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Definition of the term “capital” denotes money. Money plays a key role in the growth and expansion of an economy. However, economic expansion is not directly related to money, it is related to the value of money over time. When the Time Value of Money is diminished, capitalist systems encounter minimal growth.
In extreme cases, a country may experience recession. Interest is the reward for capital. With a diminished capital base, this reward is nonexistent. Hence, there is an intricate relationship between economic performance, deployment of capital, and its performance. The researcher will dissect these relationships. The paper will also address the related subject of globalization.
Time Value of Money and Keynesian Economics
Keynesian scientists view world economic recessions as part of developed economies unlike what classical scientists believe. Keynesian scientists argue that many investors are constantly looking for new ways to make money, which may not be waterproof. Hence, there is a possibility for something to go wrong. In 2008, there was a global recession, which originated in the United States. The recession was triggered by the lending and interest market in the United States.
Keynesian scientists argue that it is wrong to blame the players in that field for that problem. Instead, the government should bear the blame. The point is that the government should have put in place proper policies to guide the manner of doing business.
In 2008, Keynes argues, there was little policy put in place to monitor, discipline, and guides the financial institutions that were the central players in that field effectively. Hence, as noted earlier, they engaged in all manner of possibilities to make profits. It might have worked in the past, but they exceeded the limit, which triggered the economic recession.
Keynes, therefore, does not rule out such instances in the economy at times. When the government does not do enough to regulate its branches to ensure proper conduct, the likelihood increases.
Hence, Keynes largely blamed the government for the failure in United States banks. However, the manner in which the government responded to the crisis is Keynesian. The argument is that since the risk that the institutions take benefits the government, it should come to their rescue when they are stuck in such recessions. It is in tandem with Keynes recommendations to bail out the agents as the government did in the wake of the crisis.
The response of the government the current crop of new Keynesian scientists supports the economic stimulus package. However, they argue that the amount that the government set aside is too little to revive the economy. The amount is supposed to have a multiplier effect on the spending of consumers. However, consumers, the scientists argue are spending on long-term investments as opposed to the ‘quick spending’. Therefore, the scientists argue that the governments may not be able to revive economic growth on this front.
The scientists are however in unison when it comes to the long-term expectations. They say that what the economy is experiencing is a host of short-term fluctuations. In the end, market forces will weigh down these fluctuations. These forces will drive the economy into equilibrium. They include price changes, consumer awareness, and government policies – macro for that matter.
Relationship between Interest, Globalization, and Capitalism
Because of the fact that our society is evolving in technology, modern day capitalism and globalization are considered as “organized crime”; we are all victims of it. Nevertheless, are we really? These pertinent questions will be answered as we delve more into how these two phenomena influence the world. A definite fact is that, if we are all its victims then there are those of us who are victims in a negative way and others victims in a positive way.
Capitalism is a form of an economic system in which private entities own the means of production and of which the owner enjoys the benefits or profits alone. The owner of the means of production gives undue concern to the workers who offer their labor at minimal wages for the production of wealth to the owner.
The laborers have no choice but to accept the meager wages offered by the capitalist or the owner since they do not have their own means of production. In the past, capitalists were rich land owners who accumulated wealth by having the landless peasants work on their huge lands in return to the lard lords offering the peasants spaces to settle and cultivate their own food.
The capitalist form of economic system is very unfair, as a few people own a large chunk of wealth at the expense of the majority poor. The few rich people are referred to as the bourgeoisie while the majority poor are the proletarians.
According to Karl Marx, the proletarian society is set to awaken and rise up against the bourgeoisie thus toppling this economic system to a more fair economic system where wealth will be equally distributed. In fact, it is getting even worse with capitalism going to a large-scale nature where the powerful countries are putting pressure on weaker countries hence maintaining this condition by way of unbalanced market systems and stringent economic policies.
