Comprised of three institutions, private property, markets and firms, capitalist economies are characterised by private ownerships of capital goods, which are organised for use in firms, in order to generate an output. Capitalism is to a large extent responsible for economic growth on history’s ‘hockey stick.’ While some might argue that capitalism dates back even further than the 16th century, the famous 19th century economist Karl Marx acknowledged the industrial revolution of Britain as the start of capitalism. Hence I will start by using the British Industrial Revolution as an example of how capitalism ‘explains’ the ‘hockey stick’ model. He also recognised capitalism as a stepping stone in the progression of mankind, in other words he associated it with development. There is a major correlation between the climb of GDP per capita on history’s economic hockey stick and the emergence of a British capitalist society. To what extent however was capitalism a causal factor of Britain’s early industrial development and the ‘divergent performance’ of economies within Britain?
Britain’s industrial and technological revolutions occurred at the same time as rapid urbanisation. Hundreds of thousands of people flocked from outlying rural areas into big cities to find better paying jobs in firms, mostly working in factories. This period of time saw the shift from small-scale family run businesses, to firms run by owners and managers who employed labourers. This introduction of the institution firms into the economy lay the foundations for capitalism. At the same time, the “technological change” which Britain experienced in the mid-eighteenth century, revolutionised the production process of predominantly textiles, energy and transportation. As productivity soared, the prices of manufactured goods plummeted, dramatically enhancing demand for British goods globally. The end of protectionism, when import taxes on international goods and services shield domestic industries from foreign competition, turned Britain into a free-trade state. By the late eighteenth century this had a huge impact alone on the upwards ‘kink’ on the ‘hockey stick model.’ The value of British exports rose from £15million in 1760 to £59million in 1805. Machinery such as the spinning jenny, which enabled the user to produce multiple spools of thread simultaneously, dramatically increased the quantity of a single day’s output. This new technology led labourers working for firms to ‘specialise in tasks’ along the production line. Labourers who focus solely on one task produce more, these are the ‘gains from specialisation.’ This meant that from a single day’s work, firms not only generated more private property for in market sale, but also had to purchase more capital good in order to fuel their production process, thus supporting other firms. This interconnection between the three institutions, private property, markets and firms distinguished capitalism. Therefore, one can confirm that a capitalist economic system was in effect at the time of Britains upwards ‘kink’ on history’s ‘hockey stick’ model, and that it stimulated economic growth and caused an increase in living standards. The limitations to this conclusion however are that during this time, Britain’s government protected firms that had already secured foreign trade with its colonies. The British East India Company for example monopolised the spice trade between the countries prohibiting competition. This is an example of how not capitalism alone contributed to economic growth in Britain.
The beginning stages of this variety of capitalism saw some inequality between the owner, manager and labourer, in terms of income. Empirical studies conducted by economists Peter Lindert and Jeffrey Williamson confirm that income inequality did in fact rise at the start of the industrial revolution, both in the United States and Britain. They attribute this to population growth and “unbalanced technological change,” which expanded income disparities between economic sectors and increased skill premium, the ratio of wages between skilled and unskilled labourers. This is evidence of the ‘divergent performance’ of different economies within the country itself, as different economic sectors experienced disparities of income. With this information it is possible to identify the relationship between Britain’s capitalist economic system and economic inequality.
There are also examples of developmental states that contribute to standard of living in addition to capitalism itself, such as South Korea. In 1950, both South Korea and Nigeria had a GDP per capita of around $1000. Over the past 65 years, through a series of governmental acts and introductions to public programs, which class South Korea as in interventionist state, its GDP per capita had risen to $25,000, whilst Nigeria’s remained lesser than $2500. Policies introduced by the government guaranteed “jobs for life,” which resulted in low regional income disparities and the democratised economy attracted a more global audience increasing the amount of goods exported. The Index of economic freedom describes South Korea in a report as putting a “greater emphasis on enhancing regulatory efficiency and ensuring a larger role for small and medium-size enterprises in the economy.” The IEF report also says “South Korea’s dynamic private sector, bolstered by a well-educated, hard-working labor force, continues to capitalise on the country’s openness to global trade and investment.” Under Park Chung-hee’s governance, the economically stagnate country underwent rapid modernisation and industrialisation. While South Korea is a democratic state-guided capitalist state, China is a communist and statist capitalism, in which the state has substantial control over social and economic affairs. The United States is a fully democratic capitalist state.
