Question

How is the market form of economic organization known as capitalism able to adjust to a changing landscape? In other words, what mechanisms are at work in the market system which enable it to adjust to change?  

Describe how each mechanism works.

How does the Socialist Commonwealth adjust to change?

Answer 1

Capitalism is known as a free-market economy. Which itself means that the market adjusts itself to any changes within it through the forces of the market mechanism. In such a form of markets, there are minimum regulations from the regulatory bodies and the government, and the market works freely by adjusting to adversities such as a change in demand and economies and diseconomies of scale. In such economies, the prices of commodities are not set by the government and are fixed by the market forces instead, such as demand for commodities and the supply for the same. When both the producers and consumers reach their equilibrium point then the market stabilizes and stays in the resting position as long as there is no change in the market conditions. A market is affected by various factors, from the supplier's side, we have innovation, technology, production conditions, economies and diseconomies of scale i.e., the advantages and disadvantages within the organization that helps in the firm-level such as better use of technology or better work efficiency can make it advantageous over its competitors, in the same way when the price of inputs fall or the government decreases its taxes we have external economies of scale where the whole industry get benefited from the same. From the consumer's point, there are a lot of factors that affect the demand for commodities such as a change in taste and preferences, demographic changes, the income of the consumers, and various other factors. In the middle of such a changing environment, the producers change their supply based on the incentive they are getting and the demand for the product. If the demand is more and the price is less the supply would be less which will increase the price of the product due to increased demand, consumers would be willing to pay more which will raise the price. The producers, on the other hand, would keep on producing more since they would get more incentive from such extra sales. This mechanism would go on till both the supply and demand matches and the market price is fixed at the equilibrium point.

In such markets, we have different mechanisms that work within itself, and these can be explained as follows:

1. Personal incentives: From the above discussion, we can see that while the price was getting adjusted, both the producers and consumers had their own incentives to make such changes. For the producers, they needed more profit so they increased their supply whereas the consumers needed the commodities to satisfy their wants so they were paying more since the goods were worth satisfying their wants. This continued for a while when both consumers and producers were trying to maximize their personal incentives, profit and satisfaction, which when got maximized reached its equilibrium position for the market as a whole for such product since they had no incentive to change such position as they would not be able to get more incentives.

2. Private ownership: Well as was previously told, in such a form of market economies, the government has little to do with the market, and thereby it does not take any ownership on its own. Most of the goods and services are privately owned in such markets. So when everything is privately owned people are more concerned about how to deal with their private properties in maximizing their earnings and satisfaction. When a producer is acquiring capital such as land and labour, the owner of such products try to maximize their incentive and the producer being the buyer of capital goods, try to minimize its cost. This mechanism helps in choosing the producer the efficient capital with minimized cost and helps the seller of such capital goods to sell at the maximum incentive so as to maximize the utility for both the parties.

3. Competition: This is a very important factor that affects the industry in capitalism. There is free entry and exit into the market in this form of the market so anyone can start a business and anyone can leave it when they want to. This factor makes it more competitive. Now looking from the whole industry point of view, once a product in innovated, some producers will join the market initially when they would get supernormal profit since the production is less and demand is more initially, such higher profits will lure other producers to join the market and more and more producers will keep on entering the market, and this competition will lower the price to a great extent where some of the producers will start incurring losses. Due to free entry and exit, these loss incurring producers will leave the market gradually and only normal profit will prevail in the market in the long run with a stable price. Apart from these factors, competition helps the market with better quality products. As all the producers are efficient if any producer does not provide a good quality product the consumers will go to its competitors instead which will keep a check on the quality for the products offered in the market.

4. Economic liberty: As we already know in capitalism we have minimal restrictions from the authorities, everyone is free to choose their economic actions based on their personal judgement. Similarly, producers are free to choose the type of products they want to produce and how they could efficiently produce it and the consumers know their income and are free to choose any product that satisfies their wants. Neither the producer nor the consumer is forced to choose anything beyond their desires and capacities. So much liberty helps in the market with efficiently produced products from the producers who specialise in them and helps the consumers to cope with their tastes and preferences. This also helps in the innovation of new products and technology which results in best quality products at cheaper prices.

5. Negotiation: This is the mechanism where both the parties bargain for the maximization of their personal incentives from such execution of the exchange. This happens in both product and capital market. The laborers try to maximize their income in order to increase their purchasing power through such salary negotiation with their employers who on the other hand negotiate with the consumers to increase their profits. And the consumers bargain with the producers to obtain the best quality product at the best prices. So this mechanism of negotiation helps all the factors of the economy to obtain their desired outcomes at the best possible prices. It also helps in enhancing the satisfaction and utility derived from the transactions.

6. Minimal regulations: We already know that in such a form of the market there is no or minimum regulation from the government and authoritative bodies. In such economies, everything including the public goods is owned privately and the government does not intervene apart from setting the regulations and guidelines for the same. This means that there are no regulations as to investments, productions, consumptions, and any other market transaction. In the absence of regulations, the market forces can adjust freely in the changing scenarios without being held back by the authority. This helps in the working of the economy to adjust within itself without any intervention from any outside forces which enhances the economy as a whole. Privatization plays a very crucial role in such economies. Even though the authorities keep some set of rules in order to protect the public from getting eluded and saves the interests of the market in general.

The commonwealth economy, which nowadays is very rare apart from very few countries, are economies where everything is controlled by the government authorities. There is no freedom of choice in such forms of economies, neither for the consumers nor for producers but everyone is an employee of the government. There is no private ownership allowed in such economies. Even for the people government sets out what profession they should be based on their knowledge and skills. This is a highly controlled economy where the government plans what to produce, how to produce, and how much to produce. In such economies, unemployment is not a problem since the government will force its countrymen to work based on the choices of the authority. Usually, the government plans its production in such a way that there is no surplus but in reality there is rather scarcity and shortfalls in such economies. Even consumption is forced apart from essential products and services. The government changes its plans based on the needs of the country. If there is more need for public expenditure in civil services, the government reduces the production of other products and employs those resources in the production of the required products. Consumption of products and services are highly controlled and are adjusted based on the decisions taken by the authorities. In such economies, there is no self-interest of the people but it is all about the plans and needs of the country and the decision of authoritative bodies. When there is a loss in any sector of the economy the government shifts those resources in the profit-making sectors including labor and capital. Unfortunately, social economies fail due to excessive control on the personal lives of the people and political exploitation where the political people in the authoritative bodies take advantage of their positions for their personal benefits.