“Capitalism: Engine of Progress and

Development or Source of Inequality and

Corruption”

By Lennard L. Orenze, Polytechnic University of the Philippines

A.Y. 2018-2019

Submitted to: Ms. Juvy Leynes, CPA

 ABSTRACT

The aim of this research is to analyze how does capitalism become efficient towards

progress, and potent as regards to inequality. Capitalism is defined in both perspectives. The first

perspective pertains to the idea of capitalism as advantageous for: economic growth and

freedom, efficiency of production in market system and allocation of resources, and overcoming

discrimination. On the other hand, capitalism is an economic system that primarily denotes

monopoly which is followed by monopsony, economic crises, recession, unemployment,

inequality and corruption. Capitalism has existed for only a hundred years ago, making it one of

the newest social systems in the world. Thus, these pros and cons are inevitable sides that really

happening to the society and to a certain country as a whole.

INTRODUCTION

As a valid universal concept, the definition of capitalism cannot depend on time and

space – it has to be applicable to any time and at any location. Otherwise, no general statement

about capitalism can ever validly be made. Generally, capitalism is defined as an economic

system in which the means of production including resources, property, technology, knowledge,

goods and services, as well as country’s trade, industry and profit are controlled and operated by

private entities. These private entities that possess the factors of production (capital goods,

natural resources, labor and entrepreneurship) exercise control through companies. Capitalism is

also characterized by prices, production, and the distribution of goods that are determined mainly

by competition in a free market. In practice, this usually involves some state intervention to

protect private property and regulate certain aspects of the economy. Nevertheless, the definition

is not well elaborated. The aim of this paper is to ask, “Is capitalism an engine of efficiency
towards progress and development?” However, many are not in favor of what capitalism brings

to the society as a whole. Some are questioning if this capitalism is source of inequality and

corruption. Proponents argue that capitalism is the most efficient economic system, enabling

improved living standards. This study will further explain the factors why capitalism become

advantageous or disadvantageous, efficient or inefficient, favorable or unfavorable to the

affected parties involved therein.

METHODOLOGY

Research Design

The researcher chose a case study design because it best served to answer the questions and the

purposes of the study.

A case study is an in-depth study of a particular research problem rather than a sweeping

statistical survey. It is often used to narrow down a very broad field of research into one or a few

easily researchable examples. The case study research design is also useful for testing whether a

specific theory and model actually applies to phenomena in the real world. It is a useful design

when not much is known about a phenomenon.

Instrument for data collection

The researcher assembled the data collected in many sources such as articles, statistics,

online books, portable document formats (PDFs) and the internet. These sources serve as tools to

properly distribute the information to its respective topics.

 LITERATURE REVIEW

This part sums up all the related information that is used to constructively explain the

relevant data gathered. The researcher focused on answering how this capitalism becomes

efficient when it comes to progress and a driving force of inequality.

Capitalism is the dominant economic system and linked with economic growth. The more

income the capitalists gain, the more it leads to government funds. Capitalism also serves and

ensures consumer that resources are distributed in accordance to their preference. It is also

efficient in cutting costs to improve competitiveness and productivity. Regarding discrimination,

capitalism encourages trade between different nations and different people, breaking down

barriers to any sectarian differences.

On the other hand, the second perspective describes how capitalism affects others who

did not see its advantage. Capitalists with monopolistic power have the tendency to charge

higher prices, and gaining more wealth in lowering the salaries which is directly deductible to the

income. It also tends to lead to large inequality, especially to wealth inequality. Capitalist society

fails to provide equality of opportunity and have the tendency to booms and busts with painful

recessions and mass unemployment.

 CAPITALISM AS AN ENGINE OF PROGRESS AND DEVELOPMENT

When money is invested to generate more money, it functions as capital. As capital

increases (or the economy expands), this is called 1'capital accumulation', and it's the driving

force of the economy. Starting by considering the concept of growth, which is measured,

depends on the total activity in the economy. It can be maintained by consumption of goods or

can be artificially inflated by debt, with both households and firms. In the long term, however,

economic growth has arisen from changes in the sphere of production.

