The Political Economy capitalism-Marx, Smith, Hayek, O’Connor, Lindblon, Olson, Polanyi and Keynes
Answer to question 1
Polanyi was one of the economic sociologists who were for introduction of social welfare. Polanyi saw the unfettered markets as the cause of social and economic problems. The unfettered market undermine social order while also causing economic breakdown and paving way for dictatorship. In his work, Polanyi asserts that market economy and the state should be understood as one unit invented by human-referring this as Market society. This means that a competitive market needs strong state to mitigate its failures and correct social and economic inequalities. Solution to capitalism negative effects would be attained through destruction of basic historical social order. Basing his argument on Speenhamland laws which were meant to help poor rural population in England, through out door relief, he asserted that this was only a way of preserving historic social orders and traditional production systems. Social classes will continue to exist and income disparities will widen. Polanyi did not support classical economist claims that market can ensure smooth flow of the economy. Capitalism encouraged social classes of the rich and poor.
Capitalist aim was to accumulate profit through exchange transaction in the market. So it is market based ideology. According to him this will results into social dislocation. He claimed that self regulating market separates society into political and economic realms. It is this tendency of self regulating market to separate itself from the society that necessitate for introduction of welfare so as to protect the society from market failures. Polanyi concludes that social welfare legislation should be aimed at correcting social dislocation imposed by unfettered free market. (Hirschman 1991 p 27)
Hayek on the other hand was a proponent of free market and was against socialist thought. Although being a proponent of capitalism, Hayek agreed that government has a role to play to ensure smooth flow of the economy. He argued that central authority power should be brought into control. To him, individuals and groups in a centralized economy are the one to determine resources distribution and therefore planners will never have sufficient information to allocate resources effectively. Therefore, it is only the price mechanism that can allow for effective allocation of resources. Hayek claims that, the role of the state should only be to maintain rule of law and eventually price mechanism will allow society members to achieve their diverse complicated ends. The introduction of social welfare legislation should only be aimed at maintaining order. Hayek viewed government intervention to redistribute income as unacceptable and an intrusion to individual freedom. However, Hayek asserted that social legislation should be introduced to provide for those threatened by starvation or indigence only
Hayek and Polanyi had room for introduction social legislation. Polanyi asserted that the effects of unfettered competitive market are the main cause social dislocation. In his case, social dislocation will include high levels of income inequalities, and distributive injustice characterized by very poor and rich individuals. Existence of dictatorial central authorities will prevail. Society will be separated into political and economic realms. In such an economy social welfare legislation should be introduced to combat this. The society will have to react to these dislocations through social welfare legislation. Hayek on the other hand, assert that, introduction of social welfare legislation should be based on evidence of threats of famine and starvation, cases of poverty and any other threat to basic life of human.( Hirschman 1991 )
Answer to question 2
Lindblom assert there must be a close relationship between the business and the government. Government has to provide necessary environment to ensure that business people perform their task. The results will be that, business will take an active role in determining policies and issues that are affecting the economy as a whole. The popular control by the citizens will be avoided by the businesspeople and encourage close consultation between them and the government. Businesspeople also own communication institutions which they utilize to influence voters decision. In one way or another, government will have to depend on the businesspeople. As a result, business people significantly have a greater political influence and power than other groups since they are charged with the responsibility of organizing capitalist society production activities. Similarly, the government considers business activities as an essential part of economic activities that will ensure achievement of its objectives. Thus, every policy made by the government will be subject to business people scrutiny and influence. (Hirschman 1997 p 50)
The result of the government business relationship is that it becomes government’s major task to devise and sustain an incentive system for businesspeople, to be concerned of business interests, and to award them as incentive, as a sign of closeness of the government participation. Consequently government relationship with businesspeople will not be like that with any other groups. Government policies will therefore be made to ensure good business environment which will consequently lead to good profits and performance of the businesspeople. (Hirschman 1997)
In his argument O’Connor assert that a good government businesspeople relationship is indispensable and imperative. The government must provide for conditions that will enhance business performance, ease capital investments which will culminate to economic growth. Any anti business policy will be punitive to the government and economy as whole. It will discourage capital investments and business activities, lead to recession, fall in tax revenues and the ruling government will become unpopular to the public. To the government, business people are essential stake holders who should be consulted regularly. Policies affecting markets are not determined by the public or parliament opinion. It is the business people who matters. Any anti business policy, no matter how popular it is, it will have to be brought down to serve business people. (Hirschman 1997)
Both arguments are almost the same. The government has to ensure good environment for business people. One objective of government is to ensure welfare of its citizens. This is achieved by encouraging economic growth. Business people are one of the main actors in economic activities. They organize and control the capitalistic society. It is through enhancement of productive economic activities by the business people that the government will ensure desirable economic growth. Policies such as profit taxation, and wage regulations will affect the business. The government will have to consult with business people before enacting such policies. On the other hand, business people will reciprocate to good and enabling policies by investing more in the economy and enhancing business activities that will culminate to achievement of desirable economic growth. The credit will go to the government. To the society, it will be a government to applaud and vote for in the next election.
