Varieties of Capitalism

Subject: Economics
Type: Analytical Essay
Pages: 16
Word count: 4242
Topics: Capitalism, Macroeconomics, Microeconomics


The primary reason for the difference in economic growth and prosperity in countries are its financial institutions.  To solve its economic problems, countries need to make changes in the functioning of their economic systems. This is not easy because economic institutions function upon policies that denote the political processes in the country. The working of economic institutions of any country is directly tied to the allocation or sharing of political power in the country. Although economists do not fully understand the factors that create political stability in society for supporting economic institutions, what has been determined that the political character of an economic institution is not conducive for positive changed in economic institutions.  This paper presents arguments that the primary cause of prosperity in countries is the difference in its economic institutions.

The Importance of Institutions in Economic Growth

There are three fundamental institutions of capitalism: the constitutional institute which is the government; freedom; and the right to own/ the right of ownership of products (Pejovich, 1990, p. 27). The United States is essentially a capitalist country. Talking about the first institution, the US government, it would be safe to state that after the fifth amendment, the U.S. Constitution prohibits the government from robbing people of their rights to ‘own property’, ‘life’, and ‘exercise personal freedom’ without a legal permission (Lane and Myant, 2016, p. 239). However, a not-so-simple network of government rules and regulations exercise their influence upon business operations. In fact, numerous regulations are formed annually regarding what businesses can do and what they cannot do.

The French term “laissez-faire” sums up the role of the constitutional institutions of the United States (Lane and Myant, 2016, p. 252). American capitalism was greatly influenced by the ideas of the economist Adam Smith, who was a great advocate of ‘free rein’. The governmental regulation on the capitalistic markets can be divided into two categories; the economic and the social set of regulations. The economic regulations tend to control prices, whereas the social regulations comprise of ‘nonmonetary goals’ such as the provision of safer workplaces and legal work environment. The economic regulation also prevents companies and small enterprises from indulging in a ‘destructive competition’ (Lane and Myant, 2016, p. 43).

Monopolies were among the main factors that led the U.S. government to bring forth regulations for the better interest of the public. Monopolies congested consumers with high fixed prices and delimited choices (Trounstine, 2009, p. 89). An example of this is the AT&T monopoly which forced the government to intervene and ‘spinoff’ its regional sub-companies “Baby-Bells” (Shin and Ying, 1992, p. 183). This governmental act paved the way for effective capitalism by letting other competitors, i.e., MCI Communications to bring out improved services with better prices. 

The second institution refers to ‘freedom’ that is also one of the basic pillars of the American foreign policy. While speaking about ‘freedom’, non-Americans think about the ‘economic freedom’ that is deemed as the fundamental part of American capitalism (Sosa-Garcia, 2008, p. 7). People are naturally intrigued by the dynamic opportunities which this institution has to offer; this explains the factor why so many people desire to migrate to the United States. However, people are also troubled by the various social goals that are engrained into the structure of American capitalism, as well as by the various speculative market aspects, disproportionate wealth, and the impact of intensive governmental deregulation (Sosa-Garcia, 2008, p. 8). 

Until the 1980s, the American economy seemed to work hand-in-hand with the market-based requirements of capitalism: political freedom, the freedom of money-making along with its fair distribution (Rockman, 2014, p. 439). The American capitalism, as well as the social democracies of the European continent, created similar financial outcomes till the 1980s. Changings took place by the 1990s after repetitive waves of immigrants flooded the United States which led to population growth (Rockman, 2014, p. 440). About this era, serious investments were also made in the departments of research and technology. Additionally, the capitalistic culture underwent some serious changes with the arrival of ‘cheap money’ and ‘easy speculation’ which culminated in striking wealth amassment (Rockman, 2014, p. 441). Instances like these resulted not only in ethical abuses but also in legal exploitation in the world of capitalism that ultimately broke down the concept of freedom and fairness. 

The main idea of economic freedom in American capitalism is that people are ‘free’ to make all kind of contracts and agreements. Furthermore, they are also free to use their resources, to own, control, and better their means of production along with its distribution. 

