A very long post and an attempt to join in on the discussion.

Framework

By Elfren Sicangco Cruz

Debating economic philosophies

“The failures and future of capitalism” has become the most popular cover story for all serious international magazines during the last few weeks.

For anyone who wants to participate, or at least understand these ongoing debates, I would strongly suggest to first become familiar with the lives and works of the economic philosophers who started this debate around two centuries ago.

This very short list includes Adam Smith, John Maynard Keynes, Karl Marx, Joseph Schumpeter, and perhaps John Stuart Mill and Thomas Robert Malthus. In modern times, the only ones who come close to joining this list are Milton Friedman and John Kenneth Galbraith who espoused opposing views.

Considering their impact on the world, it may be surprising that there are only a handful of them. There have been thousands of economists. They can be found all over the world in businesses, universities, governments, and media. There are all kinds of awards, of which the Nobel Prize for Economics is considered the most prestigious.

However, all of them, including the Nobel Prize winners, have been involved simply either in refining economic techniques and models or criticizing or defending the grand models of economic development originated by these few economic giants.

For countless centuries, mankind dealt with the problem of economic survival, now labeled as economics or allocation of scarce resources, by command or custom. Thus, this field or area of study was really defined by theologians, political theorists, statesmen, philosophers, and even historians.

However, a few centuries later, society saw the development of a system in which economic survival was attained by allowing each individual to do what he saw fit as long as there was a central guiding rule. This system came to be known as the “market system” and the central rule was that each person should do what was to his best monetary advantage.

Adam Smith did not “invent” the market system because no one person actually did. It was a system that evolved as many other social developments evolved. However, he was the first person to actually devote himself to economic theory.

It is true that most of his best known ideas were not original. In fact, the great 20^th-century economist, Joseph Schumpeter, later wrote that Smith’s book “does not contain a single idea, principle, or method that was entirely new in 1776.” Philosophers like David Hume and John Stuart Mill who espoused the utilitarian philosophy of the greatest good for the greatest number, heavily influenced Smith’s writings.

However, Adam Smith was the first person to present a comprehensive and systematic theory of economics that was sufficiently correct to serve as a foundation for future studies in the field.

The central theme of his book An Enquiry Into the Nature and Causes of the Wealth of Nations is that the seemingly chaotic free market is actually a self-regulating mechanism which automatically tends to produce the type and quantity of goods that are most desired and needed by the community.

This economic view, now popularly known as capitalism, would later be directly challenged by two equally great economic philosophers with two divergent views.

Ninety years after the publication of the Wealth of Nations, it was Karl Marx’s turn to discover the so-called “laws of motion” in economic terms, which described how capitalism proceeded slowly, unwillingly but ineluctably to its doom.

Marx was a philosopher and a journalist. His most important work was the three-volume Das Kapital, which formed the theoretical basis of communism as well as other forms of socialism. The first volume was published in 1867. When Marx died in 1883, the other two volumes had not yet been completed. They were edited and published by Friederich Engels from the notes and manuscripts left behind by Marx.

However, most historians believe that Marx’s most influential work was The Manifesto of the Communist Party.

His prophecy was that accumulation of surplus value together with the competitive struggle for fewer and fewer markets would bring capitalism down. The prophecy involved the worsening lot of the proletariat who would then explode when their life became unbearable.

John Maynard Keynes was born in England in 1883, the year Marx died. His major work was The General Theory of Employment, Interest and Money. Perhaps the most relevant book for today’s economic debate, this work was published in 1936 during the Great Depression.

Obviously, Keynes’s ideas were shaped by the economic conditions of his time. While he was repelled by many aspects of capitalism, he nevertheless realized at the same time that it had enormous expansionary powers. He argued that instead of the cycles of economic boom and bust, increased demand would create its own supply. Therefore, government intervention would be welcomed to create demand.

Keynes argues that government, the state has a duty to maintain full employment. He believed that at a time of recession, governments ought to stimulate demand by spending on public works and welfare, which some call socialism, and by lowering interest rates. Economists who argue against government intervention accuse Keynesian economics as being left of center and inflationary.

These three economic philosophers represent the three major schools of economic thought. There are those who believe, like Adam Smith, in allowing market forces to determine economic outcomes; there are those, like Karl Marx, who believe that the market system is an evil system; and, finally there are those, like John Maynard Keynes, who feel that while capitalism has expansionary powers, there is a need for government intervention to ensure full employment.

