Regulatory Framework for UK Banks

Regulatory Framework for UK Banks Introduction Berger, Molyneux and Wilson (2010) are of the view that banks provide a full range of financial services like banking, securities, and insurance under a single corporate structure and must be supported by the single capital base, the term â€Å"universal bank† has multiple meanings, but commonly it refers to the commercial banking that is making loans and collecting deposits along with investment banking in which there are issuing of underwriting and trading in securities. Ryan-Collins and Goodhart (2012) point out the broader view that universal banks offer a wide range of financial services including commercial banking, investment banking with other activities like insurance, it seems like the multipurpose financial market which provided both banking and financial services. Financial Times (2015) terms refers universal banking as financial services of retail, wholesale and investment banking services under one roof. Demirguc-Kunt (2010) refers that universal banking is a com bination of large banks operate extensive networks of branches, providing multiple services, holding claims that firms about participation in corporate management of firms. Forsyth and Verdier (2003) are of the view that universal banking began almost in 1930 to 1940 and Europe is the home of Universal Banking, although other countries also adopted it. Structure of United Kingdom Banking System Schumpeter (1939) refers the connection between banking and financial system in economic growth and it is most old history of this specified reference of this field. Beck and Rahman (2006) speculate that in the recent economic literature, banking system measures a reasonable ratio and access like banking, loan ratios in gross domestic products, and it is a direction to analyse other financial markets. Banking systems have many other multiple dimensions that bank assets may be kept in one house, the bank required few branches or a large number of branches, but it was very true in the early stages of banking when banks were in their development phase. Heffernan (1996) describes the financial system refers some points very clearly that the system can provide payments, can give support between savers and borrows and play major role in insurance against risk. The British banking industry has many changes from the last 20 years, besides forces which have the power to change the supply and demand functions, change has also been made due to domestic deregulations. Hsbcnet.com (2015) reports that The Bank of England has always shown keen interest in the structure of the financial system because financial stability may have an effect on cost and availability. Many new products emerged over the past 50 years and the United Kingdom banks have full range of financial services and become larger. United Kingdom banking system made a dramatic shift in size from past 40 years and the total assists rise from 100% to 450% of the nominal Gross Domestic Product, banking giants claiming that the UK banking system keeps this pace in future also. Salina and Peltonen (2013) describe that financial stability depends the potential impact size of UK banking, so ultimately there must be some factors behind this huge banking size, description about those factors is important and these are financial hub benefits, comparative advantages and historical factors. Bush, Knott and Peacock (2015) d escribe the size of the UK banking system as shown in figure 1.1 and figure 1.2 refers below. Size of GDP of UK Banking System (2013) Regulatory Challenges of Universal Banking Models Alworth and Bhattacharaya (1998) are in the view that in the recent decades, the banking sector has undergone due to the forces of globalization and lack of technology, secondly it is also recognized de-regulation is due to that higher degree of freedom to financial institutions as a so it requires strong supervisory authorities. Changes in the nature of banking risks, off-balance sheet business and complexity in the nature of transactions all these need strong internal risk management and strengthening of existing capital requirements in 1980 and early 1990 numbers of bank failures were due to the way banks were regulated. Quinn (2012) is in the view of that change is needed in the banking sector, there is some need to show the market trends of entry and switching are enough for competition where customer focus is on the front line. Different advance economies adopted structural bank regulation measures to face the regulatory challenges and one element is mandatory upon them that se paration of commercial banking from certain securities market activities. Treanor (2011) reported in the â€Å"Guardian†, that the United Kingdom is going to act upon Vickers Commission suggestions as a major measure the report, in which Sir John Vicker recommends to Britian biggest banks to implement reforms until 2019, this is going to be initiating after the collapse of Lehman Brothers in 2008. Conway (2011) is in the view that Vicker’s recommendation is going through to ring-fencing in the United Kingdom banking sector. The Economist (2012) reveils the report that universal banks merging investment banking complexities with commercial banking services, in one extent it is good offering services to the customer while on the other hand analyst have no second thoughts also, the famous universal banking giant Sandy Weill, the mergers of Citigroup saying that the megabanks should be broken up. Shrivastava, Pandey and Vidyarthi (2007) describe the view that banks facing information imbalance which will cause the lack of public confidence in the banking system, so there is the need to protect it from this high risk taking by