The institution of private property is deeply ingrained in capitalism. Private property is deemed a necessary condition for a prosperous capitalist society. “A property right is the liberty or permit to enjoy benefits of wealth while assuming the costs which those benefits entail… property rights are not physical things or events but are abstract social relations. A property right is not a thing” (Pejovich, 1990, p. 30). In this regard, it is important to note how capitalism leads to the active creation of property rights. It would be wrong to assume that those rights are established by the government; on the other hand, it is the capitalist market that creates all kind of property rights.

Property owners, who make up the third institution, possess the right to transfer their ownership as it suits the best of their interest. This act of transfer creates a flow of trade between different property owners who possess different resources and have different demands and wants (Lane and Myant, 2016, p. 15). This sort of trade establishes an ‘exchange value’ where the highest bids are accepted while each property owner maximizes his/her trade value. The ‘value’ is obtained by legalizing one’s property/ trade/ business in order that it is recognized as ‘valuable’ by someone else who holds the interest in generating trade and business transactions (Lane and Myant, 2016, p. 17). 

Therefore, the relationship between the three institutions (government, freedom, property ownership) and capitalism in the United States is an organic one. This relationship is influenced by the mutual progress of the capital markets as well as the institutions related to American capitalism.

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United States

Public Relations

The practice of public relations in the United States is very big business and has become an art form. The United States has a free media and operates according to the “First Amendment,” which guarantees “freedom of expression” for everyone including the media. Public relations in practices in America are regulated, and there are restrictions on certain types of advertising that is considered unethical by the regulatory authorities. The media is independent, and public relations are one of the largest and most lucrative businesses in the country. PR firms form public opinion from selling products to establishing the credibility of the company. Good and efficient PR will enhance the image of the company, and it is not as easy as it sounds. PR companies must be current with changing trends and mould their public relations campaign in a way that gets into the mind of the public and convinces them to buy a product or service. However, because the media is under no constraints in America, it acts freely to influence the public (Public Relations Society of America 2017). Public Relations have their deep roots in capitalism as it is directly related to welfare capitalism. Welfare capitalism tends to provide medical care, employment housing, and pensions to induce productivity of employees (Tedlow, 1998, p. 114). It is believed that the public demonstration of compassion and care for one’s employees serves as a ‘humane presentation’ of American capitalism (Kochan et al., 1986, p. 195). Public Relations establish a positive factor of the firms and companies that is different from the ‘soulless’ presentation of American Capitalism


The basis of the legal system in the United States is the federal law, supported by legislation enacted by Congress. Everyone in America enjoys equal rights protected by the “Bill of Right.” American law under the Constitution is the same for everyone without taking into account citizenship or immigrant category. Even people, who are living in America as illegal immigrants, enjoy most of the fundamental rights of US citizens. The Constitution has given each state the authority for establishing its own civil and criminal laws, which has given 50 different state legal systems. Each state has its own police force, prisons, and courts. Sometimes things get complicated for people when they move from one state to another because the laws could be different. Residents are warned never to assume that the same laws apply all over America. Property and business rights are the same for everyone, whether they are immigrants, or foreigners doing business in America (Brennan 1977, 504). The original constitution of the United States grants protection of private property, and thus secures capitalism. It is rightly said that the growth and the condition of the capitalistic system have been interwoven with the Constitutional law (Beard, 2012, p. 129). Furthermore, the American system of capitalism law is best understood when it is read in the light of law and legality. 

Nature of America and Americans

America is the world’s largest economy, and also the largest democracy in the world. Apart from maintaining law and order, and other functions essential to governance, the government is constitutionally forbidden to interfere in the life of citizens. Every American has the right to life, liberty and the pursuit of happiness, and to pursue their dreams. Being a member of any organization or political party does not help careers because everyone qualifies succeeds according to his/her capabilities and hard work. Americans seem to be a business-friendly nation who are “prone to ferocious debates about how capitalism should be organized and regulated” (Lexington, 2015). The “American Enterprise” which is an exhibition at the National Museum of American History, reveals that capitalism has always been an uncontroversial aspect of the American life. It also depicts how the various aspects of civil war, the baby boom, the Great Depression etc. made politicians, think tanks, and the general American population aware that American capitalism required some reformation (Lexington, 2015). However, Americans seem to prioritize “opportunity for all” over the fair distribution of money, which is hard to exist in a capitalist society. 

