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During recessions, a government can try to increase employment and stimulate the economy by spending the taxpayer's money on government projects. This strategy is based on Keynesian economics, famously applied in Franklin Roosevelt's New Deal in 1937 during the great depression, and now resurging in the wake of the global economic crisis. More liberal minded economists believe that the best way to stimulate the economy is by lowering taxes.
A government can set a minimum wage to legally prevent an employee accepting what is declared to be unfair income from an employer. The strategy is one of many cases of contentious economic regulation, where advocates of free markets may claim its distortionary effects neutralize its supposed benefits.
Capitalism is an economic system where wealth is privatized, that is, controlled by individuals. It stands in contrast to socialism, where wealth is controlled by the government. Western economies are said to be capitalist systems, though in reality they are a blend of capitalist and socialist systems, where the left and right wing advocate socialist vs. capitalistic leaning economic policies respectively.
Many countries have a reserve requirement for banks, where banks cannot loan the full value of their deposits, but must reserve a small percentage (e.g. 10%). The trade-off between a low vs. high reserve ratio is between increasing liquidity and economic activity vs. safeguarding against risk. In recent years, financial firms have used exotic financial instruments such as derivatives, which in effect reduce reserve requirements, and furthermore, make the risk itself very difficult to calculate.
The now infamous Fannie Mae and Freddie Mac are publicly traded mortgage finance companies. They make a profit by buying mortgages from banks, repackaging them, and then selling them as securities, and more recently, simply by buying high-yielding mortgages. Their liability is $5 trillion (roughly half of all US mortgages). Their lack of transparency, privileged relationship with the government, and sheer size, were all cause for concern before the government had to bail them out.
The Emergency Economic Stabilization Act of 2008 enabled the US Government to bail out failing financial institutions. The bailout was deemed necessary to increase liquidity in frozen market, where a fear to lend would have crippled the economy.
Adam Smith is the founder of the concept of free trade, in his book "The Wealth of Nations" published in 1776. He came up with theoretical arguments showing that governmental barriers to trade such as tariffs and subsidies are ultimately not in the best interests of either side in a trade agreement. Karl Marx, the founder of communism, vigorously disagreed.
Robin Hanson
This seems to me a common situation – things said to be critiques of capitalism are often just critiques of humanity. Humans vie selfishly and self-deludedly for status. Some succeed, while others fail. The struggle, and the failures, aren’t pretty. Yes capitalism inherits this ugliness, but then so does any other system with humans.
Historically, capitalism has fostered freedom and an increase in the standard of living and human rights, and vice versa. Societies that have tried non-capitalist systems inevitably fall into tyranny.
Ron Paul
Free trade is not a zero-sum game where some countries benefit and others inevitably suffer. On the contrary, true free trade by definition benefits both parties. Free trade is the process of free people engaging in market activity without government interference such as tariffs or managed-trade agreements. In a true free market, individuals and companies do business voluntarily, which means they believe they will be better off as a result of a transaction.
Robin Hanson
We want a system where stuff is produced by the lowest cost suppliers and goes to the buyers who value it the most. If some supplier offers to sell stuff to folks at a lower price, well then we want folks to switch to buying from that supplier. ... This logic applies just as well to distant nations as it does to a convenience store down the street. Don't be fooled into treating [foreigners] differently because you were built to fear foreigners.
Ayn Rand
Today’s widespread unemployment is the result of organized labor’s privileges and of allied measures, such as minimum wage laws.
Ayn Rand
The essence of capitalism’s foreign policy is free trade—i.e., the abolition of trade barriers, of protective tariffs, of special privileges—the opening of the world’s trade routes to free international exchange and competition among the private citizens of all countries dealing directly with one another.
Ayn Rand
The moral justification of capitalism does not lie in the altruist claim that it represents the best way to achieve “the common good.” It is true that capitalism does—if that catch-phrase has any meaning—but this is merely a secondary consequence. The moral justification of capitalism lies in the fact that it is the only system consonant with man’s rational nature, that it protects man’s survival qua man, and that its ruling principle is: justice.
Ayn Rand
The government has no source of revenue, except the taxes paid by the producers. To free itself—for a while—from the limits set by reality, the government initiates a credit con game on a scale which the private manipulator could not dream of. It borrows money from you today, which is to be repaid with money it will borrow from you tomorrow, which is to be repaid with money it will borrow from you day after tomorrow, and so on. This is known as “deficit financing.”
Joseph Stiglitz
[It's] a choice of one form of waste verses another form of waste. And so it's a judgment of what is the way to minimise the waste. No perfection here. And what [the Australian] government did was exactly right. So, Australia had the shortest and shallowest of the downturns of the advanced industrial countries... [the economic] recovery actually preceded China. [The] preventive action, you might say pre-emptive action, prevented the downturn.

New Comments

0 Points       dionisos       22 Aug 2016     Is capitalism good? Disagree
It can’t be good nor bad in itself.
It could be better or worse than another economical system, given a particular ethical system.