banks. Because banks are critical for mobilizing the public savings, its safety and return to savers also, so banks need for their heavy regulation in this sense also. Mostly challenges have faced by bank regulators in the early 80s, due to deregulation of economic system, financial innovation waves and internationalization of financial flows all these challenges arise the potential of doubts about the bank’s risk management procedures. Orbell and Turton (2001) speculate that banks take deposits from public to investing these deposits in risky assets and businesses, ultimately banks are in a position to take risks excessively, secondly market discipline, where these deposited are invested, is a mechanism which curb the incentive in taking excessive risk more costly for banks. So after recent events of severe market and re gulatory failure in Europe and United States a point arisen that there should be need for reforms. While on the other hand single regulator model of United Kingdom widely accepted across the globe. Regulatory Challenges, and British Economy Kim and McKenzie (2010) argue that financial crises faced globally in 2008 laid many questions for strong measures to prevent any resemblance in future, bankers, regulators, politicians or economists nobody want accept the blames of crises. Particularly in British banking which has a rich history, which spread out on centuries, founding of the Bank of England in 1694. Bank of England has always had a dominant position in the British economy while other banks were underdeveloped. So due to small in size other country banks were inherently fragile, which made to face them financial crises in early nineteenth centuries, one major example is crises of 1825, and then the first time the Bank of England understood the role of lender of last resort. Gregory (1929) quoted ‘The Economist’ that â€Å"the limited liability of the wealthy may not be expected to prove as good if not better security than the unlimited liability of the poor†. Mullineus and Murinde (2003) urges th at the in 1986, main clearing banks ranked them fully integrated banking, invested more than one billion in the securities business. British banks highly enhanced their standing globally, commercial banking was higher profit gaining business in the United Kingdom and have much concern about the level of competition. Conway (2011) describes that the time of financial crises all had become universal banks, amalgamation of commercial and investment banking activities, on the other hand Barclays, HSBC and Standard Charted faced crises without government support. Treanor (2011) describes that British’s fifth largest mortgage lender Northern Rock, is going to run on, and this disaster situation was not seen in United Kingdom from over 100 years, most dramatic symptom of Northern Rock crises indicated the low grip on financial markets in the United Kingdom. Northern Rock has good use of structured products in funding before to the crises, but still impacted by the turmoil in America ’s mortgage market. The bank has a low deposit ration to loan failed to renew its short term financing and was forced to beg to the Bank of England for assistance. As soon as news broke, the customer quickly withdrew their savings, such panic situation which was not experienced in the United Kingdom since 1866. Salina and Peltonen (2013) describe that at the time of crises United Kingdom government need to inject billions into the industry, also the Bank of England funded many banks for keeping them in running and this bail out costs raised real concerns. Some lesson has been learned from Northern Rock incidents that the regulation of banks on liquidity along capital should be centralized, because Northern Rock faced reduction in the liquidity for securities mortgages rather than the inadequacy of capital. Financial crises and reactions of Regulatory Authorities The Economist (2012) explained that after 2007 to 2010 financial crises banking and finance market faced severe consequences specially on supervision and regulation aspects, the question was not only to build the public confidence again, which is also a very difficult in its but also the future evolution of the financial industry and banks at larger scale. Regulator and supervisors worked hard after crises and there was a lot of analysis has been conducted towards the causes and their solutions. Some of the measures have been taken by regulatory authorities which describes here one by one (i) Adjusting budgetary problems; failure of banks in many countries faced the common budgetary problems, there are many ways that can affect the real economy and budgets. (ii) Rebuilding the structure of responsibilities; in 1999, the G20 was established and made lots of contributions to shaping up international finance regulation. Biannual meeting was held in the early years, but greater frequency of meeting done in 2009 and 2010 due to the issuance of declarations and progress report. Multinational agency standards have been formalized and Finance Stability Board in 2009 formed with core responsibilities of coordination between national financial authorities and international standard setter. Bank of England (2014) in its news release reveals that The Prudential Regulation Authority (PRA) introduces a new (iii) accountability regime about insurance sector, PRA also consulted same regime for banking sector in July 2014. This regime will also take care and account of the need of new measures which relate to governance of individuals as a part of solvency. (iv) new international standards are coming into being both for regulatory activities for financial firms along with quantitative and qualitative approaches. Besides that there are many agreements done