The process of social evolution has been fascinating people for years, and there have been a number of theories concerning the way in which society functions and develops. Among the theories that stand out the most, the ones by Spencer, Comte and Marx should be mentioned. Though rendering the same issue, the three philosophers managed to approach the concept of society from completely different angles and yet come up with the ideas that cross at some points.
Comte, perhaps, deserves to be mentioned first as the founder of the so-called “social physics”[1], known later as sociology. It is rather remarkable that Comte was the first to suggest looking at society as an organism, with each element having to be in its place and performing a particular function. Comte defined three stages that a society must pass to reach its peak, i.e., theological, metaphysical and positive.
Speaking of Spencer, the philosopher introduced a new way of envisioning evolution in society, though clearly borrowing some of the concepts from Comte’s theory. Spencer should be credited for actually coining the term “social evolution”[2]; in fact, Spencer considered it a cosmic principle that can be applied to any society, life or matter.
As for Marx, his idea of social evolution revolved around economical relationships between individuals and companies. Marx also used Comte’s concept of society being an organism, yet the functions that its elements performed were tied in with major economical concepts[3].
Technically, it would be wrong to compare the theories suggested by three philosophers, though. Instead, their work should be viewed as a whole, with Comte creating the premises for one of the most significant social sciences, sociology, to be born. Spencer, in his turn, perfected Comte’s work, while Marx’s efforts helped envision the society as a mixture of social and economical interactions.
The founders of modern sociology, Spencer, Comte and Marx managed to create unique theories explaining the mechanism of society clockwork. Each offering his idea of how a society functions, they helped envision the complexity of society and understand the significance of its elements.
Over time, the idea of political economy has gained multiple distinct meanings. In this case, the political economy, which emanated from moral philosophy, is viewed as the means to understand production and trade as they relate to laws and regulations, governments, practice, as well as sharing of national resources, income, and wealth. In the realm of political economy, a question may be raised concerning certain economic policies adopted by a government. For instance, what is the fuel that drives capitalism? This question can be effectively answered using capitalism as a model of political economy. This paper compares and contrasts Adam Smith’s and Karl Marx’s perspectives on capitalism. Specifically, the paper examines some of the key concepts (e.g. division of labor, mode of production, creative destruction, and gender oppression) and the underlying assumptions of each theorist concerning factors that drive capitalism in the 21st century. In this regard, the paper strives to show that these two theorists’ works have some inherent strengths and weaknesses. While these perspectives present diverse viewpoints, they continue to provide interesting insights for economists and scholars to understand market systems of political economy.
Capitalism
Capitalism, from an economic system perspective, is an economic and a political system in which private owners, rather than the state, control means of production and operations of profits. Capital accumulation, private property, wage labor, competitive markets, voluntary trade, and pricing are some of the major features of capitalism where owners who control factors of production solely undertake decision-making and capital investment. However, external factors, such as competition and location, tend to influence investors’ decisions.
The market economy is responsible for determining supply and demand in the common market. That is, no central planning is employed to run the economy. In its purest form, capitalism is recognized as laissez-faire capitalism. In this case, private individuals act freely to determine investments, production, selling, and prices with no controls and restrictions from governments. However, it is noted that many modern states practices various types of capitalism characterized by state controls and regulations to stabilize markets. Capitalism is considered as a model for overcoming challenges associated with the production and distribution of resources. As opposed to socialism, capitalism as a model of political economy is based on voluntary decisions and decentralized economic planning and activities.
Capitalism favors economic growth. It offers incentives for private individuals to direct resources in more productive areas of the economy rather than less profitable ones. The outcomes have been massive economic growth across the globe. Most societies realized sustained growth associated with capitalism after the 17th century. Major growths were only witnessed after the Industrial Revolution as opposed to predominant agricultural societies. In the following centuries, capitalism was responsible for increased investment and production. More products were cheaply and readily available to masses, leading to improved standards of living across the world. Consequently, many theorists have argued that the capitalist political economy is the most effective and efficient model of promoting exchange.
Adam Smith’s and Karl Marx’s Perspectives
Karl Marx wrote that “every society is built on an economic base” (Heilbroner, 1995, p. 82). The economic base in a capitalist society is driven by factors of production, including the division of labor. Over time, an increasingly intricate division of labor has been witnessed, and it is closely related to improvements in aggregate output and trade, the development of capitalism, and the involvement of industrialization processes. While others may claim that the division of labor is an ancient practice, it has strongly emerged in the 21st century to drive capitalism. In this regard, human capital is now a major factor in the modern economy, and it has become significantly critical for production in the last few decades. As witnessed today, human capital is now a prominent feature of the international division of labor.
It is widely acknowledged that the incessant division of labor leads to higher levels of productivity. A firm’s success, for instance, appears to depict principles of efficiency noted during practices in the 20th century. To this end, societies run on capitalism have grown wealthier as individuals seek to specialize in distinct fields. Also, the 21st century is characterized by even more narrowly defined jobs to ensure developments of complex skills, such as IT skills, which are now highly traded in the global labor market. According to Adam Smith, markets were responsible for economic efficiency vital for most aspects of economics. The ‘invisible hand’ is responsible for the efficient allocation of labor. He notes, “the private interests and passions of men” are led in the direction “which is most agreeable to the interest of the whole society” (Heilbroner, 1995). While the division of labor has resulted in significant achievements, one cannot ignore the unintended side effects, particularly on individual lives. Specifically, Karl Marx showed how capitalists acquired large profits from workers by manipulating work conditions. He noted that the fall in labor power would in turn result in a decline in production. That is, workers had to suffer low socially required labor time for production. As such, Marx (Capital, Volume One) states:
…this is impossible without an increase in the productivity of labour…by an alteration in his [the worker’s] tools or his mode of working or both. Hence the conditions of production of his labor, i.e. his mode of production, and the labor process itself must be revolutionized…to endow a given quantity of labor with the power of producing a greater quantity of use-value. (Marxists Internet Archive, n.d)
On this note, one can conclude that it is by enhancing labor productivity that the capitalists realize comparative surplus-value and as a result, profits. Capitalists have realized such profits by investing in various ways of production and transforming the productive stages using modern technologies and techniques.
The rise of capitalism in the 21st century is largely credited to changes in the mode of production. Capitalism now controls global trade. The overall goal of the capitalist mode of production, based on competitive practices, is to optimize net profits by reducing costs of production, increasing sales, and gaining a market monopoly. It also focuses on capital accumulation for the acquisition of both productive and ideal assets and privatization of supply and consumption of goods and services. In this case, labor is extremely important for capitalists. Any excess product of labor has to be reinvested in production to increase output and capital accumulation. Capitalists understand that the mode of production requires investments in terms of money to drive both labor and other modes of production for commodity creation. Capitalists then sell commodities in free markets for profits. Profits are then reinvested into the business as a larger component of the capital required for increased production of commodities. According to Marx, transformations in forms of exploitation are associated with developments in modes of production. It is precisely observed that such changes lead to new production methods that spread across the world. As such, for capitalism to grow further in the 21st century, there should be a separation of means of production from the producer. That is, a free labor market is required to ensure that capitalists can maximize profits. Marx argued that cooperation was vital for workers in the production process, and it was responsible for driving modes of production. On this note, Marx envisages transformation in the mode of production to facilitate growth (Capital, Volume One):
Capitalist production only then begins, as we have already seen, when each capital employs simultaneously a comparatively large number of laborers; when consequently the labor-process is carried on an extensive scale and yields, relatively, large quantities of products. (Marxists Internet Archive, n.d)
Adam Smith sees mode of production through market mechanisms, and he supports Marx’s viewpoints on changes. “Society will have changed the allocation of its elements of production to fit its new desires” (Heilbroner, 1995, p. 35). On this note, the mode of production in a capitalist economy is driven by emerging needs and desires.
