Debate

 Notes  
 
1. ADAM SMITH

1. The desire for wealth permeates all human activity. Therefore, self-interest, or
profit, motivates people to perform necessary tasks for which society is willing to pay.
As Smith writes, "It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from our regard to their self-interest." Thus, the
first law of the market is self-interest, or the profit motive.

2. Smith answers that the individual, in the process of providing for personal interests,
unintentionally contributes to the economic wellbeing of society. Therefore, the
second law of the market is competition. The individual who overcharges for products
soon learns that competitors will take away business by offering more reasonable
prices. If wages are too small, workers will hire out to another employer who will pay
more for their services. Thus, selfish motives are tempered by interaction, resulting in
social harmony.

According to Smith, under the market system each worker freely chooses a trade.
Through such a multitude of choices, society reaps the benefit of having all its
necessary tasks filled. The individual, motivated by self-interest, selects a particular
task. Competition for these tasks prevents the individual from over-charging society.
Thus, the two laws of the market — self-interest and competition — react upon each
other and form a balance, guaranteeing the survival of society.

The laws of the market also regulate incomes of producers. When profits in one type
of business become unusually large, new producers are attracted to the business —
until competition reduces the surplus of profit. In the same way, labor's wages are
regulated — workers are attracted to higher paying industry until the labor supply
lowers the pay scale to that of comparable jobs.

To him, the society of the market system was dynamic and progressive. During his
lifetime, division and specialization of labor greatly increased productivity. He
expressed enthusiasm after his visit to a pin factory which employed only ten people.

In his vision of society's economic progress, Smith saw two additional fundamental
laws which propelled the market system in an ascending spiral of productivity and
away from the "avarice of private greed." These laws he called the law of
accumulation and the law of population.
3. The law of accumulation refers to the accumulation of profits, which are put back
into production. By accumulating profits, capitalists can purchase additional
machinery, which will stimulate further division and specialization of labor, thereby
boosting productivity. However, additional machinery means more workers to work
them. Eventually this increased demand for workers leads to higher and higher wages
until profits vanish. At this point, further accumulations are impossible.
4. The solution to this obstacle is Smith's law of population. Labor, like any other
commodity, is subject to demand. As the law of accumulation increases wages for
workers, the numbers of the working class will increase. As the population of workers
increases, its size becomes a counterforce, pushing wages down. As a result of lower
wages, profits for the capitalist will rise again, and accumulation will continue.
Thus, these two evolutionary laws form an endless chain for society through which
progress is inevitable. Even though the Law of Population depresses wages toward a
subsistence level, it never arrives there. Conditions steadily improve, resulting in
further accumulation for further investment. What is the end result? Not a utopia, but
the economy, if left alone, will ultimately reach its "promised reward" — a world
where poverty and wealth balance each other

2. DAVID RICARDO

To Ricardo, society was a bitterly competitive contest. He viewed the worker as little
more than an automaton, whose only human expression was an indulgence in sex.
Instead of raising the family standard of living when wages rose, the worker produced
more children and thereby increased the labor supply, offsetting the tendency for
wages to rise as the supply met and exceeded the demand for workers. Thus, the
worker was doomed to gain no more than a subsistence level of wages.

As for capitalists, Ricardo saw them as eternally seeking profits but engaged all the
while in fierce competition with other capitalists. This situation naturally reduced
profits. Worse, the capitalist was further squeezed by the landlord because profits
depended largely on the amount of wages which had to be paid, and the high price of
grain always resulted in high food prices, which led to higher wages. While Ricardo
considered the roles of the worker and the capitalist in the market system to be
legitimate, he saw the landlord as a villain.

Ricardo explained rent — the landlord's income — as a very special kind of return
which originated from the differences in cost between productive land and less-
productive land. In other words, the yield was so much greater from productive land
that its cost of production was much less than that of less-productive land. This
difference in costs was represented in rent, for the selling price of the product —
artificially high due to great demand and lack of competition from imported grains —
was the same for both yields.

Rent in the nineteenth century was not controlled or restricted by free competition
because land did not change hands. Thus, Ricardo viewed land as a monopoly. As the
economy progressed and the population increased, more farming was needed to meet
the increased demand for grain necessary to feed that population. This situation
pushed the selling price of grain up and increased the income of the landlord. Thus
the capitalist, who paid increased wages to the workers to enable them to live, also
suffered. Therefore, concluded Ricardo, of the three parties in this bitter struggle —
worker, capitalist, and landlord — only the landlord profited.