for betterment of the regulatory process, but it has also been clear that individual nations not waited for agreements on in ternational standards to regulate financial sectors. Financial Stability Board, (2010) issue a list of scope and scale of activities about reforms which is a) reforming compensations b) refurbish accounting standards c) strengthening supervisory and regulatory standards d) refining the regulatory perimeters. Brunnermeier et al. (2009) argue that (v) reforms in corporate governance were certainly needed to avoid futuristic failure of financial institutions and this was the main lesson to come out of the crises. (vi) Revision in remuneration structure also required as the mentioned structures of remuneration was very poor in financial institutions. The Financial Stability Board also produced some principles for solid compensation practices. (vii) Reforms in risk management practices also observed, as the failure of risk management systems is the most critical, unfortunately, it is shown in a lot of institutions like international banks specially. Johnson and Kwak (2010) speculate that the (viii) accounting reforms, accounting are a basic component of regulatory regime for example calculation of capital is cor dependent on reported, assessed values, one of the core areas of reforms is required in valuation and provisioning of accounting. One of the other lessons drawn from crises that is regarding (ix) risk identification and mitigation, actually authorities, in some views, are not good to identify or projecting the risk so capabilities to resolve these kind of issues need to be improved and financial policies need to follow proportionate principle. The bank should (x) act like a social contract, in the new regulatory paradigm, it is a major challenge that how bank again focuses on retail business, most banks are in the risk business about the turning liquid to liquid loans, while doing this job banks are badly failing in fulfilling their social contarct part and they need to build it up again. There should be (xi) new business models required as in the phase of crises no business model looked fixer of crises, the diversified banking model required in the scenario and that will help to secure the banking business as well as revenues and customers also. Salina and Peltonen (2013) posit the view that (xii) false sense of security is the core reason of financial disaster, describing further that capital provisions are important but only capital is not only sufficient to address the issue. It was also observed that (xiii) there is a need to redefine systemic risk, in current crises which reflects the unpredictable size of the losses and who will bear that losses. Loss distribution will come as battle in financial crises, bailing out also not a good practice and seems to be taking from one to give others. Regulatory Framework – Suggestions Some overhauling required in regulatory framework facing worst financial disaster in Europe and the rest of the world also, reforms are required on regulatory framework internationally in general, and the United Kingdom in particular. Including reinforcing macro-prudential oversight, giving the strength in the overall resilience of banks and shadow banking (or unregulated sectors needs to be in regulation). (i) Optimistic about pricing the assets and risks, much precaution required to observe in risk taking secondly, there is need to be more awareness about regulated and non-regulated structures on information sharing. (ii) Cross border banking resolution required in national and international approaches. (iii) Far-reaching changes required for shaping and functioning of financial institutions with the high pitch of transparency in regard to the financial instruments (iv) In future crises may differ in nature like size, type and its cross border exposure so consolidation and coordina tion among banks should required on local and international level, one other thing should remain in mind that for the survival, some business models may disappear but some may strengthen their risk management. (v) Measures which could be taken in the middle of crises need to be more supportive rather to hide them, it must be planned whether mega project should remain in the market or there is no need of them, there should be some policies without exacerbating the present crises for the long term view of financial systems. (vi) Financial sector scrutiny perimeter need to be expanded to a wider range of better prevention of banking sector and other financial institution. (vii) Management needs to encourage incentives and discourage regulatory arbitrage. (viii) Need to adopt the concept of systematic risk factoring among funding and effects of leverage. (ix) Buffering between good times and bad time, which can help for liquidity norms of capital provisioning (x) Progress required to ta ckle the regulation and resolution of cross border institutions for legal hitches. (xi) Flexibility for central banks in providing liquidity, focus also required in the attention on credit and asset booms. Many central banks, especially in emerging markets facing capital outflows so the provision for extra liquidity may more complex regarding foreign exchange reserves and may work fuel to drain for this. (xii) Better crises responses and fiscal support required from national authorities regarding to increase the concern about credit risk and realization of losses there also needs a clear exit policy for withdrawing market or transit to new markets. (xiii) Market discipline must not ineffective for constraining risk taking other than the banking sector. Consolidation rules required more strict specially for entities and risks, particularly with off balance sheet activities.