These two arguments are compatible. They both show how government and business people dependent on one another to achieve different objectives and how their relation dictates the working of the economy at large.
Answer to question 3
The emphasis of social welfare by many economies has led to increase in proposals for increase in minimum wages and ‘living wages’. Minimum wages is meant to increase income equalities in the economy. It also serves as a form of social welfare legislation by the state. As social welfare legislation objective is to strike a balance between capitalism and socialism ideology, sociological economists will greatly support this while capitalist will be reluctant to accept this idea. To a capitalist, increase in minimum wages and living wages is a decrease in profit margin. They will strictly assert that forces of labor market should be allowed to determine wages. Additionally, in a competitive free market, wages should equate to marginal productivity. Increase in minimum wages will result into inequality where those who earn increased minimum wages will receive more than their marginal productivity. The unfair earnings by the workers result into losses to the production means owners. The socialist economists will view this as a big step in eradicating income inequalities and encouraging distributive justice. (Hirschman 1991)
Hayek as a supporter of capitalism will not welcome such proposals. As it is made clear in his work, market mechanism should work should be left free and government intervention should be only come in form of rule of law to ensure smooth flow of the economy. A proposal for increase in minimum wages is unfair and unacceptable. It should be unheard off. The only government intervention that should be accepted is the one meant to help those threatened either by starvation or extreme poverty and cannot afford the basic needs. Hayek will propose that wages should equate to the marginal productivity of labor.
The price mechanism will determine the price of goods produced by the labor employed. This will eventually be a measure of labor productivity. Wages will be determined on this price. Eventually, market mechanism will have worked it all. Hayek will argue that minimum wage increase will disorient markets. In a case where marginal productivity is less than wage paid and wage paid is high than market price of the commodity produced, then the owner of means of production will incur losses. Although increase in minimum wages may be meant to reduce inequalities, the end result will be increase in equalities on the part of the owner of production means which jeopardize the situation further. (Hirschman 1991).
Polanyi as an economic sociologist will be in support of these proposals. To him, these proposals will be one of the society reactions against social and economic disorders created by the capitalistic economy. He will applaud the proposals and recommend them for every economy. To him it will be a way of ensuring distributive justice among owners of factors of production. Polanyi will argue that this will increase income of the minimum wage workers. Increase in income will lead to an increase in their utility as they will be able to buy more goods and services as the rich and political elites do. (Hirschman 1991)
O’Connor as a Neo-Marxist will view this as an important step towards a revolution of ensuring the government serves the interests of all groups of the society. As Marx claimed, government is a tool for furthering the elites selfish interest, then empowering the poor will be a good step in ensuring a responsible government to all citizens. O’Connor will undoubtedly applaud these proposals. To him it will be a move to redistribute income from the rich to low income workers. (Hirschman 1991)
Answer to question 4
Recently there has been call for health reforms that will ensure health care for all citizens. Such a policy is meant to tax the rich and subsidize health services especially for the poor and the old population. This has been a proposal by social welfare inclined groups and politicians. However the proposals have not been welcomed by capitalists and especially insurance companies’ owners. The capitalists have been lobbying against these proposals. To them this will affect their earnings and cut off their income. They assert that the low income earners and old people should pay for their health services bills. However to those soliciting for these proposals, this is a big relief to the beneficiaries. It will also enhance income equality. The beneficially of such policies can use the income saved through paying subsidized health care services to purchase other basic needs so as to increase their utility.(Hirschman 1991)
Hayek reaction to such proposals will be inclined to that of those lobbying against health care policy. As asserted by this economist, government intervention to ensure social welfare should only be based on situation where beneficiaries are threatened by starvation or indigence. It should only be meant to ensure survival of the threatened poor population. He will loudly object provision of subsidized health care services to the old rich population. Hayek is likely to claim that unemployment benefits is a good assurance from starvation and indigence, so any government intervention to provide free or subsidized health care services should not exist. Incase where this policy is implemented through the public health facilities, this will affect demand for health services for the private sector. Eventually this sector will have reduced revenues and reduced income to the owners. The policy proposed also requires that insurance companies should not discriminate against those with chronic disease owing to their high cost of insuring. Hayek reaction to this is that this is a form of inequality to the insurance company owners and their rational decision is not respected at all. He will prefer a situation where such decision are allowed to be determined in the market where buyers and sellers utilize the information they have to make rational decision. (Hirschman 1991)
