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Economic development has been the area of concern
to the world at large in all times. Either it
was prior to the World Wars, the post cold war
period or the period recognizing globalization.
Economic strength has always been to struggle
to gain power. In the past countries used to believe
that the only means to gain economic strength
and power was occupation of lands, fighting and
winning other territories. However, in the present
world power is determined through economic strength,
as the means of economic development has changed
immensely then the past. In the period prior to
the cold war, USA was the super power, and then
slowly and gradually he started loosing all its
economic power and went into the era of its Great
Depression. However many scholars say the Great
Depression were a global event and not a US debacle,
though the emphasis has always been on the happening
in USA. (Hall, Thomas E. and David J. Ferguson,
1998) So lets try to understand the causes of
Great depression and the implications of the economic
theories in practice.
Causes of the Great Depression
Great Depression is recognized as one of the
most severe economic downfall of US ever happened
in the history of America. This whole period of
economic downfall lasted for about a decade as
it begins during the late months of 1929. Though
there are many factors that are held responsible
for the Great depression in America, but the principle
cause was the amalgamation of the immensely unequal
distribution of wealth throughout the period of
1920’s. Furthermore the widespread stock
market speculation that took place in the following
years is also one of the main causes. Wealth was
distributed in a very much unorganized an uncalculated
way to all over the nation, including the industrialist,
middle class, the rich as well as the agriculturists
with in the USA. Moreover wealth was desperately
distributed between US and Europe. So the imbalance
of wealth created an unequal economy that kept
the US stock market synthetically high but practically
at the end resulted to large market crashes. (Gusmorino,
Paul A., III. 1996) Therefore the wrong and uneven
distribution of wealth all over with in USA and
between US and Europe was one of the major causes
of the Great depression.
However the most important thing to notice and
realize is growing gap b/w have and have not.
The unequal distribution among the industrialist
and the agriculturalist, the rich and the middle
class has created a wide gap between the rich
and the poor, which in the coming years resulted
in many other socio –economic problems.
For instance, during the period of 1923-29, the
average output per worker was increased to 32%
in the manufacturing industries while the average
salary for these working in the manufacturing
departments was increased only to 8 %. (Mc Elvaine,
Robert S.1984. P.38-39) So the workers were increased
that resulted in a better productivity but at
the same time the wages were not increased to
the average of hiring workers and achieving productivity.
Therefore the ratio between the increase of wages
and productivity was one fourth, which resulted
in a cheaper production cost but nor the workers
got any benefit nor the prices for the products
were decreased and all the profits earned due
to the increased productivity was kept with the
corporate profits.
Moreover, the federal government also played
a prominent role in developing the gap between
rich and the middle class. However, the conservative
government at that time favors the ones who use
to invest more in the federal business, which
were the rich class of the society. At the same
time the government favored them by passing the
Revenue Act of 1926 that was to reduce the federal
income and inheritance taxes radically. (Mc Elvaine,
Robert S.1984. P.39)
Therefore, it was the increasing inequality
of economy between those who are economically
already sound and those who were just hand to
mouth i.e. the rich and the middle class, that
unbalanced the US economy. Thus it comes to our
understanding that a state can only be economically
stable if it has a balance in the in the demand
and supply percentage for a strong and proper
economic function, a country needs to reach a
balance in the total demand and the total supply.
Nonetheless the income should not be distributed
as desperately as it happened before the Great
Depression in US. Thus during the 1920’s
the supply of goods were far more then demanded
by the market. Basically the shortcoming was in
meeting the requirements of the industrialized
society to a satisfactory level rather then the
need of the products that were produced in the
market.
Economic Theories
The economic depression in America was due to
many reasons, as one single cause cannot be made
the only factor of this economic depression. Where
there was unequal distribution of wealth, which
was at the same time increasing discrimination
among the various classes in the society, on the
other hand there was high productivity with low
cost and high prices with out satisfying the demands
of the market. Nonetheless, the crash of the stock
market during 1920’s inflamed the economic
downfall in America. During this phase of severe
economic turmoil, Maynard Keynes, presented his
economic theory, which for a considerable extent
worked well in these times of economic depression.
Keynesian economic theory
Keynes was recognized as a socialist in disguise
as he had a very radical approach towards economic
progress. He presented the idea that in order
to recover the economic downfall, it is important
for the government to interfere in the market
and reduce the taxes as well as increase it’s
spending on the American people by allowing more
Americans to keep what they earned. This will
help America once again to be prosperous. (Collins
1991. P.13-15) However, at the same time he was
not at all a socialist but wanted to develop the
idea that the people of America should have enough
money to invest and help building the economy.
So his theory was used for economic recovery of
America at its extreme hard economic times. Where
he gave the solution to collect funds either from
the private sector or via aggressive government
spending programs with a perceptible amount of
tax cut. (Winkler1986. P20-22).
Keynesian economic theory was a contrast to the
theory of Supply Surplus, which was practiced
before his theory. Basically this theory was introduced
during the Regan administration in 1970’s
therefore, it is also known as the Reganomics.
During this period, the local governments as well
as the state government increased taxes over sale
as well as excise taxes. This idea resulted to
higher prices of the products as they were passed
from business to business and ultimately imposed
on the customer.
Though the philosophy of this theory was to
have such an economic medium whereby the output
and the prices are constant and at the same time
there should be no deficit and no surplus. However,
by supply side economic he means the supply of
goods, which supports a high percentage of taxes
with a low percentage of governments spending
to help the economic development. Nevertheless,
the Supply Side theory was in practice prior to
the great depression that ultimately resulted
to the great economic downfall while the Keynesian
theory emerged just after the aftermath of the
economic depression.
