Question: Describe some of the basic components of the evolution of capitalism (pages 73 - 82)

According to Investopedia (2017), capitalism grew from

European feudalism in which workers were controlled by feudal

lords. The system was mainly agricultural in nature, and as

economies became more urbanized, child labor and long working

hours were common. Mercantilism and colonialism expanded

trade among countries, with periods characterized by wars,

nationalism, exploration, and exploitation.

Henri See (1928) also believed that capitalism was part of an

economic revolution in Europe, which first appeared in the form

of commercial and financial capitalism. The capitalistic businesses,

which manifested themselves in the nineteenth century, went

through some transformation with labor businesses and relations

between employer and employee.

Historically, capitalism was seen as an exploitation of labor

in the wealth-creation process and in the reproduction of social

relations. According to Shaikh (1990), the manner in which

society was structured enabled some people to live off the labor of

others. The subordinate classes supported the ruling class, and the

existence of a ruling class was the result of the exploitation of labor,

as well as the perpetual reproduction of the social and material

conditions of that exploitation. Such conditions gave rise to social

and political unrest. Shaikh further explained that capitalism is

a class society in which the upper class's existence is the result of

the ownership and control of a large portion of society's means

of production. In commenting on Marx's ideas, Shaikh (1990)

demonstrated that it is the surplus of the working class's labor that

provided the capitalist profit.

Today, one thing is certainover many decades, capitalism has

gone through a dynamic evolution. The capitalism of today is vastly

different from the one that existed centuries ago. Therefore, some

of the justifiable rationale used to condemn this economic system

many years ago is not applicable today. Capitalism has evolved into

an engine of economic prosperity and poverty reduction.

In describing the evolution of capitalism, it is clear that wealth

creation was accomplished mainly from the acquisition of land

with added labor. Agricultural and forced labor were common. As

capitalism progressed with manufacturing and industrial activities,

capitalists were seen as extractors rather than contributors. Wars,

revolution, and slavery were all associated with capitalism. It was

about being selfish, not about self-interest. The world economy

was seen as a fixed pie; someone's gain was at the expense of others'

loss. Today, the wealthy are more of contributors and should not

be seen as extractors. Their wealth is not created by exploiting

others. Due to the advancement in technologies associated with

transportation and communication and the interconnectedness and

interdependence of economies, capitalism should not be equated

with the European economic systems of centuries ago.

Computers and the Internet have significantly transformed

the manner of wealth creation. It demonstrates the importance

of human capital in economic prosperity, and easy access to the

Internet for business transactions is conducive to economic growth.

According to Li (2011), there is a 2.5% increase to GDP growth

for every 10% increase in broadband implementation.

Modern capitalism is propelled by the acquisition and

enhancement of human capital. Human capital plays a significant

role in wealth creation. Competition leads to innovation because

people are in constant pursuit of trying to produce better, cheaper,

and newer products, as well as more improved distribution methods.

Therefore, those innovators and creators in technology can become

billionaires. Those with the relevant and needed knowledge and

information to sell have the opportunity to become wealthy. This

is certainly not the accumulation of wealth by exploitation of

others. These people have a service to sella service that can

transform society for the betterand as a result, they are highly

rewarded for their service. As a result of this, the education system

is propelling the income inequality. According to Dadush et al.

(2012), advancement in technology results in replicating the task

performed by low-skilled labor but not the tasks performed by

high-skilled labor. The interdependency of the different forms

of technological research and advancement cause an increase in

productivity. This, in turn, creates a tremendous demand for

educated workers who are associated with the development and

operations of such technologies. As a result, the wages of these

workers, such as computer programmers, application developers,

software developers, and computer engineers, experience a

tremendous increase compared to low-skilled workers.