Polanyi will view this as a society reaction against economic and social disorders which have resulted from market mechanism. It is through market failure in resource allocation of resources that has lead to income inequalities. These inequalities have led to poor and rich classes. The poor cannot be able to pay for their health care bills. Reacting to this, the society will propose for health care services to subsidized health services for the poor through taxing the rich. Polanyi will have no problem with this proposal since it is a spontaneous occurrence initiated by the society but not for any self individuals. (Hirschman 1991)
O’Connor view is that this is an initiative by revolutionists to ensure equality through taking over the control of the government expenditures. As a proponent of government intervention he will applaud these and term its implementation as a century achievement. O’Connor will term those opposing the proposals as selfish people whom wish is to behold the government for their selfish interests. He will see opposition to this policy as part of necessary conflict which in the fiscal operations. O’Connor will also draw a distinction that it is only the old poor who should benefit from such a policy. (Hirschman 1991)
Answer to question 5
Labor union is a group of workers who are brought together to achieve certain common goals e.g. improved working conditions, desirable wages, and good allowances.
Marx believed that pure communism, should replace capitalism where the society will be stateless, and classless. In his work, Marx asserted that this will be achieved after a period of proletariat dictatorship. The revolution from capitalism to socialism will be achieved through actions organized by global working class. Marx was for workers state and democracy where the workers will not be exploited and will be fairy rewarded and income inequalities will not exist. Contemporary workers movement can be traced back to Marx work. Marx will view the labor unions as a movement towards liberation of workers from exploitation by the capitalists. It will be a one step towards pure socialism. To him it will be start of a classless society with neither the rich nor the poor. (Hirschman 1997)
Hayek on the other hand, believed that union movements should be voluntary based on correct understanding of rule of law and freedom of association. Hayek was against most features on labor unions. Practices such as ‘closed shop’ by labor unions excluding non members from initial employment and its continual will not be acceptable to Hayek. He will also condemn yellow dog contracts (union free) where the employer and employee agree that employee will not subscribe to any labor union during their employment period. He will also be against ‘union shops’ which require that where a non union worker is employed, he/she must eventually join the labor unions. According to Hayek such practices are against freedom of association. As a proponent of capitalism and free market, labor unions practices do not give a chance to market mechanism to determine the wages. Some labor unions instead, coerce employers to increase wages through threats and strikes. They also force the employers to continue employing workers whom they may wish to lay off during hard economic conditions. ‘Union shop’ will also force newly employed workers to join unions even if this is against their will. To Hayek this is against rule of order and unfair to the employers. (Hirschman 1997)
O’Connor as a Neo-Marxist will certainly have views related to Marx. He will consider labor unions practices as a move to ensure the workers take control of the economy from oppressive employers who are out to exploit them and accumulate capital. Act of joining together all workers will foster a revolution towards a more fair society where resources are equally distributed. (Hirschman, 1997)
Olson as an economist who rewrote Adam Smith’s work will view labor unions practices as a part of furthering the selfish interest of individuals. According to Olson, labor unions practices where there is no coercion are part of self interest of individuals. People seeking jobs will submit to labor unions practices such as ‘closed shop’ in an effort to secure employment which will be driven by their selfish interests. He will not view labor unions as an organization of workers who are furthering a common goal, but an organization of individuals collectively furthering their individual interests. It is only through these selfish interests that keep workers together in a form of union. (Hirschman 1997)
Polanyi will view labor unions as a reaction by the society against social and economic disorders resulting from unrestrained market mechanism. To him, this is an attempt to ensure inequalities in income and eradicate social classes of poor and rich elites.
