There are three basic economic models.
1. The Classical Model
This covers a period form 1776 when Adam Smith published his Wealth of Nations, until 1848 when Mill put before the world his Principles of Political Economy. Between the publication of these two works lay the astonishing career of Ricardo, who like Mill, was a child prodigy. Unlike Mill, he had little formal education.
He was born in 1772 to Jewish parents who settled in London.
His parents had been involved with the money market and it was there that he followed them at the tender of fourteen years. Such was his ability that he was able to retire at the age of 42 and was persuaded by Mill to commit himself to writing. This he did, publishing some half dozen important works during the first twenty years of the 19th century. His retirement was disappointingly short, only nine years, before he died at the early age of 51.
Although the writings of these classical economists were diverse, they are mostly remembered for belief in free and unfettered competition within the economy - that the government that interferes least does the most good. Such a laisse faire doctrine informed most of the political thought of the last century.
The Classical Model was thus the earliest and simplest generally-accepted model and held sway for many years. But what may be suitable for the comparatively simple economies of 18th and 19th Century Europe, may be simplistic in a more complicated modern economic environment - or so some thought.
By way of example the Classical Model states that when interest rates are low (the cost of money is low) it should follow that production should increase. But between the World Wars it did not, and for this reason Keynesian economics distrusted the Classical Model and preferred fiscal policy as opposed to Monetarist Policy.
But why should anyone want to increase production because money is cheap? Production should only increase if demand increases. Increasing expenditure/production in the hope that the goods so produced will be sold is naive. Full employment can indeed be achieved by this method - making goods which cannot be sold - but the end result would be bankruptcy. Surely it would be better to increase demand first and increased production would surely follow.
The classical way of doing this would be to decrease the price of money and consequently the price of goods with it. Demand should increase, and with it production, as night follows the day. The trouble with such a purist view is that under normal circumstances this should indeed apply but after the depression things were anything but normal.
Once businessmen have suffered substantial losses it will require more than cheapness of money to entice them back into production. A man who has nearly drowned in a deluge may become afraid of his own bath tub. The reason why economists so occasionally agree with each other is because they take no account, or different accounts, of the psychological factors involved.
Out of this equation must not be left cultural factors such as the work ethic or the absence of it. Economics is a soft science (according to students in the Engineering faculty) and because it deals with man it is more of an art than a science. Or at the point it touches man it ceases to be a science at all and becomes an art.
Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management.
This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C
No comments:
Post a Comment