Media Constraints in America 

The media is absolutely free in America, and the government does not interfere with its workings. There are ethical considerations that have to be adhered to by the press, and a person or group can be sued for making allegations that cannot be proved. The media can criticize the government without fear of reprisals by the state or any of its agencies. Media constraints can be implemented in case of war or any other national emergency, but apart from such rare situations, the media is completely free. The media in the country is self-regulatory and acts with the utmost responsibility in the dissemination of news and information. Everything that is published or broadcast is only done after authentication of its sources and credibility (Orme 2017)

Independence Judiciary 

The American judof icial system works on the concept that the judiciary  is completely independent, and cannot be controlled or dictated to by any other branch of government. Courts cannot be pressurized by any quarter, and make decisions according to the proof at hand or upon  documentary proof. The American judicial system is not like other countries where the government regularly interferes with the judicial process and judges are threatened or pressurized into making the decisions that are favorable to the government. The form of judicial system prevailing in the country is essential for the separation of powers between the government and the judiciary (The Economist 2009).

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Corporate Governance Institutions

Corporate Governance means the relationship in the topmost hierarchy, like the board of directors, stockholders, stakeholder and the senior managers. Institutions here means the recurring components in the distribution of power among them and the corporate decisions that are made at the top. American Corporate Institutions whether government or private where authority is shared between the board and the CEO, the shareholder, and other shareholders. The power that is given to managers in the firm is to make them perform well and show loyalty to their shareholders. Public companies that have no majority shareholder are dependent upon their senior managers for looking after shareholder interests (McCahery, Sautner & Starks 2016, p. 2932). 

Labour Market Institutions

The policies, practices and formal agreements all are integral components of the “labour market institutions.” All these factors determine the type of labour agreements and contract that are acceptable to both labour and companies. These conventions also include wages and benefits, working conditions and hours, rules for collective representation and bargaining, controlled labour norms and the provision for social protection for workers. The reason for creating these institutions is to provide cohesive and correct information, inequalities in market power (such as exists between employees and employers) discrimination and the failure to provide insurance for employment-related risks. Labour institutions are essential for the allocation of income to employees and the protection of the workers (Potrafke 2013, p. 842).

By the 1990s, intensive economic changes took place in the global market including the United States. As capitalism began to spread, employers implied reduced wages and demanded ‘flexible’ workers (Peters, 2008, p. 83). Capitalism separates laborers from their own produced products as well as the value of their production. Their wages are set by the labor market. Free from governmental regulation, organized labor has become weak in terms of freedom of demand of wages as well as workplace actions. Without a doubt, capitalism offers better employment to the population, however, after an analysis of the role of power between capitalists and workers, it is better to understand the deterioration of labor-unions, good employment, as well as good wages (Peters, 2008, p. 87).

VoC Employment Protection and Worker Participation

VoC employment means opportunities given to employees to participate in decisions that are related to their work. The opportunities can be task directions that are related to their specific job description or larger company areas of concern. The discussion can be about “indirect job involvement” or “direct job input.” Indirect involvement is meant to refer to the involvement of employee agents such as trade unions, and direct employee involvement is referred to direct discussions and agreements between employees and employers. Some determinants of employment participation systems are as follows.

  1. the individuality of the work that is performed;
  2. the type of employer flexibility and course of action;
  3. The human resources capacity of the company;
  4. the accessibility of counselling and delegation institutions;
  5. the category of ownership;
  6. the type of employment directives and guideline implemented.
  7. Sound evidence regarding the implicit understanding of employee participation is still inadequate.
  8. Nonetheless, four issues are usually influenced:  
  9. Receiving education and training opportunities at work;
  10. motivation given to the employee;
  11. employment conditions;
  12. the well-being of workers (Wood, Dibben & Ogden 2016, p. 396). 