Answer to question 6
Keynes as one the great economist of 20th century has played a great role in study of economics. In his work ‘The general theory of Employment, Interest and Money’ which was published after the great depression of 1930, Keynes was against capitalism, and condemned free market mechanism as the main cause of the hard economic conditions. Keynes proposed that free market cannot assure smooth flow of the economy. Government intervention is imperative and indispensable in achieving economic growth. Through government interventions in terms of monetary and fiscal policies, the market mechanism will be capable of ensuring economic growth. Fiscal policies to be employed should include taxation and government spending. The monetary policies include reserve requirements, discount rates, and open market operation.
Keynes asserted that these interventions can be applied to check on the business cycle to achieve desired results. When an economy is in the depression phase, Keynes suggested that the government should take expansionary policies. Expansionary fiscal policies should be in form of increased government spending and lowering taxes. Keynes argued that increase in government spending will increase level of employment among the households and this will increase their spending. Consequently, increased demand from the household will be an incentive to investors. Investment will increase and this will increase demand for labor. This will eventually increase employment level, household income, demand, and the result will be increase in production activities and eventually economy will shift from depression to the growth phase. The expansionary fiscal policies should be combined with expansionary monetary policies such as reduction in requirement reserve, the discount rate, and purchasing of government bonds. This will increase money held by the public, increase the purchasing power and demand which will lead to more investment and economic growth. Taxation reduction will also increase households’ income which will increase their demand for goods and services in the economy. High demand will propel more investment, increase in production and consequently economic growth.
In case of inflation, Keynes suggested for taxation and reduction in government spending as the fiscal policies. This will reduce purchasing power of economic agents which will consequently decrease demand in the economy. This will pull down the prices and inflation will be checked. These fiscal policies should be employed in conjunction with monetary policies such as increase in reserve requirement, the discount rate and selling of government bonds which will reduce money with the public, reduce demand and consequently check the inflation.
O’Connor describes government interventions as necessarily conflicting issues. As Keynes suggested, the fiscal policies include government spending and taxation. On the other hand, monetary policies include requirement reserves, discount rate and open market operation. O’Connor in his work agrees that there is a need for government intervention. He defines state function into two categories: ensure favorable conditions for capital accumulation and also ensure social harmony. These two functions should be executed properly to avoid what O’Connor calls Fiscal Crisis of the State. fiscal policies such as an increase in government spending in security, social welfare, and public goods is necessary for ensuring social harmony for the capitalist economy. On the other hand, the government should ensure favorable environment for capitalistic activities which will ensure capital accumulation. Policies such as low taxation on corporate income, low discount rate and reduction in reserve requirement will favor capital accumulation. However, in encouraging low taxation, this will reduce revenue to the government. This will threaten government ability to ensure social harmony. In such a case, the government should seek for economic policies that will counteract this.
Answer to question 7
Adam Smith is one of the greatest classical economists. According to Smith the working of an economy is as a result of efforts of various individuals to further their own interests. The sellers will offer goods and services to the buyers not that they want to meet the needs of the buyers but to meet their needs through the market.
Olson interpreted Adam Smith theories using theories of selfish interest. In part of his work, ‘Economics of Autocracy and Majority Rule’ shows how autocratic governments are controlled by dictators or other ruling interests who want to further their own interests. He compares the ruling interests to those of firms, consumers and workers. This is a further application of the concept of self interest by Adam Smith based on the assumption that economic agents are rational self interested beings. Mostly the self interests by autocrats will determine the policies by such government. The policies will focus on ensuring that their interests are best served. To Olson, even if an autocrat obtained power through revolution by support of majority, he/she will eventually seek to take as much as possible from others. On the other hand, such a leader will put into consideration the will of the subjects e.g. if he want to further his interest through taxation he/she will consider levying a moderate tax and ensure the incentive of his/her subject to produce and ensure a reliable tax base since high taxation will lead to less production and therefore his/her interest will not be met as wished. An autocrat will also spend some of resources that could be spent on his/her consumption to provide public goods to those from whom he takes. This will ensure a good reputation and support by the subjects. (Hirschman 1997)
Many policies are also as a result of economic agent’s effort to further self interests. An example is subsidies that favor individual industries. They arise out of pressure from firms’ organizations, professionals or workers who are in one way or another affected by the industry.
