Workers and the Economy: Concentration of capital and centralization of capital Clear: Workers and the Economy: Concentration of capital and centralization of capital Capital is a financial asset or money that is invested with the aim of making more money or increasing the value of the investment through profits, capital gain, royalties, interest, rent, or any other form of return. Concentration of capital is the condition where the individual capitalists increasingly accumulate more capital with the effect of increased absolute amount of capital within their control. The occurrence results in the increased economic value of the capitalist firm.
The concentration of capital results in the centralization of capital as well captured by Smith in "Uneven Development: Nature, Capital, and the Production of Space". The author stated, “the initial concentration of capital in a number of hands provides for a more advanced division of labour, the production of a larger quantity of surplus by each capital and therefore a further concentration of capital through accumulation” (Smith, 2008). He also stated, “Capital accumulation leads directly to the concentration of capital in existing units, it leads indirectly but no less inexorably to a far more powerful process- the centralization of capital” (Smith, 2008).
Centralization of capital entails the redistribution of existing capital in ways that result in fewer and fewer hands having control and ownership of the capital including takeovers and mergers. The size of the firm/s also increases with the concentration of capital. The purpose of the study is the provision of a better understanding of the effect of both concentration and centralization of capital on the aggregate demand and supply. Effect of concentration and centralization of capital on aggregate supply and demand The concentration and centralization of capital has a number of effects that on the aggregate demand and supply, which form the basis for this part of the research.
Both concentration and centralization of capital result in the increased absolute value or size of a firm in the market resulting in similar effects on the aggregate demand and supply in the economy. One of the effects of concentration and centralization of capital is the decrease in the degree of competition in the market because of the increase influence of fewer large firms in the market while smaller firms are absorbed (Lee, 2013).
A decrease in the competition depicts a condition where the market forces are not very strong to limit the prices to desired levels by the society resulting in the decreased demand for goods and services compared to a situation of perfect market conditions. The end effect of decreased competition in the market is the decrease in the aggregate demand for goods and services by the concentration and centralization of capital.
The large firms in the market have access to the best technology, production techniques, and human resource resulting in high aggregate supply in the economy. Centralization decreases the number of firms operating in the market as the large firms absorb the small firms to leave few large firms operating in the market for the supply of a range of goods and services (Swanson, 2013). The effect of decreased competition in the market is control of means of production and economies of scale by larger capitalists resulting in their increased competitiveness in the market and ability to limit entry by new players.
Owing to barriers to entry, the capitalists have monopoly power and have the power to set prices resulting in low aggregate supply in the economy. Therefore, concentration and centralization of capital results in the decrease in aggregate supply in the economy. Capital centralization and concentration results in an increased in the prices of goods and services. The reason for the increase in prices and services in the economy is that the players in the market decrease and capital is controlled by fewer players in the market having the potential of deciding to decrease the supply of the goods.
The increase in prices of goods and services follows the law of demand that an increase in prices results in a decrease in demand keeping all other factors constant. The effect of concentration and centralization of capital by extension is as decrease in the aggregate demand for goods and services produced/supplied in the economy. Concentration and centralization of capital has an influence on the competition with the firms that gained overall control of the market having the power to undermine the competition (Phlips, 1998).
The impact is the eventual lack of competition for the concentrated and centralized capital for the large firm in the market resulting in reduced aggregate supply of goods and services ion the economy. The indirect impact of the centralization and concentration of capital is a fall in the aggregate supply of products or services provided by the firms. The other indirect impact is an increase in the fight for the low supplied goods and products in the economy because of the reduced players in the market.
Since the amount of goods and services supplied in the market is low, the aggregate demand for the products and services increases resulting in the eventual increase in prices for the inability of the large market player to meet demand owing to its selfish needs for increased profitability and high profit margins set by large firms. Concentration and centralization of capital results in the existence of a small number of the population have lots of money and enjoy luxuries. Since they comprise a small percentage of the population, their luxurious living and the workers demand goods and services at their low income is not enough to meet aggregate demand in the economy.
Investment demand compensates for this discrepancy in aggregate demand in the economy but only in the short-run because of the effect of investment augmenting aggregate demand in the economy. On realizing the effect of increased demand in the economy owing to investments, the capitalists reduce their investment plans further worsening the already low aggregate demand. The effect is under consumption where the workers have low wages that cannot allow them to make purchases provide high demand while the capitalists are too few to meet the high supply made by the workers from their hard work at low pay.
The effect of under-consumption is high aggregate supply of goods and services faced with a lack of aggregate demand in the economy depicting the other effect of concentration and centralization of capital in the economy. Concentration and centralization of capital result in the operation of few companies in sectors of the economy, known as monopoly capitalism.
Monopoly capitalism allows the firms in the market to have market power for sell at high prices despite low aggregate demand and produce at lower than full capacity resulting in low surplus and inability of the poor to purchase goods and services. The effect of the poor not being in a position to purchase goods and services offered at high prices, low surplus, and the rich not spending all their money is low aggregate demand in the economy or under consumption. High aggregate supply and low aggregate demand in the economy arise from the concentration and centralization of capital in the economy as depicted by the poor’s low ability to purchase whi9le the reach cannot spend all their income on consumption to cater for the lack of demand by the poor.
The poor work harder for low wages to produce high aggregate supply yet demand very little resulting in low aggregate demand. In conclusion, centralization and concentration of capital have varied effects on the aggregate supply and demand in the economy. Some of the effects include the reduction in competitors in the market owing to undermining of small market players by large firms, ability to install new technology, access to best qualified labour and better means of production, presence of monopoly capitalism, resulting in the increased aggregate demand in the economy.
The other effects are payment of low wages to workers, control of factors of production by a select few firms, increased prices owing to monopoly power, causing low aggregate demand in the economy. The high differences in the purchasing power of the poor and the rich also result in the reduction of aggregate demand in the economy as an effect of concentration and centralization of capital. References Smith, N.
(2008). Uneven Development: Nature, Capital, and the Production of Space. Athens; London: University of Georgia Press. Phlips, L. (1998). Applied industrial economics. Cambridge, U.K: Cambridge University Press. Swanson, P. (2013). An introduction to capitalism. New York, NY: Routledge. Lee, S. H. (2013). The end of communism. Lulu. com.