Marxian Economics

Our work aims to research a modern development of Marxian economics, primarily at the theoretical level and make clear how do Marxs’ â€Å"laws of motion† of capitalism relate to Schumpeter’s views of imperialism. † Marx was a German journalist, exiled in London, who combined significantly different intellectual traditions in order to explain economic systems, including German philosophy, French political theory, and English political economy. Joseph Schumpeter was an Austrian scholar who was very critical of, yet much taken with, his predecessor, com/compare-and-contrast-karl-marxs-and-walt-rostows-theories/">Karl Marx, whose focus on historical analysis he admired and emulated.They both believed that capitalism is a stage of economic development in which the potential of humankind cannot fully develop. Both came to the study of economics questioning the fundamental assumptions of existing economic theory, and thus each took more of economic theory to be p roblematic than did most economic theorists. Both conceptualized the capitalist system as a whole, yet with the realization that the economic realm hardly constitutes the totality of human experience and thought.The real issue, which may indeed appear to have its scandalous aspect, arises when great economists direct their attention to what I shall call the cosmological problem of economics—namely, the social configurations of production and distribution (if you will, the macro and micro patterns) that ultimately emerge from the self-directed activities of individuals. What is remarkable about Marx and Schumpeter is that they are among the very few who have proposed solutions to this problem of an imagination and scope comparable to that of Smith, but that their resolutions differ from one another almost totally.In Marx's schema the system is destined to pass through successive crises that both alter its socioeconomic texture and gradually set the stage for a final collapse. Marx described his view of capitalism in â€Å"The Communist Manifesto† (1848), a social vision that, as Schumpeter points out, underlies Marx's life-long research program. In the introduction to his â€Å"Contribution to the Critique of Political Economy† (1850), Marx gave the clearest and most succinct description of his method of historical analysis, referred to by others as historical materialism.According to Marx, historical development is a progression of epochs, each distinguished by a particular mode of production, a â€Å"way of life,† based on the level of technology and division of labor (the forces of production) and a corresponding set of class (social) relations of production. For any epoch, any mode of production, according to Marx, the development of the forces and relations of production forms the foundation of social life. With the production of surplus over subsistence, classes emerge and develop, divided conceptually by Marx into producing an d non-producing (exploiting) classes.Social change is propelled by class conflict, that is, the struggle related to the contradictions between the developing technical forces of production and the existing class relations which act to impede this development. Socioeconomic development involves the transformation of class relations, which in turn enables the new dominant ruling class to exert control over resources and productive labor. Marx claims that the transition from one mode of production to the next is fundamentally revolutionary because the new mode of production is a qualitatively different social formation organized around new laws of development.Furthermore, the transition is one of violent, wrenching changes in social status, power, and legal rights. â€Å"The history of all society that has existed hitherto,† Marx firmly asserted, â€Å"is the history of class struggles† (1904 : 45). For instance, Marx describes the transition from the feudal to the capita list mode of production as a long period of conflict and bloodshed in which old class relations give way to new ones, a period in which primitive accumulation creates capitalists and expropriation creates a mass of wage-workers.Class-divided society proscribes the satisfaction of â€Å"truly human† needs because production is based on exploitation of the producing classes by the non-producing classes. Emancipation of humankind requires an end to this exploitation which, according to Marx, becomes possible with the development of the capitalist mode of production, which polarizes society into a small capitalist ruling class and a working class of exploited wage-workers who make up the vast majority of the population.Marx defines capitalism as a system of commodity production—production for exchange and profit—based on a system of wage-labor. Capitalists own the means of production and hire workers who must sell their labor power because they have no control over the means of subsistence or means of production. Capitalist development is dominated by capitalist control over production to accumulate capital. Capitalists are interested in production for profit rather than for use.This motivation means that the system as a whole operates to expand exchange value, market value, the money capitalists receive for the commodity production they control. According to Marx, this motivation to accumulate capital, that is, exchange value, creates contradictions in a system of unregulated market exchange because commodities are a unity of opposites. They are both useful objects to be consumed in the