The Evolution of Economics, Economic Systems and Politics
The science of economics, starting with Adam Smith –the father of economics, is the total efforts for developing an understanding of the economic behaviors of the humans. The science of economics follows a development path in defining the economics.
The first definition of the economics was based on the household management. Members of family specialize in completing some specific tasks. The specialization relies on the genders' traditional functions. This definition was developed by the philosophers in the ancient times before the Dark Age in Europe. Adam Smith developed this definition by creating a theoretical economic system which has the main factors of the invisible hand and market mechanism. The market mechanism, depending on the labor value of the products, could clear the market, and develop a suitable economic and social environment for every agent involved in the market mechanism (Barber 2009).
The idea of the labor value dependent market mechanism is developed by the followers of the classical economy school including David Ricardo. The neoclassical economy school added the analytical analysis by using the mathematical techniques in the science of economics. The market mechanism was interpreted by using the mathematical formulas.
The late neoclassical school economists developed a new approach to the economics: the institutional approach. They developed definitions for the agents in the economy, and each agent was a part of these institutions: producers, sellers, demanders, and government. The institutional approach made an essential contribution to the evolution of the economics by adding other factors which are not determined by the agents inside the free market economy.
There are three main questions to be answered in the economics: 1-For whom to produce, 2-How to produce, and 3- How much to produce. The answers given to these questions define the different economic systems: 1-Traditional economic approach, 2-Command economic system, 3-Free market economic system, and 4-Mixed economic systems. Each system is developed by the various approaches in the science of economics (Barber 2009).
Democracy is a political system which favors participation of all the agents in a country and protection of the rights of the minorities. Democracy is chosen as the best way of state management in the modern times. There is the high importance of equality and fairness in democracy. Each has the same rights and an individual’s rights end where the other individual rights start. The most prominent characteristics of the democratic management are the transparency. Transparency means that all the information in the democratic system is open to all the agents (Coyne 2016).
Democracy seems to have similar characteristics of the free market system: transparency, equal rights for everybody, no external pressure on the system, etc. The free market system has the idea of the existence of state involved in the market mechanism. The state is defined as a passive agent in the system until there occurs instability or safety problem happens in the economy. Therefore, the state might intervene the markets when there exists security issue or inconsistency (Coyne 2016).
The Keynesian approach supports the idea of a protectionist state involving in the market mechanism. State stays passive till the external powers break the market mechanism, and the market cannot clear. The state is a power which might push the market to a new equilibrium. Accepting the state as involved in the market mechanism, we take the other powers those might intervene the markets. Therefore, the other powers other than the market forces (buyers and sellers) might intervene the markets (Bateman 2015).
Democracy and free markets have similar characteristics, and the most important similarity between two is the accessible information rule (transparency). The intervention of the external powers makes the free market mechanism a political market. Subsequently, while considering the problems in the market, we need to take the all the political, economic and social facts and powers into account. This situation is named as the political economy by Phillips. The market mechanism or the decisions made in the economy is dependent on the political, economic, and social powers.
Political Economy in our Lives
The political economy explains how the powers interact each other in economy and shape markets. The market mechanism creates one of the most important fact: the market price. The market price is the information that carries clues in many aspects of the life. The market price means that one person can buy a product or a service at this price, and if the market price is not acceptable or affordable, then this person cannot consume this product or use the service. Another aspect, the production owners receive their shares from the market price. If the market price is high enough, the factor owners can develop a share plan respectively easier. If the market price is low, then the competition between the production factor owners would be relatively harsher.
A good example of how the political economy influences our daily life is the labor markets, and the political and social powers other than the economic forces influence the market price in the labor market, wage. The wages are determined in the labor market through a negotiation between the labor demanders (employers) and energy suppliers (employees). If there exists a free market, and then the negotiation between these two parties would determine the wage. However, the capitalists (employers) are stronger than employees. Therefore, they might use their political power for influencing the equilibrium wage to create a more advantageous position against the workers. The workers are weak agents against the employers as one by one. However, they can form a labor union, and become another political power. Also, if the legal regulations allow the employees to have some rights as forming a labor union, they might increase their power by getting support from the state and the court. Another significant political power in this relation is the state. The state aims at continuing the production in the national economy. Therefore, creating a relationship between the employers and the employees is essential for the government (Bateman 2015).
