Capitalism and the World Economy

Toshiaki Hirai

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317859901
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Globalization is a phenomenon which has attracted much attention in the past, but there are still many questions that remain unanswered.

This book categorizes globalization into three types: Financial Globalization, the collapse of the Cold War order and the ensuing convergence toward the capitalistic system; and the rise of the emerging nations. The globalization of capitalism has two implications. One is trust in the market economy system and support for a minimal state while another is an aspect of the Casino Capitalism as typically seen by the rampant emergence of hedge funds.

This book explores both the light and shadows cast by globalization, endeavoring to identify both positive and problematic effects of the globalization process on the world economy. For this purpose we would first examine the nature and the feature of the world capitalism in relation to globalization. Then we would discuss and investigate the path along which important nations - first the developed nations (the USA, EU and Japan), followed by the emerging nations (BRICs) - have proceeded under the influence of globalization. Focusing on this phenomenon from diverse points of view, which is to be taken by the first-rank contributors in their fields, will be extraordinarily fruitful for understanding not only the world capitalism.

This collection, from a selection of leading international contributors, will not only shed light on world capitalism as it is now, but will also offer pointers as to its future directions.

Part I

Bird’s-eye view

1 Capitalism and globalization globalization globalization globalization

Toshiaki Hirai

1 Introduction

This chapter aims to address the following themes fairly broadly and theoretically, reflecting a general perspective on the whole book: What is the present state of globalization? How should we evaluate it in relation to capitalism?

If we try to characterize the development of the world economy from the latter half of the 1980s to the present day with a single word, there could be none more appropriate than “globalization,” which may be defined as the “phenomenon moving toward market economy (or capitalism) on a global scale.”

We may then go on to single out three points to characterize the present state of globalization: (1) As a principle of operating the economy, capitalism has been globally adopted, while socialism has been abandoned; (2) financial globalization has developed to an extreme degree; and (3) several countries that had been regarded as developing countries have attained remarkable economic growth, to such a degree that they have come to occupy an important role in the world economy. (1) is an epoch-making phenomenon in the postwar world economy, never before seen on the worldwide scale, although it found a place in the Pax Britannica. (2) is remarkable in terms of scale and the multiplicity of financial products. (3) is a new phenomenon that is throwing the North–South dichotomy awry.

This chapter runs as follows. First, we look into the nature of capitalism, for the present globalization constitutes a development of it. Here the essential characteristics of the capitalistic system are pointed out, followed by its problematics.

Second, globalization is examined. It can be approached from two sides—five factors which caused it, and four types of globalization which occurred as a result.

The five factors are: (1) neoliberalism; (2) financial liberalization; (3) liberalization of capital transactions; (4) the New Industrial Revolution; and (5) the collapse of socialistic systems. The four types of globalization lie in: (1) financial globalization; (2) capitalism in the ex-communist bloc; (3) the emerging countries; and (4) the EU. An important point is that globalization can be classified under the broad headings of financial globalization (1) and market system globalization, which includes (2), (3) and (4). The salient tendency has been for the former to promote the latter; while bringing about a huge glut of financial capital, the former has left the world economy more fragile.

2 The capitalistic system

2.1 Essentials

We may mention six points worth noting as essentials of capitalism: (1) dynamics, (2) markets, (3) capital, (4) firms, (5) uncertainty, (6) ambiguities. The first four are connected with the strong points in a capitalistic system, the last two with the weak points.

1 Dynamics—The essential nature of a capitalistic system is embodiment of an impulse toward growth. A capitalistic system generates increase in production and growth through the development of division of labor, competition and technology while it plows down the existing systems. Thus the capitalistic system is a dynamic system which also embodies instability. Its “dynamics” operates through “markets” and “capital.”

2 Markets—They have two salient characteristics: (a) that of “turning everything into commodities” and (b) “the monetary economy.”

a A capitalistic society might even be summed up as a society in which the most important elements of the economy come to be transacted, being turned into commodities. These include not only labor but also, in recent years, securitized products, the emission trading system, etc.

b In the markets, almost all the transactions are carried out by means of money. That is, in a capitalistic society barter is not an essential form of transaction.

3 Capital—Capital, which is divided broadly into “real capital” and “finance capital,” is an important wheel which sets markets in motion. Finance capital, among other things, keeping a lookout over all the markets on the globe, enters those deemed most profitable, making some markets active, others inactive. Firms and industries that cannot procure finance capital face grim prospects. As a result, the industrial structure undergoes sweeping transformation and the capitalistic system sees growth.

4 Firms—Firms play an absolutely vital role in “dynamics” of capitalism. They must develop, looking to the uncertain future, new goods and new markets, injecting huge amounts of capital and human resources.

The above-mentioned four features are strong points. Through a gigantic network of markets, economic activities are developed and economic agents are allowed to behave on a self-driven basis. Through the mechanism of numerous markets a great many economic agents produce and exchange vast quantities of goods and services. Moreover, through the activities of firms the economy as a whole can enjoy dynamic development.

The capitalistic system operates through the activities of economic agents who are free to choose their rational behaviors, bringing about desirable results from the point of view of economic efficiency. It is superior to socialistic systems in terms of freedom, for it is through the markets—to a great extent “autonomous,” not depending on decrees by some particular persons—that the production and exchange of goods and services are carried out.