Capitalism has an ability to promote economic growth as measured by gross domestic

product (GDP), capacity utilization or standard of living. GDP is one of the primary indicators of

a country's economic performance. It is calculated by either adding up the annual incomes of all

working-age citizens or by totaling the value of all final goods and services produced in the

country during the year. 2Per capita GDP is sometimes used as a standard of living indicator,

with a higher per capita GDP equating to a higher standard of living. Per capita GDP is a

measure of the total output of a country that takes the gross domestic product (GDP) and divides

it by the number of people in that country.

The per capita GDP is especially useful when comparing one country to another, because

it shows the relative performance of the countries. A rise in per capita GDP signals growth in the

economy and tends to reflect an increase in productivity. Productivity, what some call efficiency,

is a mundane but fundamental economic concept that is at the heart of capitalism. It is measured

in output per hour worked in the economy’s nonfarm business sector. The economy can grow

without inflation only as fast as the growth of the labor force plus the rate of productivity

1
increase in assets from investment or profits, investopedia.com
2
late 17th century: Latin, literally ‘by heads
improvement. The table below will show the updated trend of the top 10 biggest economies for

the year 2018 and 2019.

` Nonetheless, going by nominal GDP measured in U.S. dollars alone, the U.S. maintains

its spot followed by China and Japan. The U.S. economy represents about 20% of total global

output, and is still larger than that of China. The U.S. economy features a highly-developed and

technologically-advanced services sector, which accounts for about 80% of its output. The U.S.

economy is dominated by services-oriented companies in areas such as technology, financial

services, healthcare and retail. These are the countries that present productivity; therefore, given

the facts, these are capitalist countries.

However, the table above only indicates the Nominal GDP of a certain country. What about

the GDP Per Capita? If we look at GDP per capita, which generally gives us an idea of the

3
according to the Consensus Forecast of 2018
living standards and quality of life of a country’s residents, the list changes up quite a bit. Here

are the top 10 projected economies in terms of GDP per capita in 2018 according to the

FocusEconomics Consensus Forecast:

1. Luxembourg USD 107,500 6. United States USD 59,578

2. Switzerland USD 80,922 7. Qatar USD 58,820

3. Norway USD 73,334 8. Denmark USD 55,939

4. Iceland USD 70,228 9. Australia USD 54,888

5. Ireland USD 67,342 10. Singapore USD 53,847

The U.S. moves down to sixth on the list, while the rest of the top 10 largest economies fall

substantially. Canada is next on the list of top GDP per capita economies at number 17 directly

followed by Germany while China moves all the way down to number 62. It doesn’t mean that a

productive country is the best country to live in. Nevertheless, the figures stated above pertain

how capitalism appears to each country mentioned. Capitalist countries are developed by means

of productivity it exhibits nor the standard of living it provides or both.

The most important quality needed for development of the human being, or for that

matter any being, is the ability to think and make decisions on one’s own. In capitalism,

economic freedom is essential. Economic freedom allows people to think, to progress, and to

make decisions. Nations such as Communist Russia, Cuba, North Korea, Iran and many others

that deny people the freedom to think and make decisions are socialist countries which mean

large, powerful government makes most of the decisions. That’s why these countries (given that

Russia is the biggest country in the world) didn’t belong to the top 10 countries with biggest

economy.
 The main idea of economic freedom lies on the people making all sorts of agreement or

contracts with other people. Therefore, capitalism is a system based upon the freedom to contract

and the freedom to garner and use your resources, whatever they may be, to own, control and

improve the means of production and distribution of goods and services in society. Consumers

are allowed to make choices from the goods and services they buy in a free market (laissez faire).

Unlike socialism, progressivism, fascism and communism, which are economic systems

largely owned or controlled by a large central government, capitalism is based on the

presumption or idea that individuals and groups of individuals working for their own selfish

gain, called profit in economic theory, can do a better job of satisfying economic needs of the

population than can a centrally-planned economy. It has helped more people to be lifted out of

poverty, slavery and disease than any other economic system in existence.

Capitalism also unveils the efficiency it brings to the production. In a market system,

firms have incentives to be productively efficient – cutting costs to improve competitiveness and

productivity. If firms don’t remain productive and efficient they will go out of business. From a

production perspective, effective resource allocation means that the available resources are

utilized with minimal to no waste during the production. It is important to every capitalist that

costs may incur anytime if production is mishandled. Production efficiency is an economic level

at which the economy can no longer produce additional amounts of a good without lowering the

production level of another product. This happens when an economy is operating along

its production possibility frontier. Efficient production is achieved when a product is created at

its lowest average total cost; production efficiency measures whether the economy is producing

as much as possible without wasting precious resources.

