March 2, 2021

Capitalism At Stake: Courtesy Banks

In theory, capitalism is described as the social system wherein the means of production, distribution and exchange are owned by the private parties. The two major elements of capitalism are profit and wage. Profits are amassed by the capitalists because of their control over the tools of production. These profits are utilized to expand businesses, create employment and to generate wealth. Again, the workers receive wages for the services they provide to the enterprises. However, the workers do not have the ownership rights in the properties and they are compensated for the services they render to the enterprises, irrespective of whether the enterprise makes a profit or loss. This is how the capitalist system works, at least theoretically. And the capitalism works riding on the philosophy of laissez faire (no government intervention).

In other words, prices and wages in the capitalistic system are determined by the free interplay of the markets with no government intervention at all. And, for long United States has been cited as a classic example of capitalism, with unfettered proliferation of the business conglomerates. Banks in the country have also expanded their businesses across the globe with the monetary authority not putting in many restrictions. However, it can’t be said that there is absolute interplay of the markets in different sectors of the economy. In some sectors, such as the banking sector, government does play key role so as to provide necessary cushion, which is against the tenets of capitalism.

For capitalism to work efficiently, all economic activities, including the financial firms, must be allowed to function freely and the successes and failures of these business entities owe to them only, with government playing the role of a spectator. However, this has not been the case with the banking sector in the country which has been oft-touted as epitomizers of capitalism. Recently, Thomas Hoenig, the head of the Kansas City branch of Federal Reserve, has commented that the biggest banks in the country threaten the future of capitalism. He is of the opinion that the gigantic and highly complicated banks in the country are fundamentally incompatible with the principles of capitalism.

As long as there is the existence of systematically important financial institutions (SIFIs), free interplay of the markets in the financial sector can’t be called for. These financial institutions are indeed powerful and treated as very important that they require special support and different set of rules. Offering special support to these financial institutions and treating these organizations in a different way, are not akin to treading the capitalism route. This according to Hoenig has jeopardized the prospects of capitalism and market economy. There are some banks in the country which are too big that the government can’t afford them to collapse. This very idea to protect the super giant banks does not go with the ideology of capitalism and distorts the free functioning of the market economy. Bailouts of some banks which are under financial stress are also nothing but distortion in the working of the market economy.

Author’s Bio: Martha Jackson loves to write financial articles and she is a contributory writer associated with the Debt Consolidation Care Community and has written several articles on debt consolidation, debt settlement and get out of debt for various financial websites. She holds her expertise in the Debt industry and has made significant contribution through her various articles. Please follow us on twitter:

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