process of reproducing the material needs of the society and exchange values representing part of the socially produced value created through the social division of labor.This â€Å"value,† that is, embodied labor, â€Å"objectified abstract homogenous labor,† regulates the exchange value or price of each commodity. Commodity prices reflect the m agnitude of value, of â€Å"socially necessary† labor used to produce the commodity. Each commodity is a â€Å"social product† in that its production is dependent on a complex social division of labor that determines its labor cost, the amount of socially necessary labor time that goes into producing it.Marx sees contradictions in capitalism because, for the system as a whole to create a steady accumulation of capital over time, it must also create just the right combinations of different use values, specific useful products, to generate the growth in capital year to year. Marx recognizes capitalism as the most productive mode of production in history, because capitalists control the surplus product over and above the needs of simple reproduction of the existing level of output, and they use the surplus mainly to expand production and to increase productivity.Marx characterizes capitalism thus: the ascendance of industrial capitalists whose profits are based on exploit ation of wage workers through the extraction of surplus labor; revolutionary changes in the forces of production (technology and the division of labor) and therefore dramatic, continuing increases in productivity; capital accumulation fed by a growing mass of surplus value controlled by capitalists; increasing subordination and dependence of workers on capital; continual deterioration of workers' working and living conditions; and increasing competition for available jobs from a growing reserve army of unemployed workers.Other characteristics of a capitalist system for Marx include a tendency toward a declining average rate of profit; expansion of nonproductive but necessary commercial and financial capital; new forms of monopoly; extension of the capitalist mode of production to create a world market and worldwide capitalist system; uneven development of capitalism geographically so that at any time the existence of newly developing capitalist sectors provide fresh opportunities fo r capitalist exploitation; periodic trade cycles; and less frequent convulsive general crises of the system.In selling their labor power, wage-workers give up any right to the output they produce so that in capitalist production, objectification, the production of material objects, becomes alienation. Furthermore, in alienating their labor, the workers produce commodities that become capital, that is, the capitalists' source of power over the workers. Thus in capitalism, alienation brings about reification. Also, workers give up control over the labor process and therefore over their own productive activity, so much so that labor becomes a burden, and workers work to live instead of live to work.The accumulation of capital, representing the realization of man's essential powers, becomes for the wage-workers a loss of their reality, which for Marx connotates sociality. Marx shows that alienated labor means alienated man, devaluation of life, loss of human reality. Only the working cl ass can bring about this fundamental change because only workers gain this insight through their historical-social situation. According to Peter Drucker (1983: 125), Schumpeter considered himself the â€Å"son† of Marx.Schumpeter devoted himself to promoting scientific progress in economics, through theoretical, historical, and statistical contributions, on the one hand, and teaching and critical analysis of economic doctrine on the other. In his History of Economic Analysis (1954) Schumpeter‘s epistemology may be summarized as follows: 1. He had great faith in science, which he defined as â€Å"technique† and â€Å"tooled knowledge. † 2. Schumpeter was a great advocate of mathematical and econometric methods in economics. 3.In his History of Economic Analysis, Schumpeter had already outlined the major points of the Popper/Kuhn/Lakatos debate: the tension between conservatism and change that is inherent in scientific revolutions; the usefulness of both ten dencies. 4. Schumpeter was a positivist, but he accepted both verification and falsification as tests of a theory. 5. Schumpeter was anti-instrumentalist. He did not see the purpose of science as simple prediction but believed that the truth of assumptions does matter. 6.Schumpeter appears to have held contradictory views of the impact of ideology on economic analysis. He considered the intrusion of politics and ideology in economics as the major cause of â€Å"misconduct† in science. These apparently contradictory views represent, in my opinion, a defense of economics against Marx's evaluation of it as â€Å"bourgeois ideology. † Schumpeter agrees with Marx and credits him with the discovery that ideas tend to be historically conditioned, reflecting the class interest of the writer.Schumpeter claims, however, that ideological bias is not solely caused by the economic element in class position, and that social position is not shaped entirely by class interest (1954:10) . Thus, despite the fact that ideology affects the focus and the content of economic writings, analysis is not bourgeois ideology. Thus, Schumpeter believed that even Marx and Marxists contribute to progress in economic analysis. It was important to Schumpeter to acknowledge