In the current capitalist political economy, it is believed that creative destruction will drive growth. That is, constant industrial changes would constantly transform economic structures from within and eliminate old ones while creating new ones. For most economists, more compelling evidence suggests that creative destruction would drive productivity and growth across many countries. In other words, modern innovations are constituents of creative destruction. The most interesting fact about capitalism in the last three centuries has been enormous growth that innovation has brought about to many states. In the 21st century, therefore, it is necessary to construct economic policy to facilitate and shape innovation for global economies and perhaps strategies to mitigate its outcomes. States that have demonstrated their capabilities to advance innovation have been able to improve the living standards of the public. One may, therefore, claim that the next wave of capitalism innovation would eventually lead to consumer engagement in various processes in the design and production of commodities.
Creative destruction, however, has some unfavorable consequences. That is, winners and losers are created in the economic process because workers are most likely to lose their jobs while some investments become obsolete due to technological advancement. Today, many workers fear that robots or technologies would eventually replace them. Marx and Engels observed that capitalism had some crisis tendencies related to “enforced destruction of a mass of productive forces …. In these crises, a great part not only of existing products but also of previously created productive forces, are periodically destroyed” (Marxists Internet Archive, n.d). In modern capitalist economies, losers are all workers as employment declines and wages become stagnant, creating ‘squeezed middle class’. On the other hand, skilled workers with the right expertise have gained from creative destruction. While workers may respond by attempts to resist forces of creative destruction, it is senseless to resist innovation because it supports economic growth and offers higher rewards resulting from improved productivity.
The solution in capitalism is to revamp and radically improve innovation, distribute gains as much as possible, and create enabling environments to assist workers in transit from old practices to innovative solutions. This approach involves rethinking to enhance social security for workers. Moreover, capitalists should strive to profile innovation more aggressively. Evolutionary political scientists and economists have long acknowledged that innovation is the means to advance economic activities for enhanced productivity. As such, Adam Smith supports creative destruction. Capitalists improve production using advanced techniques that create more productive workers. Firms that fail to be competitive and offer what customers want eventually disappear. The ‘invisible hand’ of the market argues for the transfer of factors of production from deteriorating sectors to sectors that are more productive where workers, capital, and inputs would yield optimal returns. Overall, capitalism as “the perennial gale of creative destruction” has to turn out to be the driving force for contemporary thinking on how economies grow.
On gender oppression, one can observe that capitalism has improved the status of women in society as they begin to take new roles in the economic arena. Developments noted in gender relations since the 20th century have been among the most rapid, deep social changes in the history of humanity. For over 7,000 years, male domination has always been felt throughout gender relations. Even today, men and women are still seen as holding diverse positions in society, albeit with changes toward more women’s involvement in economic affairs. Nevertheless, a significant minority of individuals still hold the notion that women should be of lesser ranks relative to men. Although all kinds of gender inequalities are observed in the current political economies, and some appear too difficult to change, they are generally observed in disparate contexts of cultural, political, social, and institutional relations. Male domination still exists and continues to define gender relations in the 21st-century political economy.
One must acknowledge that Karl Marx presented profound insights on gender relations, specifically focusing on the need for a complete change of society that would significantly advance novel relations between men and women, notwithstanding some challenges. Adam Smith is accused of failing to recognize the role of women in economic activities in the Wealth of a Nation. However, Smith did point that society was responsible for determining the social importance of observed differences. As society advances, Smith noted that physical strength grows less relevant. Hence, transformation in economic activities would eventually lead to better positions for women in the economic sphere for new gender relations. Smith also observed that the principle self-interest advanced by men who made laws that were unfair to women. Smith, however, did not refute the lawful domination of women.
Conclusion
This political economy paper has explored capitalism concerning specific factors that drive it. It has explored these factors by comparing and contrasting Adam Smith’s and Karl Marx’s perspectives on capitalism. By examining vital concepts, such as division of labor, mode of production, creative destruction, and gender oppression, it is revealed that capitalism continues to gain strength. Karl Marx and Adam Smith appear to hold diverse views on some of these subjects, but they seem to agree on issues that concentrate on the exploitation of workers and economic transformations. Economic concepts introduced by these two economists and moral philosophers have continued to shape the 21st-century practices. Overall, capitalism continues to grow stronger as many states are now more advanced under this political economy compared to other previous political economy models.
References
Heilbroner, R. L. (1995). The worldly philosophers. New York, NY: Simon & Schuster Inc.
Marxists Internet Archive. (n.d). Political economy. Web.
Say’s law is summarized as ‘supply creates more demand’. It indicates that activity meant to produce aggregate output with enough income to purchase the entire output produced. The law indicated that insufficient demand for production or excess production was unlikely to occur at the minimum of an extended period.
The law explains further that economy would easily maintain full employment of the resources. The major element of Say’s law is that recession does not happen as a result of lack of money or failure in the economy.
In terms of business he argued [against the belief that business was suffering since people lacked enough money and therefore should be printed more. The believers of the theory holds that power to purchase could only upsurge by more production.
During great recession, there was less supply and therefore the demand was also low. The argument consistent with the Says point is that the purchasing power of the populace depends on the increase in the production of goods and services.
There are a number of policies which the government can put in place according to the Says law. The first policy is to come up with stimulus program to increase the production of goods and services in the economy.
The stimulus program will ensure that the existing companies produce more products in the economy and at the same time enhance the capacity of the small companies to produce the right and required products in the economy.
Another policy that the government can put in place is the tax secession. The tax break policy can be given to firms which are involved in the production of those products which required in the economy.
Low taxes will mean that the cost of production will go down and therefore revenue and profits will realize an upsurge. Therefore the supply of products and services in the economy will definitely increase.
How Did Marx and Keynes Challenge Say’s Law?
These critiques came during the depth of great depression in 1936.The first question is on whether or not supply does help in the creation of demand.
According to them and the principles the generated revenue through production process usually ends up as the household income though does not happen instantaneously. Households can only spend the income that they have.
If the income is less then expenditure, sales will be less, less will be produced and therefore less revenue will be produced. (MacEwan and John 56)
Marx’s Theory of Crisis
A profit squeeze is defined as the reduction in earnings which is caused by bad business climate, rising costs and increased competition. Capital accumulation might pull they demand for labor power and raising wages. The rate of profits will be hurt when wages go higher leading to recession.
In the crisis of realization there is the contradiction in the capitalist mode of the entire production process and also the laborers ac ting as the buyers of various commodities which are quite important to the market. The capitalist society tends to keep them down to some minimum price though as sellers of their own commodity-labor power.
Profit squeeze theory is more preferred since recession and poor performing business will likely occur when there is low profit. Poor performing business climate will result in low revenue and therefore low profit; this will result in low capital formation and therefore squeezing the profit and low standards of living.
According to Marx, society is comprised of the bourgeoisie and the proletariats. This leads to the existence of two different classes in the society. To him this is what leads to the inequality in the society. With the inequality, wealthy and the power to purchase will be in the hands of a few rich people in the society. Low spending among other factors will result into recession and poor performances of various businesses in the economy.
In the analysis of Marx all value derives from various labor times which are necessary for the production of goods. Therefore all the value derives exclusively from the workers efforts; later, the profits which come from the seized workers. The argument of Marx is that through class the capitalists will create demand through paying their workers and therefore Say’s claim that is the supply that creates demand.