Socialism
Where the increasing inequalities in the American
society presented the idea of social change that
was related to the economic inequalities. The
socialist wanted to bring change in the society
where the means to bring the change were different
for different socialists. Some believed gradual
change should be adopted for a better socio-economic
growth while others favored for a rapid change
brought about via revolution. However the very
idea of socialism was there since the beginning
but took its modernized form during the 18th C
with the industrial revolution in the world.
Therefore, great structural changes started to
begin with the development of socialism in its
modern form of industrial revolution. The whole
Western Europe and North America went through
a transformative phase from agricultural trading
nations to industrial nations. Thus complex changes
occurred not only in the economic structure but
also in the life style of their people. For instance
the average worker passing the stage of a self
employed farmer reach to an employee at a larger
factory. In short it actually formed the working
class. (Newcombe, Julien,)
Capitalism
Capitalism is the most active and recognized
economic theory thought during the Great Depression
it weakened its strength due to many other factors
but it was believed that the gap between the various
classes is a temporary phase. The idea of social
harmony and economic development based on the
self-interest of not only the individual but also
the state and government was promoted under the
theory of capitalism. In a capitalist system,
the political development of the state and economic
development are separate issues and both are practiced
independently. So this provides more chances to
make wealth in a more efficient manner, at the
same time the individuals make personal effort
based on self-interest to raise the standard of
their living. There is no division of classes
as any class can earn depending upon its earning
capacity as the growing supply of products is
for every one. Capitalism is principally based
on a system of free market economy and trade liberalization
but this is the advanced and modern form of capitalism,
which was shaped after the end of the cold war
between USA and former USSR. Therefore, capitalist
theory is a balanced theory that serves the interest
of all people of the state no matter they belonged
to what ideological group or what class. It is
therefore, furnished with a strong and modern
form of nationalism for developing the economic
structure of America.
Marxism
Basically Karl Marx did not presented an economic
theory as his theory was related to history and
human nature. However, he spoke about the working
class in regard to their social as well as economic
security. Taking influences from the history he
also realized the importance of productivity but
his way of thinking was supportive to the working
class, which is in contrast to capitalism.
Therefore, he was of the idea that if feudalism
can be replaced by capitalism for a more successful
mode of production and better economic growth
then there should be a replacement to capitalism
too for a better productive growth. Actually he
was predicting the division of different classes
in the society and he idealized a society to be
a classless society. However, the Marxist ideology
is an extension of the socialism, which later
on was adopted by Soviet Union, China as well
as a few other countries as an influence of the
Great Depression. They believe that Marxism is
better then capitalism for a more stable economic
society. (Ross, Kelley L.)
Implications of Economic Theories in Practice
Positive Implication
History tells that the world has passed through
a phase of substantial changes where the very
ideologies and theories have been in constant
development with some change and advancement in
them. However, in the early stages prior to the
World War I the economic ideologies seem to be
in a transitional phase as at that time the most
successful economic theory was yet not explored
to its fullest extent. Moreover, with the end
of the World War I and the Great depression strongly
witnessed the need of a very efficient and constructive
economic theory that can bring massive economic
changes in America as well as over all in Europe.
Not only the economic development was the concerning
area but also the social structure was in strong
need to be built. (Teichman, Judith A. 2001. P.
13-15)
Thus after a decade slowly and gradually America
recovered its economic downfall and once again
emerged as a super power, which later on succeeded
due to its economic ideology of capitalism and
won the cold war too. Therefore, the world going
through a phase of multi power blocks to two super
powers and then one super power that is presently
America due to its capitalist theory. It was the
introduction of globalization and free-market
economy, trade liberalization and free trade along
with advancement of technology that brought the
world so close to enter the economic challenges
with a struggle based on self-interest, from individual
to government and then state-to-state and region
to region.
Consequently, we notice the strong and most
effective economic theory of capitalism implicated
even today fabricated under a modernized and advanced
structure. Now not only individuals are independent
to grow economically to raise their life styles
but also states are involved into trade and business
with each other, which has now introduced regionalism.
Today the world is struggling for only economic
power via strong economic development that ensures
the social as well as political development of
any state. Nonetheless privatization has gained
a lot of importance with the fast economic development
of the world along with the advancement of technology.
Now money is not earned only by trading with in
the country or to a neighboring country, but also
to countries of other regions, as well as using
Internet to enhance business to sell out products
and advertise via Internet globally with in few
minutes just by using a dial up connection. So
this is the implication of the theories practiced
in the past during and after the Great Depression
in today’s world.
Negative Implication
Though Marxism and socialism did not succeed as
good and efficient economic theories but they
did not stop their struggle and still rooted in
this capitalist society. Globalization that was
introduced as an extension of the capitalist economic
ideology has now many negative repercussions as
it has instead of bridging the gap between the
rich and poor countries widened the gap. For instance
the developed countries of the globe opens multinational
companies in the developing world with the idea
to help them develop their economy via the capitalist
ideology but later on start grabbing their sources,
provide them employment within their MNCs but
reduces their internal productivity. For instance,
where the MNCs are entered in any developing country,
it strengthens its root there due to its good
quality and satisfactory employment facility but
at the same time diverts the attention of the
masses from the local products, which returns
to a huge economic loss to that very country.
However, capitalism was initially with in the
state it was successful as former USSR lost the
cold war and accepted the capitalist theory, China
has become economically a capitalist follower
while politically still it is communist. So this
witnesses the near downfall of capitalism. Furthermore,
the economic conditions of USA is witnessing bleak
economic future that can result it to go into
the same economic depression if not revised its
economic policies as now the world has emerged
with many other economic giants that will leave
America behind.
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