A student of economics must know how intellectual development evolved in response to economic events, get some idea of the times and personalities, and at the same time build familiarity with the basics of the subject.
There are three broad groups of economic ideas.
The first, the classical group, developed the Laissez Faire view based on competitive markets. Economists of this group regard markets as an efficient allocation mechanism. They, of course, acknowledge that large companies often sabotage competition and this reduces the ability of markets to allocate resources properly. So they would support regulatory action if it were necessary to ward off any subversion of the market mechanism. More recent supporters of this position are the neoclassical economists. They have developed the basic classical themes in more refined models of the market. They realize that markets fail from several other reasons apart from monopoly and imperfect competition, for example externalities and public goods. They agree that the government has to act to get the outcomes closer to optimality in these situations. This is also the view of contemporary supporters of market liberalization. They suggest the following list of do’s for the government: (i) markets should be kept competitive and contestable; (ii) anti-competitive and restrictive practices should be curbed; (iii) externalities should be tackled through setting up missing markets; and (iv) the government should provide for public goods, but contract out their production to private producers, operating in contestable markets. On the macroeconomic side, they prefer supply-side policy to demand management. In the recent world-wide crisis following the housing market collapse in the US in 2007, they however agreed to demand-enhancing government spending in many countries. But they have been quite clear that they support demand-based action only as emergency measures in serious recessions.
The second group is that of the socialists. It includes Marxists who held a very special position in the events of the last century. They believe that capitalism is a contradictory mechanism and on top of it, is grossly unfair to the majority of population. To keep it going, capitalists have to seek higher profit all the time. But that reduces the relative buying power of those whose income comes from sources other than profit. To sell the growing output of a capitalist economy, therefore, becomes increasingly difficult. They believe that this will produce recurrent crises in the capitalist order and weaken it to a point where other forms of social organization are possible. The fall of the Soviet Union and the opening up of China to international trade and investment have led many socialists to revise their theories of capitalism. Of course, the fall of the socialist economic system does not logically mean that capitalism is not fragile. Yet, in the 1990s after the Soviet Union and other socialist states failed there was a major change in how people look at industrial capitalism.
The third group of ideas—Keynes and his followers—agree that capitalism has a problem of selling its output. Like Marx before them, they observe that the demand coming from consumption cannot buy all the output of an economy. So the rest has to be absorbed by the demand arising in business. But there is no necessary reason for this to happen. Business demand is temperamental depending, as it does, on expectations and fears. When it is inadequate, it is not possible to increase it just by cutting down interest rates. Investment responds to interest rate, no doubt. But the response is rather feeble, and more so in bad times. But then having almost agreed with Marxists in diagnosis, Keynesians differ in their prescription. They do not think that private property and the market system have to be abolished to cure the problem. Private initiative, they think, is of paramount importance as it provides the incentive for progress. Their prescription for the demand problem is that governments should make up the shortfall. In the decades after the Second World War, Keynesians participated in policy making and helped develop institutions and procedures for this intervention. This has changed the face of capitalism radically from what it used to be before the war.
None of these three strands of economics has become obsolete. Like in the past there are believers and followers who confront one another’s position and often with intolerance. However, there seems to be a subtle difference compared with the days before the 1990s. An increasing number of people reveal—in opinion polls, interviews, and in their writings and blogs—that they do not think of these ideas as inviolable truths and think of them as all partly true. Those who act and decide, for example, business companies, workers, farmers, bureaucrats, and politicians, have become fairly eclectic, much more than they used to be a few decades ago. They tend to support policies depending on the issue and the situation. They might demand hands off in one situation and intervention in another. They appreciate the features of modern capitalism as often as they criticize them. The idea that only one view can be true seems to be surviving more among specialists and ideologues.
This subtle change of attitude has influenced governments and other institutions quite visibly in democratic countries. Policy regimes have lost the rigid left-right stance that used to characterize most of the post-Second World War period of the last century. Even though specialists continue to debate using polarized phrases coined in the last century, policy itself has become more flexible and eclectic.
By Amal Sanyal
Retired Professor of Economics, Lincoln University, New Zealand.
Sanyal, Amal. 2012. Economics and Its Stories. Social Science Press. New Delhi.