The economic success of Western capitalist Germany versus the centrally planned government of Eastern Germany alone exemplifies the fact that capitalism is responsible for the upwards ‘kink’ on the hockey model. Centrally planned economies take governmental direction to an extreme. In the case of East Germany, the government acted as the institution controlling how goods were produced, how they were distributed and to whom. When compared directly to the capitalist economy of West Germany, East Germany’s growth rate was insubstantial. The introduction of central planning essentially eradicated the three institutions that comprise capitalism. The lack of private property, firms and markets resulted in a GDP per capita half that of West Germany.
To what extent is capitalism responsible for economic inequality between countries? Why, for example, is the average income in Norway nineteen times that of Nigeria? Jared Diamond, a geographer and UCLA professor, among other things, wrote a book titled ‘Guns, Germs and Steel.’ In his book he accredits geography, germ immunity, food production, the domestication of animals and the use of steel to uneven worldwide development. On the one hand, Norway has extensive access to surrounding waters and access to foreign markets. This sparked international trade, primarily via merchants for thousands of years but made the transfer to firms a lot easier because connections to foreign markets were already established. Twenty percent of Norway’s economy is comprised of oil and gas production. This, a high cost good, of which there is a high demand, resulted in a consistent revenue. Contrariwise, Nigeria is a landlocked country who’s primary industry is agriculture, a low cost good. With a yearly average temperature of between 26 degrees Celsius and 28 degrees Celsius, Nigeria is prone to the spread of diseases among people, livestock and crops, which typically has resulted in low food security. The majority of the population employed in the formal sector, work in primary industries producing low cost goods. During development, the most competitive markets are ones with more diverse and complex goods. Currently, globalisation allows for production of a particular good or service to occur in different places around the world. This means that countries such as Vietnam and Indonesia do not have to be economic powerhouses to get involved in private property and markets. In conclusion, irregardless of the economic system, these countries as examples were already predisposed to success or failure.
Households also play a pivotal role in economies as they foster the next generation of owners, managers and labourers. Well developed countries have a positive feedback cycle where on average, future workforces are better educated, and have the tools required to contribute to their economy simply because their country is already at the necessary stage of development. Likewise, poorer countries do not have the same calibre or quantity of recourses available for the net generation of labourers. This is why goods and services produced by low income countries typically remain primary sector jobs. This negative feedback cycle can make it very hard for countries to break out of poverty.
In conclusion to the primary question, the increasing interaction between private property, markets and firms caused the birth of capitalism which predominantly explains history’s economic ‘hockey stick.’ This then triggered a technological revolution and ‘specialisation’ which further fuelled firms with ‘ammunition' in markets, as productivity increased. There are also different varieties of capitalism such as developmental states, which contribute to GDP per capita in different ways.
Problems associated with capitalism:
Unfair distribution of wealth. The economist Thomas Picketty wrote a book called “Capital in the Twenty-First Century.” In his book he discusses how capitalist benefits aren’t equally distributed among the workforce and that wealth builds up in the top percentage of the population. He also states that this will continue to occur because wealth is passed down and inherited from generation to generation so it rarely leaves the same hands. These privileged people are a part of a positive feedback cycle in which they have the best resources available to them in order to succeed, such as education. Picketty also claims that individuals who buy assets which gain interest, such as real estate, accumulate wealth overtime while the poorer population remain behind.
Market inconsistency. Because markets are ever changing, succeeding rapidly and crashing, economic downturns can evoke periods of mass unemployment and the decrease of living standards.
Monopolisation. Firms that succeed gain ‘monopoly power’ and are able to charge higher prices to their customers because they control the market. Electricity and water are examples of monopolies, customers must pay the price asked of them because they rely o heavily on the service.
Environment. Increase in temperatures and change in climate affects agriculture and tourism which has further negative consequences. ‘The likely consequences of global warming are far-reaching: melting of the polar ice caps, rising sea levels that may put large coastal areas under water, and potential changes in climate and rain patterns that may destroy the world’s food-growing areas.’
Avarice. According to economist Michael Sandars’ book “Moral Limits of Markets,” because capitalism as a system generates such profit, incentives are created for owners and managers to break moral codes in pursuit of more money. Price discrimination is a common area in which firms break moral boundaries in order to generate more profit.