Global Commodity Chain
Ever since the early twentieth century, capitalism has stood for engaging with dynamic, diverse, and fascinating series of developments that have shaped our present and will continue to develop our future. We may argue that capitalism is the reason for income inequality and poverty (Gerrard and Jessica, p4). Still, yet surprisingly, capitalism is the system that governs the entire world, except for a few countries. The global commodity chain implies that the raw materials of the goods we consume are imported from other countries. International trade helps to facilitate such action by orchestrating the global flow of goods from places of production to areas of consumption. Based on market demand, commodities are traded through participation in development projects such as improving the quality of plantations and investing in infrastructure by traders. Capitalism, therefore, has played a part in the global commodity chain with growing companies that traders invest. There are a lot of misconceptions going on around this system, but the main question is, “why does it make some people rich while others inferior?” We have to understand what capitalism is to answer such a problem.
Capitalism is an economic system where businesses and industries are owned and controlled by the people and not the government (Fraser et al.). It implies that people are free to do what they want and deserve what they work for. In the previous past, everything in a country was controlled by the state directly or indirectly. However, the most significant advantage of capitalism can be overturned to its most considerable disadvantage. In the free market, there are no limits to how big you can grow, and it all depends on how creative one is and how hard one works because capitalism promotes competition (Shahrier et al.). The markets that are successful pay their workers higher wages than that of the small companies, which in the long run, creates a bridging gap between classes in a community.
Karl Polanyi’s Paradox
Karl Polanyi states in his book that “nineteenth-century civilization has collapsed” (Thomasberger et al. p170). He was referring to Europe and had in mind components such as; the place of power system between competing for nation-states, the gold standard, the idea of mechanical markets, and the notion of the liberal night-watchman state which protected property but otherwise would let capitalism run its cause.
Polanyi had seen a previous world order, had passed Europe, and probably would not return soon. The culprits of this system are risk, deflation, and self-regulating market annihilated its underlying social context. The notion that a self-regulating market economy means that individuals are exposed to too much risk on their wages, capital returns, rents, and business prospects. Too much risk is brought upon individuals in society. The gold standard tied together with Europe in a network of self-regulating trade relations and a self-regulating monetary order which prevented rapid inflation.
Polanyi claimed that the market was recently invented and that they were so prominent in human affairs, that social orders had their regulating principles which were distinct from market economies. Such social context helped to give rise to a market order and a liberal trading order. Still, the market itself would become so rampant, and so commoditized and commercialize that human activity and the self-regulating market would eventually weaken the underlying social context. Therefore, there would be a cultural contradiction to capitalism and economic opposition to fair capitalism arising from excess risk, deflationary pressure, and annihilation of the underlying social context. Post coronavirus may bring an uprise to such inconsistencies.
Negative Externalities
One of the critical causes of market failure is the presence of externalities (Mouraviev et al. 186). Externality effects lie outside the initial market transaction. They affect people not directly involved in the production and consumption of a good or service. Therefore, they could also be known as spillover effects (Chen, Xiaoyu, et al., p916). Most economic activities cause spillover benefits and spillover costs. Market failure happens if the price mechanism does not take into account the social value and social benefits of production and consumption.
In this context, it is essential to outline the connections between private costs and enteral costs, which leads to the idea of social cost. Negative externalities imply that the social cost is greater than the private cost, and this can lead to overproduction and market failure. On the contrary, when positive externalities exist, the social benefits will be higher than the private benefit (Shahrier, et al.). For instance, in the case of health, patients in private hospitals have increased benefits in life compared to those who are in public medical facilities. Aside from the patients, it can benefit society as a whole. The reasoning behind this is because, as productive and healthy individuals, they may make contributions and benefits to society.
Social costs are equal to private fees plus external costs. In the case of air pollution from production, the individual costs to the firm in the image will be the various costs they face for producing, such as rent, wages, and materials such as masks. Beyond the firm, their emissions will harm those living nearby. People nearby will be suffering from pollution and respiratory diseases. To mean, they will face costs in treating their health problems, and this negative impact is considered the external cost. The private cost of production and the external cost of pollution combine to form the social costs of production.
As companies and firms produce goods, there are direct private costs that are disturbed, as mentioned above. Without facing any penalties for pollution and the spread of viruses, they will do so at the expense of those living nearby. These third-party individuals may experience illnesses, and the impact of the production is the damage done to the health of third parties or the external cost. Therefore, the social costs of production include all the costs of production, including both those directly incurred by the firm, like laborers, as well as those inflicted by third parties.
Challenges in Internalizing externalities
There are broadways mechanisms for solving negative externalities; taxation, regulation, and property rights (Belloni et al. 580). A tax could be imposed on a producer that would reduce the amount of production of whatever good is producing negative externality or a health risk to society. For instance, in light of the corona outbreak, it would turn out risky to overcrowd laborers in firms. However, it is difficult to monitor the producer and know precisely how much the damage is causing the environment, and therefore, the monitoring cost is quite high.
Regulation is an orderly way of beating negative externalities, and it can be broken down further to technology-specific methods, and restricted quantity of goods or pollution produced. Technology specific methods have a low monitoring cost since a supervisor is not needed to continually monitor the number of emissions due to the presence of technology. On the contrary, it reduces the incentive for firms to find innovative ways to reduce their emissions further. Restricting the number of goods or pollution has the benefit of introducing ways to involve creative ways to reduce emissions, but the monitoring costs are quite high.
The third way to address negative externalities is the property rights solution suggested by economist Prof. Ronald Coase. He said, “if a property is well defined, divisible and defendable, and negotiation costs or transaction costs are low, simply by assigning the property right, we can overcome the externality.” (Gaikwad and Suhasini.)
Work Cited
Belloni, Alexandre, Changrong Deng, and Saša Pekeč. “Mechanism and network design with private negative externalities.” Operations Research 65.3 (2017): 577-594.
Bentzen, Jan, Ngo Thi Thanh Truc, and Tran Sy Nam. “A Social Cost-Benefit Analysis of Biogas Technologies using Rice Straw and Water Hyacinths as Feedstock.” International Energy Journal 18.4 (2018).
Chen, Xiaoyu, et al. “Impacts of air pollution and its spatial spillover effect on public health based on China’s big data sample.” Journal of Cleaner Production 142 (2017): 915-925.
Fraser, Nancy, and Rahel Jaeggi. Capitalism: A conversation in critical theory. John Wiley & Sons, 2018.
Gaikwad, Suhasini. “Module 03 COASE THEOREM OF PROPERTY RIGHTS AND LIABILITY.” (2020).
Gerrard, Jessica. “Introduction: Work, Poverty and Capitalism.” Precarious Enterprise on the Margins. Palgrave Macmillan, New York, 2017. 1-26.
Mouraviev, Nikolai, and Nada K. Kakabadse. “PPP Impact on Market Failures and Externalities.” Public–Private Partnerships. Palgrave Macmillan, London, 2017. 183-201.
Shahrier, Shibly, Koji Kotani, and Makoto Kakinaka. “Social value orientation and capitalism in societies.” PLoS One 11.10 (2016).
Thomasberger, Claus, and Michael Brie. “Karl Polanyi’s Search for Freedom in a Complex Society.” Österreichische Zeitschrift für Soziologie 44.2 (2019): 169-182.