his debt to Marx, and apparently crucial to him that he refute the revolutionary basis and purpose of Marx's work.Schumpeter adopts what he takes to be Marx's research program and, like him, attempts to uncover the laws of motion of capitalist development. His purpose is clearly to defuse Marx's theory of revolution by converting it to a theory of evolution. Schumpeter accepts the structure and some of the content of Marx's economic sociology (the theory of origins and transitions) and economics (the theory of markets and mechanisms). Schumpeter's social vision as depicted in the Theory of Economic Development rejects—in fact inverts—important relationships of Marx's social and economic vision.In à ¢â‚¬Å"The Communist Manifesto in Sociology and Economics† (1949b), Schumpeter paid homage to Marx's contribution to economic sociology, which he considered to be the prescientific theorizing necessary to the research program they both pursued. In this article, he also suggests the theoretical basis for his revision of Marx. Schumpeter analyzes the scientific content of the Manifesto, which contains Marx's social vision, and he then identifies three of Marx's important contributions (however â€Å"warped by ideological bias†) to economic sociology.Schumpeter points out that Marx identified the necessary theoretical ingredients of the economic sociology in which to embed an economic theory of capitalist development: (1) a theory of history (which for Marx, according to Schumpeter, was an economic interpretation of history); (2) a theory of class (in which, for Marx, social classes and class relations become the pivot of the historical process); and (3) a theory of the sta te (which Schumpeter says shows Marx's understanding of the state even though Schumpeter believes that Marx recognized these tendencies only in the bourgeois state) (p. 09).Schumpeter criticizes Marx for his attachment to his social vision, his inability to revise his social vision in the light of contradictory scientific evidence. Clearly, it was Schumpeter's intent to counteract Marx and serve science by converting Marx's program into positivist science. This required building economic analysis on a social vision that is scientifically acceptable. In accepting a Marxian research program (analysis of the historical development, the internal dynamics, of capitalism), Schumpeter also had to use the structure of Marx's economic sociology.He needed a theory of history, of social class, and of the state to describe the development of the economically relevant institutions. But Schumpeter rejected much of the content of Marx's theory, including what he considered to be Marx's economic de termininism, that is, the analysis of change in social structures in terms of economic change alone; Marx's theory of class relations, that class conflict is the motive force behind economic and social change; and Marx's critique of the state, which was directed only at the bourgeois state.Also Schumpeter rejected Marx's class conflict and revolutionary theory. He could hardly envision the working class becoming a revolutionary class, that is, becoming the subjects of history, the major actors and motive force for change. Instead, he substituted his own theory of class and class relations based on his ideas about leadership and followership in which entrepreneurs carry out the â€Å"new combinations† that promote capitalist development. Schumpeter accepted Marx's materialist, dialectical view of history, the view that people create their own history through choice, concerted action, and struggle.He also recognized that history must be dialectical if it is evolutionary. Human subjects react to and change history. Change occurs through opposition and adaptation and learning. He objected to Marx's purely economic definition of class based on individuals' relations to the means of production, a definition he believed to be at the basis of Marx's economic determinism. Schumpeter paraphrased Marx's theory thus: â€Å"the social process of production determines the class relations of the participants and is the ‘real foundation' of the legal, political, or simply factual class positions attached to each.Thus the logic of any given structure of production is ipso facto the logic of the social superstructure† (1949b: 206). Schumpeter also rejects Marx's view that class relations are exclusively antagonistic, and that antagonisms among groups are exclusively based on distinctions of economic classes. He believes that there are multiple classes in capitalist society, just as there were in earlier epochs. There is a strong family resemblance here to Sc humpeter's vision of capitalism as an evolutionary process of creative destruction. The innovative function certainly plays a vital role in Marx's laws of motion.This bring Marx into the picture in a way that attempts to minimize the distance between him and Schumpeter and which is consistent with Schumpeter's well-known admiration for Marx. They are both concerned with the dynamics of development, and although they come from the opposite ends of the political spectrum, their similarities are profound and stand as an affront to the modern theory of static equilibrium in the Walrasian tradition. In the vision of capitalism as a dynamic process, Marx and Schumpeter share common ground, not just in their appreciation of capitalism, but also in their attempt to construct a truly dynamic economics.Marx and Schumpeter set the economic process into historical time. This is more