The wage is an important market price for the employees and the employers. For the employees, the wage means the life standard, and for the employers, the wage means the production cost. For the state, the wage means the income transfer and allocation of resources. Each agent has a different objective function. For instance, the employers try to maximize their profits by decreasing the production costs while the employees work to maximize their utility by increasing the budget constraint (wage). Each agent uses all the economic, political and social power to reach his goal.
Also, the wage might different values to the people from the various income groups. For the poor people, the wage is something that they cannot do anything without it. Their income elasticity is so high. For the rich people, the wage is something that increases their comfort. Their income elasticity, compared to the poor people, is very low.
The Distribution of Power and Economy
The main study area of the political economy is the distribution of power to the agents in the economy. There is no particular rational reasoning behind the allocation of the political power. The policy decisions are the result of the political processes. The historical developments determine how the power would be distributed.
An outstanding example of the distribution of the political power is the transition to the city economies after the Dark Age. During the Dark Age, the church was the central power in the politics and the economy. All the lands belonged to the church, and the church provided food and the other necessary things for the survival of the serfs (villagers or workers). The serfs were responsible for producing the agricultural products. The church was the only power in the Dark Ages. Through the end of the Dark Age, the cities were developed by some people called bourgeoisie. These people developed cities inside the city walls, and they started the trade by using the rivers inside Europe. The trade made them rich, and they could attract the serfs to the towns as workers. The richness they reached gave them a significant political power, and the church lost all the power to the cities and the new social class. As can be seen in the example, the political power was shaped by the economic power. Consequently, for developing an understanding of the distribution of the political power, the researcher needs to analyze the historical background (Schauerte 2016).
The political power might reshape the free markets. The parties with the political power might influence the market powers for getting some more share or profit from the market. The legal framework allows some groups or individuals to use the political power in the markets. For instance, some companies can gain the monopoly rights for certain products according to the legal framework. Taxation is an important example of the use of the political power. Taxation is an income transfer from some agents in the economy to some other agents. For instance, increasing the tax on the consumption, and decreasing the tax on the profits would an income transfer from the people to the capital owners. Therefore, the use of political power might influence our daily lives.
Liberalization and Social Results
The Keynesian approach caused a welfare state in the developed countries. The Keynesian economy suggested increasing the share of the state in the economy by using the fiscal policy tools including the taxation and the government spending. The use of the fiscal policy tools expanded the state in the economy. This situation created a state-dependent economy where the government spending and the taxation were influencing the whole economy and the large enterprises’ profit were dependent on the fiscal policies. Many of the workers were hired in the state, and many poor people were receiving financial assistance from the state. Therefore, the expansion of the state limited the field for the private companies.
The wide expansion of the state in the economy caused inefficient use of the resources by the state. The governmental institutions were the main players in the markets, and their objective was not to increase the profit. Therefore, the decision-making process not interested in increasing profits in the economy created inefficiency in the economy.
The solution to the large state was privatization. The states started selling the governmental production plants and companies to the private companies which aim at increasing their profits. Privatization was the transfer of the rights to use the resources from the state to the private entrepreneurs. The regulations that limited the private entrepreneurs were changed to create freedom for the private entrepreneurs in the markets. This is called deregulation.
Privatization was a necessary strategy to solve the issue of the large state; however, it caused new social and economic problems. The privatization was another redistribution of the wealth. Some capitalists and entrepreneurs became the large powers in the economy. Therefore, the redistribution through the privatization ignored the equal income distribution and the social development. The only entrepreneurs or capitalists could afford to purchase the production plants from the government. They became the big economic powers in the economy.
The private companies owned by the capitalist people gave more importance to increase their profits. The increasing profits created relatively more pressure on the other people in the economy. While the middle income and low-income classes could not gain much in the privatization process while the capital owners could increase their profits in the markets. Consequently, the privatization created other large entities in the economy those did not care the social development or the income inequality.
Works Cited
Barber, William J. A History Of Economic Thought. Middletown, Conn.: Wesleyan University Press, 2009. Print.
Bateman, Bradley W. "Analyzing Market Failure: Adam Smith And John Maynard Keynes". History of Political Economy 47.suppl 1 (2015): 127-144. Web. 28 June 2016.
Coyne, Chris. "Capitalism And DemocracyTake Two". The Economist. N.p., 2007. Web. 28 June 2016.
Schauerte, Michael. "History Of Political Economy: An Overview". Marxists.org. N.p., 2016. Web. 28 June 2016.
