Tuesday, 23 February 2016

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origins of various Economies.

Q. Describe the origins of various Economies.

✳⏩⏭ 1. Capitalistic Economy :

The capitalistic form of economy has its origin in the famous work of Adam Smith—Wealth of Nations (1776). Adam Smith (1723–1790), the Scottish philosopher-economist professor at Glasgow
University whose writings formed the basis of classical economics had stressed certain fine ideas which were to take fancy among some of the western countries and finally capitalism took birth. He
raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of wellbeing.

Stressing 'division of labour', an environment of 'laissez faire' (non-interference by the government) he proposed that the 'invisible hand' of the 'market forces' (price mechanism) will bring
a state of equilibrium to the economy and a general well-being to the countrymen. For such an economy to function for public well-being, he has acknowledged the need of competition in the

Once the USA attained Independence the ideas of Adam Smith were made part of its public policy – just one year after Wealth of Nations was published. From here the idea spread to other parts of Euro-America—by 1800 the economic system 'capitalism' was established which was later known by different names—Private Enterprise System, Free Enterprise System, Market Economy.

✳⏩⏭ 2. State Economy :

Rooted in the ideas of historical change proposed by the German philosopher Karl Marx (1818– 1883) more specifically, this kind of economic system first came up in the erstwhile USSR after the
Bolshevik Revolution (1917) and got its ideal shape in the People's Republic of China (1949).

This form of economic system also spread to other countries in Eastern Europe. Here we see two versions of the state economy—in erstwhile USSR known as the socialist economy and in pre-1985 China as the communist economy. While socialistic economy emphasised the collective ownership of the
means of production (property and assets) and it also ascribed a large role to the state in running the economy, communist economy advocated state ownership of all properties including even labour and absolute power to state in running the economy. Though for Marx, Socialism was a transitional stage
to Communism, it never did happen in reality.

Basically, this form of economy came in reaction to the prevalent popular economic system of capitalism and proposed just the opposite. The decisions related to production, supply and prices
were all suggested to be taken by the state only. Such economies were also known as Centralised  Economy, Centrally Planned Economy, Non-market Economy.

✳⏩⏭ 3. Mixed Economy :

The belief in the self-correcting quality of the market and the 'invisible hand' of Adam Smith got a major setback in early 20th century during the Great Depression (1929). The impact of the depression spread from the USA to the other economies of western Europe escalating large scale unemployment,
downfall in demand and economic activities and lockouts in industrial enterprises.

The prevailing Smithonian macro ideas failed to check the crisis. A new approach was needed which came in the famous work, The General Theory of Employment, Interest and Money (1936) by the English economist at Cambridge University, John Maynard Keynes (1883–1946).

Keynes questioned the very principles of 'laissez-faire' and the nature of the 'invisible hand'. He even opined that the invisible hand brings equilibirium to the economy but by 'strangulating the poor'.

He suggested that prices and wages of the labour are not flexible enough to provide employment to all. It means there will be some people unemployed when the economy will be at its full potential.
Ultimately, a fall in demand will be imminent resulting in recession and if unchecked, in depression which happened in 1929. Questioning the limitations of the market mechanism, Keynes suggested strong government intervention in the economy. To get the economy out of the depression, he suggested and increase in the government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demand of goods and services as this was
the reason behind the depression. As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.

While Keynes was inquiring into the causes and cures of the Great Depression he questioned the capitalist economic system being practised throughout Euro-America. He suggested the capitalistic order to assimilate the goals of the socialistic economy (economic ideals of the socialists i.e. the ex- USSR). In the capitalist economies of the time, all the basic goods and services were part of the market mechanism i.e. being produced and supplied by the private sector. It meant that almost
everything the people required was supplied by the private enterprises via the market which was ultimately an undimensional movement of money and wealth (from the mass of people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation every day, thereby weakening their purchasing power.

In the end, it affected overall demand and culminated in the Great Depression.
As a follow up to the Keynesian advices, many trendsetting economic policies were initiated throughout the capitalist economies. One very important initiative which came out was the
government's active role in the economy. The governments started producing and supplying some basic goods and services which are known as 'public goods'. These goods basically intended to guarantee minimum level of nutrition to all, healthcare, sanitation, education, social security, etc. The
expenditure on the public goods were incurred on the public exchequer even if it required deficit financing. Starting from 1930s upto 1950s, almost 50 per cent of the GDP in the Euro-America was spent by the governments on the public goods which also become popular as the social sector.

The essential goods and services which were till date being purchased by the people as 'private goods' were soon made available by the state 'free-of-cost' giving people more spare money to create demand for the goods and services which were part of the market.

The above instance has been cited here to just show the process as to how capitalism redefined itself by including some useful traits of the non-market economy i.e. the state economy. The mixed economy arrived in this way and the classical capitalistic economy was challenged by it.

Thanks Kp :)