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The current mainstream economic ideologies are founded on very distinct views on economics and social interactions. From free markets to state ownership of the economy, there is an entire spectrum of ideas founded way back in the days that still deeply influence existing economic discussions.

In this article we go through the main figures behind some of the most influential ideas followed today, expressing their economic and social ideas and the arguments behind them. We also try to establish a bridge with periods in time where those ideas were put in practice thus providing some real-world examples.

Karl Marx and The Communist Manifesto

Karl Marx (1818-1883) was a philosopher, author and economist that became famous due to his theories about capitalism and communism. In 1848, Karl Marx and Friedrich Engels published The Communist Manifesto, his most influential book. Later, he also wrote Das Kapital where he states his labor theory of value that the value of a produced economic good can be measured objectively by the average number of labor hours required to produce the good.                                                                                 

Figure 1 – Karl Marx

Operating from the premise that capitalism contained the seeds of its own destruction, in the mid-19th century, Marxism was created, serving as a theoretical base for communism. Marxism is a social, political, and economic philosophy that examines the effect of capitalism on labor, productivity, and economic development and argues for a worker revolution to overturn capitalism in favor of communism. This theory believes in the revolutionary communism which inevitably happens due to the struggle’s existence between the bourgeoise (capitalists) and proletariat (workers).

According to Marx, every society is divided into social classes with different powers in society. As base for the Marxism theory there is a capitalist society which is made of two classes: the bourgeoisie, who control the means of production and the proletariat, the part which in fact transforms the inputs into outputs. The latter has little power in the capitalist economic system which means that in periods of high unemployment rate, workers will be replaced very fast, and, according to the profit maximization profit, business owners would want the best of their workers while paying the lowest possible wages. All these points would create an unfair imbalance in the society leading to the alliance of the workers and consequently to a revolution in which the working class takes control of the means of production and would dethrone capitalism (capitalism contains the seed of its own destruction) and private ownership of the means would be replaced by collective ownership, first under socialism and then under communism with no more class struggles. Society would then be run by a central committee that would allocate all the means and resources within the economy without the intervention of markets and the price system.

Marxism has developed over time into various branches and schools of thought, and currently there is not a precise, concise, and single definitive Marxist theory.

The Marxism-Leninism was the self-described ideology of many communist states in the second half of the 20th Century. The repressive political regime and famines that led to the deaths of millions of people in the Soviet Union constitute what is regarded as one of the great tragedies of the previous century. Supporters of Marxism argue that the economic ideology and that Stalin’s oppressive political regime can and should be separated, and that dismissing the Marxist critic of capitalism because of the tragedy of the Soviet Union is fallacious.

John Keynes and the Keynesian Theory

Figure 2 – John Maynard Keynes

In the 1930´s a new economic school of thought emerged that represented a complete break from the previous theories of the deemed “classical economics”. In the wake of the Great Depression, – a gloom period of the world economy marked by low output and high levels of unemployment – the existing economic theory proved unable to both explain the causes of the severe worldwide economic downturn, as well as provide a suitable public policy response to launch the economy back on track.                                                                            

Consequently, in response to this, British economist John Maynard Keynes (1883-1946) developed a new theory that claimed aggregate demand as the most crucial driving force of the economy, calling for the need for government intervention to stimulate demand, hence becoming the founder of what is now modern macroeconomics.

Keynes’s theory was greatly revolutionary for its era, focusing instead on the “demand-side” of the economy and the impact of short-run changes on output, employment, and inflation. In his book “The General Theory of Employment, Interest and Money” (1936), he refuted the then-prevailing notion that free markets would automatically adjust to business cycle changes in order to guarantee a return to full employment (i.e., a situation in which anyone who wanted a job would have been able to get one as long as they were flexible in their wage demands). However, he argued that, as the paradigm of the 1930´s showcased, high levels of unemployment persisted even though people were willing to work for any price, which could simply be explained by the fact that firms were not hiring at all. Indeed, in true snowball fashion, as consumer confidence eroded and uncertainty increased, firms (also plagued by fear and pessimism), responded in kind in a self-fulfilling manner, by cutting back on investment and in their unwillingness to hire people to produce goods that would not be sold due to the weak demand. As a result, the recession became even more pronounced, in the form of a further plunge of aggregate demand and unemployment.

Faced with this, Keynes defended that stabilization of the economy in these recessionary periods should be achieved through government intervention in the form of public policies aimed at reclaiming full employment and guaranteeing price stability. Indeed, in accordance with his belief that prices, and particularly wages, are not quick to respond to changes in supply and demand, he argued that active fiscal and monetary policies were required to reduce the amplitude of the business cycle and thus boost aggregate demand and fight unemployment, ultimately succeeding in pulling the economy out of its depression. For that to be achieved, Keynes advocated for countercyclical fiscal policies, reasoning that during economic downturns the government should incur in deficit spending to compensate for the drop in investment, therefore increasing its expenditures and lowering taxes to promote consumer spending.

An example of the influence of Keynes ideas can be found between the 1933 and 1937 when, following the Great Depression, President Roosevelt implemented “The New Deal”. The New Deal was program of strong government involvement in the American economy through increased public spending, through work programs that employed people in public infrastructure projects, and through the increased government support of unionization.

Milton Friedman and the Free Markets Capitalism

Milton Friedman, born in 1912, was the twentieth century’s most prominent advocate of free markets. In 1976 he was awarded the Nobel Prize in economics for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Before that, he had served as an adviser to President Richard Nixon and was president of the American Economic Association in 1967.

Figure 3 – Milton Friedman

In Capitalism and Freedom, Friedman made the case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. His ideas spread worldwide with Free to Choose, the best-selling nonfiction book of 1980. This book made Milton Friedman a household name.                         

Although much of his work was done on price theory (the theory that explains how prices are determined in individual markets), Friedman is popularly recognized for monetarism. Opposing Keynes, Friedman presented evidence to resurrect the quantity theory of money, the idea that the price level depends on the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect.

Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP (Gross National Product) was a money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear.

Throughout the 1960s, Keynesians had believed that the government faced a stable long-run trade-off between unemployment and inflation (Phillips curve), and thus by increasing the demand for goods and services, permanently reduce unemployment by accepting a higher inflation rate. But in the late 1960s, Friedman challenged this view arguing that once people adjusted to the higher inflation rate, unemployment would creep back up. To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate. The stagflation of the 1970s (rising inflation combined with rising unemployment) gave strong evidence for the Friedman view and convinced most economists, including many Keynesians.

Conclusion

The article discusses some of the main themes behind the most mainstream economic ideas, providing real-world examples for which one. Their ideas have persisted the test of time and influence economic discussion until today.


Sources:

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia

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