Aggregate Supply Function
This is delineated as the total supply of goods and services produced in an economy at some specific overall price level in some period of time. The curve describes relationship between price level of and total output that the firms are willing to provide. When the supply of goods is limited then it means that less people will be employed in the firms.
Aggregate Demand Function
This Is defined as the total amount of goods and services which are demanded in the economy at some given overall price level and a given period of time. When there is less demand in the economy, production of goods and services will come down.
Effective Demand
This is defined as the level of demand representing a real intention to purchase by people within a means to pay. When the effective demand is low then the level of unemployed people will increase.
Rate of New Investment (Or Investment Demand)
This is delineated as the level of injections in the economy; the amount of money which is invested in the economy. When the rate of investment is high, many firms will be in a position to create jobs in the economy. When the rate of investment is low it means that there will be low capital formation and therefore less number of people will be in a position to get jobs.
Marginal propensity to consume
This is defined as the proportion of Income that is converted into consumption. When the Marginal propensity to consume is high it means the marginal propensity to save is low and the vice versa. Keynes also state that savings are equivalent to investment In an economy. When the marginal propensity to consume is high then it means that the ability to invest in the economy will see an upsurge. This will result in the creation of jobs in the economy.
Marginal Efficiency of Capital
The marginal efficiency of capital is the rate of discount which is usually equates the price of a given price of a specific capital asset. When the rate is high then unemployment will reduce. (MacEwan and John 93)
The major importance of the distribution of income to Key it helps in the explanation of unemployment in the economy. Poor distribution indicates high level of unemployment in that specific class. When there is unequal distribution of resources in the economy then it means that the level of dependency will go high, resulting into the level of unemployment going higher. (Rajan 78)
Keynesian disagreed with the belief that supply in the economy creates demand. He instead argued that the purchasing lower in the economy is what leads to an upsurge in the value of goods which are being demanded.
According to Keynes recession is caused as a result of decline in the Gross Domestic Product. This results from the slowdown in various activities in the economy like reduction in the manufacturing and also the increased unemployment.
The major suggestion that will be put forward by Keynes to help address recession is through ensuring that there is full productivity in the economy. There should be enhanced production and performance of various sectors in the economy.
The Golden Age (1950’s – 1970’s) vs the Neoliberal Era (1980’s – 2007)
Golden age in the economy was that period when there was no free economy. Most of the production was purely under control. Neo liberal economy is whereby the economy is free to operate without regulations in it. The n economy is free to operate with minimal interference.
I would regard the neo liberal era as the very best approach as the economy should be given room to operate with minimal interference if there are. The government policies like taxation, wage rates, growth rates should be left to operate with eased without any interference in the economy.
When the regulations are enhanced then a myriad of players will be discouraged from entering into the economy.
Labor accord is defined as the control and regulations which were put to various labors in the economy. There was cohesion in the management of the labor. This ended as there were a myriad riots and chaos in the economy.
In the neoliberal area, there was upsurge in the number of banks in the economy as compared to the golden age. (Rajan 113)
Inequality was a major enhanced by the increased number of capitalist in the economy.
Work Cited
MacEwan, Arthur, and John A. Miller. Economic collapse, economic change: getting to the roots of the crisis. Armonk, N.Y.: M.E. Sharpe, 2011. Print.
Rajan, Raghuram. Fault lines: how hidden fractures still threaten the world economy. Princeton: Princeton University Press, 2010. Print.
The article written by Mr. Viscusi outlines characteristics of a good employee in work places. The four main characteristics that make an employee safe in his job are being visible, ready, easy and useful at the work place.
This is an advantage to the employee because when it comes to firing employees, the first people to go are those that the employer does not know. He encourages employees to be visible by coming to work before and leaving after the boss.
Employees should be smartly dressed, participate in volunteer works, make presentation and represent their boss in functions so that they can be recognized. Employees should be easy by giving the working conditions for the boss easy listening and following instructions given to them.
Otherwise, chances of being fired are high in difficult employees. Employees should avoid unnecessary complaints like the quality of chairs they use or the system of lighting. They should be contented with what is provided to them.
Employees are allowed to take part in office but they should measure their words before letting them out. Punctuality is very important, as employees should make sure that they arrive in their offices early but leave a little bit late. This is to say that they should be beyond time expectations of the company.
A good employer should set apart some time to train other employees on the importance of taking part in extra tasks in jobs, being responsible as well as giving support to their boss. Employees should be ready for issues arising unexpectedly by updating their resumes and networks, enhancing their interview skills, adding knowledge to their skills as well as maintaining good relationship with employers.
They should also have cash with them in banks. According to Viscuss, the most important factor in work places is the relationship between the employer and the employee.
He asserts that bosses hold the fate of employees and therefore employees should maintain good relations by looking and sharing interests common to both. Socialization is very important in work places. It is difficult for the employer to fire employees who are his friends.
Following those laws prevents an individual from being fired in a case where employees have to be reduced. All employees regardless of the position they hold in the organization should follow the rules (Little, 1986). Some of the aspects expounded in the article are good in work places but others are subject to criticisms.
Employees should take part in activities in work places such as presentations, representing their boss, arriving in jobs early and leaving late, for success of the organization but the reason behind good participation should not be for the boss to recognize you.
Firing employees should not be based on the level of interaction between employer and employees. Whether friends or not, this should be based on the quality of work done by employees. A good employer should be in a position to fire his best friend if they are not performing.
Employees have rights to demand what best fits them. They should be allowed to put forward their complaints that the boss should listen to. If they do not have say, then they lack freedom. These rules should make employees feel empowered.
These rules benefit labor because employees will be working to their best to produce quality and quantity work so that the boss can recognize them. The employer should discuss the regulations with his/her employees before passing them to be laws so that employees are not pressed up.
The advice given by Mr. Viscusi contributes to alienation in the work place, a condition in which an employee feels foreign. Employees are not comfortable in work places if they do not meet some of the conditions.
For example, employees who are not friendly to the boss are always insecure when it comes to reducing the number of employees because they stand at high chances of being fired regardless of the quality of their work. In addition, employees are not free to demand for their rights because if they do so, they will be the first to go. Such conditions make employees to remain in a condition of fear.
Karl Max argues that alienation in work places is brought about by capitalism. In the theory of alienation, he asserts that workers are deprived of their rights in capitalistic societies that make employees to lose hope in their lives and destinies.
In these societies, employees are not given rights to choose what to do or not, but are expected to follow laid down instructions that may be offending (Cutler, 1977, p. 227). The working is directed by rules and activities passed by those who own the means of production.
The bosses want the employees to work as much as possible so that they can get huge profits out of their work. They also ensure that the wages they pay to the employers is too low. The main beneficiaries of the work are the owners even though employees do most of the work.
It is obvious with employers that they want employees to work to their maximum for their benefit. The major role played by employees is not realized when it comes to payments. In the same case, extra work should be done for an individual to be recognized according to the article.
Creating a friendly environment with the boss is an added advantage to the employee. Employees who are not ready to adhere to the policies outline in this article are likely to be fired (Hindess & Hirst, 1975, p. 260).
According to Little (1986), the labor theory was founded by Karl max to explain the high levels of exploitation experienced by working people in capitalistic societies. The owner of the means of production exploits poor employees by overworking them and giving them low wages compared to the work that they do.
The employers gain at the expense of the employees. The rules found in this article exploit the employees too. This is because employees have to adhere to certain conditions in order to maintain their position; otherwise, they will be fired.