As to the future, it held little promise as the worker was doomed to a subsistence
wage because of his growing family, and the capitalist had his profits gobbled up by
the landlord.

3. Thomas Malthus
Thomas Malthus defended the landlord and attacked Ricardo's views. Instead of
viewing landlords as villains, Malthus praised them as ingenious capitalists. Still,
Malthus was pessimistic over the future of capitalism, but for a different reason. He
warned of general gluts, when the process of saving might lead to a lessened demand
for goods and thereby to an excessive quantity of products without enough buyers.

Malthus earned criticism by opposing relief and housing projects, objecting to these
measures on the grounds that charity is really cruelty in disguise. He reasoned that by
keeping the poor alive, they would continue to propagate, producing more poor.

Malthus' thesis — known as the Malthusian Doctrine — states that population grows
at a rate greater than the means to feed it, and, if unchecked, the world's populations
will double every twenty-five years.

4. Robert Owen

Owen believed that humanity is no better than its environment. Since people are
shaped by environment, improvement of that environment can produce a paradise on
earth. Stated that the development of machine production, if organized entirely for
profit, would inevitably lead to poverty and degradation for workers.

His solution was cooperation. Envisioning Villages of Cooperation — planned

communities where 800-1200 persons worked together and lived in private
apartments — Owen insisted that kitchens, reading rooms, and sitting rooms be used
in common. Young children would be boarded; older children would tend the
gardens. The community would carry on a variety of occupations insuring self-
sufficiency. At a distance from the commune would be the factory unit.

5. Saint-Simon

Saint-Simon proposed to reorganize society along the lines of a factory, with the
function of government being economic rather than political. With the aid of
scientists, technicians, and capitalists, government should arrange for rewards to be
allotted in proportion to each person's social contribution. Rewards should go to
active members and not to lazy onlookers. But Saint-Simon offered only theory
without working out practical details. After his death, his ideas degenerated into a
mystical, hazy religion, with churches in France, England, and Germany.

6. Charles Fourier

Fourier saw the practical world as utterly disorganized. As a solution, he proposed to

reorganize society into phalanxes, or organized communes, of 1800 persons living
under one roof, as in an ultra-modern hotel. Each person would have privacy, and the
style of life would vary with one's ability to pay. Since everyone would have to work,
there would be farmers, mechanics, and craftworkers. Children would perform dirty
work and tend flowers. Residents would labor a few hours each day at whatever job
appealed to them. A spirit of competition would exist.
Fourier believed that the phalanx concept would produce profits as high as 30 percent
of the investment. Every member would share profits, which would be divided on the
basis of 5/12 to labor, 4/12 to capital, and 3/12 to ability or talent. Everyone would be
encouraged to become a part owner.

7. Karl Marx
The history of humanity, according to Marx, is primarily the story of one class'
exploitation of another. Applying the theory of dialectical materialism, Marx
determined that the inevitable next step was a revolt of the overwhelming majority of
workers, who would overthrow the ruling capitalists and establish a dictatorship of the
proletariat, or workers. This economic cataclysm would lead to communal ownership
and a return to a classless society.

Marx sets the scene for his attack on capitalism by describing a capitalistic world of
perfect competition — where the market is free, without monopolies, unions, or
special advantages for anyone. Every product sells for its correct price or value.
Agreeing with Adam Smith and David Ricardo on the definition of value, Marx states
that the value of a product is the amount of labor which goes into making it. The
worker wishes to sell labor-power; the capitalist wants a profit.

He concludes that labor actually produces more for the capitalist by working extra
hours. The surplus value of labor gives rise to the capitalist's profits. In short, while
the worker receives only a daily wage equal to subsistence requirements, actual
production for a workday results in extra units of products. The value is translated
into profits for the capitalist, who steals what is rightfully the worker's.

It results when the capitalist monopolizes the means of production and forces the
laborer to work a full day in order to remain employed. Since the typical factory
work-week in England during Marx's time averaged slightly more than eighty hours,
his concept of surplus value was not as farfetched as it seems today.

In Marx's view, the capitalist strives to obtain more surplus value by expanding
production, thereby increasing profits. However, other capitalists compete in the same
fashion, hiring more people and bidding against other capitalists, consequently
driving up wages. This situation serves to decrease profits. Marx rejects Ricardo's
notions because he believes that workers are too enlightened to continue increasing
their offspring.

As the economy expands, profits fall, both within the business cycle and outside it. As
profits fall, business seeks new survival techniques by innovating, inventing, and
experimenting. Business runs in cycles of depression and boom. Huge firms dominate
the business scene and suppress smaller firms.
Finally, the working class overcomes factory owners and capitalism disappears.

