Fall of Global Capitalism (Frieden)

Clinton Surratt ECON 295 Mid-Term Exam October 15, 2009 I. Introduction The fall and rise of Capitalism only tells part of the story of Capitalism. If Frieden were to title his book a few years from now, it would probably read “The Fall, Rise, and Fall of Global Capitalism” or “The Cycles of Capitalism” for I feel Capitalism has, in fact, occurred in cycles in we are in one of the final cycles. From the onset of Capitalism until today, Capitalism has produced some vast contrasts between many factors in the economy.

Some of these contrasts are the rise of Monopolistic firms and the death of small firms along side and an ever-increasing income inequality between the rich and poor. The effects of Capitalism on today’s modern economy have come to a head. Our approach and attitude in attaining wealth in this Capitalist economy is almost reckless. The magnitude at which we are careless about the effects of Capitalism on our society is alarming and its death will bring about what I would call Efficient Conservationalism. Global Capitalism is more evident now then it has ever been.

If you look at the rate at which GDP has increased since the beginning of our country, you will see a sharp acceleration of total output since the inception of Capitalism in the late 1800’s and early 1900’s. With this rapid acceleration, Capitalism is showing signs of overheating and weakness in its practices, especially in America, which is evident by the intensity and frequency of economic recessions and depressions. It is also being blamed as one of the main causes of modern pollution trends. Let us look at the history and evolution of Global Capitalism.

The rise of Global Capitalism was introduced by the beginnings of Mercantilism in which there was a rapid growth in overseas trading with an emphasis on exports. Mercantilism is considered the earliest stage of modern Capitalism for it favored the accumulation of capital. Following Mercantilism, Capitalism changes faces and transforms into Industrialism and furthers its unremitting climb. During the industrial revolution, firms developed the factory system, where they learn to maximize their profits by achieving “economies of scale”.

This new found manufacturing system establishes the framework for the Capitalist model to embark on its victorious endeavor of global domination. With the rise of economies of scale and the ability of firms to generate more profits, the rise of Monopolism begins and the horizon of Global Capitalism’s peak emerges. During this time, there was the development of a complicated system of banking and a new model of capital wealth, such as stock ownership, that essentially becomes the initial push for the birth of globalization and was an essential component for realizing the pinnacle of Capitalism.

Major characteristics of Capitalism in this era are the establishment of a large number of industry giants. These oligopolistic companies produced massive profits thus exacerbating the competition in the market and the assassination of the smaller firms that could not compete. This may not be such a bad thing for the labor market because now the jobs lost in the small companies are created in these monopolistic firms in which sometimes pay better than the previous jobs lost.

Consequently, the negative effect of the creation of these monopolies was their power and complete control over the prices in that market with no reference to supply and demand. The Monopolistic (Capitalist) way of thinking created many reoccurring problems in the economy such as economic depressions and the boom bust business cycles which is evident by the Long Depression of the 1870’s and 1880’s, the Great Depression, and the various recessions of today.

How did the Soviet Union avoided suffering the same scale of hurt caused by the global depression? The Soviet Union, at that time, was probably the furthest away from a Capitalist economy in which most of the damage from the depressions had occurred. These problems affected almost the entire Capitalist way of thinking and fashioned fears about the long-term effects and survival of the Capitalist system.

Globalization helps and hurts Capitalism for it introduces more financial tools, a more-integrated worldwide financial market, and the creation of various World organizations and agreements, such as the World Bank, IMF, WTO (formerly GATT), and NAFTA. Globalization also helped to lead the way in the creation of the Euro currency in Europe. The integration of global financial markets helped Capitalism by making Capital accumulation easier and more of it was now available to be taken. All of hese combined, helped to dilute the Monopolistic type firm’s power over the market and introduced more regulations. The complexities of the global market, with minimal ways to regulate it, essentially became the downfall of Capitalism for as the saying goes “it takes money to make money”. II. Global Recession: Conservative To me, conservatives are the ones whose values are based around limited government, personal responsibility, and moral values. With that in mind, according to our lecture notes, I feel there are three main reasons rather than two: 1.

A combination of lenders relaxing credit requirements and offering mortgages to homebuyers for homes the borrowers really could not afford 2. Rating agencies giving improper ratings to securities 3. CDO and MBS then are sold to investors for hedging and leveraging Over time, when these lenders lend this money to the people who could not afford the loan, the housing prices increased as the amount lenders are willing to lend, and the amount individuals are willing to pay for a piece of property, increases which caused the housing bubble.