 Production efficiency is based on a business’s ability to produce the highest number of

units of a good while using the least amount of resources possible. The aim is to find a balance

between the use of resources, the rate of production and quality of the goods being produced.

When production efficiency has been reached, it is not possible to produce more goods without

using excess resources or sacrificing product quality.

Given the fact that resources are scarce, it is a must to know how much resources are

needed than to how much are available. Effective handling of resources will turn into a not-so-

costless production. Capitalist always have the awareness of where will their money go because

the essence of capitalism is to make money out of money, hence, generating income out of the

investment. The higher the income a private firm gets, that more it contributes to the economic

growth of such a country.

“4Hidden hand of the market”, an idea that if there is any good or service that is needed

in society, people will pay more for it and this will attract people into such business. When a

good or service is in demand, no matter what it is, entrepreneurs will begin to offer those goods

or services at a much higher price, otherwise, if goods and services are not that trendy, they will

lower the price just to deplete the goods and services they’re selling. Some will just wait for the

declining of price, some will not but will choose another line of business where the demand is

greater. Capitalists always insist the principle of making money out of money, without any

wastage of both time and resources. The higher the income they produce, higher the percentage it

contributes to the economic growth.

4
Invisible hand, Adam Smith’s “Wealth of Nations”
 The insight that markets break down discrimination is not new. Over 200 years ago

Voltaire wrote: 5“Go into the London Stock Exchange. . . and you will see representatives of all

nations gathered there for the service of mankind. There the Jew, the Mohammedan, and the

Christian deal with each other as if they were of the same religion, and give the name of infidel

only to those who go bankrupt.”

Voltaire was pointing out that people on the London Stock Exchange wanted so much to

make money that they were willing to deal with others who had different religions and cultural

backgrounds. This seems an obvious insight, but apparently it is not. How often have you heard

people denounce businessmen for ruthlessly pursuing profits and, in the next breath, castigating

those same businessmen for discriminating against a minority group simply because they’re a

minority? Well, which is it? Are they trying to maximize profits or are they discriminating? It

can’t be both. Capitalism deals with individual freedom, people should be free from

discrimination. It encourages trade between different nations and different people. This

economic incentive works to break down barriers and go past narrow sectarian differences.

As Milton Friedman stated, 6“The great virtue of a free market system is that it does not

care what color people are; it does not care what their religion is; it only cares whether they can

produce something you want to buy. It is the most effective system we have discovered to enable

people who hate one another to deal with one another and help one another.”

In progress and development, the government is still involved. One of the main issues in

economics is the extent to which the government should intervene in the economy. Free market

5
Voltaire vs. Marx, fee.org
6
Milton Friedman's 1999 essay "Why Government is the Problem"
economists argue that government intervention should be strictly limited as government

intervention tends to cause an inefficient allocation of resources.

Capitalism is an economic system, unlike any other system, that is not under the

government power. When governments spend on public goods and merit goods, they may create

excess bureaucracy and inefficiency. State owned industries tend to lack any profit incentive and

so tend to be run inefficiently. Privatizing state owned industries can lead to substantial

efficiency savings. Politicians don’t have the same market discipline of seeking to maximize the

use of limited resources. Government intervention causes more problems than it solves. For

example, state support of industries may encourage the survival of inefficient firms. If

governments bailout banks, it may create moral hazard where in the future banks have less

incentive to avoid bankruptcy because they expect a government bailout. Real business cycle

theorists argue that at best government intervention makes no difference to the length of a

recession, but may just create additional problems, such as the accumulation of public sector

debt.

CAPITALISM AS SOURCE OF INEQUALITY AND CORRUPTION

The use of wealth to create more wealth is the underlying theme of capitalism. Refuted in

the Middle Ages, the simplest form of this is lending money at interest as the sin of usury.

