Liberal Capitalism in Canada - Research Paper Example

The paper "Liberal Capitalism in Canada" is a great example of a research paper on politics.Canada has been described in this course as a liberal capitalist democracy. Yet the very pillars upon which this model is built have been shaken by the tremors wracking the global economy. Thoroughly discuss the precepts of liberal capitalism and contemplate whether or not they are still valid in the face of massive bailouts of private industry by governments around the world. What went wrong and why? What could be done to improve the current economic model?

Is there a better theoretical/ideological model for managing the economy? Why? Your mark will reflect the extent to which you indicate comprehension of the theory, the thoughtfulness of your analysis, the evidence you use to make your points, and the structure of your answer. Liberal capitalism is comprised of two parts: the first is a healthy, functioning democracy. In a democracy, each citizen has the right to select their government. The second component is a laissez-faire market, where the government seldom intervenes except to provide legal and ethical guidance.

The government may also regulate companies where the start-up costs are prohibitively high, like power companies. How liberal capitalism functions in today’s economic times is further discussed below. In some instances, the government should intervene. In others, the government can overstep their bounds and interfere with a functioning capitalist market. There are occasions where government intervention is appropriate. The economic problem faced by nations today is multifaceted—one major problem is the lack of transparency in the stock market.

Credit default swaps are one huge component of the meltdown that had neither legal requirements nor transparency. These safeguards, present in many other stock market transactions, do not exist. Such safeguards are critical to a well-oiled economy where supply and demand rule the free market. Without fully gauging supply and demand, the invisible hand (a metaphor devised by Adam Smith his book, Wealth of Nations) cannot guide rational individuals towards sound decisions. According to the Associated Press, government correction of these risky credit default swaps to include transparency is already underway: “the House could vote in September on a bill to regulate derivatives, legislation that is a crucial element of Congress' effort to overhaul the system of financial rules.

Both proposals involve a new network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives” (Gordon, 1). Such government legislation does not contradict liberal capitalism: the government already intervenes in markets in various ways—the government sets interest rates, monitors the flow of money, and the SEC ensures ethical behavior by companies. The government providing judicial guidance to the market is both prudent and necessary. Thus, this type of government intervention in the current economic meltdown is not inherently anti-capitalist.

In this economic meltdown, the government has acted inappropriately. The government should not bail out large corporations that are supposed “too big to fail.” Doing so creates poor incentives for corporations. Should a bank know they will receive a bailout, they have no reason to reduce risk-taking behavior. In functioning capitalist markets, the risk is a large incentive (or deterrent) of behavior. If the government removes risk from the scenario, two things happen: competition is compromised, and incentives are mal-aligned.

Thus, government bailouts are undermining a critical component of capitalism and should not be tolerated. The New York Times noted this egregious mistake of the government when they wrote, “the doctrine of “too big to fail” has confirmed and reinforced the superior market position of those banks and investment banks that survive. The United States has made it known that the current players will not be allowed to fail. These banks had an advantage already, based on their size; that advantage is now greater and carries a government guarantee” (Saft, 1).

The article points to another obvious problem of government intervention through bailouts: fostering already-large banks and supporting their growth eliminates healthy competition from the market which is crucial for a capitalist society. Otherwise, large banks turn into monopolies that can influence prices. Instead of government intervention, financial institutions should make rewards based on long-term profits instead of short-term profits. Doing so would lead to better decision making: what looks good on the books in one quarter can create drastic effects on year-end profits.

Government intervention of this magnitude undermines two important tenets of capitalism, which is competition, and risk-based decision making. As indicated by the prior examples, government intervention is appropriate (and always has been) in ensuring legal safeguards are in place. Government intervention is grossly inappropriate in other areas, as is the case with the massive bank bailouts. To improve the current economic model, Friedrich von Hayek’s principles of a free market should be incorporated over that of John Maynard Keynes.

Keynes believes the government should spend in times of difficulty to promote consumer confidence and stimulate the economy. Hayek, on the other hand, believes markets are cyclical: during inevitable rough patches, “weathering the storm” is preferred to spending, which he believes leads to stagflation. The government should foster spending in times of surplus and reduce spending in times of economic difficulty. Currently, Keynesian theory dominates the political landscape, as indicated by massive government spending in the worst recession since the Great Depression.

As a result of this spending, taxes must inevitably rise to support the larger government budget. Excess spending under Keynesian theory created hyperinflation in the 1970s: a reality likely to appear in the future. The remedy is to “weather the storm” as prescribed by Hayek. His ideological model was adopted by Ronald Reagan, whose “Reaganomic” economic policies of lowering taxes, reduce government spending, and controlling the money supply were seen as a guiding force for getting the US out of the recession in the 1980s.

Using the economic policies of these predecessors, these are ideologies and methods that can better manage the economy.