than just adding a â€Å"t† subscript on all the variables of a model, and it is clearly different from pr oducing a growth model, although a growth model may be a useful aspect of a dynamic analysis. It means that the analysis does not violate the fundamental reality of time that the future follows the present and is unknowable, while the present has a past that is knowable and has caused the present to be what it is. In such a world disequilibrium and/or equilibrium-destroying events would be the central concern of the theorist.Thus, for both Marx and Schumpeter, capitalism has a past and is tending toward a future that is imminent in the configuration of forces at work in the present (Schumpeter, 1962: 43). To illustrate, it was capitalism's similarity with feudal and slave relations of production that led Marx to search for an explanation of how exploitation occurs under capitalism. Moreover, it was the vision of historical transformation that supplied the basis of his critique of classical political economy based on the latter's tendency to assume that capitalist production relation s were fixed and external.It is important to note that Schumpeter misses, misunderstands, or rejects Marx's value theory and the basis for Marx's theory of revolution Private property and capital represent a class relation in which wage workers, by selling their labor power, create the capitalist's private property. Furthermore, not only do they create a product that becomes a power over them, but also, by submitting to a work process organized by the capitalist for his own profit, they alienate their life activity, their work. They work to live rather than live to work.They become more and more dependent on the cash nexus of market transactions for their survival and for their satisfactions. They become alienated from their species life, the essence of the life of the human species which is human social development through creative work. Marx's basic argument, which is also an argument about logic, is that for truly human life to be possible, it is necessary (but not necessarily in evitable) for the wage-workers, for the exploited, to revolt. Schumpeter's class theory and theory of value together eliminate the possibility of revolt.It may be true that there is a high correlation between belief in the efficacy of the free market as an allocator of resources and protector of individual freedom and the method of static equilibrium theory to explain the operation of the market. However, as Schumpeter himself stressed many times, the deductions of economic analysis do not logically imply any particular ideological position. Static equilibrium theory no more proves the desirability of the free market than the labor theory proves the desirability of socialism.The fact that Marx and Schumpeter ascribed to radically different ideologies but each believed in the central importance of the evolutionary approach is itself sufficient proof that holding to a conservative, liberal, or radical ideology does not force one into the static equilibrium mold. In his works Marx wrot e about substratum of abstract labor which was an â€Å"essence† of concrete labors. Schumpeter in his â€Å"Imperialism and Social Classes† thought about social process regulated by a hierarchy of talents, organized in social classes (Schumpeter, 1955: 137, 160). In this process bourgeois class must provide the leadership role.

Essay on The Causes of the Great Depression - 1002 Words

Since the beginning of the Industrial Revolution early in the nineteenth century the United States ad experienced recessions or panics at least every twenty years. But none was as severe or lasted as long as the Great Depression. Only as the economy shifted toward a war mobilization in the late 1930s did the grip of the depression finally ease. br brStock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent. The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks. That easy credit lured more speculators and less creditworthy investors†¦show more content†¦After 1927, consumer spending declined and housing construction slowed. Inventories piled up, and in1928 and 1929 manufacturers began to cut back on production and lay off workers. Reduced income and buying power in turn reinforced the downturn. By the summer of 1929 the economy was clearly in a recession. Although the stock market crash and its immediate consequences contributed to the Great Depression, longstanding weakness in the American economy accounted for its length and severity. Agriculture, in particular, had never recovered from the recession of 1920-1921. Farmers faced high fixed costs for equipment and mortgages incurred during the high inflationary war years. At the same time prices fell because of overproduction, forcing farmers to default on mortgage payments and risk foreclosure. Because farmers accounted for about one-forth of the nations gainfully employed workers in 1929, their difficulties weakened the general economic structure. Other industries also had experienced economic setbacks during the prosperous 1920s. The older industries such as textiles, mining, lumbering, and shipping faltered, newer and more successful consumer- based industries, such as chemicals, appliances, and food processing, proved not yet strong enough to lead the way to recovery. br brThe nations unequal distribution of wealth also contributed to the severity of the depression. During the 1920s the share of the national incomeShow MoreRelatedCauses Of The Great