Capitalism became more involved in investing money in a project in return for a share of the

profit. In the case of a sole proprietor, all the profits go to one man though many others share the

work. With the rapid development of European trade and prosperity in the 13th century, cities in

Italy and the Netherlands witness a creation of wealth which is capitalist in kind - because any

merchant is in essence a capitalist, risking his pot of money each time he buys in one place to sell
in another. Florence in the 14th century demonstrates more familiar indications of capitalism. It

has its great banking families, engaging in transactions across of Europe. It even has a

successful strike, by underpaid day workers in the cloth industry who want a share in the benefits

enjoyed by their employers.

The essential characteristics of capitalism only become evident with an increase in scale -

in two quite separate contexts. One is the formation of joint-stock companies, in which investors

pool their resources for a major commercial undertaking. The other, not evident until

the 7Industrial Revolution, is the development of factories in which large numbers of workers are

employed in a single private enterprise.

As John Maynard Keynes stated, “Capitalism is the astounding belief that the most

wickedest of men will do the most wickedest of things for the greatest good of everyone.”

Private firms who are in control of the means of production define capitalism. Firms can gain

monopoly power, private ownership of capital enables them to control over product and labor

markets. This enables them to charge higher prices to consumers.

Supporters of capitalism argue only capitalism enables economic freedom. But, the

freedom of a monopoly can be abused and consumers lose out because they have no choice. For

example, in industries like tap water or electricity supply, which are a natural monopoly,

consumers have no alternative but to pay the prices charged by suppliers. By this monopolistic

approach, many people believe that the basis of capitalism is greed. They derive their income

from their ownership that gives them the ability to operate their companies efficiently. It also

provides them with the incentive to maximize profit. This incentive is why many capitalists say

7
transition to new manufacturing processes in the period from about 1760 to sometime between 1820 and 1840
"Greed is good." It is greed that drives the economy and inspires people to innovate and earn

more money. Business is business; government generally does not get too involved in business

issues in a capitalist economy resulting in monopolies that control the pricing and supply. But

most capitalist economies today do have some government intervention, which means businesses

have to follow regulations. However, there is no assurance that all businesses in a capitalist

country will follow those executed regulations of the government. Firms with monopoly power

can exploit their position to charge higher prices even without these said regulations.

Unlike the classical economists, however, 8Marx recognized that such an economy was

inherently unstable and impermanent. The way to succeed in a competitive market is to cut costs

and expand production, a process which requires incessant accumulation of capital in ever new

technological and organizational forms. In Marx’s words: “The battle of competition is fought by

cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the

productiveness of labor, and this again on the scale of production. Therefore the larger capitals

beat the smaller.” Further, the credit system which “begins as a modest helper of accumulation”

soon “9becomes a new and formidable weapon in the competition in the competitive struggle,

and finally it transforms itself into an immense social mechanism for the centralization of

capitals”.

Prices under conditions of monopoly, he thought, are indeterminate and hence unstable.

Whenever concentration enables capitalists to achieve higher than average profits, suppliers and

customers are put under pressure to create counter combinations which wiI1 enable them to

appropriate part of the extra profits for themselves. Thus monopoly spreads in all directions from

8
Marx's ‘Capital’, Philosophy and Political Economy by Geoffrey Pilling 1980
9
(Marx, 1894, ch. 27)
every point of origin. The question then arises as to the limits of “cartelization” (the term is used

synonymously with monopolization).

Marx summed this up in the well-known formula that “10the real barrier to capitalist

production is capital itself.” This comes in 3 ways:

(1) Monopolistic organization gives capital an advantage in its struggle with labor, hence tends

to raise the rate of surplus value and to make possible a higher rate of accumulation.

(2) With monopoly (or oligopoly) prices replacing competitive prices, a uniform rate of profit

gives way to a hierarchy of profit rates—highest in the most concentrated industries, lowest in

the most competitive. This means that the distribution of surplus value is skewed in favor of the

larger units of capital which characteristically accumulate a greater proportion of their profits

than smaller units of capital, once again making possible a higher rate of accumulation.

(3) On the demand side of the accumulation equation, monopolistic industries adopt a policy of

slowing down and carefully regulating the expansion of productive capacity in order to maintain

their higher rates of profit.