Conclusion
The article encourages employees to maintain good relationships with their employees for their safety in jobs. The working conditions given in this article may not be applicable in a different economic system like communism. In this mode of production, the society is organized into units like tribes bound by the same laws and regulations.
Little or no surplus is produced and therefore there is no ruling class. Equality is enhanced in this mode of production because there are no classes. Oppression and exploitation does not occur in such societies. These rules are applicable in some modes of production like capitalism (Little, 1986, p. 80).
In conclusion, employers should consider employees before passing out laws to be followed because some may be oppressive. They should also understand that employees play a very important role that calls for increase in the wages they get. Employees should get good wages enough to cater for their basic needs. They should be allowed to exercise their rights.
References
Cutler, A. (1977). Marx’s capital and capitalism today. New York, NY: Taylor & Francis.
Hindess, P. & Hirst, P. (1975). Pre-capitalist modes of production. London: Taylor & Francis.
Little, D. (1986). The scientific Marx. New York, NY: University of Minnesota Press.
“Too Big to Fail” is a book by Andrew Ross Sorkin and a movie; it is about the 2008 economic crisis events and the collapse of Lehman Brothers from the perspective of the US government watchdog and Wall Street CEOs. The book/movie gives a summary of the first phase of the fiscal crisis of 2007-2010 from the beginning of 2008 to the decision to create the Troubled Asset Relief Program (Cunningham 42). The book/movie tells the story from the viewpoint of the leaders of the most important monetary institutions and the major dictatorial authorities. Too Big to Fail is the ultimate story of the most influential men and women in economics and politics struggling with achievement and disappointments, ego and voracity, and, finally, the destiny of the global economy. The book is compared to Marx’s theory and other scientific semiotics in different ways.
Marx was a great economist, and in his theories, he talks about the financial crisis and the world’s economy. This story is not only about the financial institutions that were “too big to fail,” it is a suspenseful story that has forceful characters who thought they were “too big to fail.” The book discusses the issues in the world’s economy and the financial crisis experienced. Marx’s theories explicate why such issues arise and how they can be controlled. According to Marx, an idyllic economic system involves equal value exchanges where value is basically determined by the magnitude of work put into the production. In the book/movie, these principles are not applied, and many decisions are made in a meaningless way. A lot of money is raised by the government to save financial institutions from great economic depression.
Marx categorized government control of assets and funds as one of the ten crucial steps to the road of communism. Capitalism disrupts this principle by initiating a profit motive, a need to create an irregular exchange of smaller value for bigger value. Profit is eventually founded on the extra value produced by human resources in financial institutions. All of this is aggravated by capitalism, which only augments the discrepancy between the affluent classes and the manual labor classes. An altercation between them is inevitable since these classes are driven-by chronological forces that are beyond their control.
Capitalism is evident in the movie/book; it creates economic depression through the misuse of surplus-value. Finances/economics are what make up the foundation of all human history and life, creating a distribution of labor, class struggle, and all the societal and financial institutions which ought to uphold the status quo. Those societal and financial institutions are a superstructure formed on the foundation of economics, entirely reliant on economic and material realities (Ross 514). Scientific and Marx ideologies are helpful in understanding the reasons behind the financial crisis events taking place in the movie. All of the institutions which are important in people’s everyday lives can only be truly comprehended when scrutinized with regard to economic forces.
Marx had a unique expression for all of the efforts that go into building those financial institutions: ideology. Individuals working in those financial systems believe that their ideas originate from a need to become successful, but that is not always true. In actual fact, they are terminologies of class interest and class divergence. They are manifestations of an underlying desire to preserve the status quo and maintain various economic realities. This isn’t astounding; those in authority have always desired to substantiate and preserve that power.
Works Cited
Cunningham, John. Karl Marx’s economics: critical assessments, New York: Routledge, 2008. Print.
Ross, Andrew. Too Big to Fail: Inside the Battle to Save Wall Street, New York: Penguin Books Ltd, 2010. Print.
Political economy originates from the concept of private ownership of the property; however, it does not explain the topic conclusively. It generally expresses the material processes through which the property passes. These abstract formulas are taken as laws. Political economy does not establish the basis of how legislation arises from private ownership of property. Indeed, it also fails to expound on the factors leading to the separation between capital and labour in the same way as capital and land.
Consequently, it has become relatively easier to understand the association between private property and other aspects attributed to a man. It has become easy to comprehend the connection between exchange and competition, valuation and devaluing of man, and monopoly and competition. Economists fail to deduce the relationship between the division of labour and exchange. Workers continue to be poorer as they continue producing more wealth.
The worker gets relegated to an ever cheaper commodity as he continues producing more. Labor produces itself, and the worker is seen as a commodity other than the actual commodity he is supposed to be producing. The end results of the labour challenge it because it is unfamiliar. Objectification of labour thus comes about hence loss for the realization of workers. The working populace is often deprived of their sweat as they are robbed of the possessions that are most important in their life and occupation. As a result, the worker is separated from the fruits of his labour as and is treated as an alien object.
This accentuates the fact that as the farmer’s expenses increase (or the more he works hard), the more powerful the instruments that make him alien to his own possessions become, causing the farmer to become poorer.
Marx discusses various aspects of primitive accumulation with respect to the transformation of money into capital. Normally, primitive accumulation of capital is when existing direct producers are forced into laborers that transform money into capital within a given economy.
Historically, the primitive accumulation of capital preceded the capitalist production mode. Despite the numerous arguments against and for primitive accumulation of capital, highly contested debates still exist within the global arena in respect to primitive accumulation of capital. Marx provided a deeper understanding of the primitive accumulation of capital. It is important to understand how Marx explains the concepts of primitive accumulation and political economy.
Marx defines the primitive accumulation of capital as “the historical process of divorcing the producer from the means of production. It appears as ‘primitive’ because it forms the pre-history of capital and the mode of production corresponding to capital (Pages 874-875).”
In this definition, Marx attempts to explain that primitive accumulation of capital is directly linked to historical perspectives of detaching producers from the process of production and instead of making them (producers) tools for transforming money into capital. What’s more, Marx explains that primitive accumulation of capital begins with gathering together available commodities such as gold and silver coupled with money for purposes of establishing a base to accumulate capital.
According to Marx (873), there are similarities in the roles played by primitive accumulation and political economy. Marx provides an analogy of the original sin committed by Adam in trying to explain the similarity between primitive accumulation and political economy.
From the concepts of the original sin, it is clear that both primitive accumulations of capital and political economy distract people’s attention from the contemporary problems and concerns to a mythical past, which is regarded as a source of many misfortunes that people suffer within the current world. In an attempt to provide an understanding of the starting point of capital accumulation, Marx claims that political economy is the starting point of the primitive accumulation of capital (Marx 874).
Also, Marx compares the political economy to primitive accumulation of capital when he asserts that the latter is an irreducible process that emanates from categories of the former hence can only be explained and described in terms that revolve around struggle and ultimate force. Therefore, Marx confirms the relationship between political economy and the primitive accumulation of capital.
Based on the above concepts and facts, it is evident that Marx has a good explanation of the primitive accumulation of capital concept. Primitive accumulation of capital is a global aspect that would be used in finding answers to the many struggles and ultimate forces that keep on shaking the global economy. No wonder, Marx’ analogy of the original sin of Adam, which resulted in the many contemporary problems is used to explain concepts of primitive accumulation of capital.
Moreover, Marx explains in respect to the relationships or similarities existing between the primitive accumulation of capital and political economy. There is no doubt, therefore, from Marx’s perceptions that primitive accumulation of capital stemmed from political economy. Some of the features that influenced Marx into believing the same is that political economies are in most cases associated with struggles and ultimate force, which are the same features seen within the primitive accumulation of capital where producers are turned into tools of transforming money into capital.
