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To what extent does the State hamper the Success of a Capitalist Economy?

Paper Type: Free Assignment Study Level: University / Undergraduate
Wordcount: 2729 words Published: 27th Feb 2020

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A capitalist economy is a liberal economy where private individuals or businesses own the means of production and the free market determines the product prices by the mechanisms of demand and supply. As a result, the state cannot control or intervene with the economy. However, the state can have an impact on how successful a capitalist society can be, and I will discuss the extent of these impacts. Economists such as Adam smith, Karl Marx, Milton Friedman and Friedrich Hayek believe that the state intervening can lead to a number of issues therefore, staying away will allow the capitalist society to be successful. Smith uses examples of division of labour to emphasise how efficient and successful the market is without government intervention. Marx ultimate goal is to have the working class overthrow the capitalist society which includes the state to have a classless society. Friedman, believes that the state should limit its involvement with the economy because, they always seem to fail and end up with a problematic outcome even though it was not intended. Finally, Hayek agrees with the statement that the role of state intervention should be limited because, it leads to totalitarianism which takes away society liberty and therefore, inefficient. On the other hand, economist such as Keynes disagree with their views and believe that, a socialist economy is the way forward. This is because, state expenditure is necessary as it brings the capitalist market to an equilibrium and saves society financial crisis.

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Firstly, according to Smith, minimising the role of government intervention and taxation in the free markets can lead to a successful capitalist economy. Smith believed that the economy would be more efficient through the “invisible hand” of the market and therefore, the state should refrain as far as possible. An example of government intervention was the Acts of Settlement preventing labourers from moving from their home parish to another one in search of work. This was seen as a breach of natural liberty and was an obstacle to having an efficient economy. Stopping the labourers prevented work opportunities and fostered the extension of a commercial society where the poorest of families paid the highest price. In addition to this, Smith argues that the division of labour and specialisation produces prosperity. “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people,” states Smith in “The Wealth Of Nations”. Smith used the work required to make a pin to explain his point. He cited one man undertaking the 18 steps to complete the tasks would make a lot in a week but, if the tasks were completed by ten men, production would increase massively, and thousands of pins could be made instead. This goes to show that the state does not have any impact on the success of the capitalist economy and therefore should stay away. The success is down to the entrepreneurs controlling the ‘invisible hand’.

Marx agreed with the fact that the state should not have any role in the economy so that society can reach the goal of a classless society. In the “Communist Manifesto”, Marx argued that the state was a “parasitic” institution that worked against the public interest and also, the main cause of the lower-class repression and exploitation. The state helps reproduce this exploitation that people are not conscious of. The state does this through a number of ways the main one is law making so that the underclass obeys in a workplace. This ensures that capitalism is not disrupted and make the proletarians feel powerless and defenceless. He also states that “the living [proletarian] person is dependent and has no individuality”. Marx highlights how the division of labour forces the worker into more and more simple, mechanised roles where they are alienated from themselves. This means that capitalism makes people agents of production that they can’t control and only get a small percentage of reward for their labour. Furthermore, whilst capitalism is likely to be extremely successful, the very success of capitalism will, according to Marx, create problems. Their greed will create a series of crisis, which will eventually collapse, leading to revolutionary change and a passage for a socialism society.  Overall, the state has helped the capitalist economy successful but, when the lower class gain more consciousness of the exploitation that is occurring, the state will fall along with the bourgeoises to produce a communist society.

Friedman was best known for his strong belief in free market capitalism and that the government should stay away because, they always seem to worsen problems instead of fixing them.  The political power of government force creates an incentive for the wealthy and devious to misuse it, helping generate what Friedman called “government failure.”

Friedman told a Chicago student in a recorded lecture “You have to put into the balance that when government seeks to achieve an answer, you’re likely to have a government failure.” This highlights the fact that the government always end up causing more problems even though that was not their intentions so instead they should focus on the results.  Famously, he stated that the combination of “public schooling, minimum wage laws, drug prohibition and welfare programs” had unintentionally forced many inner-city families into cycles of crime and poverty. As a result, the state should not provide social security as it creates a welfare dependent society.

According to Friedman, the state has three primary functions. Military defence of the nation should be its main worry. The state should focus on enforcing contracts between individuals. Finally, it should protect citizens from crimes between themselves or their property. When government in pursuit of good intentions tries to rearrange the economy, establish morality, or help special interests, the cost come in loss of freedom and lack of drive. In his words, “Government should be a referee, not an active player”

Overall, the state should have some involvement in the economy but, should stay away from the economic aspects of policies. They will only bring down capitalism by having an involvement because, by trying to fix a problem they create a problem.

Hayek will also agree that the role of the state, should be limited despite its importance which is similar to the ideas of Adam Smith. They both agree that self-interest and the market meet human need more effectively than benevolence or planning and interference creates problems. Hayek also states that; government planning threatens political liberties and the government are found in a position where “to support themselves they are obliged to be oppressive and tyrannical”. In addition, in ‘The Road to Serfdom’ he states that state interventions are the slippery slope to “totalitarianism”. In a market decision, the power is concentrated in the state which is economically inefficient and will have political consequences. Central direction is always required. This will ultimately give one individual the power to have the final say in how the economy should be structured.  Hayek argued that this meant that economic planning inevitably led to dictatorship. As a result, the managed society does not work as it is incompatible with freedom and takes away people’s independence. In his book, he uses the destruction of liberalism in Germany to prove his case. The totalitarianism experienced in Nazi Germany was mainly due to the dominance of politics and the government over economics.