No one knew there was a bubble so these rating agencies had a false sense of value of the loan, loan holders, and their ability to pay back the loan (or they just did not care because they had the Capitalist mindset of “make money make money” at any cost) which then led to rating agencies giving improper ratings to these loans which are then sold as CDO’s and MBS’s to investors for hedging and leveraging. Once the bubble busted, these securities ultimately lost a large amount of its value leaving the lenders and investors to suffer the majority of the loses when the loans could not be paid back.

This then caused banks stop lending to each other and to clients because they lack the confidence that loans will be repaid hence the credit market being “frozen” causing the credit crisis. From a conservative point of view, all of this is a violation of both personal responsibility and moral values. II. Global Recession: Liberal To me, liberalism is the belief in individual freedom and the free exchange of goods and ideas. With that being said, after looking at our lecture notes my two reasons would be: 1.

Rating agencies give improper ratings to securities. 2. Banks stop lending to each other and to clients (business and consumer loans) because they lack the confidence that loans will be repaid. When there is not a free flow of information and ideas or there is a flow of wrong information and ideas, which is the case in rating agencies giving improper ratings, things go wrong. If these rating agencies had the right information they could of rated the securities more closely to their risk.

If this would of happened, Fannie and Freddie Mac would not of bought as many “toxic” or risky loans, investors wouldn’t have bought as many risky CDO’s or MBS’s, and the financial institutions would not of had to cover as much risk which would have eased the tightening of the credit market compared to what did happen and the banks would still have lent to each other and consumers. Probably not at the same capacity as before but the credit market would not have “frozen” like it did and consumer confidence would not have fell as sharply as it did. III. Global Capitalism Management

Some positive ends are the increased ability in communication and the phenomenon of global information sharing. New smart phones such as the iPhone and Blackberry are making almost everything electronically easier. Better fuel-efficient cars are being imported from various countries; advances in health care and technology create an overall better quality of life. Some flaws in Global Capitalism are that it is associated with unfair and inefficient distribution of wealth and power thus causing a growing disparity in income equality (refer to the graph courtesy of the Bureau of Labor Statistics). At the 2000 peak, the top 1% of our income bracket held 21. 5% of household income, a share exceeded only in the late 1920’s, a period of highly unstable economic speculation and has only increased since.

Along with this, the average amount capital income generated by the lower 95% of the income bracket has been steadily decreasing but increasing in the top 5%. To make matters worse, there is an increasing momentum of capital income generation away from labor income for in the top 1% receives only 35% of its income as labor income but obtains more than half from capital income. Mishel, Bernstein, and Shierholz’s: The State of Working America 2008/2009 provided all information contained inside the brackets. This capital accumulation is not being passed down to the lower income brackets thus the growing income inequality. If the majority of the population’s overall purchasing power is decreasing, then their ability to purchase consumer goods is also decreasing. This is the present scenario in which I feel everyone loses.

In addressing these flaws, I feel in a Capitalist economy where there is a common trend of capital accumulation, the government should play a larger role in income redistribution. I am not saying take all of the rich peoples money and give it to the poor like Robin Hood, but make it more of an even playing field which would give consumers more disposable income to be spent on the finer things in life such as fuel-efficient cars, smart phones, etc… The government should focus on not increasing its expenditures on primary education and social services but making its expenditures more effective.

The U. S. is one of the higher spenders on education compared to the rest of the world while our math and science scores continue to slip way below those of other countries. III. Conclusion In conclusion, I will reiterate that Capitalism is associated with unfair and inefficient distribution of wealth and power, which again is the leading cause of the growing income inequality in America. (View graph above). Our economy is essentially a “scale”, a scale that should balance evenly in the middle where everyone can evenly benefit from its prosperity.

But the pendulum is on the side favoring the wealthy and is still swinging in that direction, which is not the makings of a healthy, balanced economy where everyone prospers. Economist Branko Horvat states, “It is now well known that capitalist development leads to the concentration of capital, employment, and power”. This concentration again must be passed down to the lower income brackets of our economy in order for the Capitalists system to keep functioning properly and the “scale” to become more even.

Economics Professor Ravi Batra states “excessive income and wealth inequalities are a fundamental cause of financial crisis and economic depression, which will lead to the collapse of Capitalism and the emergence of a new social order”. Environmentalists have argued, “Capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resources”. Since the beginning of the global financial crisis a year and a half ago, almost 45% of global wealth has been erased.

Capitalism has proven to fabricate financial leeches and has helped to destroy the global economy. The moral of the story is for our economy not to increase it’s spending, but make it’s spending more effective and to find a newer, better, more efficient way of doing business which takes into account the overall morality and condition of the state with an emphasis on improved income mobility. Efficient Conservatism will be the only way for the United States to sustain global economic superiority. Where will we go from here…

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