Another factor to be considered why capitalism is iniquitous, firms with monopsony

power (from monopolistic power to monopsonistic power). Monopsony is market power in

employing factors of production. Those firms with this kind of approach over their personnel can

pay low salaries. This enables firms to be more profitable but can mean workers don’t share from

the same level of proceeds as the owners of capital. This results in members of the working class

struggling to survive in many situations. The discussion of monopsony focuses on its impact on

10
Capital Vol. III Part III
The Law of the Tendency of the Rate of Profit to Fall Chapter 15
median wage setting. It tends to abstract the nature of wage determination as economic models

often do. This obscures an important link to what I believe to be a profound effect of monopsony

power. It allows companies who hold it to change the way they set wages. Monopsony

potentially confers an ability to solve an old problem for companies—balancing paying wages

linked to performance against internal equity norms that, if ignored, have morale and

performance consequences of their own.

Market power confers an ability for companies to change the very structure of their

internal labor markets to allow them to not only reduce wages for median workers, but to change

the structure of pay entirely. Market dominance can lead firms to use raise price and restrict

output. A powerful company that maintains prices that are above those that would prevail in

more competitive markets deprives access of goods to consumers who would pay a price above

the cost of production (including a normal rate of return) but below the company’s price. That

means a loss for overall societal wellbeing since the additional benefits to society from

consumption of goods foreclosed by the monopolist outweighs the additional costs of providing

those goods to society. Market power is also a problem for economists when used to keep other

competitors from entering the market, further strengthening the incumbents’ economic position

and market power.

11
Economists have recently turned attention to the parallel issue of monopsony—

conditions where a single buyer dominates a market, in particular cases where a company or

small number of companies dominate their labor market. By exercising power in the labor

market, companies are able to set wages below those that would prevail in the more competitive

conditions posited in economic models. Rather than being forced to equate their economic gains

11
Joan Robinson, 1939
of adding hours and workers against the preferences of workers in the labor market,

monopsonists exercise their dominant position by paying below the wage rates that would

prevail in a competitive market. This hurts society in that additional workers who would

otherwise come into the labor market decide cannot do so, even though there are opportunities to

provide additional employment and still produce products profitably.

Every day, we eat at restaurants, stay at hotels, receive packages, and use our digital

devices with the assumption that the branded company we pay for these services — Amazon,

Apple, Marriott, etc. – also employs the people who deliver them. This assumption is

increasingly incorrect: Our deliveries are often made by contractors and our hotel rooms are

cleaned by temporary employees from staffing agencies. This is what I deemed the fissured

workplace, the cracks upon which today’s economy largely rest, and it leaves so many without

fair and decent wages, a career path, and a safe work environment.

Capitalists wish to pay as little as possible for labor, and this is easiest to do when there

are too many workers floating around.

It is a routine within the Capitalist system to have periodic economic crises. They are part

of what is called the “12Boom & Bust Cycle”. Some economic crises are so extreme that they

shake the foundations of the capitalistic economic order. Amongst these severe crises is the

recent American economic crisis which effects are still present in the world today.

In the view of capitalists, individual freedom is most important, one can buy whatever he

wants and the state will not intervene in this matter. Banking system, interest-based business,

stocks and shares, derivatives, futures and insurance have come from the concept of freedom of

12
Economic expansion and contraction, investopedia.com
ownership. This results in a race to accumulate wealth through rate fixing, rumor and other

illegal practices. The problem was that if the people did not buy the goods, then how would the

factories and mills make profit? They would produce more which will result in more profit.

However, if the people did not buy what was manufactured, then the whole investment will be

wasted.

To solve this dilemma, the Capitalists created a demand through various marketing

methods. An American lifestyle arose where man strives to buy luxury goods irrespective of

whether he has money or not. If he does not have money then he takes loan on interest from the

banks. Without expensive luxuries, he feels incomplete and backward in society and becomes a

victim of sense of deprivation. The people started to see that stock market trading could be an

easy and quick way to earn wealth. They had become accustomed to this luxurious lifestyle,

where greed and love for wealth had seeped into their hearts. Their luxurious needs grew to the

point they could not be satisfied.

Taking loans on interest from the banks had become a norm. People in large numbers

then took interest-based loans from the banks and invested in the casino of the stock markets that

make it rising sharply. People would just invest their money to whether they win or lose on

betting. However, this ‘Boom’ was based on the interest-based loans, with the bubble of the

stock markets swelling until it burst. The ‘Bust’ was such that a man would stand in a queue for

hours to get the bread to eat two times a day.

