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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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