NEW IDEAS FROM DEAD ECONOMISTS
Jason L. Scarabin
Economics 110-003
Dr. Dwight M. Blood
Book Report
11 November 1992
NEW IDEAS FROM DEAD ECONOMISTS
To be perfectly honest, I did not enjoy what I did read of the book. It was very difficult to concentrate on what I was reading. The most important insight I gained from reading the book was the simple economic fact that it all boils down to people’s self-interest. Self-interest, in my opinion, runs the economy.
Secondly, I must admit I jumped around in the book and read only 65 to 70 percent of it.
Throughout recent human history, there have been many economists express different philosophies describing human behavior concerning choice. The most prominent economists are Adam Smith, Karl Marx, Maynard Keynes, and the monetarists. Although these men have opposing views on economic theory, their ideas shape the economic systems of various nations and governments today.
The first and great economist was Adam Smith. Smith looked for cause-and-effect relationships between people and the economy. He felt that man is continually trying to better himself and his surroundings by trying to improve his standard of living. One way in which man tries to improve his surroundings is through trading his possessions with someone else, or bartering. Since man is born with the instinct to seek for better things, Smith believed that the government should not interfere with mans’ quest. People will act out of self-interest and obtain what they desire.
In his book, “The Wealth of Nations”, Smith trusts an “invisible hand” which guides the decisions that people will make. It is this invisible hand that creates social harmony, and allows the free market system to run smoothly. For instance, Smith says that people will produce things which are in demand. No one will produce something that nobody will buy, or something that will be economically disadvantageous.
One way of multiplying the wealth of nations is through the division of labor. By dividing the production of a good into many separate and individual jobs to be completed by a skilled worker greatly expands output. This is accomplished through saving time in switching from one task to the next, and through greater skill obtained through experience. The wealth of nations could also be expanded through specialization of towns and countries. If trade routes were to open up, it would be possible for increased trade, and for countries to buy products at a lower cost than for them to produce it themselves. But on the down side of divided labor, Smith warns that specialization could create boredom, and a decrease in creativity. He thought that man might lose his spirit and intellect. He felt that public education could remedy this side effect of specialization.
The roles of government were defined by Smith to be: “first, providing for national defense; second, administering justice through a court system; third, maintaining public institutions and resources such as roads, canals, bridges, educational systems, and the dignity of the sovereign.” In Smith’s economic theory, the government had no position to set laws or regulations. He believed that the free market would be guided by an invisible hand, and that man should act according to his fellow man’s needs and desires. He felt that labor would spark economic growth–not government intervention.
Karl Marx, a socialist economist, believed that society was a product of constant struggle and conflict. He felt that one day, the working class capitalists would rise up and overthrow their leaders. He claimed that capitalism would crumble while socialism thrived. The workers in a capitalist society were exploited by their employers, receiving only enough salary to live on, while their wealthy employers live extravagantly off of the profit that the workers should receive. The working class will eventually revolt, and regain their humanity that they have lost through repression. They will take control of the economy and unite together forming a dictatorship. Under this dictatorship, “property rights would be abolished, heavy, graduated taxes would be imposed, a national bank would be established, and free public education would be provided.” Under this new form of economic government, imagination and entrepreneurship will die along with wealth, because wealth depends upon imagination and entrepreneurship.
While Smith and Marx display two different methods of extreme government intervention (either for or against) in economics, the next two economists prefer a more middle of the line type policy. Maynard Keynes felt that income was the determining factor to how much a consumer spends. As income increases, so does spending. Households are also the key factor of demand. Keynes believed that depression occurs when total demand for goods and services is less than total income. How much a household spends determines the quantity demanded in an economy. In order for a healthy economy to exist, “households must consume and businesses must invest enough that sales of goods equal the amount produced.” But since people save their money, business must make up for the loss of the money supply, and increase investments. If this condition is not met, then output will exceed sales, inventories will stack up, and the unemployment level will increase; thus creating a recession. The cause of the recession is clearly the fact that people save their money instead of spending it.
If people keep on saving their money, then the economy will continue to suffer. This suffering will continue to pile upon itself, creating what Keynes calls a multiplier. A multiplier exists due to the change in spending by one person creating a spiral leading to a national trend in spending. The government’s duty is to intervene and increase their spending to balance out the multiplier. Keynes feels that the best way to pull out of a recession is to create deficits.
The other group of economists who believe in a government regulated/free market system are the monetarists. The monetarists parallel Keynes’ economic theories to that of a car. The national economy represents the car. The accelerator is described by increasing government spending and lowering taxes while the decelerator is describer through decreasing government spending and raising taxes. The monetarists do believe that the national economy is controlled through an accelerator and a decelerator, but that the accelerator represents higher money supply and the decelerator represents lower money supply. The driver of the monetarists vehicle is the Federal Reserve Board, and not Congress who drives the Keynesian vehicle. Monetarists believe that the money supply is what should be manipulated in government intervention. The Federal Reserve Board can manipulate the money supply in the following ways: 1)By allowing more banks to lend a greater amount of money; 2)By putting the money into the hands of the households and into the money supply; 3)By lending funds to banks, and then raising the interest rate on these loans which discourages banks to lend the money, thus enlarging the money supply; and 4)By selling and buying government securities. Since bills held by the Federal Reserve are not considered part of the money supply, they buy the bonds, giving the seller a check, placing money into the money supply.
Monetarists also believed the velocity (the number of times that money changes hands) equals the nominal value of goods and services purchased by consumers, and that velocity is constant. They also believed that the amount of goods and services that con be produced is fixed in the short run leading to the fact that the amount by which the Fed increases the money supply is directly proportional to the percent rise in prices.
The views and theories presented by each of these economists differs by great degree. Each economist defined the roles of the consumer and the government to be different. Smith believed that the market is controlled by self-interest, and involves no government intervention. Marx believed in complete government control of the market place, leaving the consumer with little say. Keynes and the monetarists both believed in government regulation of the market place, but differed in how and why the government should spend money. Each economist had their own ideas, and governments through out the world have taken heed to their words in deciding upon their own form of economic policy. No one is quite sure who is right and who is wrong.