In his article Some Considerations of the Consequences of the Lowering of Interest and the Raising of Value of Money, John Locke outlines the main theoretical provisions of what later became known as the ‘monetary’ theory of economics. The article’s main ideas can be outlined as follows:
Money is the instrument of ensuring the efficient exchange of goods and services between two or more parties. As such, money cannot be thought in terms of an objective ‘asset’. The validity of this thesis Locke illustrates by the fact that, unlike what it happened to be the case with material goods, there can be no limit to one’s capacity (and willingness) to possess money.
Lowering the interest rate will not prove beneficial to the economy’s well-being. According to the author, the implementation of this measure will increase the amount of money in circulation – yet, there can be no guarantee that this money will continue to reflect the value of the material assets in question adequately. As a direct consequence of this, money’s ability to serve as the medium of commercial transactions will be substantially reduced: “The low Rate would be content to have more Money lye dead by them, than now when it is higher: By which means there would be less Money stirring in Trade” (Locke 3). Therefore, the government should think twice before deciding to lower the interest rate.
The process of designing a monetary policy, on the government’s part, may never cease being observant of what accounts for the ratio between the amount of traded goods, on the one hand, and the amount of money in circulation. Locke goes to substantiate the validity of this suggestion, as such that is being reflective of the fact that the amount of circulated money always equals with the medium’s overall nominal worth. What it means is that the price of a particular material asset is solely concerned with what happened to be its quantity.
Labor is the source of ‘surplus value.’ In its turn, this means that money is merely the mean of distributing wealth between the commercially active individuals, within the society.
In light of what are the economic realities of a post-industrial living, Locke’s idea that money cannot be thought of, as such that represent the value of a ‘thing in itself,’ appears rather fallacious. The reason for this is quite apparent – as we are well aware of, money has long ago been turned into the commodity of its own. The validity of this suggestion can be easily illustrated, in regards to the influence of Stock Exchanges on how the world’s economy functions. The functioning of the real-estate market confirms the soundness of the above-stated, as well, as it is largely concerned with the circulation of the so-called ‘derivatives’, which are in essence the financial contracts between two parties, backed by the third party’s financial obligations that could be bought and sold in the open market. These ‘derivatives’ continue to spawn the generations of the new ones, backed not by a value of the concerned physical assets, but by the originally issued derivatives. This, of course, creates the situation when money can no longer be considered the economy’s instrument, but rather the economy’s actual ‘fuel.’
Another idea, contained in the article, which appears largely outdated, is that the amount of applied labor positively relates to what happened to be the end-products nominal value. The reason for this is that, as of today, it is specifically the measure of a particular product’s technological advancement, which reflects as much as 90% of its value. What it means is that the process of producing a particular good can no longer be discussed, as such that is being concerned with the mechanical formula – the end-price=the cost of labor + the cost of raw material. The validity of this suggestion can be illustrated, in regards to the fact that, as time goes on, the technologically intense manufacturing processes require the progressively reduced amounts of raw materials.
For example, whereas, as recent as 30 years ago, TV-sets used to weigh 30-40 kilograms, they nowadays rarely weigh more than 10 kilograms. The reason for this is that, as this example suggests, it is one’s intellect (and not labor), out which derives ‘surplus value’ of the manufactured products. In light of the above-provided example, we can even say that one’s intellect is now capable of replacing the growing volume of natural resources, out of which the commercially traded products are made – in the literal sense of this word. It is understood, of course, that this exposes the conceptual erroneousness of the ‘nominalist’ ideas, contained in Locke’s article.
Nevertheless, Locke still needs to be given credit for having criticized the idea that money can be thought of as an ‘asset of its own.’ After all, it was the practical implementation of this idea that caused both: the Great Depression of the thirties and the financial crisis of 2008. Therefore, despite having been written in 1691, Locke’s article still represents a certain discursive value.
Karl Marx’s Ideas on Capitalism
In The Manifesto of the Communist Party (1848), Karl Marx aimed to promote the following set of ideas:
The course of history is defined by the ongoing struggle between the representatives of the dominant and subservient social classes. According to Marx: “The history of all hitherto existing society is the history of class struggles” (1). This struggle is concerned with how the so-called ‘surplus product’ is being distributed within society.
The bourgeoisie played an utterly progressive role, within the context of establishing the objective preconditions for the 18th century’s Industrial Revolution to take place. The reason for this is that the representatives of the bourgeoisie were able to endow the notion of ‘trade’ with a qualitatively new meaning – hence, making possible the establishment of the global trade-network.
It is in the very nature of the bourgeoisie to strive to increase the efficiency of the manufacturing processes. This is being achieved by the mean of speeding up the pace of the technological progress, on the one hand and laying off workers, on the other. Thus, the continuous functioning of the ‘free-market’ economy inevitably results in increasing the acuteness of the social antagonisms within the society: “Constant revolutionising of production, uninterrupted disturbance of all social conditions… distinguish the bourgeois epoch from all earlier ones” (3).
Capitalism is inhumane because it results in turning proletarians (hired laborers) into nothing short of a commodity. One of the foremost features of Capitalism is the fact that the concerned economic paradigm causes the ever-increased specialization of the manufacturing processes. In its turn, this puts the bourgeoisie in the position of being able to reduce the measure of its dependence upon workers significantly. The most direct consequence of this is that these workers end up being increasingly deprived of their social rights and freedoms.
The very fact that in the Capitalist society, the number of proletarians increases in the exponential progression, makes it only the matter of time, before the society’s underprivileged members will be able to overthrow the government (controlled by the representatives of the bourgeoisie). According to Marx, the dialectical laws of history have predetermined such an eventual development. Therefore, there can be no doubts, whatsoever, in the eventual victory of Communism.
Even though that, by the end of the 20th century, Marxism sustained an utter fiasco, as a political ideology, it would be inappropriate referring to the Communist Manifesto, as being 100% outdated. The reason for this is that this Manifesto does rightly expose what can be considered the main shortcoming of Capitalism – namely, the fact that, while obsessed with trying to generate as much profit as possible, (within the shortest period of time), the representatives of the bourgeoisie (who control the government) are naturally discouraged from investing in the long-term economic projects. In other words, despite being technologically advanced, Capitalist societies are doomed to collapse eventually.
After all, it is in the very nature of Capitalism (as an economic system that tries to optimize its functioning by the mean of reducing the affiliated operational costs) to seek out the ways to have as few people employed as possible. What it means is that, as time goes on, the socio-economic antagonisms between citizens in the Capitalist society will grow progressively more severe – especially given the exponential growth of the planet’s population. The only possible solution, in this respect, can be the adoption of the Socialist/Communist paradigm of what economy ought to be all about. The reason for this is that the main challenge of Capitalism has always been the overabundance of workers; whereas, the main problem of Socialism has been the permanent shortage of the available workforce.
Nevertheless, there are also many conceptual fallacies in the Communist Manifesto, which nowadays became obvious to just about anyone. The main of them is that, as the Manifesto implies, the pathway towards establishing a fair society, is concerned with satisfying the workers’ material/physiological needs alone. Nevertheless, as history indicates, there is so much more than a working individual can wish for, except for striving to fill its stomach with food.