For those following the current American political scene, it can be seen that Barack Obama’s economic policies are primarily Keynesian while McCain sticks to the traditional views of Adam Smith and Milton Friedman.

In a world torn by economic problems, constantly worried about economic affairs, and never-ending debates about economic affairs, it is surprising that the great economists are not as familiar figures as the great philosophers or writers.

Perhaps people should be reminded that it is the conflict of economic beliefs that caused the Cold War and that the wrong economic solutions will cause more poverty and suffering than any debates in philosophy or literature.

Elfren S. Cruz is a professor of Strategic Management at the Ramon V. del Rosario Sr. Graduate School of Business, De La Salle University-Manila. E-mail comments to: elfrencruz@gmail.com

source: http://www.bworldonline.com/BW102808/content.php?id=144

The recent problems of the US economy has been thoroughly discussed at our dinner table. We always talk of how to take advantage of such a downturn in economies around the world and how to redefine the Philippines as the sick man of Asia into its once glorious position as the premiere nation in the region.

The discussions usually drift to the current economic models that we have chosen to espouse. The American model of capitalism, with almost no difference from the model created by Adam Smith and with some social safety nets as created by welfare systems, is a model that we have been using to shape policy at the national level. Our leaders have always been trying to ape the Americans so that we could be like them. However, the Philippines has several quirks that need to be taken into consideration. The fractured setting of an archipelago makes the movement of goods difficult. Even with Galbraith, I think it was Gailbraith or Keynes, mixed in with people advocating Government expenditure on infrastructure and furthered government spending, the reality is that the archipelago makes movement difficult. 

Our leaders have always chosen to let the free market forces ravage the nation’s economy while excepting some industries such as retail, media, energy, etc. By striving to open up still fledgling industries to global competition, which also assumed no government subsidies for the foreign competitors, opened the hen-house to the wolves. The Philippines has time and again been importing rice and other agricultural products even though it is considered a primarily agricultural country. This is because of foreign governments subsidizing their own manufacturers and producers. We have no such support in our government, whatever we may have is apparently plundered.

Also, the archipelago serves not only to increase the difficulties of moving goods and people from different places it also serves to fracture the nation into factions that are defined by geography and culture. The lines are clearly drawn, one province houses one tribe another province houses another, these two normally will not agree on politics and will most likely support different candidates in the popular elections. The problem is not merely trying to ape the capitalist economic model but also the democracy advocated by the United States. The Philippines is a fractured nation better suited to perhaps a federalist state, or something else. 

Philippine politicians are also well known for grand-standing and attempting to enact laws to curry favor from the poor. Take for example the Lina Law, which has apparently been interpreted as a pro-squatting bill. Also look at the Comprehensive Agrarian Reform Program, this is a law that can be blamed for the sudden drop of agricultural land in the country. Instead of encouraging land owners to plant crops the CARP forces them to divvy up their land holdings with the farmers. Doing so actually reduces productivity in general and profitability for the land-owner specifically. How so, different farm lots owned by different farmers will generate products with differing quality. Some might not even plant at all because of personal circumstances. The land would have been productive had it been in the hands of a central well-funded administrator (the former land-owner) instead of several farmers who are poorly funded even though rich with experience. CARP therefore forces the landowner to develop his property as commercial or industrial instead of allowing it to be purchased at almost 1/10 the market value by the government.

Keynes who advocated pump-priming the economy in order to boost demand will not work in the Philippines. Pump-priming the economy merely increases governmental expenditures but does not generate anything else. It is because we must factor in corruption. Corruption takes a good 20-40% of the entire budget of any project initiated here. 

At home we have come to a conclusion that the American economic model will not work for us here. Neither will communism or socialism. These methods appeared almost during the same era. Capitalism was running wild in the US, communism and socialism emerged as schools of thought to counter the capitalist machine that sacrificed people for the sake of profits. As my father pointed out these other techniques are very much similar to capitalism in the sense that though privately owned big business rules capitalism a state owned big business rules the other two methods. That in itself is a problem, indicating that both trains of thought are driven by one and the same engine, big business. 

A better solution would be a system specially designed for the Philippines. A rebuilding from the ground up and not through the lens of other economists that drew breath in a different era.