust to changes in consumer tastes, technology, resource supplies.

5. Markets & Prices

• Market is a mechanism to bring buyers and sellers of a good or service together.
• Acts as a communication system which tracks and balances individual choices.
• Allows the various players in the system to make informed decisions.

6. Limited Government

• Capitalism leads to an efficient use of resources.
• Some believe that the market is self-regulating and government should limit its involvement.
• In Chapter 5, we will study some limitations of capitalism that lead to a role for government.

OTHER CHARACTERISTICS

• Capitalism is marked by three other characteristics:

1. Extensive use of capital goods

2. Specialization and efficiency

3. Use of money

1. Extensive use of capital goods

• State-of-the-art technology
• Think of changes in farming
• Look at the computer center
• Extensive use of technology and capital
• This means capitalism favors large scale production, complex equipment
• Simply put, those who effectively use technology, tend to make more money.

2. Specialization and efficiency

• Specialization allows for efficiencies in production
• Consider your professors, they all have an area of expertise
• Division of labor
• This means human resources specialization
• Take advantage of individual differences
• Learning curve effects - we learn by doing
• Avoid time lost in shifting tasks
• Geographic Specialization - (land)
• Concept of specialization extends to land.
• Wheat, coal, oranges
• Computers, medical devices?
• Comparative Advantage
• Specialization and trade can increase overall position of both parties if comparative costs for two products differs.
• Concentrate on what you do best
• Trade for other items with someone else

3. Use of Money

• Medium of exchange
• Acceptable by buyers and sellers
• Facilitates trade in more items
• Today it is paper
• Tomorrow will it be e-money

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