In contrast with the above (1)–(4), the following show the capitalistic system as subject to various uncertainties and ambiguities.

5 Uncertainties—the capitalistic system faces various kinds of uncertainties. Firms need to go on producing goods forecasting sales in the markets. They need to make great efforts to develop new goods. Once they succeed in doing so, they need to build capital equipment, seeking to boost profits. And yet forecasting is a very difficult art because the sales of the goods depend on demand.

Moreover, present-day capitalism has tended to get involved in “self-augmentation of finance capital,” so that firms in the real economy are forced to produce and sell goods while coping with the behavior of finance capital, which makes forecasting more difficult.

6 Ambiguities—Economics has assumed “rationality” in regard to markets and economic agents and maintained that the unfettered market system can bring about the Pareto optimum. To some extent, this system has superior features in that independent individuals can make their own decisions in the market, and many goods and services are determined without any intentional interference from outside.

This assumption, however, entails big problems. It relies excessively on “rationality.” If the capitalistic system was conceived exclusively in terms of rationality, cognitive errors would be inevitable. One example lies in the “ambiguities” characterizing capitalism, as distinct from uncertainties. We will illustrate this point with three cases.¹

Market price: Economics teaches us that the relative price is determined at the intersection between demand and supply in each market, regarding money as a veil. However, it should be an absolute price which is actually determined at the intersection, with money always working as a counterparty. This has important consequences, quite different from barter transactions.

Suppose that a certain good has enjoyed extremely high sales due to, say, word of mouth or advertising. The absolute price goes up and the firms concerned can make a huge profit. In this situation financial institutions can enter this market, creating money. As this phenomenon encroaches on the goods concerned, the possibility looms up that the price as determined by demand and supply is not the result of optimal behaviors of economic agents. Could the market mechanism, greatly influenced as it is by credit creation, really determine a “fair” price? We need to keep an eye on the market, with some idea of fairness in mind.

Accounting: The amount of profit a firm can make depends entirely on the accounting system, for complicated everyday business activities cannot provide it with concrete information. Thus every transaction is kept on a balance sheet. And once or twice a year a firm makes performance public in the form of the balance sheet and the earnings statement.

However, this system has a shortcoming. Among other things, depreciation allowance and inflation/deflation are serious matters. Depreciation allowance is not exempt from some degree of arbitrariness. Inflation/deflation is more serious, for if it went to extremes, accounting would lose its significance. The figures thus kept for, say, half a year, show a bias and do not convey correct information, and yet firms have no other choice. In this case, nominal GDP does not constitute correct information. In order to avoid the problem, social accounting calculates real GDP by dividing it by the GDP deflator, although even this method cannot prevent the essential ambiguity.²

Debt contract: In a capitalistic system various kinds of debt contracts are made, using money as unit of account. In this case, debts cannot avoid the influence of inflation/deflation, and yet people cannot help but enter upon debt contracts based on money as unit of account. In spite of the fact that in a capitalistic system contracts in terms of money are absolutely fundamental, “ambiguities” always crop up there.

2.2 Issues involved

We saw in section 2.1 that a capitalistic system, in principle, has strong points in terms of “dynamism,” “market,” “capital,” and “firms” while it has weak points in terms of “uncertainties” and “ambiguities.” In this section we will see three issues—(1) the bubble phenomenon; (2) corruption and injustice; and (3) the disparity problem—as constituting headaches for the system, which are, more or less, related to the weak points.

2.2.1 The bubble phenomenon

Reference here is to a situation in which the economy overheats due to some factor, to such a degree that the government tries in vain to control it, finally leading to the bubble bursting. These phenomena have occurred repeatedly over the centuries (e.g., the Tulip Bubble and the Stock Bubble associated with John Law).

In economics, however, the bubble phenomenon has been dealt with as an exceptional case. The principal task of economics has resided, rather, in analyzing normal processes. Most economists placed profound trust in the “classical dichotomy” and “Say’s Law,” thereby failing to address an issue like unemployment in a capitalistic society until Keynes appeared on the scene.

The trend in these last two decades has been to revert to the tenets prior to Keynes. The new classical macroeconomics has defended the “classical dichotomy” and Say’s Law, and yet it allowed for economic fluctuations. Worse still, this has become the mainstream.

Strangely enough, these two decades have seen increase in the degree of instability of the capitalistic system with repeated bubble phenomena—e.g., the Japanese bubble and its burst from the end of the 1980s to the early 1990s, the US dot.com bubble and its burst from the mid-1990s to 2000, and the housing and subprime bubble and its burst in the early 2000s, all of which occurred due to speculative activities with an abnormal bloat of money. Moreover, our modern-day governments have been unable to prevent these bubbles from reaching a bursting point. The reason why the bubble is a serious issue for the economic system is that it could drive people excessively into money-making activities. When rival firms are making huge profits on a bubble, the CEO of any particular company will not be allowed to sit and wait, stating that the bubble will burst soon. Employees are put in a similar position. This sort of climate comes from human nature itself, underlying society—people cannot sit and wait while rivals are making profits.

Human beings are consciously or potentially driven by the desire to obtain wealth and fortune. Once the bubble occurs, increasing numbers of people grow eager to pursue profit—even those who had hithert...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Preface
• PART I Bird’s-eye view
• PART II Developed nations—USA, EU and Japan
• PART III Emerging nations—BRICs
• Index