Major Economic Theorists
We will consider four thinkers who have made influential contributions to ideologies concerning the relation of economic activity and government. They are Adam Smith, Karl Marx, John Maynard Keynes, and Milton Friedman, ADAM SMITH AND "FREE" ENTERPRISE." Adam Smith ('2-1790), the economist who wrote The Wealth of Nations, reasoned that the strongest government was one in a country in which business prospered. He also felt that economic decisions were best made by individuals responding to the market rather than by government agencies. This theory kept government out of most business decisions and allowed modern industrialism to develop. Smith felt that government had no need to be concerned about wages or prices, since competition would set these at levels best for the total society. if wages ina business were too low, this would discourage workers from seeking jobs and eventually wages would have to be raised. If they were 'vo high, too many ar plicarus would show up, employers could then cut wages, and the excess job applicants would move to other employers. The same would be true of prices if too high, the seller is left with unsold merchandise and must cut prices. The movement of prices and wages would thus constitute an invisible hand which would direct both capital and labor into those economic which were most profitable for them and for so iety as a whole. Government intervention would be nit only unnecessary but positively harmful. since it would interfere with rational economic decisions. These ideas form the basis lor the system of C1pltnlism (or free enterprise, as it is often called).
KARL MARX AND COMMUNISM, Karl Marx (181B-1883) looked at economic activity as a theorist. He felt workers wa te ag s high and capitalists wanted rem low. This created an inevitable an ago I in which one or the other wa bound to lose. The capitalists appearedmore powerful because of their wealth and influence; but the workers, more numerous, were bound to end Then they would end the conflict elinunating the private ownership of the nam communism, common ownership by society. A number of nations now profess to operate according to the ideas of Marx, although their policies vary considerably and depart from Marx's ideas at many points. While the Soviet Union, the oldest Marxist country, has had some accomplishments, the relatively slow pace of its economic development and its brutally oppressive governgovernment make this example of communism unattractive that many modern Marxists deny that it is Marxist. However, the Marxist view of the governmental-economic relationship as mainly the focus of conflict continues to be influential. Many critics look at any change in governmental-economic relationships fromhe standpoint of their alleged effect on either workers or capitalists. It is usually assumed that seems S.od tor capitalists, it is bad for workers. Marxists would that capital from income held by government enterprises not from private savings.
Most of the industrialized countries are closer to Adam Smith than to Karl Marx.There are, however, two chief departures from Smith's teaching' the growth of a welfare s ate and the at to prosperity. The we state provides people with an It when they are stranded by the market economy. Likewise, busines leaders interrupt their ritualistic objections to government interference longenough to ask Ior subsidies a, d protection against competition. while these trends have had an effect in keeping government expenditureshigh, they are probably less important that the ideas of Keynes.
JOHN MAYNARD KEYNES AND "FINE TUNING' John Maynard Keynes (1883-1946) would beclassified as more of a functionalist than as a conflict theorist. He saw society as a. whole in which all groups prospered or suffered together. He felt society suffered because business seemed to move in alternate cyclesof prosperity and depression. In prosperity, business saw the chance for good profits and expanded rapidly. The expansion was usuallyoverdone, and then profits fell operations were then cut back, and unemployment rose. Keynes thought this could be corrected by increasing government expenditures in time of depression and cutting back in times of prosperity. Government expenditures were justified to keep economic activities stable. Deficit spending in a depression when private investment dropped would sustain economic activity and keep people employed versely, a drop in government expenditures during prosperity would allow more activity to be carried on by private business. Governments could borrow money during a depression and pay back the loans with money received from higher taxes in a period of prosperity.
Keynesian thinking was quite influential in the period from 1930 to 1975 and was often used to justify government policies. For a time, Keynesian policies appeared to solve the question of the relation of government and business in capitalist societies and depressions did indeed become less severe. It was all a matter of fine tuning" of government taxes, financial policies, borrowing, and' expenditures in ways appropriate for each' stage of the business cycle. But difficulties arose. Increased government expenditures did not always counteract the effects of a business depression as easily as expected, and they seemed to lead to inflation [Roberts, 1978]. The Keynesian remedy was attractive· but not always workable [Feldstein, 1981], A major criticism ell Keynesian policy is that there is always a demand for more governmentexpenditure. To increase government expenditures during a depression is popular, but to cut back on expenditures during prosperity and payoff government debt is difficult. Legislators cannot resist demands to spend money when it is available. This imperfect following of Keynesian policy leads to ever-increasing government debt and unending inflation.
Friedman's theories are so contrary to most current trends that it is difficult for any government to follow them, and evenhe counsels a gradual shift from a welfare state to a market economy. He is at his best in his criticism of collectivistlrgolicies which have failed to work as he has been amajor influence in current thought and has paved the way for the current "supply-side" economists who insist that government intervention has often tilted things in the wrong direction. Friedman sees a free market (capitalism) as being essential for a democratic society. Capitalism not only liberates economic energies, but it also limits the likelihood of heavy-handed government dictation.