Until John Maynard Keynes came along, the world was spilt vertically between two major economic ideologies; capitalism and communism. Adam Smith (aka the father of modern economics) was the main propounder of capitalism (refer to Wealth of nations) and Karl Marx was the main defender of socialism / communism (refer Das Kapital). The main difference in the thoughts of these two gentlemen was defining the forces at the fore front of an economy. According to Adam Smith, private entrepreneurs were the main force behind job creation and creating meaningful commodities that in turn would create a business cycle of generating revenue through sales; to scaling up the output to meet the demands which in turn generates more employment. This would mean free enterprise is the corner stone of a robust economy and the job of the elected Government is to promote free enterprise by having adequate tax structures that would motivate business rather than impede it. Mr. Smith believed in small Government and a strong stable free enterprise would be best suited to create wealth for nations.
We can think of several developed countries that adopted this free market enterprise style of economy and are doing fairly well for themselves. Karl Marx had contrarian views to Adam Smith and was strong advocate of socialism or communism or Marxism. According to Marx, true wealth of a nation was in its citizen and taking care of this human capital should be the primary focus of the elected Government. The prescription from Marx was that Government should tax the business heavily (sometimes up to 70% of Income) and use the generated revenue to build state run schools / hospitals / social programs which would provide for the citizen at nominal cost and thus help build the human capital. A healthy workforce raring to go would be the ideal indicator of a nation’s wealth. Several powerful nations of the 19th century adopted the Marxist ideology for economy – chief being USSR (erstwhile Russian federation) and People’s Republic of China. The GNP (gross national product) – a generally accepted indicator of how well an economy is performing was slightly higher for countries adopting capitalism while the social indicators like health / nutrition etc. were slightly better for socialist countries. Did we have a winner? Well, not exactly, each one was a prescription for a different illness and both worked very well depending on what target were you trying to achieve.
Socialism was open to abuse by politicians who used tax revenue to fund pet projects and seek votes on them and Capitalism gave the business a free run to hire people based on need and re-trench them when not required. So effectively, the workforce became one of the raw materials for the business. Then we had the work regulations which tried to tie some loose ends so that businesses don’t end up exploiting the workforce. However, since the main focal point was business and not people, capitalism never found much traction in Europe (large parts) and Asia where some or other form of socialism found roots.
Keynes was never formally trained in economics but by far made the biggest contribution to find a middle ground between the extremes of capitalism and communism. Keynes was trained in Mathematics and was an active trader who invested in stocks. He made a lot of money in the 1920s until the great depression – when he lost 3/4th of his earnings only to win back considerable amount by investing in stocks that lost value during the depression but later regained value during the New Deal. Keynes accurately forecast major economic events of the 1920s (except the great depression) and chronicled his experiences in his works. Today, apart from China and Cuba and some smaller countries, almost all economies have adopted Keynesian model of economics. There is no such thing as capitalism anymore and socialism is on its last leg. This is the impact of Keynesian economic model. Keynes concluded from his experiences that capitalism works best only when there is near universal employment. With higher rates of unemployment, the capitalism fails to deliver and simply increases the gulf between the haves and the have not. Hence, Government must play its part in generating demand during an economic downturn to keep the unemployment ratio down and keep the economy healthy despite adverse economic condition.
Government is expected to provide for higher wages and larger number of infrastructure projects to keep the workforce employed during downturns so that it maintains the consumption of goods and the economy does not slide into recession. Due to the peculiar nature of Government borrowings, it can afford to ramp up the spending in the short term despite not having revenues to cover the costs. Private businesses which work on profit basis cannot afford to retain workforce when the economic conditions are bad and it is at this time the Government steps in and provides short term employment. Hence, Government has an important part to play in the GNP of a nation and the exact portion of its contributions would change from time to time based on the domestic/ international economic scenarios. Keynesian economics brought together the good aspects of capitalism and safeguards of socialism (limited way). In the latest instance, major economies are using Keynesian model to overturn the economic recession of 2008 triggered by the subprime mortgage crisis and Greece debt crisis. So far, it seems like Keynesian economics is here to stay.
So long…
We can think of several developed countries that adopted this free market enterprise style of economy and are doing fairly well for themselves. Karl Marx had contrarian views to Adam Smith and was strong advocate of socialism or communism or Marxism. According to Marx, true wealth of a nation was in its citizen and taking care of this human capital should be the primary focus of the elected Government. The prescription from Marx was that Government should tax the business heavily (sometimes up to 70% of Income) and use the generated revenue to build state run schools / hospitals / social programs which would provide for the citizen at nominal cost and thus help build the human capital. A healthy workforce raring to go would be the ideal indicator of a nation’s wealth. Several powerful nations of the 19th century adopted the Marxist ideology for economy – chief being USSR (erstwhile Russian federation) and People’s Republic of China. The GNP (gross national product) – a generally accepted indicator of how well an economy is performing was slightly higher for countries adopting capitalism while the social indicators like health / nutrition etc. were slightly better for socialist countries. Did we have a winner? Well, not exactly, each one was a prescription for a different illness and both worked very well depending on what target were you trying to achieve.
Socialism was open to abuse by politicians who used tax revenue to fund pet projects and seek votes on them and Capitalism gave the business a free run to hire people based on need and re-trench them when not required. So effectively, the workforce became one of the raw materials for the business. Then we had the work regulations which tried to tie some loose ends so that businesses don’t end up exploiting the workforce. However, since the main focal point was business and not people, capitalism never found much traction in Europe (large parts) and Asia where some or other form of socialism found roots.
Keynes was never formally trained in economics but by far made the biggest contribution to find a middle ground between the extremes of capitalism and communism. Keynes was trained in Mathematics and was an active trader who invested in stocks. He made a lot of money in the 1920s until the great depression – when he lost 3/4th of his earnings only to win back considerable amount by investing in stocks that lost value during the depression but later regained value during the New Deal. Keynes accurately forecast major economic events of the 1920s (except the great depression) and chronicled his experiences in his works. Today, apart from China and Cuba and some smaller countries, almost all economies have adopted Keynesian model of economics. There is no such thing as capitalism anymore and socialism is on its last leg. This is the impact of Keynesian economic model. Keynes concluded from his experiences that capitalism works best only when there is near universal employment. With higher rates of unemployment, the capitalism fails to deliver and simply increases the gulf between the haves and the have not. Hence, Government must play its part in generating demand during an economic downturn to keep the unemployment ratio down and keep the economy healthy despite adverse economic condition.
Government is expected to provide for higher wages and larger number of infrastructure projects to keep the workforce employed during downturns so that it maintains the consumption of goods and the economy does not slide into recession. Due to the peculiar nature of Government borrowings, it can afford to ramp up the spending in the short term despite not having revenues to cover the costs. Private businesses which work on profit basis cannot afford to retain workforce when the economic conditions are bad and it is at this time the Government steps in and provides short term employment. Hence, Government has an important part to play in the GNP of a nation and the exact portion of its contributions would change from time to time based on the domestic/ international economic scenarios. Keynesian economics brought together the good aspects of capitalism and safeguards of socialism (limited way). In the latest instance, major economies are using Keynesian model to overturn the economic recession of 2008 triggered by the subprime mortgage crisis and Greece debt crisis. So far, it seems like Keynesian economics is here to stay.
So long…
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