For example, the Bloomberg company receives large sums

of money for providing data, news, and other information to

companies. As a result, the Bloomberg company is very profitable,

and its founder, Michael Bloomberg, is one of the richest individuals

in America. According to Edmund Lee (2017), Forbes's estimate

of Bloomberg's wealth makes him the eleventh-richest person in

the world and the sixth-richest technology executive behind Bill

Gates, Jeff Bezos, Larry Ellison, Mark Zuckerberg, and Larry

Page

According to Caroline Freund (2016), the advancement in

communication technology has caused people to communicate

more easily, enhancing returns to scale, while globalization

provides a nearly unlimited audience. Benefits of communication

technology lead to wider customer bases and allow for more

efficient production techniques. This new method of wealth

creation has resulted in many self-made billionaires around the

world. These include company founders and executives who are

not inheritors of family wealth. Freund (2016) stated that

many billionaires become extraordinarily rich

because of innovation, especially in the fast growing

markets. Jan Koum and Brian Action (combined

net worth of US $10 billion) of WhatsApp, a phone

base instant messaging service, first appeared on

the list after Facebook bought their app. (23)

In some cases, the fortunes of many other self-made individuals'

wealth come from their executive positions in particular companies.

Facebook's chief operating officer, Sheryl Sandberg, is one such

example. Freund (2016), posited,

Extreme wealth today is largely self-made, and the

self-made share is growing, driven by emerging

markets. Among self-made billionaires, in

emerging markets, the share of company founders

and executives is growing exceptionally quickly, as

the share of inherited money declines. (p. 29)

Another area in which wealth creation is made possible, which

is quite different to the capitalism of long ago, is reflected in the

manner of capital acquisition and the role played by investment

banks and other financial institutions. Miller (2013) made the

point that in many advanced countries, such as the United States,

institutions, such as Wall Street investment banks, stock market

environments, and the related complex financing system, which

facilitate availability of large pools of capital for investment purposes,

have made significant contributions to inequality. Pension funds

now invested and managed in a manner to generate additional

retirement income for employees. The complexity of this financial

system and their importance in stimulating economic growth

require people of high intelligence, insatiable drive, and diligence.

As a result, these individuals possessing such skills are highly paid,

thus making a significant contribution to the inequality in income.

The transformation of investment banks into publicly-traded

corporationsin which a highly competitive financial system

is created and with a complex-incentive structure to reward

profit, large amounts of money flow into the financial system

that is createdstimulates economic prosperity and inequality.

According to Bryan Kantor (1995),

Financial markets link borrowers to lenders and so

determine the rewards for saving and the minimum

returns required for investments. Financial markets

not only help raise capital for investment, but also

keep the score on the performance of investments

made in the past. They inform savers about the

value of their accumulated savings. In order words,

they help measure wealth and by so doing, influence

future consumption, as well as investment decisions.

(106)

Galbraith (2016), in explaining how the financial sector can

influence inequality, demonstrated that facilitating investment

growth and increased income to be concentrated in a relatively

small environment of economic activity at any one time leads to

a herd mentality by financial entities. They all rush in to take

advantage of the available opportunity. Many certainly have

financially lost, but a few have made lots of money.

Another significant component in the evolution of capitalism

is the tremendous involvement of the government in establishing

and enforcing the rules of the game. These laws help to promote

competition, regulate monopolies, and protect workers and

consumers.

Capitalism cannot function without property rights laws.

Miller and Kim (2017) linked economic freedom to economic

prosperity and made the point that there is a direct relationship

between the Index of Economic Freedom and economic prosperity.

The Index of Economic Freedom is a composite measure of how

free a country's economy takes into account the different aspects

such as property rights laws and market openness. As countries

advance their economic freedom, entrepreneurship is encouraged,

resulting in economic prosperity. Miller and Kim explained that

for the past two decades, the global economy has achieved greater

economic freedom, resulting in almost an 80% growth in real

GDP. The reasoning is clear. Economic freedom encourages

open competition, which in turn causes greater productivitya

necessary component for increasing real GDP per capita. That

prosperity has caused a significant reduction in the world's poverty,

and it has created a greater economic well-being for millions of

people.