Depression1319 Words   |  6 Pageshaving classic satisfying life concluded when the Great Depression ushered in the negative trend that would impact the U.S. economy in 1929. Therefore, what happened? In this essay, we will discuss what the Great Depression was for the Americans, the causes of the Great Depression, and the U.S.’s recovery from the Great Depression. The Great Depression One of the terrifying times in the U.S. history is the Great Depression. The Great Depression is an economic phenomenon, which according to theRead MoreGreat Depression and Its Causes1256 Words   |  6 PagesThe causes of the Great Depression of the 1920s and 1930s has been argued about for generations. Most people agree on several key topics and that it was the severity and length of time the Depression lasted that was actually the most remarkable. Hoover made many noteworthy attempts to try and solve this crisis, yet in the end it was President Roosevelt and his New Deal, that brought many Americans hope for the future. The first factor in the start of the Depression was the lack of diversityRead MoreCauses of the Great Depression2012 Words   |  9 Pages The causes of the Great Depression in the early 20th century is a matter of active debate between economists. Although the popular belief is that the main cause was the crashing Stock Market in 1929 caused the Great Depression, There were other major economic events that contributed just as much as the crash, such as American’s overextension of credit, an unequal distribution of wealth, over production of goods, and a severe drop in business revenue. As these events transpired the state of economicRead More Causes of the Great Depression Essay1143 Words   |  5 PagesCauses of the Great Depression Throughout the 1920’s, new industries and new methods of production led to prosperity in America. America was able to use its great supply of raw materials to produce steel, chemicals, glass, and machinery that became the foundation of an enormous boom in consumer goods (Samuelson, 2). Many US citizens invested on the stock market, speculating to make a quick profit. This great prosperity ended in October 1929. People began to fear that the boom was going toRead MoreCauses of the Great Depression Essay1108 Words   |  5 PagesThe United States has experienced recessions about every twenty years (give or take) since the beginning of the Industrial Revolution. Nothing that had happened before was quite this serious, chaotic, or as long lasting as the Great Depression. The crash was felt far beyond those on the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks, because no one else would buy them. This caused many banks to fail,Read MoreCauses of The Great Depression Essay701 Words   |  3 Pages Imagine a society where over 25% of the population was unemployed. That is what it reached during The Great Depression (â€Å"The Great Depression†). During the depression unemployment rates were the highest they have ever been. It is highly speculated to this day on what exactly caused The Great Depression. Most historians agree it was a chain of events, one after another, that brought our country into chaos. Some events were more impactful than others. These events caused pandemonium amongRead MoreEssay on The Causes of the Great Depression697 Words   |  3 PagesThe Causes of The Great Depression History Imagine waking up one morning, only to find out that all your investments and savings are gone. So if your bank that you invested all your money in collapsed, you didn’t get any money back. This is what happened to millions of Americans during the 1930s. This era was called the great depression. The great depression was one of the worst economy issues we have ever had in history. It was a hard time for everyone. The great depression started in 1929Read More The Cause of the Great Depression Essay552 Words   |  3 PagesThe Cause of the Great Depression The economic expansion of the 1920’s, with its increased production of goods and high profits, culminated in immense consumer speculation that collapsed with disastrous results in 1929 causing America’s Great Depression. There were a number or contributing factors to the depression, with the largest and most important one being a general loss of confidence in the American economy. The reason it escalated was a general misunderstanding of recessions byRead MoreCauses Of The Great Depression And The Great Recession2292 Words   |  10 Pages1. Examine the causes of the Great Depression of the 1930s and consider what similarities and differences can be drawn with the problems from the financial and economic crisis which began in 2008. Introduction 2007-2009 in America has often been described as the worst economic crisis since the Great Depression in 1929. There was lots of debate whether the economy was slipping back to double dip recession but there is considerable evidence that the economic crisis in 2008 is worse than the crisisRead MoreCauses of the Great Depression Essay651 Words   |  3 PagesIn the 1920s, American economy had a great time. The vast majority of Americans in 1929 foresaw a continuation of the dizzying economic growth that had taken place in most of the decade. However, the prices of stock crested in early September of 1929. The price of stock fell gradually during most of September and early October. On â€Å"Black Tuesday† 29 October 1929, the stock market fell by forty points. After that, a historically great and long economic depression started and lasted until the start of