Another conceptual shortcoming of the Communist Manifesto can be well considered the assumption that, after having been brought up by the Industrial Revolution, the main principle of what causes a particular society to remain stratified (along the line of people’s affiliation with the classes of capitalists, proletarians and peasants), will never undergo any qualitative transformation. The validity of this suggestion can be well shown, in regards to the fact that, as of today, it is specifically the individuals affiliated with the economy’s service-related sectors, who account for the bulk of the economically active citizens in just about any Western country. It goes without saying, of course, that these individuals can neither be referred to as the representatives of the bourgeoisie nor as to the proletarians or peasants.
Thus, just as it happened to be the case with Locke’s article, the Communist Manifesto by Karl Marx can be best regarded as being simultaneously both: the intellectually enlightening and yet somewhat outdated piece of the politically-economic rhetoric.
Works Cited
Locke, John 1961, Some Considerations of the Consequences of the Lowering of Interest and the Raising of Value of Money. Web.
Marx and Engels discuss that the bourgeoisie is the most important force in history. Marx’s reason is that the bourgeoisie has carried out more development than all other societies that ever lived before them. Marx and Engels (14) discuss that the developments made by the bourgeoisie are greater than those left behind by the Egyptians and the Romans during their revolutionary times. According to Marx & Engels (14), the bourgeoisie has invented many things, but they have not been able to eliminate class struggles. The class struggles have been clearly outlined between two groups, bourgeoisie and the proletariat, under the progress of the bourgeoisie. Free Trade has emerged as a dominant feature of the bourgeoisie that is more valued than all other freedoms that were pursued by ancient societies.
The bourgeoisie refers to a group of people who emerged from the working class to become owners of the factors of production. The groups that became the bourgeoisie once lived in cities, and other small-sized towns. They emerged to own workshops in the towns that they lived. According to Marx and Engels, the bourgeoisie came out of the “serfs of the Middle Ages, the chartered burghers of the earliest towns” (14). The dictionary meaning of a serf is a person who works for a lord under the feudal system. The feudal system is where an individual owns many acres of land and has many workers. The basis of the bourgeoisie’s power is mass production and large markets. The bourgeoisie’s initial markets were the towns in which they lived. Marx and Engels discuss that “the bourgeoisie cannot exist without constantly revolutionizing the instrument of production” (15). They are constantly looking for new markets for their products. The bourgeoisie’s method of production has eliminated competition through changing production into more efficient methods.
Marx and Engels considered the bourgeoisie to be revolutionary because they find new solutions to old and new problems that they have encountered through their ‘Free Trade’ agreement. Marx and Engels (15) elaborate that the bourgeoisie has assigned a cash payment to most interactions between man and man. Man’s time is valued by generating cash.
The bourgeoisie is revolutionary because of how it responds to the crises. The bourgeoisie’s system is prone to periodic crises because of its symbolic feature known as over-production. The bourgeoisie produces massively and then looks for markets for its products. It has sought new markets or new ways to extract more from customers in old markets (Marx and Engel16). The bourgeoisie may have destroyed some productive forces to save its existence. However, Marx and Engels (16) consider the solutions to the crises as a delay that increases the extent of areas that will be affected by future crises.
Marx and Engels characterize the role of money as increasing the speed of exchange of cash and commodities. The increased speed of exchange gave rise to the rapid development of industries and cities. Commodities could be exchanged easily, which created increased demand in new and old markets. Old markets were areas where the bourgeoisie lived, and new markets were lands that were discovered for exchange. Money made over-production to be reasonable because money could be stored. Marx and Engels identify that over-production, also known as a glut of products, was considered irrational before the bourgeoisie engaged in mass production. The bourgeoisie exploits old and new markets to clear its over-production. The money provided a faster means to clear the stock of goods.
The proletariat was a new group of the lower working class. It was the group that was employed by the bourgeoisie after the bourgeoisie’s revolution. The bourgeoisie was initially the working class who worked for the lords. They used their expertise and savings to open workshops, which they advanced to mass production by innovating new and efficient methods of production. The proletariats were employed by the bourgeoisie after they had been pushed out of business by the bourgeoisie’s productive system. The bourgeoisie’s efficient methods of production were more competitive than the proletariats’ production.
The proletariats could not access better means of production to stay in business because the bourgeoisie paid them just enough to sustain their lives, and to feed their families. Marx and Engels describe that the wages of a workman “are restricted, almost entirely, to the means of subsistence that he requires for maintenance and the propagation of his race” (17). The low payment prevented the proletariat from advancing his trade. The proletariats were once isolated individuals who worked in their workshops without engaging in mass production.
Marx and Engels (17) explain that as soon as they are paid, other groups of the bourgeoisie arrived at their doorstep, demanding the payment of monthly bills. It left the proletariat with nothing for innovation, but to rely on providing the bourgeoisie with labor.
Marx and Engels describe that the bourgeoisie has advanced to almost all continents. They describe them by the spread of industrialization, transport, and communication networks. Marx and Engels state that “the discovery of America, the rounding of the Cape… the East-Indian and Chinese markets… opened up fresh grounds for the rising bourgeoisie” (14). The rounding of the Cape signifies that their influence had reached the furthest end of Africa. In another part, Marx and Engels elaborated that “in proportion as industry, commerce, navigation, railways extended, in the same proportion the bourgeoisie developed” (14). They use the expansion of industry, trade, and transport networks as a measure for the advancement of the bourgeoisie.
Weber gives credit to the Protestant sects for creating self-interest
Weber (1) describes that association with a Protestant sect was enough to assure the morality of an individual. Weber uses the Baptist Church and the Presbyterian Church to form his argument. He uses three examples of cases that association with a religious sect was considered creditworthiness. In one of the cases, Weber uses the situation where an individual who wanted to open a bank was baptized under the Baptism sect. His baptism gave him creditworthiness in the perception of the whole society because he had been baptized among the strictest of all sects. Baptism Church did a thorough review of an individual’s character before they endorsed him as their own.
Creditworthiness through the affiliation with a religious sect also came through the guarantees that the sect offered to their members. Weber uses a part of a verse found in Luke chapter 6: 35 which states that “lend to them without expecting to get anything back” as one of the core principles of the sects” (2). Sect members could bail out a member stuck in debt, which supported their creditworthiness.
The difference between membership in a Protestant sect and membership in the Catholic Church was the guaranteed moral character attributed to membership in a sect. Weber explains that a church “lets grace shine over the righteous and unrighteous alike” (3). Weber meant the Catholic Church and other churches when he said a ‘church.’ He further explains that “affiliation with the church is, in principle, obligatory and hence proves nothing about the member’s qualities” (Weber 3). It meant the Catholic Church by Weber calling it ‘the church.’ Weber emphasizes that the Catholic Church membership was available to everyone. As a result, it could not be used to ascertain that an individual has a principled moral character.
On the other hand, the sects based their membership on moral character. They verified an individual’s character by doing a background check of the individual’s behavior. Members of sects had to behave appropriately to the sects’ standard, or their membership could be nullified.
One’s status and moral standing were judged by how successful one were in business, and attaining higher levels of education. Weber explains that “the America tradition was to honor the self-made man more than the heir” (4). The sects honored those who succeeded in business as a form of grace they had received from a higher power. Success in business showed that an individual was intelligent in running it profitably. In America, people came to be recognized by the clubs in which they were members. The most recognized clubs were associated with distinguished colleges. Weber explains that honor came through “affiliation with a genteel fraternity in a distinguished college, formerly with a distinguished sect” (4). Weber explains that men of honor no longer shook hands with workers in the farms because they were not their equals. The men of honor were either successful businessmen or professionals associated with higher learning institutions.
Weber (4) explains that money can make individuals gain recognition not only in America but everywhere else in the world. However, he makes it clear that honor cannot be gained through acquiring riches in American society. Honor is gained through joining the renowned clubs in America.