In America, where this Boom and Bust was originated, the situation is such that the loans

of many Americans are more than their total assets, whereas as the debt in the whole American

economy is seven times more than the actual American wealth. In capitalism, the purpose and
pursuit of life is the satisfaction of sensual pleasures. This concept makes humans greedy and

this was the greed which forced the Americans to pursue the American dream. It is this greed

which persuaded the grey suited men, the large scale capitalists, to develop banking and financial

markets to exploit this dream for themselves.

CONCLUSION

The research summed up all the positive and negative effects of capitalism, basing on the

view of those who assert and of those who refute. In the perspective of the pros, capitalism

allows the economy to grow exponentially. It is the basic fact of economics that the more money

a firm make, the more it can invest in production, and the more it invests in production, the more

money it makes. Capitalism also allows people to own private property, have the right to gain

wealth and compete in the market. This system encourages people to contribute to the economy,

thereby gaining wealth for them and promoting wealth for other.

In the perspective of the cons, the main issue is the distribution of wealth. Because

capitalism is centered on competition and the success of major companies, it can make difficult

for people with fewer resources to compete and succeed. Having low income, allowing them

very few opportunities, blocked and eaten by larger ones, making the small ones discarded and

not seen in the society.

Both sides really have a very huge impact. Both sides have the idea that this capitalism is

a factor of efficiency and a factor of inefficiency. These kinds of scenarios exist in the economic

situs. Arguments about what really capitalism exhibits will make the economic system more

complicated. “We are only as strong as we are united, as weak as we are divided”.
 GLOSSARY

BOOM AND BUST CYCLE - process of economic expansion and contraction that occurs

repeatedly

CARTELIZATION - process of organizing a group of apparently independent producers whose

goal is to increase their collective profits by means of price fixing, limiting supply, or other

restrictive practices

CAPITAL - form of money or other assets owned by a person or organization or available or

contributed for a particular purpose such as starting a company or investing

CAPITAL ACCUMULATION - refers to an increase in assets from investment or profits

CAPITALISM - an economic and political system in which a country's trade and industry are

controlled by private owners for profit, rather than by the state

CAPITALISTS - a person who uses money to invest in trade and industry for profit in

accordance with the principles of capitalism

COMMUNISM - all property is publicly owned and each person works and is paid according to

their abilities and needs

ECONOMY - wealth and resources of a country or region, especially in terms of the production

and consumption of goods and services

FASCISM - Political ideology that imposes strict social and economical measures as a method of

empowering the government and stripping citizens of rights

GROSS DOMESTIC PRODUCT (GDP) - the total value of goods produced and services

provided in a country during one year

INVISIBLE HAND - a metaphor for how, in a free market economy, self-interested individuals

operate through a system of mutual interdependence to promote the general benefit of society at

large

LAISSEZ FAIRE - abstention by governments from interfering in the workings of the free

market

MONOPOLY - the exclusive possession or control of the supply or trade in a commodity or

service

MONOPSONY - a market situation in which there is only one buyer

NOMINAL GDP - include all of the changes in market prices that have occurred during the

current year due to inflation or deflation

OLIGOPOLY - a state of limited competition, in which a market is shared by a small number of

producers or sellers

PER CAPITA GDP - a measure of the total output of a country that takes the gross domestic

product (GDP) and divides it by the number of people in that country

PRODUCTIVITY - the effectiveness of productive effort, especially in industry, as measured in

terms of the rate of output per unit of input

PROFIT IN ECONOMIC THEORY - profit in the accounting sense of the excess

of revenue over cost is the sum of two components: normal profit (regular income) and economic

profit (loss of the difference of income and sale output of the opportunity cost of the inputs used

PROGRESSIVISM - is the support for or advocacy of improvement of society by reform

SOCIALISM - a political and economic theory of social organization that advocates that the

means of production, distribution, and exchange should be owned or regulated by the community

as a whole

USURY - the illegal action or practice of lending money at unreasonably high rates of interest

REFERENCES

www.focus-economics.com www.economicshelp.org

www.theguardian.com www.jstor.org

truthout.org
www.softschools.com

www.investopedia.com
http://www.independent.org/issues/artic

https://www.hbs.edu/faculty/Publication%20
le.asp?id=2769
Files/07-037.pdf
capitalism.columbia.edu