CHAPTER 4: PURE CAPITALISM AND MARKET SYSTEM

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CHAPTER 4 PURE CAPITALISM AND MARKET SYSTEM
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CAPITALIST IDEOLOGY

• PRIVATE PROPERTY
• FREEDOM OF ENTERPRISE AND CHOICE
• SELF-INTEREST AS THE DOMINANT MOTIVE
• COMPETITION
• RELIANCE ON THE PRICE SYSTEM
• LIMITED ROLE OF GOVERNMENT

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OTHER CHARACTERISTICS OF CAPITALISM

• USE ADVANCED TECHNOLOGY CAPITAL GOODS
• SPECIALIZATION
• USE OF MONEY RATHER THAN BARTER

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ECONOMIC QUESTIONS

• WHAT TO PRODUCE AND HOW MUCH
• HOW TO ORGANIZE THE RESOURCES TO PRODUCE THE
  OUTPUT
• WHO WILL RECEIVE THE OUTPUT
• HOW CAN THE SYSTEM ADAPT TO CHANGE

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INVISIBLE HAND

• THE MARKET COORDINATES ACTIONS OF FIRMS
  IF PRICES INCREASE, THEN PRODUCER MORE, IF
  PRICE OF RESOURCE FALLS , USE MORE.
• FIRMS MAXIMIZE PROFITS TO SATISFY
  INDIVIDUAL WANTS
• NO DIRECTION --

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MICRO THE PARTS

• CONSUMERS --
• FACTOR OWNERS
• FIRMS - AN ENTITY THAT BUYS ORGANIZES
  THE FACTORS OF PRODUCTION TO PRODUCE SELL
  GOODS/ SERVICES TO OTHERS

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FIRMS EXIST

• EARN PROFIT
• SPECIALIZATION -- WORKING TOGETHER CAN
  PRODUCE MORE BECAUSE TALENTS ARE FOCUSED AND
  ARE HONED TO HIGHEST POSSIBLE LEVEL
• - WIREMAN EXAMPLE

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THE MANAGER

• THIS PERSON DIRECT ACTIONS OF WORKERS , IS
  RESPONSIBLE FOR MONITORING BEHAVIOR,
  DISCIPLINE

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OBJECTIVES OF FIRM

• MAX PROFIT
• MAX SALES
• GROWTH
• ALTRUISM
• HELP WITH SCHOOLS
• WORK ON PROJECTS FOR CHURCH OR OTHER
  INSTITUTION

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TYPES OF FIRMS

• PROPRIETORSHIP -- ENTITY OWNED BY ONE
  INDIVIDUAL WHO MAKES DECISIONS, EARNS THE
  PROFITS, IS RESPONSIBLE FOR DEBT
• HAS UNLIMITED LIABILITY
• ABOUT 71 OF ALL FIRMS 1990
• EARNED ABOUT 6 OF BUSINESS REVENUE
• REPRESENTS AGRICULTURE

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PROPRIETORSHIP

• ADVANTAGES
• EASY TO FORM DISSOLVE
• ONE PERSON MAKES DECISIONS
• PROFITS TAXED ONCE
• DISADVANTAGES
• UNLIMITED LIABILITY
• LIMITED ABILITY TO RAISE FUNDS
• NEW FIRMS OFTEN FAIL AND END

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TYPE OF FIRMS CONT.

• PARTNERSHIPS -- OWNED OPERATED BY AT
  LEAST TWO PERSONS WHO SHARE DECISION MAKING
  RESPONSIBILITIES, PROFITS, DEBT
  RESPONSIBILITY
• AN EXTENSION OF A PROPRIETORSHIP
• ABOUT 10 OF ALL FIRMS, EARN 4 OF ALL
  BUSINESS REVENUE

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PARTNERSHIP

• ADVANTAGES
• EASY TO ORGANIZE
• MANAGEMENT IS CENTRALIZED AND WORKER
  BEHAVIOR IS EASY TO MONITOR
• BENEFITS FROM SPECIALIZATION
• PROFITS TAXED ONLY ONCE

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PARTNERSHIP

• DISADVANTAGES
• PARTNERS HAVE UNLIMITED LIABILITY
• DECISION MAKING MUST BE SHARED
• FATHER SON Dilemma
• VOLUNTARY WITHDRAW OR DEATH OF PARTNER
  CALLS FOR Restructuring

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TYPES OF FIRMS CONT.

• CORPORATION -- IT IS AN ENTITY THAT CAN
  CONDUCT BUSINESS IN ITS OWN NAME AND
  STOCKHOLDERS HAVE LIMITED LIABILITY
• ABOUT 20 OF FIRMS IN 1990
• NEARLY 90 OF BUSINESS REVENUE

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CORPORATIONS

• ADVANTAGES --
• STOCK HOLDERS HAVE LIMITED LIABILITY
• EXISTENCE DOES NOT DEPEND UPON INTEREST OR
  DEATH OF OWNER
• EASY TO OBTAIN FUNDS

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CORPORATIONS

• DISADVANTAGES
• PROFITS ARE TAXED TWICE
• OWNERS MANAGERS SEPARATE WITH POSSIBLY
  DIFFEREMT OBJECTIVES
• IF BECOME TO LARGE, MAY NOT BE EASY TO
  MANAGE AND PROBLEMS WITH WORKER MORALE

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CORPORATIONS

• FINANCING
• BONDS - PROMISE TO PAY FOR THE USE OF
  SOMEONE ELSES MONEY
• MATURITY DATE
• FACE VALUE OR PAR VALUE
• COUPON RATE ON INTERESTS
• STOCKS - A CERTIFICATE PROVIDING CLAIM ON
  ASSETS AND OWNERSHIP

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TYPES OF FIRMS CONT.

• NONPROFIT FIRMS -- MOTIVE OTHER THAN PROFIT
  AND ANY EARNINGS MUST BE RETURNED TO FIRM
  OR TO OTHER ENTITY
• CAN BE PRIVATE OR PUBLIC
• UNITED WAY - PRIVATE
• POLICE DEPARTMENT - PUBLIC

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BUSINESS ORGANIZATION

• TYPE OF U.S. OF OF
• FIRMS SALES U.S. OF
  FARMS SALES
• Prop. 70.7 6.0 86.7
  56.3
• Partner 9.7 4.1 9.6
  17.1
• Corp. 19.6 89.9 3.2
  25.6
• Family
  2.9 19.5
• Other
  0.3 6.1