American Public University
The Moral Critique
The moral critique views that political scientist's, as well as economists, became less principle experts who betrayed their original vision and goal of political economy. Greater than any other social sciences economists separated themselves from these controversial concerns in last half of the century and have since developed a personal contained professional discourse. The newly created discourse is that of positive science that excludes the evaluative claims earlier stipulated. Myrdal Gunnar never wanted to see these economist returning to the political and moral commitment and advocated for a clear distinction between the advocate and scientists roles as science could not resolve value conflicts (Staniland, 1985).
The Political Critique
The political critique implicated the manner in which authority was practiced and distributed as well as to how the decision-making and quest process were handled. Just like how the financial aspects had completely distanced itself from regularizing duties, it also disregarded the presence of authority. According to Donald Winch, the disregard notion rose from the presumptions of the liberal financial concerns that arose. Appropriate competition only exists in a structure where power is not the key societal determinant, a society in which everyone is equal and enjoys equal privileges and rights. However, the economic matters greatly focused on a man to nature approach stipulating that an agreeable balance was only achievable through a quest for individual rather than societal driven interest. The establishment of syndications further aggravated these neoclassical beliefs, and urgent change measures were required. This critique is more valid for the third world countries as these countries lag behind because the leaders are corrupt and they are only concerned with their self-interests rather than the public interest.
The Explanatory Critique
The explanatory critique primary focus was on power blindness, and it was an extension of the criticism. It main argument was that economics perspectives despite how logical they seemed to be were quite narrow, and they excluded a number of non-economic values. These values ought to be political, but they also included all practices and beliefs that never conformed to the economics neoclassical rationality. Moreover, the critique put more focus on the psychological factors further suggesting that conventional economics was very shallow. It also attacked economist because they made consumer preference assumptions without taking into consideration the want creation mechanism required in a just social system. Other assumptions that were made include the preferences formation process, the power distribution process, the social class interaction process and the equilibrium disruption forces (Stainland, 1985).
What the Neoclassical Economy Claims
The neoclassical economy claims that the market mechanism can create the necessary dynamics in the economy, and provide the desired economic development under the assumptions of rational individuals, rational decisions, and perfect competition. Intervening the markets by the government using the fiscal and the monetary policies create inefficiency in the economy according to the neoclassical economists. The government intervention can create barriers in front of the freedom of the agents in the economy. The limited actors in the economy cannot function to maximize their utilities, or they cannot behave rationally. In another word, some irrational decisions can be made because of the limits the government place. Consequently, the irrational decisions might cause a transfer of the resources from the relatively more efficient investments to the relatively less productive investments. In this case, the economy cannot produce enough, and the economic inefficiency influences all the agents in the economy negatively (Endres, 2002).
The neoclassical economy is the perfect competition. The perfect competition depends on the rational decisions making and competing agents in the economy. The strong assumption of full information is the base for the rational decision-making and competition in the markets. The perfect information assumption is that every agent in the economy has the full information of the market such as the production process of the products, the cost structures of the products, the rivals' information, and other market-relevant products. The perfect competition makes cheating impossible in the market, because every agent is aware of the changes in the market, and the cheating agent can easily catch by the others. The cheating agent will be pushed out of the market, or the cheating agent will have to stop cheating to be able to stay in the market. Consequently, every agent in the market spends the effort to develop his product by increasing quality, decreasing costs, and some other similar efforts (Stainland, 1985). Thus, the agents in the economy compete with each other by improving their production processes and their quality. Ultimately, the customers benefit from the high competition in the market. The competitive agents also guarantee the efficient use of the resources in the economy because if an agent wastes some resources, then he cannot be competitive in the perfect competition markets. However, the assumptions of the neoclassical economy are very strong, and it is possible to claim that the perfect competition market cannot come true (Endres, 2002).
The World War II and the Collapse of the Assumptions
The World War II has created inevitable changes in the national economies while destroying many European cities. First of all, the rational agents have started fighting, and even they lost their lives and their wealth. The wartime was full of irrationalities. The war also destroyed all the production plants in the European countries. Almost, all the European countries were engaged in the war, and they did not have any production facility to continue their economies after the war. As a result of this, the European governments have decided to change the economic setting, and the states have started a kind of planned economies term in Europe. Germany had been the most prosperous economy in planning and implementing the economic development plans. However, the free economies in Europe were transformed into the economies under the control of the social states. The state social idea is basically that the government intervenes the economy when the free agent cannot accomplish to continue production and competition, and the resources are allocated to the inefficient places in the free economy (Stainland, 1985). In another word, the perfect competition creates inefficiency.