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It has been evidently clear in the last century that the western economies which include the USA, Europe and Japan have continually suppressed the so called third world economies by way of taking natural resources and mineral wealth from these countries either forcefully or through some poor economic policies.
In the last one hundred or so years, the western countries completely dominated the third world countries through colonialism. They forcefully took over the lands and other resources of these countries in order to acquire raw materials and cheap labor for their industries. Most of these countries had to result to armed struggle in order to gain their freedom from this form of oppression.
Amin, in the article ‘exiting the Crisis of Capitalism or Capitalism in Crisis’, discusses the concept of capitalism in detail. In the Journal globalization, defines capitalism as “accumulation by Dispossession”. He continues to say that capitalism involves endless accumulation of wealth by those who already have.
In the quest to establish a liberal market economy in the world, the oligopolies and modern day plutocracies have put into place policies whereby the third world countries’ governments have no control of their market systems hence exposing themselves to the cheap and in most cases substandard commodities from these oligopolies.
These commodities flood their markets hence suppressing domestic production leading to abject poverty in these countries. The concept is referred to as neo-liberalism or neocolonialism. Hence, the cyclic poverty pattern is likely to continue (Amin, 2010).
Capitalism is intricately connected to globalization. The rapid advancement of technology has propagated capitalism, which has made the world to be a form of a global village. The world’s economic system is continually being unified hence bringing close the different nations of the world. There have been numerous reductions of trade barriers thus establishing a form of a unified market.
Tariffs, import restrictions, and export expense have been significantly reduced hence unifying the world market. In some regions, there has been the adoption of a single currency leading to further unification. In Europe for instance, many countries have adopted the Euro as a common currency and have opened up boundaries. Coupled with ingenious technological advancements, the movement of people and goods has been made really easy, fast, and efficient.
These advancements, though, have been to the advantage of the European countries, the US and Japan who have taken advantage of these advancements to accumulate wealth at the expense of the majority third world countries. The establishment of the free market economies has led to what is popularly known as global capitalism. Oligopolies have taken the advantage of the free market economy to flood cheap and substandard goods and commodities to the developing economies thus suppressing the third world countries’ development.
Neil Thomas in his article “global capitalism, the anti – globalization movement and the third world” asserts that the third world countries are falling deeper into international debts. The establishment of international financial institutions (IFS), Multinational corporations, and stringent international economic policies has largely contributed to the above scenario. The more developed countries (MDCs), through these unbalanced economic policies have continued to take undue advantage of the less developed countries (LDCs) in the third world.
The IFS, which include the World Bank and The International Monetary fund (IMF), are controlled by the MDCs, mostly the US. Due to the military and economic superiority of the MDCs, they have continued to put unfavorable conditions in the advancement of funds for development to the LDCs.
They have denied the developing countries the subsidies, which were available to them at the onset of their development. The capitalist or free market economy propagated by these western countries is unfair to the world in general. There have been structural adjustment programs in advancing loans to the LDCs hence putting them in poor competitive position in this free market economy. The IFS also impose high interest rates to these loans hence putting a heavy burden to the third world countries (Brue, 2000).
Due to the lack of modern production methods in the LDCs, the MDCs have also taken this to their advantage. They give tied foreign aids in the name of helping LDCs develop. Nevertheless, in essence, it is just a way of ensuring that the LDCs remaining in their poverty state so that they can continue accumulating wealth by plundering the third world’s natural resources. In Haiti for instance, the IFS put pressure on the government to cut Import quotas.
The Haiti government reduced import quotas to as low as three per cent from fifty per cent which resulted in low quality and cheap products from the MDCs. Haiti being an agricultural country saw its economy plummet as agricultural commodities were imported into the country in large quantities. The rice farmers were adversely affected as cheap rice was imported into the country.
Capitalism has continued to prove that it is structurally imbalanced. It does not make sense for the MDCs to be determining prices for products in the world market. If this market was fair and liberal as it is supposed be, then it would be fair and prudent only if the producing countries would be given an opportunity or a voice in determining the prices of their commodities (Albritton, Bell & Westra, 2004).
