History of Economic Thought - Literature review Example

History of economic thought; Governments History of economic thought; Governments In economics, the term government refers to a system that governs a community or a nation by setting rules and administering public policy. The government is not only meant to enhance social harmony but also engage in economic development activities (Dillon, 2014). The functioning , set up, and efficiency of the government has been a subject of discussion. As time moves by, nations grow economically, progress and increase interrelation with others. This comes hand in hand with economic problems such as depressions, inflation and so on that needs to be solved. For this reason, economists of different times, hold different views of how governments should be involved in solving these problems. Surprisingly, each view of government operation seems to be effective during its era and somehow inapplicable in a different era. Pre-capitalist thought During the pre-capitalist era, government was viewed as an unquestionable system. Majorly, the rulers were hereditary kings, whose word was law. The feudal system is a good system. The success of pre-classical system depended on citizen’s believe by that they not only did not have control over the government. Moreover, governing systems always acted in manner to ensure that every citizen is protected. In the feudalism system, ruling was hierarchal. The system was headed by a king that worked hard to protect the masters’ rights. Masters included landlords and some clergy men viewed to belong to a higher status quo (Magnusson, 1993). Most of these governments were successful, involved negligible rebellions due to the fact that the enacted laws protected the rich in return funded the security system. The tenants were left at the mercy of their landlords. In economic point of view, these governments ensured maximum utility to each individual and best fitted the period when birth determined individual’s fate (Dillon, 2014). The king’s son inherited kingdom, landlords children were allowed to own land and live as nobles while tenant’s descendants maintained their parent’s social life as serfs. The habit of respecting the rich at the expense of the poor was extended to the mercantilist system. During this era, the main purpose of having a government was protecting the citizens, possibly from wars. Mercantilists believed in strong armies and thus respected merchants who funded the government’s security force (Magnusson, 1993). Each government in the mercantilist era, aimed at being the most powerful. Gold and other precious metals were viewed as source of power. For this reason, mercantilists tried to accumulative as much specie as possible. Part of the accumulated specie was stored as personal wealth with a proportion set to support government operation. As matter of fact, specie accumulation was not only viewed as personal gain but also a national responsibility. For that reason, the government supported merchants implementing laws that restrict specie outflow while promoting specie inflow. In other words, governments constrained importation of goods and services and promoted exports. For instance, the minister of Finance in France, Jean-Baptiste Colbert, barred foreign entry of imports by increasing import port duties while encouraging local production by subsidizing French shipbuilders. The essence was to produce excess of local demand and export to accumulate species (Magnusson, 1993). Mercantilism emerged to expand the feudal territories into more powerful nations. Acquisition of colonies abroad, motivated expansion of the government system. As matter of fact, mercantilism advocated for international trade. The government was to play a key role in protecting local merchants, while merchants adventured new colonies in seek of new markets for their products. Therefore, the governments maintained strong armies and navies which not only protected the land but also various sea routes that merchants used to access the abroad colonies (Magnusson, 1993). In Mercantilists era, government power was more important than social welfare. Production was mainly made for export, a concept that was later opposed by the Physiocrats. The government depended on merchant’s tax to support its operation and thus set laws and regulations that favored their businesses. In his book, The Wealth of Nations, Adam Smith criticized the act of collaboration between the government and the industry, arguing that it harmed the population at large (Medema, & Samuels, 2013). The believe that specie accumulation was vital in building nations wellbeing, or rather power as advocated by the mercantilist contradicted the modern social welfare improvement goals. Production was basically for specie accumulation rather than for the population satisfaction. Maintaining a strong army that was always ready to fight to maintain the accumulated specie was the key objectives of the government. Worse though, wars eloped not for self-defense but to reap gold and silver from other nations. Before the classical economics came into existence, the mercantilists view was challenged by the Physiocrats, who existed in late 18th century. Existing in the pre-classical physiocrats maintained that government played no role in economic development. Moreover, these economists discarded the government’s role of maintaining harmony. Turgot maintained that their existent a natural order, that drove people’s character, based not on the nations laws but self-interest (Medema, & Samuels, 2013). Notably, the physiocrats advocated for laissez -faire, emphasizing that trade barriers hindered the natural order. However, the physiocrats did not totally eliminate the government’s contribution to the economy. Land was very important as the key driver economic growth. Physiocrats advocated for governments intervention in land ownership laws. Classical Thought The classical economists disregarded government intervention in business operations. Opposing the Keynesian view of government as a solution to economic problems, the classical economists, advocated for free market correction mechanism. Preceding the mercantilists and pre-classical economic thought, early classical economists accused the previous government systems of combating economic progress. They advocated for free trade as well as freedom in production. According to Adam smith, self-interest motivated individuals to get involved in trade while sympathy ensured that business operations promoted harmony in the society (Medema, & Samuels, 2013). For that reason, governments, if present