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Session 5: The Battle for the World Economy: Part One Students participating in this class session will prepare their homework assignments and post their responses in Drop box 5 on the course lesson board by 5:00 p.m. on the Sunday evening immediately following each on-campus class meeting. However, all class readings must be completed prior to class convening to insure students can participate in class discussion. Remember you are required to know the answers to each and every one of these questions for the Comprehensive Exam.
The
Commanding Heights:
Episode
One, The Battle of Ideas
The social and economic catastrophe left in the ashes of World War I
ignited an intellectual and political struggle that would last
most of the 20th century -- a battle between the powers of
government and the forces of the marketplace over who would
control the economies of the world's great nations.
"The Battle of Ideas" tells the story of how, for half a
century, the world moved toward more government control --
from the centrally planned economies of the communist world to
the "mixed economies" of Europe and the developing
world to the United States' regulated capitalism -- and then
began to move away.
The ideas of two economists lay at the center of that struggle: John
Maynard Keynes, the elegant Englishman who advocated
government intervention to control the booms and busts of
capitalist economies, and Friedrich von Hayek, the Austrian
immigrant who argued that government intervention in the
economy would erode human freedom and was doomed to failure.
In western democracies, Keynes's ideas would dominate for decades,
until the economic crises of the 1970s forced political
leaders to look for new ideas, and rediscover Von Hayek's
theories. In the 1980s, the simultaneous emergence of the
conservative governments of Margaret Thatcher and Ronald
Reagan, who both embraced Hayek's free-market ideas, set the
stage for a worldwide capitalist revolution.
Adam Smith (1776) The
Wealth of Nations
p. 270-286; 307-311; 341-360;
(Further Reading (if you so choose):
Daniel Yergin and Joseph Stanislaw, The Commanding Heights.
Video Transcript
One).
Pick
four reading discussion questions to answer between questions
1-7.
Students participating in this class session will prepare their homework
assignments and post their responses in Drop box 5 on the course lesson board by
5:00 p.m. on the Sunday evening immediately following each on-campus class
meeting. However, all class readings must be completed prior to class convening
to insure students can participate in class discussion.
Remember you are required to know the answers to each and every
one of these questions for
the Comprehensive Exam!
1.
What is the
difference between productive and unproductive labor from the perspective
of Adam Smith?
2.
Consider this explanation from Adam Smith about how resources to
create capital value are utilized in agriculture and manufacturing:
"Though the whole annual produce of the land and labour of
every country is no doubt ultimately destined for supplying the
consumption of its inhabitants, and for procuring a revenue to them; yet
when it first comes either from the ground, or from the hands of the
productive labourers, it naturally divides itself into two parts. One of
them, and frequently the largest, is, in the first place, destined for
replacing a capital, or for renewing the provisions, materials, and
finished work, which had been withdrawn from a capital; the other for
constituting a revenue either to the owner of this capital, as the profit
of his stock, or to some other person, as the rent of his land. Thus, of
the produce of land, one part replaces the capital of the farmer; the
other pays his profit and the rent of the landlord; and thus constitutes a
revenue both to the owner of this capital, as the profits of his stock,
and to some other person as the rent of his land. Of the produce of a
great manufactory, in the same manner, one part, and that always the
largest, replaces the capital of the undertaker of the work; the other
pays his profit, and thus constitutes a revenue to the owner of this
capital." Explain what Smith has in mind when he talks about
"replacing capital."
3.
Now Consider
this quote from Smith: "That part of the annual
produce of the land and labour of any country which replaces a capital,
never is immediately employed to maintain any but productive hands. It
pays the wages of productive labour only. That which is immediately
destined for constituting a revenue, either as profit or as rent, may
maintain indifferently either productive or unproductive hands."
Reflect on Smith's words and explain what Smith is saying here.
4.
In speaking of the creation of profit, Smith uses these words:
“Whatever part of his stock
a man employs as a capital, he always expects it to be replaced to him
with a profit. He employs it, therefore, in maintaining productive hands
only; and after having served in the function of a capital to him, it
constitutes a revenue to them. Whenever he employs any part of it in
maintaining unproductive hands of any kind, that part is from that moment
withdrawn from his capital, and placed in his stock reserved for immediate
consumption.” Why would Smith assert that capital resources are only used
to maintain “productive hands” while resources used to maintain
“unproductive hands” constitutes a drain from capital resources and is
reserved for immediate consumption? What is he saying here and what is
rationale for saying this?
5.
Smith elaborates upon the implications of the use of productive
and unproductive labor by distinguishing between French communities that
principally serve the judicial system or cater to nobility and those
communities that produce goods or services for sale. He states the
following: “The proportion between
those different funds [devoted to productive and unproductive labour]
necessarily determines in every country the general character of the
inhabitants as to industry or idleness. We are more industrious than our
forefathers, because, in the present times, the funds destined for the
maintenance of industry are much greater in proportion to those which are
likely to be employed in the maintenance of idleness, than they were two
or three centuries ago. Our ancestors were idle for want of a sufficient
encouragement to industry. It is better, says the proverb, to play for
nothing, than to work for nothing. In mercantile and manufacturing towns,
where the inferior ranks of people [what we would call working class
people] are chiefly maintained by the employment of capital, they are in
general industrious, sober, and thriving; as in many English, and in most
Dutch towns. In those towns which are principally supported by the
constant or occasional residence of a court, and in which the inferior
ranks of people are chiefly maintained by the spending of revenue, they
are in general idle, dissolute, and poor; as at Rome, Versailles,
Compeigne, and Fontainbleau. If you except Rouen and Bourdeaux, there is
little trade or industry in any of the parliament towns of France; and the
inferior ranks of people, being chiefly maintained by the expense of the
members of the courts of justice, and of those who come to plead before
them, are in general idle and poor. The great trade of Rouen and Bourdeaux
seems to be altogether the effect of their situation. Rouen is necessarily
the entrepot [port of entry] of almost all the goods which are brought
either from foreign countries, or from the maritime provinces of France,
for the consumption of the great city of Paris. Bourdeaux is, in the same
manner, the entrepot of the wines which grow upon the banks of the
Garronne, and of the rivers which run into it, one of the richest wine
countries in the world, and which seems to produce the wine fittest for
exportation, or best suited to the taste of foreign nations. Such
advantageous situations necessarily attract a great capital by the great
employment which they afford it; and the employment of this capital is the
cause of the industry of those two cities. In the other parliament towns
of France, very little more capital seems to be employed than what is
necessary for supplying their own consumption; that is, little more than
the smallest capital which can be employed in them.” Given this explanation, from a purely economic perspective what
conditions for the employment of labour are most sustainable? Explain why.