It is a historical fact that competitive markets produce the best and more significant resources. Participants of the free market depend upon complete and costly sources of communication obtain information about the demand and supply of commodities. One of the overriding subjects of discussion about labour distribution has been the abundant resources and scarce labour to work the land and industries. The insufficiency of labour increased the productivity of labour, because of which the average American lives a superior mode of life than the European contemporaries. The American labour market made the maximum use of technological innovation, but to use these technological innovations to maximum advantage needed corresponding labour institutions (Wood, Dibben & Ogden 2016, p. 396).

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Banking structure

The banking structure in the United States works under the regulatory authority of both the federal and state governments. The assets of the largest banks in the US are equal to 43 percent of the US economy are; Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase and Wells Fargo.  Banking policies are made for looking after privacy, disclosure, preventing fraud, the prevention of money laundering, anti-terrorism, lending at exorbitant rates, encouraging lending to lower-income populations. Some cities also implement their individual financial regulation rules such as defining lending at exorbitant rates (Cull & Pería 2013, p. 4878).

The collapse of Enron

The collapse of the Enron Corporation in 2001, was invariably the largest corporate bankruptcy in the United States of America. The failure raised countless questions regarding the effectiveness of governance norms, auditing, and accounting methods. The company’s board of directors failed to protect the interests of its shareholders. Enron did not follow the conflict of interest regulations and permitted its chief financial to initiate private partnerships for doing business with Enron. The partnerships enabled the officer to hide liabilities and debts, which if reported would have had a negative effect on the profits that Enron reported. Thereafter, the bankruptcy of Enron raised the issue of how to reinforce the will and capability of company directors to question questionable dealings through corporate managers (Chernov & Sornette 2016). 

History of Enron and Where It Went Wrong

The Enron Corporation was an American service, commodities, and energy company from Texas. It was a small company, and its merger with National Gas and Inter-North made it one of the largest natural gas, electricity, communications, and paper manufacturing companies in the world. Its reported income from the business was 101 billion dollars in 2000 (Li 2010, p. 41). 

Ownership of Enron

Enron was founded by Kenneth Lays, but when it collapsed, many employees who held large amounts of ENE shares as their retirement. The value of the stock was utterly wiped out from $84 to less than $1. It shattered the dreams of many and the conventional wisdom that ownership of Enron was the best thing to do. The obvious causes of the collapse are the legal and regulatory framework. The legal structure and current laws permitted companies like Arthur Andersen to provide consultancy to the company, and then audit its services. 

People lost their life savings, but then everyone wanted to cash in on a good thing. People were complaining that they only got cash, while the lucky ones were getting company shares. The press pushed the idea that it was important for employees to be shareholders in large corporations to protect their interests in the company. The error in this theory was demonstrated by the collapse of Enron. Whatever went wrong was obviously not the fault of the employees who had bought shares, because they could not have prevented its collapse even if they knew that something was wrong. (Petrick & Scherer 2003, p. 50). 

Deregulation of the energy markets gave Enron innumerable venues for raising finances, in fact, it had an online trading site for commodities that brought in millions of dollars for the company. Enron created assets and straight away enter the anticipated profits in its books, although the company has not made even a dime from the project. If the revenues were not as anticipated, the company would immediately transfer the assets to a company that would not report the true worth of the project or the losses that it had suffered. This made it possible to conceal losses because they did not affect the company’s bottom line. (Nelson, Price & Rountree 2008, p. 293). 

This type of accounting practices enabled schemed that were created to conceal the losses, and in the books, the company remained profitable. To hide the losses, Andrew Fastow, who later became the CEO, devised a plan that made the company look in good shape in spite of the fact that it was losing money. Enron did not have a union because it was a trading company. The norm in America was that manufacturing units had unions for collective bargaining on behalf of the workers. However, the Enron scandal has created dialogue all over the country regarding business ethics. What happened at Enron has given unionization a boost, because there were no regulations to check the books at Enron, and the auditors were already supplying services to the company. The scandal at Enron made more people (74%) believe that unions serve to protect the interests of workers, and if there had been some form of collective bargaining at Enron, the shareholders would not have been hurt so badly (Bhasin 2013, p. 47). 