As Webley (1967) mentioned, in countries in the world where

freedom of the use of capital is allowed, the standard of living

is far greater than those governed by a command economic

system. Webley (1967) stated that "a property-owning society

is fundamental to successful capitalism. To deny the rights of

individuals and corporations to own and derive wealth from

property is to betray the root principle on which western civilization

has been built" (p. 36). According to Powell (2008), since 1980, as

a result of economic reforms, China's economic freedom index has

made a 66% improvement. That created profit opportunities for

business entities, which led to the tremendous economic growth

achieved by China.

According to Beaulier (2008), in 1965, Botswana was

considered the third-poorest nation in the world, but since its

independence in 1966, it has experienced economic growth. In fact,

between 1966 and 1996, it was the fastest-growing economy in the

world, and its growth was the result of significant improvement in

property rights and limiting the government's role in the economy.

The private sector flourished, and profit was the key to its growth.

The survival of a market economy depends on the establishment

and enforcement of relevant rules and regulations that provide an

incentive for citizens to engage in economic enterprise (Cudd

2014). Property rights laws do not only cover tangible assets but

intellectual property as well. There are laws involving copyrights,

patent rights, and trademarks, and many individuals become

billionaires due to their intellectual property.

Owners of patents associated with profitable companies,

such as Google, Facebook, and Apple, have realized tremendous

revenue for these companies. Due to competition, investors are

constantly promoting new inventions as a means of increasing

productivity. Computer engineers and programmers are constantly

developing new software, which promote the enhancement in the

way goods and services are produced and distributed. Computer

programmers, through patents, are given ownership of their

inventions. Duhigg and Lohroct (2012) made the point that large

corporations, such as Google and Microsoft, have ownership of tens

of thousands of patentspatent applications that are computerrelated

and otherwise have been increasing exponentially every

year. In fact, in 2011, the United States Patent Office received

about 540,000 patent applications. In this lucrative sector, many

companies and individuals are profiting from their inventions and

ideas by collecting much revenue from licensing. An example of

how the patent and licensing market generates billions of dollars

in revenue is through contracts involving Microsoft, Apple, and

AOL. In 2012, according to Fuchs (2012), Microsoft sold 650

to Facebook, which were worth US $550 million, and

more astonishing is Microsoft's purchase of AOL's patents for

US $1.5 billion. Vaughan-Nicholas (2014) mentioned that in

2013, Microsoft's android patent licensing contract with Samsung

yielded US $1 billion for Microsoft. For that year, Microsoft made

about US $3.4 billion from its android patent licensing.

The patent market is, indeed, a lucrative way of generating

income. To protect ownership of patent licenses, expensive lawsuits

are filed, resulting in hefty judgments. Duhigg and Lohroct

(2012) reminded that in 2012, Apple won a US $1 billion patent

infringement judgment against Samsung.

According to Louis M. Hacker (2012), property rights laws

are a necessary pillar of capitalism, and for capitalism to function,

it is necessary to have private property and the resulting unequal

wealth and income should be protected by law. Accumulation

of wealth must be linked with both profits from enterprises and

savings as a surplus over personal expenditures. The market

system is dynamic and involves a process in which goods and

services are voluntarily exchanged, and the value of the goods and

services exchanged is mainly determined by how highly they are

demanded. Given that human capital, services, and the goods we

sell are different, we are rewarded differently, and thus, all have

different incomes.

There are numerous federal and state agencies enforcing

hundreds of federal laws and regulations that aim at protecting

workers and consumers. There are laws dealing with workplace

security, minimum wage, health care and other employments

benefits, and job-related harassment and discrimination. In

addition, there are federal laws that protect the formation of labor

unions. This association of workers represents union members in

negotiating labor contracts; dealing with wages, complaints, hiring,

and firing; and handling promotions and demotions. Unions work

for their members' protection against unfair treatment because of

their race, color, religion, ethnicity, and sex.

Consumer protection laws make provisions for people to

challenge businesses if they think they were unfairly treated in the

marketplace. Such laws and regulations help to prevent deceptive

and fraudulent business activities. As Muller (2013) stated, "Prior

to capitalism, life was governed by traditional institutions that

subordinated the choices and destinies of individuals to various

communal, political, and religious structures. These institutions

kept change to a minimum, blocking people from making much

progress" (p. 2).