The difference between Germany and America is that one can be respected for being born into an honorable family in Germany. In Germany, the person who gains wealth can purchase honor for his grandchildren. Himself, he will remain the person from a lower social class. In Germany, one has to purchase a feudal estate and transform it into a modern production system to gain honor for his grandchildren. In America, inherited wealth does not receive the same recognition (Weber 4). One has to acquire wealth by himself to gain recognition, although honor is gained through the professionals’ clubs.
In his comparison between the guilds and the sects of the Middle Ages, Weber (5) attempts to say that the Protestant sects were instrumental in shaping today’s way of looking at creditworthiness, and inspiring self-interests as the spirit of capitalism. According to Weber (5), the guilds did not like individual success, and because of that, they cannot be credited with the success of the self-interest drive of capitalism. The guilds were groups formed by people who engaged in a similar trade or production of similar commodities. The guilds are similar to modern boards that govern the standards in each industry. The guilds felt that individual success paid tribute to individuals instead of the guild who govern the industry. Capitalism honors individual success in a manner that had been started by the sects and later accepted by the clubs.
The Views of Ricardo, Mill, Marx, and Keynes on the Long-run Dynamics of the Capitalist System
David Ricardo
Ricardo considered an economy that consisted of workers, landowners, and capitalists. The workers earned wages in exchange for their labor, whereas the landowners leased their land to farmers. The capitalist s invested their capital, paid workers, and earned profits. Ricardo’s analysis of the dynamics of capitalism indicates that real wages can fluctuate in the short-run (Hunt and Lautzenheiser 96). However, in the long-run Malthusian law prevents wages from rising above the subsistence level. Thus, the production of agricultural output such as corn will have to be increased in order to develop industry and to reduce unemployment. In a closed economy, the farmers will have to cultivate the land of low quality in order to increase employment. However, the price of the output must increase so that the cultivation of the low-quality land can be profitable. Similarly, owners of the fertile land will charge high rent for their land.
As the rent continues to rise and wages remain constant, capitalists’ profits will begin to fall. Consequently, the capitalists will not have any incentive to increase their investments. At this stage, the economy will be at a steady-state (Hunt and Lautzenheiser 102). The new land will be required to sustain production and economic growth. Alternative, highly productive farming methods can be employed on the best lands to improve efficiency and productivity.
John Stuart Mill
According to Mill, the accumulation of wealth is not boundless. Mill argues that achieving a stationary state is the ultimate goal of the process of wealth accumulation. The stationary state is characterized by freedom from “the imperatives of economic necessity and the freedom to develop as a human being” (Hunt and Lautzenheiser 115). In this regard, having limits in economic production is crucial to the achievement of human ends. According to Mill, the expansion of economic production is a relevant objective in underdeveloped rather than developed countries. The main economic problem in developed countries is distribution.
Mill believed that uncontrolled production in the capitalist system merely leads to increased accumulation of wealth, rather than improving the standards of living. For instance, he states that increased use of machinery in production would ultimately abridge labor, thereby increasing unemployment (Hunt and Lautzenheiser 117). Similarly, Mill argued that increased use of machinery in the capitalist system had enabled most manufacturers to increase their earnings. By contrast, most workers continue to live “the same life of drudgery and imprisonment despite the use of machinery in the capitalist system” (Hunt and Lautzenheiser 118).
In sum, Mill argues that extreme capitalism that is characterized by endless accumulation is unsustainable because the world has limited resources. Thus, production in the capitalist system should be regulated to prevent its destructive effects and to enhance the achievement of human ends in the long-run.
Karl Marx
Marx had a pessimistic view of the capitalist system, which he expected to collapse in the long-run. Marx perceived capitalism as a system characterized by “a reserve army of the unemployed, falling rate of profit, business crises, increasing concentration of industry into fewer firms, and increasing misery within the proletariat” (Hunt and Lautzenheiser 121). According to Marx, the supply of labor often exceeded its demand, thereby reducing wages and maintaining positive surplus value and profits. The supply of labor exceeds demand because of the increased use of machines in production.
Although Marx acknowledged the potential of capitalism to increase material wealth, he believed that the system had inherent contradictions that would eventually lead to its collapse. In particular, the capitalist system is characterized by the intense competition that forces capitalists to improve their efficiency. This involves increasing investments in machinery and reducing expenditure on labor. Thus, workers’ earnings and purchasing power will reduce, thereby reducing demand for the capitalists’ products. In this regard, the reduction in demand will reduce the profits earned by the capitalists (Hunt and Lautzenheiser 124). Moreover, the increase in the misery of the workers will eventually lead to a revolution against the capitalists. Marx believed that capitalists focused on profit maximization rather than satisfying needs. They produce the goods and services that the rich can afford rather than the goods needed by the poor. These contradictions ultimately lead to the collapse of the capitalist system, and the society will embrace socialism.
John Keynes
Liberal economists believed that government intervention was not necessary to move the business cycle from depression to recovery in a capitalist system. They believed that the capitalist system would recover from the recession on its own since recovery often followed the recession. However, the experience of the great depression in the 1930s disapproved the notion that the capitalist system was capable of recovering from depression on its own.
Keynes argued that capitalism could be saved through government intervention. In this regard, the government is expected to run a budget deficit to compensate for the reduction in expenditure in the private sector. As a result, unemployment will be replaced by full employment. Keynes believed that recession could be prevented through “increased deficit spending by the government-backed up by interest rate cuts by the central bank” (Hunt and Lautzenheiser 245). If inflation increased, the government could respond by balancing its budget or reducing its deficits.
According to Keynes, the lack of demand during depression can be permanent, thereby causing stagflation. He argued that the rate of profit would tend to reduce as the world’s capital stock increased. Consequently, investments and consumption would decrease. In this regard, the collapse of capitalism can be prevented if the government increases its spending to stimulate private investments, as well as implementing fiscal policies that encourage consumption (Keynes).
The Responses of Keynes, Kalecki, and Friedman to the Problem of Full Employment
Keynes
According to Keynes, full employment can be achieved through feasible government policies. Keynes noted that it is impossible to determine the full employment level of output that must be produced in order to employ the unemployed. Consequently, the focus of fiscal policy should shift from stimulating growth to direct provision of wages through public works programs (Hunt and Lautzenheiser 315).
Keynes believed that the private sector was not capable of creating full employment since it is the main cause of unemployment. In the capitalist system, full employment cannot be achieved since employers can pay wages that are too low to reduce unemployment (Hunt and Lautzenheiser 316). Similarly, employers will not have an incentive to hire more workers if they expect low profits. According to Keynes, achieving full employment through the private sector has two problems.
First, there is a disconnect between stimulating aggregate demand and increasing employment. Keynes asserts that the rate of employment and aggregate demand is not effectively connected despite the relationship that exists between them. In particular, aggregate demand is a determinant of employment. However, the private factors that influence aggregate demand are characterized by high uncertainty (Hunt and Lautzenheiser, 317). Thus, it is not possible to guarantee a sufficient increase in aggregate demand in order to achieve full employment.
Second, creating jobs through fiscal stimulus programs is not effective due to its inequitable distributional effects. Keynes argued that “the size of fiscal stimulus is irrelevant to eliminating unemployment” (Hunt and Lautzenheiser 319). Specifically, policies such as reduction of taxes and interest rates have no influence on the uncertainties that prevent job creation in the private sector. According to Keynes, the policies that are often implemented to increase aggregate income do not address the problem of distributing stimuli in the economy since unemployment varies across the country. For instance, the stimuli attributed to fiscal and monetary policies often benefit consumers of durable goods rather than the unemployed. In this regard, Keynes argues that full employment can only be achieved if the government creates jobs through public works projects.
