Capitalist Economic System and Government Intervention.

Economic system can be divided into three; capitalist, socialist, and mixed. Many economists believe that capitalism economic system is the best economic system to create an efficient economic activities and maximize people needs. However, based on this article, http://www.capitalismwithoutfailure.com/2011/05/you-cannot-have-capitalism-without.html, criticsms and awareness are arise about the weaknesses of capitalist economic system and this leads to dishonesty, criminality and corruption.

In a capitalist economic system, people are free to decide what type of business they want to create and to decide what type of product they want to produce and sell. In contrast, for socialist economic system, allocation of resources and the decision of what type of product to be produced will be decided by a state. I believe, the failure of communist country to build up the economy shows that socialist economic system is not a good choice to change capitalism. Capitalist economic system has several weaknesses that will affect the efficiency of economic activities and the people welfare. However, I also believe capitalist economic system also has several characteristics of the efficient economic activities and economic growth. This leads economists to propose a government to intervene in the inefficient economic activities. Generally, capitalist economic system will be used but in some market, government will actively carry out the activities. This type of economic system is called mixed economic system.

Capitalist economic system has several benefits. One of the benefits is factors of production will be used efficiently. In capitalist economic system, firms allocate all the resources efficiently without the interventions from government, so that they can minimize the cost of production and maximize the profit. If the firms are able to allocate the resources efficiently, then the production of the goods and services will be at the equilibrium point and at that point consumer surplus and producer surplus are maximize. This will benefit both, the consumer and producer. 

This is shown in Figure 1. 

Besides, the markets in capitalist economic system are able to adjust any matters immediately without waiting any referrals from government. For example, increasing in quantity of rice supplied in particular season. This can increase the surplus of rice if the price is not change but in capitalist economic system, when there is excessive supply, the price will drop.

According to law of demand, the lower the price, the higher the quantity demanded. Increasing in demand can handle the excessive supply. 

However, capitalist economic system has also several weaknesses. One of the weaknesses is a problem at producing public goods and merit goods. Most of the goods produced in capitalist economic system is private goods which is goods that can be bought by people privately. For example, shoes, t-shirts, foods and variety of private goods. Capitalist economic system is very efficient at producing private goods and there is no reason for government to intervene this activities. The freedom given will encourage the market to be efficient. However, besides private goods, there is also public goods such as public hospital and public school. These goods are needed by the people and not all people are able to pay if there the government does not provide it. Medical treatment and education involve higher cost and people surely will be charged expensively if there are no public hospital and school. Because of the production of these goods is less compared to private goods, government may intervene. Some production of goods need to be controlled. If the goods are beneficial to the people, government will encourage the production. For example, education. For government, education is important, and this is the reason why government obligate the education until certain level. If the goods are harmful to the people, government will discourage or ban the production. For example, drugs, cigarette, and prostituition. To prevent the negative impacts of these, government intervenes by banning or cutting the production. 

Second weakness of capitalism is monopoly will exist. One of the characteristics of capitalist economic system is competitive market. In the competitive and fast-growing market, there will be firms that are outstanding compared to others and these firms will be powerful in the market. There will be constraints for other firm to enter the market. Monopoly will reduce the competitiveness in the market. The firm that monopoly the market will set the price. A development of technologies encourages the existence of monopoly. Technology will increase the production but the firm needs huge cost to develop it and the management part will be more complicated. For established companies, this is not a problem but for new-small companies, this will be an obstruction to them. 

Other than this, there will be inequality in income. Capitalism tends to give rewards to the people who has good skills, intelligence, and creative thinking. In this kind of economic system, there will be people who is very rich and there will be people who is very poor. Usually, the poor group of people is larger than the rich one. Health and social problem can be resulted from inequality. In order to achieve standards of living enjoyed by the rich one, this can lead to higher criminality such as robbing and even killing. Other than that, debt level will be grater which will create greater inequality. For the rich people, because of greediness, the wealth they already had must not enough and they are willing to do criminality such as corruption. Economic activities supposed to give benefit to all people, but the inequality in the income distribution will cause dissatisfaction towards the efficiency of capitalism. For example, one of the riots in UK and protests in New York’s Wall Street are resulted from the anger and dissatisfaction among public at what they conceive as corporate greed and political corruption among wealthy elite. 

From all these weaknesses of capitalist economic system, the government has several purposes of the intervention. One of those is provide public goods to the people and to ensure that economic activities will not oppress people. In some markets, such as India and UK, property price increase rapidly and this can cause greater gap between rich and poor. To less the widen gap, the government can set price floor or make schemes to help the poor. Government can also introduce minimum wage legislation and higher tax rate for the rich. In this market, people usually spend a lot in food/beverages and tobacco and alcoholic beverages but very little in housing expenses. Government can help by setting the price floor for housing market and increase the tax for tobacco and alcoholic beverages. 

Sometimes, the desire of maximizing the profit will do harm to society. For example, drugs can bring a lot of money and profit to the sellers but very harmful to the society. Another example is pollution. In order to maximize the profit, firms are willing to do anything eventhough it will be harmful to the society. To ensure the people is not against the rules, government can punish the guilty. Other than that, the reasons for setting up the rules are rules are able to increase the efficiency in the market and rules also can ensure the competitiveness can happen in the market and remove monopoly. 

In conclusion, I believe, capitalist economic system has both, benefits and drawbacks and the drawbacks can be handled by the government interventions. This intervention by government creates mixed economic system that will benefit many people.