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Wage bargaining was not done at Enron because the employees were paid by issuing them shares of the company. Everyone thought that they were lucky and that the shares would ensure a comfortable retirement. Enron was a trading company, so the necessary training for trading in commodities and things related to commodities was carried out at the company. Enron did not suffer any work stoppages or strikes because the employees felt that they were adequately compensated with the shares that the company so easily handed out (Bhasin 2013, p. 47).

The Enron collapse seriously questions the regulatory policies in the country. This was a different situation than the loan and saving crises which went on for almost a decade before Congress decided to take action. However, what has been done can be avoided in the future by making improvements in the disclosure system. For many kinds of transactions, there are no completely “right” answers. The Enron scandal happened because of the absence of regulatory processes that would act as checks and balances on the company’s auditing and its auditors (Conroy & Emerson 2006, p. 410). 

Companies should be prevented from hiring and paying firms that audit their accounts. This cause a conflict of interest in the legal system, because auditors are paid to issue favourable reports on the company that is paying them. Large companies like Enron strictly forbid its employees and manager from having any involvement in businesses that do business with their company. However, these codes of ethics are not legally binding upon the managers and can be waived by the board of directors. The legal framework of American gives substantial latitude to managers and executive to make their own decisions about what serves the business interests of the company (Rapoport &. Dharan 2004). 

Companies like Enron came into existence and boomed in the 90’s. Stock markets were performing beyond expectation; venture capital was being brought in by start-up, consumer spending was up and established businesses were expanding and prospering. Everyone was making money, which is why the moral standards and code of ethics of businesses are ignored. To make money easily and quickly, everyone cuts corners and only concentrates on getting his/her share of the money coming in. The top executives of the company had financial obligations, which were set aside because they were making incredible amount of money (Boddy 2017, p.4).

Thousands of Enron employees lost their life savings and health care benefits in the collapse of the company. Enron’s top executives made millions of dollars while the average shareholder lost everything in the collapse. Millions of workers put their savings in company-sponsored 401(k) plans, and although the company gets a 100 percent tax rebate, the employees are required to hold on to the shares for a specified period until the shares reach maturity.

Another tendency in such situations is “cronyism.” With so much money rolling in, managers at Enron began to think that nothing could go wrong and they sealed themselves off from outside influences. Any person that was not in step towards their way of thinking was eliminated, and many people who could have spoken up did not speak up because of the fear of elimination (Boddy 2017, p.4).

The Enron case is a perfect example how aspects of business failure and price collapse cannot be out ruled by a capitalist market. The Enron case is like a ‘wake-up’ call for all pro-capitalists as it draws home the message that when a corporate organization fails their investors, then the employment contracts fail their workers. The Financial Accounting Standard Board (FASB) fails the accountants, who continue to fail the shareholders who employed them in the first place. The chain continues to make the investment counsellors fail their valuable clients, whereas the media fails its viewers. Therefore, the Enron case is a perfect example of how capitalism can go wrong and the problem of one firm turns into the problem of the whole economic system. 

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Capitalism has many forms, and although it is the most successful of systems, it has its pitfalls. The more money that people make out of capitalist investments, the more they lose if the company declares bankruptcy like Enron did. People lose their life savings, their medical benefits and more when the bubble bursts. The worst affected are the elderly who were looking forward to retirement, and now have to compete for jobs with youngsters who are better qualified with college degrees and IT skills.

Capitalism is the best system, but in the absence of regulations that are necessary to keep checks and balances on the business, things invariably go out of control. In cases like Enron, the company must not be audited by company appointed auditors as they will not issue negative reports for the company that is paying them. Enron was a large and valued client, and nobody wanted to lose the Enron Account. Besides, with a CEO like Andrew Fastow, who is aggressively pushing the company’s shares and concealing its trouble, ordinary investors do not stand a chance of knowing the truth because it is skilfully concealed from them.

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