When MDCs determine their prices, fair development is assured hence meeting the real tenets of capitalism. A country would only develop based on the hard work of its citizens to maximize production.
Instead, the western countries, due to their industrial advancements have ensured that this does not happen so that they can continue getting cheap raw materials and labor from the third world countries. The liberalism put forward by the western countries is only a fallacy to blind the developing world that forms the majority of the world’s population.
Economic Growth and Interest
The government uses two policies to control money supply in a country. That is, expansionary and contractionary policy with the effect of increasing and reducing money supply respectively. The effect of expansionary policy on the AA-DD model is a shift to the right, which increases the exchange rate of a country’s money with respect to another country. However, this does not happen fast. It takes on a transitional mode with many factors at play.
For example, the real money supply exceeds the real money demand, which, in the short run, means that inflation levels increase quickly. However, the trend lags as more people convert their money assets into non-money assets to beat or take advantage of the inflation levels. In the long term, the natural effect is that the exchange rate will increase with the amount of cash in the economy (Suranovic, 2012).
Governments employ the contractionary monetary policy when the money supply in an economy reduces. The reduction has the effect of shifting the AA-DD model downwards. When this happens, there is an immediate reduction in Gross National Product of a country. It also leads to a relatively stronger local currency.
Fiscal policy refers to government spending. The government is the biggest consumer and its consumption has many policy effects on the economy. The government uses this power to effect policies in a country through either reduction in spending (contractionary fiscal policy) or increase in spending (expansionary fiscal policy).
An increase in government spending causes AA-DD model to shift to the right, which causes a decrease in the exchange rate. For example, the Canadian dollar would do better than the American dollar in this situation. However, this leads to an increase in the GNP for the country. An increase in GNP is productive because it may attract more foreign investment as it is favorable to a nation. There are many causes for an expansionary policy. This includes transfer payments, tax reductions, and government direct spending (Suranovic, 2012).
The three factors lead to different effects on the AA-DD model. The increase in government direct spending and tax reductions leads to increase in disposable incomes in a country, which causes increase in GNP. Additionally, an increase in government direct spending leads to an increase in GNP, which also increases real money demand. The effect is that interest rates increase. The reverse is true for contractionary fiscal policies, which occur because of limited government spending (Suranovic, 2012).
Labor and Interest
Multinational corporations have also contributed largely to the poverty in third world countries. They have grown to some even being more than some countries economies, which is further evidence of how global capitalism is unfair. These multinational corporations due to globalization have extended their tentacles to the third world countries where there is availability of low cost raw materials and very cheap labor (Brue, 2000).
For instance in Mexico car industry export assembly, the workers are paid a meager wage of around US$ 1.26 an hour, 40 cents and 27 cents in Nicaragua and china respectively which, according to the capitalist, is still considered high as they seek to maximize profits.
It has been on record that these workers cannot even afford the basic human necessities with most of them living even in cotton houses under deplorable conditions. These corporations make huge profits at the expense of this laborers and the third world nation’s wealth and still have the audacity to repatriate each single cent to their mother countries.
The sad fact is that they even put pressure on the governments of the third world countries to use the little that they have to offer security and other subsidies with the guise that they are international investors keen on promoting development. They liaise with the leaders of these governments to suppress the efforts of the locals which is the reason why local industries never flourish in these third world countries as they receive minimal government support or none at all (Albritton, Bell & Westra, 2004).
Albritton, R., Bell, S., & Westra, R. (2004). New socialisms: Futures beyond Globalization. London: Routledge.
Amin, S. (2010). Exiting the crisis of capitalism or capitalism in crisis. Globalizations, 7(1), 261-273.
Brue, S. (2000). The evolution of economic thought. London: Dryden Press.
Suranovic, S. (2012). International finance. Retrieved from https://scholar.flatworldknowledge.com/books/26/preview