Although government spending has the potential to stimulate the economy, this essay will explain why the opposite outcome is more likely to result in the short-term. It will be shown, by analyzing the flow of money and the economies of certain countries, that government spending has little economic benefit and does not create new jobs. Nonetheless, in the right circumstances, government spending can prove beneficial to the long-term economic growth of a country. Before the government can spend any money, it must first acquire that money. A government’s two options is either to increase taxes or to redistribute money from within, from one department to another.
Many people feel that efficiency lies in the free-market economy where one can easily answer the questions what should be produced, how it should be produced, and for whom. However, the problem with this ‘capitalist’ economy is that poverty and boom and bust cycles reduce progress (Economic Systems: How Societies adapt to Problems, 2003). “If you care about economic efficiency, you should like free markets…But they would also believe the second one should be qualified, in addition to its stabilisation and distribution functions, governments will be needed to correct market imperfections…” (Rhoads, 1999, p.66) Rhoads (1999) mentions how a market economy leans towards more efficiency but needs the government sporadically, a combination which makes the so-called mixed economy. A mixed economy which leans towards laissez-faire, as in the case with the U.S or the United Kingdom, is rather successful. On the contrary, countries, such as Burma or North Korea, which slant towards a planned economy, lack progress.
In an effort to compete fairly, production firms left in the developed countries try to reduce their production costs by reducing labor costs and deteriorating work environment conditions, hence resulting to a race to the bottom. Economics have tried to explain this phenomenon, proposing solutions to the controversy. To start with, economic growth differs from nation to nation and thus causing differences in development status. Accordingly, prices differ mostly due to production costs. United States as a nation portrays a clear image of this phenomenon, with the south being less developed as compared to the north.
Capitalism for The Better, Socialism for The Worse Failing or profitable government? There are various types of economies in the the world, of the various types they can be narrowed down to the two most common which are capitalist and socialist economies. Capitalism is “a way of organizing an economy so that the things that are used to make and transport products are owned by individual people and companies rather than by the government” (Merriam Webster). Socialism is “a way of organizing a society in which major industries are owned and controlled by the government rather than by individual people and companies” (Merriam Webster). Every economic systems has pros and cons.
Without competition, monopolies exist and instead of the market setting the prices, the seller is the price setter, which is against the conditions of capitalism. The goal of capitalism is to maximize profit and minimize cost, promoting healthy competition between businesses as they meet the demands of consumer. The merit of capitalism are it is an internally stable economic system, in that it is consistent with human action. Capitalism is also externally stable, in that survival in a capitalistic system requires innovation and flexibility to keep up with the changes in supply and demand. Capitalism is a large population, diversified societies tend to gravitate towards hierarchical social systems.
Keynesian economists, similar to Classical economists, also believe that the economy is made up of consumer spending, government spending, and business investments. However, the Keynesian Theory says government spending can improve economic growth in the absence of consumer spending and business investment (Differences). According to the Keynesian theory, wages and prices are not flexible. A static price will give a horizontal aggregate supply curve in the short run (Classical and Keynesian Economics). The main goal of the government stimulus was to save and create jobs almost immediately.
A downside to capitalism is a monopoly can rise to power. Due to private firms gaining power in a market, they can use their power and charge higher prices. For example, if a company produces a product that is exclusive and very high in demand, then they can abuse the fact that they are the only supplier and change as much as they please for their own personal profit. Clearly, this is not moral; abusing power to screw over the majority of middle to lower class consumers because of an exploit in the capitalist system is great for the company, but is unfair to the rest of the society. “People tend to take for granted the desirability and moral legitimacy of the political and economic system within which they live” (Shaw).
Capitalism and socialism are essentially opposing schools of thought in economics. Socialists believe social and economic inequality is bad for society and that the government is responsible for reducing it through programs that benefit the poor. On the other hand, capitalists believe that the government does not use economic resources as efficiently as private enterprises, and therefore society is better off with a free market. Each economic system has had its high and low points in history, but both capitalism and socialism, if applied correctly, have the potential to be extremely successful and prosperous.
Lastly through the reduction of trade barriers it can lead to trade creation, which occurs when, the consumption switches from high cost producers to low cost producers. This creation of trade can help not only the economy but consumers as well and have many positive effects. Free trade reduces the prices of goods and services to consumers. These lower prices are a result of increased competitiveness when a country opens its borders. There is more competition therefore this pushes the prices that domestic producers charge down because a lot of the imported goods coming in are cheaper therefore the producer surplus decreases but the consumers surplus increases (Feenstra, 2011).
Investors are an important factor to consider because without investment the economy will decline. To sum up, investment solves vital economic problems and is a nourishing factor to the economy. Investors desire to invest in a capitalist economy because they make their own decisions not like communist economy and they set their own prices and they are not restricted to minimum wages. It is clear that capitalism is more advantageous than communism in every aspect in the economy. All stakeholders such as common people, state, government, banks, and investors will benefit more in a capitalist economy.