8. Thorstein Veblein

First, the practices of the actual business world, which he observed, were predatory.
Second, in his examination into the nature of economy, Veblen concluded that by
heredity, human nature itself is savage.
Veblen maintained that what was inherent in human nature was pride in work. As
men plundered, seized booty and women, and received admiration for their prowess,
approval transferred from the once-honored way of life to the spirit of plunder — and
the leisure class gained respect.

As societies progressed the leisure class changed its occupation and refined its
methods, but its goal remained the same — the accumulation of goods without
productive work, but by seizure. Applying his findings to the United States, Veblen
wrote: ". . . by heredity human nature still is, and must indefinitely continue to be,
savage human nature." Modern plunder did not exist for booty or women, but for the
accumulation of money and its lavish display. The savage displayed numerous wives,
the barbarian his conquests of war; in the same vein, modern savages displayed
wealth.

The leisure class advertises its superiority through conspicuous consumption —

enjoying leisure more fully by being able to display it before the public.
Thus, the modern U.S. businessman, by seeking and accumulating money and then
displaying it — either subtly or conspicuously — is the modern counterpart of a
savage heritage. Furthermore, everyone — the worker, the middle-class citizen, and
the capitalist — seeks through conspicuous expenditure and even the waste of money
to prove status.

Veblen charged that the businessperson is the saboteur of business. As he explains,

machines dominate society, but machines care nothing for profit. Therefore, business
people are no longer needed. Eliminated by the machine, they are replaced by
technicians and engineers.

9. Keynes
He stated that peace treaties are unjust and unworkable, with their apparent solutions
ending in fiasco. While he was not the sole possessor of this observation, his view
was the first written version which encouraged a complete revision of the treaties. The
book succeeded, and international developments confirmed his thesis.

How the economy operates and to examine in particular the problem of unexplained
bursts of prosperity followed by lows. Earlier writers accounted for this phenomenon
by such theories as mental disorders of the economy or the effect of sunspots. Keynes
returned to Malthus' warning — saving can result in depression.

The true measure of a nation's prosperity is not gold and silver nor physical assets, but
its national income, which is the total of all individual incomes in a country. The chief
characteristic of income is its flow from pocket to pocket via daily purchases and
sales. Thus, this movement is largely natural and arises from the use and consumption
of goods.
On the other hand, one part of income which does not flow in daily transactions is
savings, which represent the portion that is removed from the even flow of income. If
that portion is hoarded, it serves no useful purpose. Significantly, no harm comes
from the act of saving in modern nations because savings are usually put into banks
and invested in stocks and bonds, becoming available when business wishes to
expand production. In this event, savings flow into the economy. The increased
capacity for production of more goods assures jobs and greater prosperity. Depression
arises when savings are not invested into capitalistic expansion but are allowed to lie
idle.

Keynes' line of reasoning, which he did not invent, but only helped to explain, is
known as the see-saw theory of savings and investment. As a see-saw go up and
down, savings goes up when investment goes down. The reverse is also true. In his
polished examination of the see-saw theory, Keynes concluded that depression arises
from a decline of investment on one side and an increased accumulation of savings on
the other. However, depression is only temporary, for an abundant supply of savings
reduces interest rates, leading to a higher rate of return to be gained from investment.
Thus, prosperity returns.

Keynes described how savings, in a time of depression, cannot continue to

accumulate. Savings actually dry up, reduced to a trickle rather than a flow. When
funds are needed for investment to stimulate the economy, there is no savings
accumulation available. So the seesaw theory is invalid — replaced by the elevator
theory.

He provided a cure — government needs to "prime the pump" by deliberately

undertaking heavy government investment to stimulate the economy. By absorbing
capital goods and spending whenever private enterprise is unable to expand,
government can insure a high level of economic movement. Therefore, governments
should incorporate judicious spending programs into their permanent plans.

Keynes believed in a policy of managed capitalism, one which would

invigorate and save capitalism. Basically, he was a conservative with one major aim
— the creation of a capitalistic economy in which its greatest threat, unemployment,
would be forever eliminated. Consequently, he engineered a plan to foster a living and
growing capitalism.

10. Joseph Schumpeter

Schumpeter declares that capitalism, grounded in inertia, has no momentum.