6.
Smith extols frugality with these words: “By what a frugal man
annually saves, he not only affords maintenance to an additional number of
productive hands, for that of the ensuing year, but like the founder of a
public work-house he establishes, as it were, a perpetual fund for the
maintenance of an equal number in all times to come. The perpetual
allotment and destination of this fund, indeed, is not always guarded by
any positive law, by any trust-right or deed of mortmain. It is always
guarded, however, by a very powerful principle, the plain and evident
interest of every individual to whom any share of it shall ever belong. No
part of it can ever afterwards be employed to maintain any but productive
hands, without an evident loss to the person who thus perverts it from its
proper destination.” With these words he suggests that one essential function of the
exercise of economic frugality or conservativeness is the capacity of the
frugal employer to maintain his laborers even in economic downturns,
meaning that what we would call a “welfare” function is built into the
basic assumptions of Smith’s economic philosophy.” However, not every
economic player is frugal and thinks ahead to protect his/her laborers
from economic down turns. Smith characterizes such “prodigals” with
this description: “The prodigal
perverts it in this manner: By not confining his expense within his
income, he encroaches upon his capital. Like him who perverts the revenues
of some pious foundation to profane purposes, he pays the wages of
idleness with those funds which the frugality of his forefathers had, as
it were, consecrated to the maintenance of industry. By diminishing the
funds destined for the employment of productive labour, he necessarily
diminishes, so far as it depends upon him, the quantity of that labour
which adds a value to the subject upon which it is bestowed, and,
consequently, the value of the annual produce of the land and labour of
the whole country, the real wealth and revenue of its inhabitants. If the
prodigality of some were not compensated by the frugality of others, the
conduct of every prodigal, by feeding the idle with the bread of the
industrious, would tend not only to beggar himself, but to impoverish his
country.” So, while the “ideal” situation is for employers of
capital to frugally and responsibly utilize that capital to produce profit
to be shared by laborers and shareholders alike, this “ideal” is based
upon a work ethic that may in fact be absent resulting in the prodigal or
illegitimate utilization of resources for non-productive activities. In
aggregate, Smith sees the overall capitalist system as effectively
functioning in that the “prodigality of some” is compensated by “the
frugality of others.” Provide me with two current examples illustrating
the “prodigal” utilization of capital and two more of “frugal”
capital utilization. Thereafter, tell me whether you believe this form of
capitalism where the excesses of some are to be compensated for by the
frugality of others is an efficient and effective means for sustainably
maintaining an economy, particularly in respect to the many pressing
environmental and climate-related issues the world is currently facing.
7.
Adam Smith, using an agricultural illustration, discusses the
economic relationship between the countryside and towns. He describes this
as a reciprocal relationship in which both communities (rural and town)
thrive in interaction with one another. However, he goes on to discuss
“opulence” or the realization of lifestyles that rise significantly
beyond the basic level of subsistence. In so doing, he states the
following: “As subsistence is, in the nature of things, prior to
conveniency and luxury, so the industry which procures the former, must
necessarily be prior to that which ministers to the latter. The
cultivation and improvement of the country, therefore, which affords
subsistence, must, necessarily, be prior to the increase of the town,
which furnishes only the means of conveniency and luxury. It is the
surplus produce of the country only, or what is over and above the
maintenance of the cultivators, that constitutes the subsistence of the
town, which can therefore increase only with the increase of the surplus
produce. The town, indeed, may not always derive its whole subsistence
from the country in its neighbourhood, or even from the territory to which
it belongs, but from very distant countries; and this, though it forms no
exception from the general rule, has occasioned considerable variations in
the progress of opulence in different ages and nations.” So
conceived, “opulence” presupposes a “surplus” of resources from
the countryside which elevate lifestyles in the town well above basic
subsistence themselves. In an
economic downturn, failure to achieve a surplus in the agricultural
community threatens the basic subsistence needs of people in the towns and
cities. Comparatively, in times of economic plenty, significant surpluses
generated in the countryside can ultimately improve lifestyles within the
towns and cities beyond mere subsistence to opulence. My question for you
is how opulent do you feel a citizen’s lifestyle should be? Should it be
as opulent as an individual wishes it to be or are the environmental
activists correct in asserting that taxes and other restrictions should be
employed to dramatically limit opulence in the interest of maintaining
subsistance?
1.
What happens when
governments control or dominate a national economy?
2.
Why have most
countries in the world turned back toward free-market capitalism after 80
years of experimentation with socialism and communism?
3.
Why did so many
socialist economies fail?
4.
What are the
benefits and drawbacks of the capitalist economic system?
5.
What happens when
command economies transform into market economies? How is the transition
best undertaken?
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