The Political Economy of Capitalism - Harvard Business School
Bruce R. Scott
#07-037
Abstract
Capitalism is often defined as an economic system where private actors are
allowed to own and control the use of property in accord with their own interests, and
where the invisible hand of the pricing mechanism coordinates supply and demand in
markets in a way that is automatically in the best interests of society. Government, in this
perspective, is often described as responsible for peace, justice, and tolerable taxes.
This paper defines capitalism as a system of indirect governance for economic
relationships, where all markets exist within institutional frameworks that are provided by
political authorities, i.e. governments. In this second perspective capitalism is a three
level system much like any organized sports. Markets occupy the first level, where the
competition takes place; the institutional foundations that underpin those markets are the
second; and the political authority that administers the system is the third. While markets
do indeed coordinate supply and demand with the help of the invisible hand in a short
term, quasi-static perspective, government coordinates the modernization of market
frameworks in accord with changing circumstances, including changing perceptions of
societal costs and benefits. In this broader perspective government has two distinct roles,
one to administer the existing institutional frameworks, including the provision of
infrastructure and the administration of laws and regulations, and the second to mobilize
political power to bring about modernization of those frameworks as circumstances
and/or societal priorities change. Thus, for a capitalist system to evolve in an effective
developmental sense through time, it must have two hands and not one: an invisible hand
that is implicit in the pricing mechanism and a visible hand that is explicitly managed by
government through a legislature and a bureaucracy. Inevitably the visible hand has a
strategy, no matter how implicit, short sighted or incoherent that strategy may be.
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