In early neoliberal experiments were taken to test out Hayek ideas. Most important one was in Chile in the 1970s where the state was structured as a dictatorship. The government nationalised the copper mines and telephone services. The dictatorship in Chile allowed for a free market which then represented true democracy. This proved Hayek idea that spontaneous order is the best approach that should be taken instead. He carries on and states that there is not enough information or data required to plan society and spontaneous order works without a plan. This means that, all the negative aspects that come with a managed society is taken away such as dictatorship and control. Hayek’s main concern was to defend the first tradition of liberalism. In order to do so he explains the difference between positive and negative freedoms. Governments should not attempt to generate positive freedoms from society but instead should, take the negative freedom approach. Negative freedoms include the absence of obstacles, barriers or constraints and on the other hand positive freedoms, try to shape society by giving advantage to certain individuals or groups which leads to a road of totalitarianism. So, in order to guarantee a liberal market, the government must guarantee negative but not positive freedoms. Policies designed to help the poor i.e. redistributing wealth and power is a way of imposing obligations upon society to come out with a specific outcome. Actions such as these represent the first steps towards totalitarianism. This takes away society freedom as they are forced to conform to an artificial objective instead of allowing the natural, spontaneous market.

Intergovernmental organisations have also been influenced by neoliberal economic policies such as, The World Bank and International Monetary Fund. This was seen in Greece in 2010 where they owned the European Union a dangerous amount of debt. In return for the loan, Greece had to adopt austerity measures. The improvements purposes were to strengthen the Greek government and financial structures. Overall, Hayek believes that the state intervention should be left to a minimum as it can disrupt the capitalist society and lead to a number of issues and the main one being dictatorship. As a result, he offers a few ways to overcome the outcomes of a planned society so that the capitalist society can be successful.

Keynes is contradictory to most economists and believe that the state is the only organisation that can restore growth to the economy when there is a financial crisis and therefore, the cause of success for the capitalist economy. According to Keynes, there were many issues with the classical liberal political economy. In classical economy theory, it is assumed that output and prices will eventually return the market to a state of equilibrium. However, the Great Depression did not support their view and countered their assumption. Output was low, and unemployment issue was not resolved therefore, remained high during this time. So, The Great Depression inspired Keynes to think differently and take a different approach about the nature of the economy. Another issue with the classical liberal political economy is that it was focused in the long run. However, Keynes claims “in the long run, we are all dead”. This means that instead of focusing in the future and waiting for the economy to return back to the equilibrium through the supply-side approach, we should worry about now.

Keynes was highly critical of the British government at that time. Welfare spending were cut, and the government raised taxes to balance the national books. According to Keynes, this discouraged people from spending their money thereby leaving the economy unstable and unable to mend the market back to its successful state. As a result, Keynes believes that the demand-led recovery is the best approach. This means that the state will put money into the economy to kick-start spending and increase the growth of businesses and therefore, increase the economic activity which will bring natural results of deflation and unemployment. He also states that the governments should always have projects ready to generate employment which will solve multiple problems in one go. For example, in China there are always ongoing projects e.g. the three gorges dams which creates employment for the society but also, solves social and environmental issues. In addition, the creation of employment creates the ‘multiplier effect’ which means the loans pay for themselves because of increased tax revenue later on. In the financial crisis of 2007-2008, the G20 pledged a $1.1 trillion stimulus package through a variety of spending programs such as insurance programs, loans and direct investments. As a result, the consequence of the financial crisis was not as severe as the Great Depression in the 1930s. In addition, there was also bank bailouts of banks such as the Northern Rock. Due to the crisis occurring, consumers were worried so, tried to withdraw their money but, there wasn’t enough. Therefore, an emergency financial support from the Tripartite Authority was emplaced and the bank got nationalised. Overall, Keynesian theorists believe that without state intervention the successful capitalist cycle is disrupted making the market growth unstable and prone to excessive fluctuation.

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To conclude, Smith brings the point that the state should not have any impact in the society what so ever and should limit use of ‘the invisible hand’ as it produces inefficient economy. According to Marx, capital and capitalists are not productive as it alienates people from themselves and instead used as tools in the society. As a result, the state should be overthrown to overcome this inequality in the society. Friedman, states that the state should not provide social security as it is unintended failure and disrupts the economy. instead, they should refrain from economy policies as it never turns out right. Hayek argues for a return to liberal economic policies where there were little regulation of finance or businesses. This is because, individuals had more drive and motivation therefore, creating a successful market. Finally, Keynes believe that the demand-led approach is the best way forward. This is because, it gives people the opportunity to spend more and as a result, bring the market to an equilibrium which should be the ultimate goal for all approach.

Overall, state intervention can cause many economic issues which was presented by Smith, Marx, Friedman and Hayek. However, the state can also, save the society from downfalls which was presented by Keynes. Each approach has had an impact in the society but, not one has been dominant. It is apparent that has time progresses, new issues arise, and a different approach must be taken to overcome these issues. So, it is important to understand the complications at the current time which will then help us decide the right amount of state intervention that is best suited.


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Stewart, A. (2018). Milton Friedman Quotes (Author of Capitalism and Freedom). [online] Goodreads.com. Available at: https://www.goodreads.com/author/quotes/5001.Milton_Friedman [Accessed 9 Dec. 2018].

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