Economic Models and Concepts
The economic model that a country decides to use directly influences the flow of trade within the country and the role of citizens in determining their economic progress. Evidently, economies that are highly controlled by the government limit the citizens ability to determine their economic progress. Similarly, economies that are too liberal give people the opportunity to determine their economic development. Nonetheless, due to economic inefficiencies absolutely free economies may result in there been a wide gap between the rich and the poor. In effect, despite the perceived economic freedoms, the poor may be unable to pool themselves out of poverty. In light of this, this paper will look at the various forms of capitalism economies and their effect on the economic and social welfare to the public.
In summary, capitalism economy refers to a type of economy where there is private ownership of economic goods and factors of production. Additionally, there is voluntary decision making. Moreover, investments are freely determined by the owners of the factors of production. Further, the prices of goods and services are determined by the market forces of supply and demand (Coates, 2014). Nonetheless, since capitalism market has various weaknesses, most governments make unique changes to the form of capitalism that they use to steer their country’s economy. As a result, there are various forms of capitalism economies as follows:
Notably, turbo-capitalism is a form of capitalism where the government has minimum control on the economy. Basically, this is an unrestrained form of capitalism which is also referred to as free-market economy. In brief, this economy is characterized with financial deregulations, privatization, and low taxation. Noteworthy, due to low regulations, and absence of regulations in the finance sector, banks are able to offer more risky loans. Additionally, major corporations are able to exercise monopolies power brought by factors such as vendor lock-in tactics and economies of scale. Further, the low-income tax gives benefits to high-income earners and corporations. Finally, businesses can hire and fire employees at will. Similarly, there is little or no regulations on employees working conditions.
Importantly, this economic model leads to growth in the private sector. Notably, the low taxation policy and the minimum regulations on employment are some of the leading factors for this growth. Additionally, the deregulation of the financial sector ensures there is easy access to credit for investment purposes. Moreover, the prevailing banks interest rates are made by the forces of supply and demand (Coates, 2014). Nevertheless, this economic model is characterized by the rise of monopolies and cartels. In essence, some businesses find that they can maximize profits by working jointly rather than competing. In such cases, the public is exploited by these businesses. In addition, due to the freedoms in the labor market, big monopoly businesses underpay workers. Furthermore, the emergence of monopolies leads to huge disparities in income distribution in the country, leading to a few very wealthy individuals and a lot of poor people.
Basically, a responsible capitalism refers to a free market economy that has government regulations to avoid the inequalities brought about by turbo-capitalism. In general, this economy is characterized by welfare support from the government to the low-income earners and the unemployed. Additionally, this economy has a progressive tax regime. In essence, this aims at taxing the wealthy more than the poor (Coates, 2014). Further, there is significant government regulation on monopolies. Notably, there is some significant involvement of the public sector in areas that have positive externalities such as the health care, education, security, and public transport.
In brief, this is the best form of capitalism because it strikes a balance between the freedoms of absolute capitalism, and on the provision of social welfare to the public. Nevertheless, this system has a few major weaknesses. Notably, the high taxation levels may lead to capital flight, with large corporations and wealthy individuals fleeing to tax haven countries such as Singapore. Further, the public sector is usually difficult to govern and there are always possibilities of corruption, bureaucracy, and duplication of duties. In essence, this leads to wastage of government resources.
In brief, popular capitalism is a free market that has some degree of government regulations, as well as increased ownership of companies by the public. In addition, there are more stringent regulations by the government on the finance sector to minimize risk taking and income inequality. Noteworthy, the main distinction between popular capitalism and responsible capitalism is the increased ownership of companies by the public and more government regulation on the finance sector (Coates, 2014). Basically, popular capitalism aims at ensuring that the public has a share in large companies and thus equally benefits from their expansion. In addition, since this form of capitalism has all features of responsible capitalism, it has regulations on the wage rates and anti-monopoly laws.
Notably, this form of capitalism is popular in China. In essence, the state-owned enterprises participate, and play a significant role in the economy. Importantly, there are private businesses in this economy, and they operate just like in a responsible economy. Noteworthy, the state-owned businesses shape and direct the country’s economy by actively participating in state-led projects (Coates, 2014). Generally, these projects include construction of roads, bridges, schools, and airports. In addition, they also play a major role in the finance sector by providing banking services.
Compare and Contrast the Concept of Development From Keynesian and Neoliberal Economics Perspectives. Discuss the Successes and Failures of Those Approaches by Referring to Country Cases.
Noteworthy, the Keynesian and Neoliberal economic models sharply contrast each other. Notably, the Keynesian economic model supports government influence in the economy while the Neoliberal model advocates for one that is government free. Basically, the Keynesian economic model is one formed on the concept that in a recession, a country’s economic output is influenced by aggregate demand. In addition, this theory espouses that the aggregate demand is mostly not equal to the country’s productive capacity. Accordingly, this theory posits that government intervention is necessary to increase the country’s aggregate demand, and accordingly spur economic growth (Brinkman, 1999). Evidently, government intervention through activities such as road construction results in increased incomes. In turn, the general population has higher disposal income and purchasing power. In effect, this results in increased demand and economic recovery. Evidently, this model was successfully used in European countries such as the UK during the great depression of the 1930s. Nonetheless, this model was ineffective in the 1973-1975 stagflation in the US.
On the contrast, the neoliberalism model advocates that the government should not interfere with the economic development. In this case, economists argue that forces of demand and supply are efficient in influencing economic development in a country. Noteworthy, they advocate for an economy that is purely led by the private sector. In effect, they advocate for economic liberalization policies such as privatization, deregulation, free trade, and a reduction in government participation in the economy (Cypher, 2016). Noteworthy, Chile is one of the countries that successfully developed through the use of the neoliberalism model in the 1980s. Largely, the neoliberalism model was a failure and led to the financial crisis of 2007 to 2008. In general, it was found out that economies need some extent of government effort for them to recover.
In summary, economic models are relevant for directing and shaping economies. Importantly, the various economic models that countries form indicate the level of influence of the government and the private sector in the country’s economic development. Consequently, governments must carefully set models that promote both economic growth and development.
Brinkman, H. (1999). Explaining prices in the global economy: A Post-Keynesian model. Massachsetts: Edward Elgar Publishing Inc.
Coates, D. (2014). Models of capitalism: Growth and stagnation in the modern era. Hoboken, New Jersey: John Wileys & Sons Inc.
Cypher, J. (2016). Dollars & Sense: Real world economics. Is Chile and economic success? Retrieved from http://dollarsandsense.org/archives/2004/0904cypher.html