should focus on other issues rather than direct involvement in production. Classical economists were in favor of capitalism and individualism holding that they not only supported national growth but also enhanced community welfare. In his treatise, the wealth of nations, Adam smith talked encompassed the principle of an invisible hand that was responsible for each individual derivation of self-satisfaction from other people’s self-interests. He enforced that the fact that the production industry aims at maximizing their own profits rather than satisfying their customer. The butcher, brewer and baker aren’t motivated the customers need for dinner (Skousen, 2007). However, given competitive environment, production units strive to ensure quality goods and services otherwise competitors gain from their disadvantage. To Smith, government intervention alters the market structure by reducing competition and hence production efficiency goes down and so does societies welfare. It’s for that reason that Smith argued against, mercantilists believe, started a war against trade barriers. Free trade, opened new markets, increased foreign competition and hence improved both production and efficiency. The idea of government exclusion in production was further expounded by other scholars. David Ricardo formulated the comparative advantage model that could only be effective in absence of government restriction to trade. In His model, Ricardo acknowledged that nations were differently endowed with resources and production requirements differed for every product (Marshall, 1967). Therefore, with no intervention, free trade promoted specialization, and hence increased social welfare. Moreover, the pessimistic economist, Thomas Malthus also eliminated government in his theory of population. He advocated for natural measures to control excessive population measures as well as food production. Notably, classical economists gave room for a little government involvement in economic production, possibly due to the fact that its total elimination seemed impossible. Moreover, classical economists formulated long-term solutions. Adam smith supported government concern in enforcing contracts as well as granting patents and patent rights (Medema, & Samuels, 2013). Adam Smith’s argument is still valid to date; the government ought to protect the rights of entrepreneurs to encourage innovation, invention and new idea creations. Secondly, with the mentality of self-interest, public good production might not occur in the absence of the government. As a result, Adam smith gave the government the role of producing public goods, a concept that has maintained its validity to date. Moreover, in times of short term problems, the classical economists gave the government power to formulate short term solutions but be flexible not to combat the whole system. To Smith, retaliatory tariffs as revenge to some exportation barrier could justify the act. However, Smith maintained a significant doubt on the validity of this revenge measure. Notably, as it was the case of many other classical economists, Smith was scared that retaliation tariffs had a negative effect on the population. Marginalism thought In mid-20th Century, John Maynard Keynes formulated a new school of thought that emphasized on government intervention. Keynes acknowledged that the markets self-correction measures were the best but was concerned about the time that these forces needed. He argued,’ in the long run we all die’ and thus a short term solution could curb economic problems (Skousen, 2007). Keynes arguments opposed the classical view but in a way embraced the then developed marginalism thought. Marginalists economists, expounded on value of good determination, a topic that had challenged Adam Smith. According to the marginalists, marginal utility determined the value of goods and services. For instance, the price of water is not statistically different from zero, despite providing higher total satisfaction than diamond whose satisfaction is far much less. In support of Adam Smith’s ‘value and price‘ ideology; marginal economists attached the price of every commodity to its additional satisfaction and thus totally eliminated the government from value and price determination. However, some goods and service value failed to follow the marginal satisfaction principle. Health care, education and other public goods valuation depended on total utility (Medema, & Samuels, 2013). Hence, the government is responsible for the production of these hard to value goods necessary for the commodity. This government involvement in production, created its importance in economic growth determination. It’s on this basis that Keynes advocated or regulation of government expenditure to curb macroeconomic problems. Fiscal policy rotates on government expenditure and revenue collection, as a counter measure to depression and recession (Skousen, 2007). Moreover in determining the level of taxes that set the market in equilibrium, economists consider marginal tax rather than average tax rates. Critiques of capitalism As outlined by Karl Marx, capitalism was just a stage of economic progress whose effect would deteriorate (Skousen, 2007). Critics of capitalist governments are based on the fact that the economic setting has changed promoting socialism and communism. Capitalism has been seen to promote centralization of resources hence widening the inequality gap. As matter of fact, capitalism promotes increase in return to capital while reducing return on labor. According to many Marxists views, capitalism has reached its peak. Therefore, with time the essence of promoting private firms profit maximization goal at the expense of social welfare is expected to gradually reduce to zero. However, with the advance effects of capitalism, some people advocate for revolutionary overthrow of the system. Governments who support capitalism tend to appear more materialistic. References Dillon, M. (2014). Introduction to sociological theory: Theorists, concepts, and their applicability to the twenty-first century. Magnusson, L. (1993). Mercantilist economics. Boston: Kluwer Academic Publishers Marshall, H. D. (1967). The great economists: A history of economic thought. New York: Pitman Pub. Corp. Medema, S. G., & Samuels, W. J. (Eds.). (2013). Historians of Economics and Economic Thought. Routledge. Russell, J. W. (1975). Critiques of capitalism: Marxism and the social theories of Max Weber. Ann Arbor, Mich: Univ. microfilms. Skousen, M. (2007). The big three in economics: Adam Smith, Karl Marx, and John Maynard Keynes. Armonk, NY: M.E. Sharpe. Read More