Capitalism is a type of economic system in which the production means are privately owned and are operated for profit in the competitive market. In the capitalist system, two types of incomes are related, which are profit and wages.
Capitalism is a type of economic system in which the production means are privately owned and are operated for profit in the competitive market. In the capitalist system, two types of incomes are related, which are profit and wages. Profit is received by those people who provide capitals for any business (Black, 2010, p. 467). Aside from being used for expanding any organization, profits also create more jobs and wealth. Wages are received by those who provide service to the organizations called workers, who do not have any ownership and are not responsible for profit or loss of the organization. A popular quote of Johan Norberg blames capitalism as the culprit for the world's inequality not because it made certain groups poor but because it made its practitioners wealthy. An analysis of this quote is necessary to further explain the concept of capitalism.
Economic inequality is found in a wide range of society. The nature, importance, and causes of inequality are a matter of debate. Nobody is clear about it. Various factors like economic system or structure of a country, the past wars, and the difference of individuals to create wealth or make money are involved in the creation of economic inequality. Capitalism is one of the most important causes of economic inequality (Carr, 1940, p. 378).
The most important and common charge against capitalism is that it is responsible for creating wealth and income inequality. It hits a chord with a huge number of people. Nobody can deny the fact that bond traders, such as Warren Buffett and Bill Gates, have a huge amount of money if compared to other ordinary folks. The followers of capitalism also concede that inequality promotes greater wealth inequality. According to Heilbroner (2008, p. 398), inequality of wealth and income is an essential feature of the economy.
The political-economic issues of capitalism have to be considered for describing economic inequality. There are huge differences in the economy of different countries. USA is the richest country in this world now. This economic difference affects the different lifestyles of different people of various countries. Unfortunately, the governments of some countries of lower economic status tend to give preference to the people of the upper section in all fields (Tucker, 1997, p. 167).
There are some political cultural factors that influence the economic inequality. The upper class of people can afford various cultural equipments and attend some social cultural functions. However, the middle or lower class of people cannot attend them because they cannot afford the amount required for attending the cultural functions. Thus, economic inequality can also create cultural difference among people.
Capitalism can be described best through international relations. There are mainly three theories that are best suited in describing capitalism. The theories are realism, liberalism and radicalism. Realism mainly focuses on the security of state and power. Realists like Case (2004, p. 267) argued that the states are power seeking and self-interested rational actors who want to maximize their chances of survival and security.
Political realism states that society and politics are governed by some objective or law that has effects in the nature of human beings. In order to improve the society, it is important to understand first the laws related to the particular society where people live. The operation of these laws can improve the nature and status of society. Capitalism and economic inequality are the failure of the operation of these laws (Kissinger, 1995, p. 197). Economic inequality will continue unless laws are operated properly in the society.
Liberalism came into the society after the World War I to control the inability of states and to stop the wars in international relations and the concept of economic liberalism also came from this theory. Proponents of economic liberalism fall into two main families (Roskin & Berry, 2009, p. 379). According to classical liberals, economic liberalism is the economic application of the founding principles of liberalism, which are freedom, responsibility, and ownership. They challenge both the legitimacy and effectiveness of the extended action of the State. They believe in particular that the public has neither the information nor the legitimacy they need to know better than consumers what they should eat or pretend to know better than the producers what they can and must produce.
For others, economic liberalism is economic reasoning that is based mostly on the theory of general equilibrium, which is often called "liberal neoclassical theory". The question of the effectiveness of the state is more sensitive than classical liberals starting to criticism of market failures. Thus, they differ in the exact limits set to state intervention. Currently, classical liberalism has become very small, and the economic liberals are mostly based their positions on the neoclassical liberalism. As a result, most critics focus on the arguments of this thought that these critics are especially virulent in France, as part of the population of certain policies (Nau, 2008, p. 657).
In the last 25 years, economic inequality in developed countries is on the rise. The Income Distribution and Poverty Database of different countries reveal three main reasons for this, which are the increase of people working on a part-time basis, increase in income that are based on investment, and the marriage of rich people to double their wealth (Saunders, 1995, p. 126). However, there is a dominant reason behind which is the labor revolution. This is the difference between low skill industrial work and high skill knowledge work. The remunerations of low skill industrial workers are quite lower than high skill knowledge workers (Scott, 2005, p. 57). The condition is stuck as the education cost is increasing day by day and people from middle-class families cannot obtain higher education due to lack of money. This is why the rich people are getting richer while the poor people are getting poorer, widening the social gap caused by economic inequality as Johan Norberg had pointed out.
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