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Modern Capitalism

Laissez-faire capitalism, which seemed so secure during the 1800s and early 1900s, came to an abrupt end during the global depression of the 1930s. During this global depression, called the Great Depression in the United States, the weaknesses inherent in laissez-faire capitalism were exposed when businesses failed, unemployment rose, national output plummeted, and despair reigned. The prolonged global depression of the 1930s intensified the call for a more activist role for government in the economy. In the United States, Democrat Franklin D. Roosevelt (FDR) unseated the incumbent Republican president Herbert Hoover in the presidential election of 1932. FDR promised a “new deal” for the American people. Immediately after FDR's election to the presidency, an avalanche of New Deal programs were created to stem the tide of bank failures, home foreclosures, business bankruptcies, and lost jobs. During the 1930s the government became a prominent player in the national economy.

Despite these changes, capitalism proved to be a resilient economic system. While the concept of limited government in the U.S. economy has expanded, it has done so without abandoning the essential features of American capitalism. These features included the sanctity of private property, freedom of contract, profit incentives, freedom

ECONOMICS IN HISTORY: Partitioning the Planet: Capitalism and Imperialism

By the early 1900s the triumph of laissez-faire capitalism had created domestic markets largely unfettered by government regulations. It had also resulted in international markets where free trade, exuberant foreign direct investment, and investment in capital markets had stitched together a highly interdependent global economy. Capitalism’s ascendancy was hastened by the imperialist policies of the world’s major powers.

Imperialism is a process by which one country wrestles political power away from the existing leadership in another country, kingdom, tribe, or other political entity. It brought many of the poorer regions of the world under the control of the industrialized nations, mainly the major European powers. The scramble to expand colonial empires, and thereby control key resources and markets, intensified during the late 1800s and early 1900s. By the turn of the century, about 30 percent of the world’s population lived under colonial rule, and an additional 37 percent lived under the thumb of absolute monarchs—some within the sprawling European empires.[1]

By the outbreak of World War I in 1914, much of Africa and Asia had been absorbed into colonial empires. Leading the charge to partition the planet were Great Britain, which controlled significant territories in the Middle East, southern and eastern Africa, western Asia (including India) and eastern Asia; the Netherlands in the Dutch East Indies (Indonesia); Japan in Korea and some Pacific islands such as Formosa (Taiwan); and France in northern and western Africa, and Indochina. On the eve of World War I, much of the world was marching to the beat of a capitalist drum, a circumstance that was viewed by the advanced countries as both desirable and irreversible.

of choice, freedom of enterprise, and competitive markets. The United States emerged from World War II in 1945 as the world's dominant capitalist nation, a position it still holds today. American capitalism in the twenty-first century is embedded with different types of government interventions. These interventions are felt most keenly when the government provides public goods, offers social programs, regulates businesses, or influences macroeconomic conditions. The government provides public goods to support people's general wellbeing. Public goods include features of the nation's infrastructure (roads, bridges, seaports, airports), a criminal justice system (police, courts, prisons), educational system (public schools, universities), and national defense. Social programs, a type of safety net for the needy, redistribute some of society's wealth through a system of transfer payments. In 2013 the federal government spent $1.6 trillion on its three largest transfer programs— Social Security, Medicare, and Medicaid.[2] Business regulations protect competitive markets in the U.S. economy. They also protect people from market failures such as pollution, inadequate or misleading information, or other violations of the public trust. The Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA), and Securities and Exchange Commission (SEC) are examples of regulatory agencies. Macroeconomic stabilization occurs when the government uses fiscal policy, monetary policy, or other actions to promote full employment, economic growth, and price stability.

Global Capitalism

Global economic conditions present additional opportunities and significant challenges to capitalism, the world's dominant economic system. The direction of global capitalism during the twenty-first century will likely be influenced by many factors, especially the pace of technological advance, the degree of globalization, and the functioning of multilateral organizations.

Technological advance tends to support global capitalism. For example, new technologies introduced during the Industrial Revolution encouraged global economic connections between European manufacturers and resource producers around the world. More recently, information and communications technologies (ICTs) have transformed economies at an even quicker pace. ICTs offer almost limitless business opportunities for existing firms and aspiring entrepreneurs. ICTs, along with advances in transportation, have freed businesses from traditional geographic constraints by enabling ideas and information, goods and services, money, and people to effortlessly traverse the globe in search of profits. The main challenge is to determine how economic opportunities generated by ICTs and other technologies can be made available to all countries in the global economy.

Globalization provides additional support for global capitalism. Globalization occurs when individuals, businesses, multilateral organizations, and governments encourage cross-border flows of goods and services, people, real capital, and money. Globalization creates a more integrated and interdependent world economy based on free markets. It expands economic opportunities in three main areas: international trade, foreign direct investment (FDI), and cross-border financial investments. Yet the potential pitfalls of economic globalization cannot be ignored, especially with regard to how to create equitable trade and investment environments for all stakeholders.

Multilateral organizations offer a third support system for global capitalism. A multilateral organization is a formal group or institution designed to address global issues through collective action. Some multilateral organizations establish and enforce the rules for businesses to follow in the global economy. Examples include the United Nations, which supports economic well-being and sustainable economic development; the World Bank Group, which finances development projects; the International Monetary Fund, which promotes financial stability; the World Trade Organization, which promotes freer trade; and regional development banks, which finance sustainable development projects in Africa, Asia, eastern Europe, and Latin America. On a more grassroots level the conduct of business in the global arena is also influenced by nongovernmental organizations (NGOs), which gather and share information and instigate reforms. NGOs, and other broad-based civil society organizations (CSOs), are society's gadflies. They magnify the voices of ordinary citizens and pressure governments, transnational corporations, and multilateral organizations to re-examine economic and social policies that affect the quality of people's lives.

  • [1] Freedom House, Democracy’s Century: A Survey of Global Political Change in the 20th Century (New York: Freedom House, 1999), 1-4.
  • [2] Office of Management and Budget (OMB), “Table S-5: Proposed Budget by Category” (Summary Tables), The Budget of the United States Government, Fiscal Year 2014 (Washington, DC: U.S. Government Printing Office, 2013), 189-190.
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