Kalecki
According to Kalecki, full employment can be achieved in the capitalist system through government spending. If the “government undertakes public investment or subsidizes mass consumption, and if this expenditure is financed by borrowing and not taxation, effective demand may be increased up to a point where full employment is achieved” (Kalecki 1-9). In order to finance the expenditure, the “government pays its suppliers in government securities” (Kalecki 1-9). The government securities in circulation at any given time will be equivalent to the goods and services purchased by the government. According to Kalecki, the central bank is often capable of maintaining a specific level of interest rate irrespective of the level of government borrowing.
Kalecki was aware of the fact that increased government spending was likely to increase inflation. Thus, he argued that the increase in demand as a result of government expenditure should be considered as a normal increase in demand. If there is adequate stock of factors of production, an increase in demand should be addressed through an increase in production (Kalecki 1-9). However, the prices are likely to rise in order to ration the limited supply if demand continues to rise after the full employment of available resources.
Kalecki argued that the government is not capable of maintaining full employment due to the resistance of the captains of the industry. The captains will oppose the government if the public expenditure does not favor their interest (Kalecki 1-9). An overlap between public expenditure and private expenditure will also cause opposition to the government. In this case, the government will be opposed because the overlap in spending will impair profitability in the private sector, which in turn offsets the positive effects of public spending on employment. Kalecki also argued that business leaders would oppose full employment because sacking employees will no longer be an effective disciplinary action. Workers will not be concerned about being sacked if they are able to find jobs easily.
Friedman
Keynesians believed that full employment could be achieved through an increase in the money supply. However, the expansion of the money supply was expected to cause inflation after full employment was reached. Thus, the main concern of monetary policy authorities was to determine the optimal level of money supply expansion (Hunt and Lautzenheiser 342). In response to this concern, William Phillips developed the Phillips Curve analysis to help economists to make a tradeoff between inflation and unemployment. According to Phillips, unemployment had a negative relationship with inflation. However, Friedman argued that monetary policy loses its effectiveness as businessmen refine their prediction of the expected level of monetary expansion. In this regard, both unemployment and inflation would rise, thereby causing stagflation.
According to Friedman, full employment cannot be reached through monetary policy. Specifically, monetary policy is ineffective because it results in a significant increase in inflation before full employment is achieved. Thus, Friedman believed that targeting the lowest rate of unemployment was more practical than struggling to achieve full employment using a monetary policy (Hunt and Lautzenheiser 346). Friedman referred to the lowest rate of unemployment as the natural rate. The natural rate of unemployment is desirable because it can be achieved without a significant increase in inflation. However, determining the natural rate of unemployment that should be targeted is often difficult.
Say’s Law
Say’s law states that “the production of goods creates its own demand” (Hunt and Lautzenheiser 387). The gist of this premise is that businessmen are always interested in selling all the goods that they produce. The production process generates income for the workers (salaries) and profits for the owners of capital. In this regard, the production of goods creates wealth for both workers and businessmen. Consequently, effective demand for the produced goods will always exist. According to Say, hoarding money is irrational since inflation can reduce its value.
In the capitalist system, Say’s law is characterized by six propositions. First, the “total factor payments received for producing a given volume of output are necessarily sufficient to purchase that volume of output” (Hunt and Lautzenheiser 391). Specifically, production creates the means to purchase the produced goods. Second, there are no Keynesian leakages because individuals save money that is only enough to meet their investments and transaction needs in the present period. In this regard, purchasing power will not reduce in any sector of the economy.
Third, investment is “considered as an internal transfer rather than a reduction of aggregate demand” (Hunt and Lautzenheiser 396). Fourth, demand and supply will always be equal in real terms. This equilibrium holds because individuals produce only the amount of goods that enable them to access other goods. Fifth, the level of aggregate output increases with the rise in savings. Finally, disequilibrium can only exist if the produced goods fail to match consumers’ preferences. Thus, disequilibrium in the economy is not an indication of excess output. Say’s the law has often been criticized based on the extent to which these propositions are valid.
Critique of Say’s Law by Keynes and Malthus
Keynes
According to Keynes, Say’s law implied that the economy must always achieve full employment. Although Say’s law indicates that there are no obstacles to achieving full employment, practical experience showed that full employment is not always achieved. Thus, Keynes concluded that the law advanced by Say does not hold because of the insufficiency of aggregate demand. The lack of aggregate demand was attributed to the disequilibrium between savings and investments (Keynes 209-223).
Keynes believed that resources are not always fully employed in the economy. He considered full employment as a random occurrence. Thus, full employment can only be achieved if “by accident or design, current investments provide an amount of demand just equal to the excess of the aggregate supply price of the output resulting from full employment” (Hunt and Lautzenheiser 214). Unlike Say, Keynes considered savings and investments as different and unequal activities.
Keynes also disagreed with Say’s perspective that hoarding money was irrational. According to Keynes, both consumers and investors are likely to hoard large sums of money if they are worried about future changes in the economy. In this context, the consumers would have a high liquidity preference, whereas investors would reduce their investments (Keynes 209-223). Thus, savings and investments will not be equal, thereby causing the economic decline. In this context, Say’s law does not hold since the economy is facing the paradox of thrift. In particular, supply will exceed demand if consumers and investors focus on saving rather than spending.
Keynes also criticized Say’s perception of equilibrium. He asserted that equilibrium is a state in which aggregate supply and demand are equal. Thus, equilibrium does not entail a balance between the goods produced and consumed, as Say argued. Say presented the equilibrium as an identity, whereas Keynes considered it a random occurrence. Say believed that an exogenous shock would cause disequilibrium in the economy. By contrast, Keynes argued that an exogenous shock would be required to restore equilibrium rather than to create an imbalance.
Malthus
In the theory of the general glut, Malthus criticized Say’s claim that supply will always equal demand. Say’s an analysis of the production system was based on the assumption that all profits were invested, whereas all wages were consumed (Hunt and Lautzenheiser 218). The rent received by landowners could be consumed or saved. Thus, Malthus argued that if landowners’ income is not fully consumed (part of it is saved), the demand for consumer goods will be less than their supply (there will be a general glut).
Malthus was aware of the fact that investments led to the expansion of output capacity, thereby increasing the supply of goods. In this context, the supply of goods in the current period will exceed the demand for consumption, which is determined by the income earned in the previous period. The glut will persist if consumption in the next period does not increase exogenously or the prices of goods fail to reduce (Hunt and Lautzenheiser 219). As a result, the capitalists will reduce their investments, which in turn reduces rent and labor incomes. This will further reduce consumption and the general glut in the subsequent production periods.
In order to prevent the glut, Malthus argues that the proportion of landowners’ income that is consumed should be increased in response to the expansion of the output capacity. The increase in landowners’ consumption will slow down the expansion of the output capacity by reducing savings (Hunt and Lautzenheiser 221). In addition, it will compensate for the expected reduction of workers’ consumption of capital goods. Thus, supply will equal demand. Generally, Malthus’ argument for the existence of a general glut is likely to hold only in the short-run. In the long-run, excess production will result in a reduction of entrepreneurs’ profits. Consequently, savings and investment will decline, thereby reducing output capacity.
Works Cited
Hunt, Eric and Mark Lautzenheiser. History of Economic Thought: A Critical Perspective. New York: M.E Sharpe, 2011. Print.
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Keynes, John. The End of Laissez-faire. Ludwig von Mises Institute, 31 Sept. 1926. Web. 15 Dec. 2013.
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