In describing how groups such as labor unions are formed, Olson asserted that this is a way of furthering individuals’ interests. A worker will join a labor union because he/she will like to have a better salary, good working conditions, and benefits that may arise from such association. It is not that a worker is interested with ensuring good working condition of the other workers.
Employers and business people will form organization to press for policies that will further their own interests as described by Olson and Lindblom. The government and business people relationship is a self interest based relationship. The business people will press enactment of policies that will favor their business activities. On the other hand, the ruling government needs to ensure economic growth which is greatly determined by business people activities. If business people succeed, the economy is likely to be at the desirable track, the image of the government will be good to the other subjects and political mileage will be achieved. Similarly, business people interests will also have been met. (Hirschman 1997)
A businesspeople organization is not formed because one want to ensure the welfare of the other person, but it is individual interest to acquire more wealth brings them together. The government does not positively respond to the businesspeople demands because it wants businesspeople to acquire more wealth but to ensure economic growth that will ensure its good reputation and ensure the individuals in the government will be voted in the next election.
Olson interpretation was therefore extension of Adam Smith concept of selfish interest as far as groups’ formation motive is concerned. (Hirschman 1997)
Answer to question 8
Smith, Marx and Keynes works are of great importance to our contemporary economic study. Smith introduced the concept of self interest which is the main drive in capitalist economy. Marx introduced concept of communism which is the main drive of socialistic economies. Keynes on the other hand is the founder of government intervention in the economy.
Adam Smith was a classical economist and also referred as father of political economics. This economist believed that economy is always at full employment, market is perfectly competitive, and that free market mechanism is the best way of ensuring smooth flow of the economy. Smith in his work introduced the concept of invisible hand which brings together the economic agents in their effort to further their own interests. He described an economy as a combination of individuals with different interests. The working of the economy is achieved through collective effort of individuals to achieve their objectives. He gave an example of a butcher who will not offer meat to the buyers because he/she want to meet their interests, but his/her action will be aimed at earning a living and meeting his/her pressing needs. He asserted that economic agents should be allowed to further their own interest as long as they do not harm other party. Adam Smith work is of great influence in the modern economic study. Most of today’s economies are capitalistic with some degree of government to correct market failures and externalities. In such economies, economic agents are allowed to further their selfish interests as long as they do not affect others consumption and production functions.
Marx work was based on communism ideologies. He wished for a society which will be stateless and classless. In his work he claimed that capitalistic economy is an economy where social inequalities are encouraged with capitalist exploiting the workers. He proposed for workers driven revolution and setting up workers state and democracy. His work is of great importance in our modern society. Contemporary economies are encouraging social welfare to ensure equality and distribution of income. Capitalistic economies are employing some of socialistic aspects so as to mitigate the negative effects of the free market economies.
Keynes was the father of many government intervention policies. His work directed to providing a solution to the great depression of 1930 has widely been applied. Keynes opposed classical economists’ claims that free market mechanism will ensure smooth flow of economy. Instead, he asserted that, free market will result into inefficiencies and failures as it was during the 1930 depression. Therefore, government interventions are necessary in a capitalistic economy to ensure smooth flow of the economy. Keynes introduced concept of fiscal and monetary policies which he considered as important tools of government intervention. He divided this policies into two broad categories; fiscal and monetary policies. Fiscal policies include taxation and government spending. Monetary policies on the other hand include regulation of reserve requirement and discount rates and the open market operations. The relevance of Keynes concept is not only in economic theories, but also practical employment in many economies. The recent financial crisis resulting from market failure saw many governments employing a number of fiscal and monetary policies. E.g. USA has been increasing her spending; England had to lower interest rate to save her economy from recession due to financial crisis effects.
Hirschman, A. The Rhetoric of Reaction: Perversity, Futility, Jeopardy. Harvard University
Hirschman, A. The Passions and the Interests: Political Arguments for Capitalism before Its
Triumph. Princeton University Press. (1997)