Workers, he predicted, would, in time, receive full remuneration for their toil while
owners will derive value equivalent only to the resources they contributed. Capitalists
would obtain nothing except their wages as managers. Thus, in a changeless
economy, profit does not exist.
Only explanation for profits occurs when the static economy fails to follow its circular
path, a situation which occurs when capitalists introduce innovative technology or
organizational changes. Such ephemeral profit disappears after competitors emulate
the innovation. In rapid order, innovation becomes the standard operating procedure.
Like a huge, insatiable maw, the system swallows up ideas, turning them into the
well-digested fuel of everyday productivity. Because the introducers of these changes
differ from the norm, Schumpeter awards them the title of entrepreneur, one who is a
business trailblazer, or risk-taker.
Competition, as always, forces prices down. Ultimately, profits disappear. Ironically,
the entrepreneur is not necessarily the receiver of the profit generated by an
innovative idea. As a rule, profits tend to go to the business owner, with the
entrepreneur forced out of the picture by the dynamics of the new process.
Schumpeter paints an unappealing picture of the life of an entrepreneur — a talented
specialist who differs markedly from the military leader or politician. Treated by
society as an upstart or social pariah, the entrepreneur resides outside the limelight.
Unlike people who are motivated by the urge for riches or title, the entrepreneur
prefers instead to found a dynasty. Goaded by the will to conquer, to climb to the top
of the heap, this creator resembles a paladin, or "knight errant of the system." For the
entrepreneur, the carrot at the end of the stick is not the monetary reward but the
challenge itself, the vacuum into which innovation falls.
After the publication of his ingenious work, Schumpeter served as commissioner on
the nationalization of industry, an arm of the socialist German government, as well as
finance minister of Austria.
Unfortunately, the unstable times did not permit his creative beacon to shine very far.
After Schumpeter moved into a position as bank president in Vienna, the collapse of
Europe's financial structure led to huge personal debts. During this trying period,
Schumpeter's young and charming wife, whom he had groomed for her role as his
helpmeet, died in childbirth.
Like the fabled phoenix, Schumpeter rebounded. He built a career as a visiting
professor in Japan, Germany, and the United States. At Harvard, he married
economist Elizabeth Boody. Renewed, he allowed his creative juices to flow at will.
In his thousand-page, two-volume Business Cycles, Schumpeter attempted to account
for the Great Depression. He based his explanation on a description of three distinct
types of business cycles:

1 A short cycle.
2 
3 A second span lasting 7-11 years.
4 
5 A fifty-year cycle evolving from blockbuster inventions like the steam engine or
automobile.

The Great Depression, which stands out from the norm of economic ups and downs,
was the cataclysm that erupted when a series of all three cycles hit bottom
simultaneously.
Schumpeter's conclusion produced a major economic contribution: the belief that
capitalism, which evolves from the values of the civilization itself, was losing its
steam. Even though his prediction emphasizes a moribund state of the economy, the
author appends a small hope that there are still three decades in which capitalism will
struggle before dying out completely.

Schumpeter fastens onto the bourgeois nature of the capitalist. Crucial to his
denouncement of the wearer of the lounging suit is the author's depiction of plausible
capitalism, which describes capitalism as an economic success but a sociological
failure. The system bogs down in a bureaucratic nightmare of red tape, where
entrepreneurial input counts for little. Yet, even though Schumpeter's scenario plays
well on the surface, it is riddled by the disease of rationalism, which gobbles up its
own reason for being.
Schumpeter, from the vantage point of his cleverly constructed soapbox, appears to
defeat Marx at his own game. The whole breastwork of logic carries some measure of
significance in that it predicts the bureaucratization of business and government as
well as the ebb and ultimate foundering of the middle-class ideal. Still, the fabric of
his logic is weakened in fiber. The mood of Western capitalism did indeed follow his
predicted trends through the 1960s. However, it has not resigned itself to the benign
socialism he envisioned.
The overwhelming weakness of "the world according to Schumpeter" is that the
prognosis is more social and political than economic. In guessing which way the tide
of history will direct itself, he lends credence to a belief in a noncapitalist elite, who
will form the dynamic core of an otherwise inert society. Unlike Marx's paradigm,
which centralizes a disgruntled proletariat in the heart of change, Schumpeter's model
places a changing cast of creative movers and shakers at the lead position of
capitalistic innovation.

From his perspective, the future of capitalism appears less the function of an
inevitable movement toward some predetermined end and more like a shapeless lump
of clay in the potter's hand. A truly humanistic approach, Schumpeter's evaluation
leaves hope that there's always room at the top for the tinkerer, the visionary, or the
risk-taker. In his scheme of things, the world beckons perpetually to a Walt Disney,
an Estee Lauder, a Steven Jobs, or a Liz Claiborne, whose brain children never
capitulate to mundane limitations.