The interventions in the European countries were completely different from the 1930s. In the 1930s, the Keynesian economy was the solution, and the basic idea was the stimulation of the effective demand in the economy. For providing this, the government implemented an expansionary fiscal policy by increasing the government spending. Thus, the people started generating income from the government resources firstly. The demand increased in the market thanks to the increasing individual incomes, and the economy has started producing again. After the World War II, the situation was completely different because stimulating the effective demand could not do much for the economic development because the economic production facilities of the European countries were destroyed, and the private sector could not afford to rebuild the production capacity of these countries. At this time, the government intervention was in all sectors of the economy, and even it is possible to claim that the government set up an economy control panel. The European social states also increased the social spending to soothe the injuries of the World War II on the people. The production plants were built by the governments and for a decade or a little more than this, they were run by the governments. The governments did not want to hold the production plants forever. After the recovery of the World War II, the governments started privatization programs, and many of the production plants ownership were transferred to the private owners. However, the privatization does not mean that the European economies have been free economies again. Contrarily, the control over the national economies by the governments continues to be able to intervene the economy in case of a failure in the economy.
Why the Neoclassical Assumptions Failed
The World War II has destroyed the cities, and the production plants in Europe as well as the Europeans' trust in the free markets. The loss of trust was a result of the social psychology occurred after the war. The people who lost everything could not afford to be an agent in the market. The war created a different economy in Europe. Without getting support from the government, it was not possible to start a business (Rosenberg, 1995).
The main word phrase for defining the change in the European economies is “the loss of trust.” The war created a disinformation among the agents in the markets. In another word, some people had more information about the things happening in the market more than some other people did. This situation is called as information asymmetry. In another word, the asymmetric information destroyed the full information assumption which is the base of all other assumptions in the perfect competition markets. Some people could use the advantage of being able to be active during the war in the markets, and the information they had was a big advantage in the market. Especially, the sellers in the black markets had very valuable information. Considering that at the beginning of the years after the war the production capacity was strictly limited, and the number of products was little, the black market mechanism had to work (Rosenberg, 1995).
The governments intervened the economies to develop the production capacity of the country and fix the damages in the markets. The perfect competition was impossible in the short term because of the limited production. Also, the relatively more agents realized that hiding information from the other agents was giving an important advantage in the markets. The governments firstly started production plants owned by the government.
The German example was the most striking one in Europe. Almost all the German cities were destroyed, and the Germany was separated into the West Germany, and the East Germany, as well as the Germany, lost many people in the war. The East Germany had been a socialist state while the West Germany stayed as a democratic country. The West Germany, though it stayed as a democratic country, did not create a liberal economy at the beginning. The West German government developed timely mannered development plans. The country lost a lot of workers in the war, and for starting the stimulation of the economy, they needed workers. The West Germany government made agreements with some developing countries, and the Germany imported workers from these developing countries, and many of the foreigner workers came from Turkey which was the partner of Germany in the World War I. In the planned economy, the government built many production plants, and the education system developed the idea of working hard at the schools. As known, the German people are known as strict people, and they follow all the rules. The German government placed very strict rules in the production plants and social life. The disciplined workers in the West Germany could build the country again (Lak, 2011).
The experience in the European countries after the World War II showed us that the perfect competition is impossible in the real world, and also the assumptions of the perfect competition are not realistic ones. The primary assumption of the perfect competition, full information for everybody, is not possible to come true because the information is very valuable, and everybody intends to hide the valuable information from the others. For instance, the Europeans made many inventions during the World War II, and they wanted to protect their rights of their invention. The European countries developed a legal framework for protecting the patents rights. The patent protection simply means hiding information from the others, and this was accepted as a right. Therefore, the full information assumption cannot be a real thing. Another important failure in the assumptions is the rational decision-making. It is not possible to claim that all the people are rational. The first rule of the being rational, the people should be able to receive all the information, and it is not possible. Secondly, the people can generate irrational decision-making process because the rationality defined in the neoclassical economy has changed in time. Therefore, the rationality is not something very discreet or defined perfectly. The World War II has proved us that the neoclassical economic approach which was drawn in the Newton’s dual world was not enough for the world with many different spaces more than two dimensions. Considering that the full information and the rational decision-making assumptions failed, the perfect competition markets idea completely collapses. Instead of this, we have to accept the free markets under the control or the protection of the governments.
References
Endres, A. (2002). Neoclassical microeconomic theory. London: Routledge.
Lak, M. (2011). The Making of the German Post-War Economy: Political Communication and
Public Reception of the Social Market Economy after World War II. German History, 29(3), 546-547. http://dx.doi.org/10.1093/gerhis/ghr001
Rosenberg, S. (1995). Against Neoclassical Political Economy: A Political Psychological
Critique. Political Psychology, 16(1), 99. http://dx.doi.org/10.2307/3791452
Staniland, M., & Harvard University. (1985). What is political economy?: A study of social
theory and underdevelopment. New Haven, London: Yale University Press.