I think there is a lot of better economical systems than capitalist. (given most consequentialist ethics).

0 Points       Nashhinton       20 Apr 2013     Does government spending help mitigate a recession? Mostly Agree
When the government spends more, there is usually more spending on infrastructure which increases employment. Providing financial assistance to failing businesses and financially desperate individuals (through indirect or direct means) lowers prices, increases consumer confidence and increases productivity. I personally believe we should create tax breaks for the lower classes to stimulate consumer confidence and increase income mobility. I would also want to see taxes raised on the wealthy to slightly reduce the deficit after spending on infrastructure. This increased taxation will also prevent the establishment of a plutocracy, which would severely undermine democracy.

Also, instead of redistributing wealth through welfare, which hardly stimulates the economy at all, we should instead focus on providing people more job opportunities by transferring people (who are fully able to work and who are dependent on welfare) to work for a living. I personally believe that workfare is an ideal alternative than welfare. Though I do advocate helping people, I personally support the idea that you should teach the person to help themselves. That's why we should increase government funding for job training facilities and increase employment incentives. Hence the famous phrase: "give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime"

0 Points       TheSentinel       30 Jan 2013     Is capitalism good? General Comment
wow, didnt even know about those. nice post!

0 Points       TheSentinel       30 Jan 2013     Is capitalism good? General Comment
or you will need to fight, and the lion has been training hard to fight on his own, that is why he is strong. The Hyenas can laugh but the Lion will roar feircly and scare the cowards away.

0 Points       TheSentinel       30 Jan 2013     Is capitalism good? General Comment
benefits were earned buddy. They are not simply given. Also "anti-sharing act"? Try " you get what you work for". How many people are born into wealth and keep it all by spending like crazy and not working? none, you have to work hard to make and keep your money. They dont have to share what they worked very hard for. Especially with someone like you who is ungrateful for what he has, you wouldnt even be grateful if they did share it with you.

0 Points       TheSentinel       30 Jan 2013     Is capitalism good? General Comment
well said, that is a very honest statement on Capitalisms strengths and weaknesses. Like you, I belive that a balanced system is good. However I also agree with having more economic control being left with the nature of people in the private sector.

0 Points       TheSentinel       30 Jan 2013     Is capitalism good? General Comment
your misconception is that the ONLY desire Capitalism attempts to satisfy is money. This is incorrect, and before you write off Capitalism, you should actually understand its true nature. If after truly understanding, you still disagree, then American is a not a place that would be optimal for you to live in.

1 Point       Nashhinton       20 Nov 2011     Is free trade generally beneficial for a country? Agree
Free trade is beneficial for the cooperation and foreign affairs between nations. It also increases the revenue and welfare of a nation. I'm a strong opponent of protectionism.

2 Points       Nashhinton       19 Nov 2011     Is capitalism good? Mostly Agree
Capitalism is very productive in the market world, but it is not successful for providing necessities and universal access to health care, education, police, etc. But overall capitalism is excellent for increasing innovation and productivity in the work force. I believe in somewhat of a mixed economy, but I lean more towards promoting a larger expanse of the private sector where businesses are free to compete and operate for profit.

1 Point       Robert B       19 Oct 2011     Is capitalism good? General Comment
Proverbs 28:19
He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty.

Proverbs 31:31
Give her the reward she has earned, and let her works bring her praise at the city gate.

Ecclesiastes 2:21
For a man may do his work with wisdom, knowledge and skill, and then he must leave all he owns to someone who has not worked for it. This too is meaningless and a great misfortune.

What do you think the priest would say about this??????? Right from the B I B L E

2 Points       Anonymous       01 Jul 2011     Is capitalism good? Agree
Oh yes capitalism works, but why? I will tell you, with the free education system here, we all have an equal opportunity to be successful, lower class or higher class. These "wealthy" people are either born into it, but most work very hard to where they are. People who complain it's only because money is easy to get, think about this, if it's easy to get, why are there only a select few who have it? It's because they're not fatasses who lay around and wait for the government to take money from those who worked all their life to get where the are, and bill it to them. Capitalism follows nature, if you want something, get up and get it yourself.

2 Points       Anon       11 May 2011     Is capitalism good? Agree
@Tim Peterson

Most of the millionaires and billionairs not born into there wealth. They work hard and have the right to make a profit off of their idea.

Macroeconomics Question Index

Is free trade generally beneficial for a country?
Is capitalism good?
Does minimum wage help the poor?
Does government spending help mitigate a recession?
Was the US government's $700 billion bailout ultimately good for the taxpayer?
Did the Fed bailout Bear Stearns to benefit the taxpayer?
Is the US Federal Reserve to blame for the 2008 financial crisis?
Will there be a global recession before 2010?
Is Fannie Mae and Freddie Mac a huge risk to the economy?
Is the world economy largely decoupled from the United States?
Should financial firms be strictly limited in their ability to leverage capital?
Should the Federal Reserve have bailed out Long Term Capital Management?
Will retiring baby boomers cause a stockmarket crash?