Limping Economist

Our new Finance Minister, who is refers as the Limp by one of us, was said to be a "British-trained economist! He is expected to be a better finance minister than the Flip-Flop PM, who has a degree in Malay studies/Islamic studies... Some people also insinuated that when the Limp came back in 1976, he hasn’t completed his degree then. Who knows! But the fact is that he has no experience in running the financial health of our country. If this were true, then we would be better off appointing Mustapha Mohammad as finance minister. After all he has a first class honours degree in economics.

This thing which people associate between having an economics degree and being finance minister is over-hyped and mostly baloney. One thing that I know and for sure, despite my degree in business management and with sound understanding of economic theoretical knowledge, I still have to refresh the basic economic philosophy that I have learned in my university days..

So let me recalled, for the sake of the Limp the economic though beginning from the the economic philosophy of Mercantilism as adopted by merchants and statesmen during the 16th and 17th centuries right to the current decade.

1.    Mercantilists believed that a nation's wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad. Accordingly, the leaders of those nations intervened extensively in the market, imposing tariffs on foreign goods to restrict import trade, and granting subsidies to improve export prospects for domestic goods.

2.    By 1750’s, Physiocrats, i.e. a group of 18th century French philosophers led by Francois Quesnay, developed the idea of the economy as a circular flow of income and output. They opposed the Mercantilist policy of promoting trade at the expense of agriculture because they believed that agriculture was the sole source of wealth in an economy. As a reaction against the Mercantilists' copious trade regulations, the Physiocrats advocated a policy of laissez-faire, which called for minimal government interference in the economy.

3.   Then in 1776 Adam Smith wrote, The Wealth of Nations which begin The Classical School of economic theory. Adam Smith laid out the three factors of production; land, labor, and capital. He viewed that an ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace.

He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.

The second major contributor of classical economic though is David Ricardo. In his         book-Principles of  Political Economy and Taxation, he wrote about the distribution of     income among lowners, workers, and  capitalists. He saw a conflict between                     landowners on the one hand and labor and capital on the other.  He  posited that the       growth of population and capital, pressing against a fixed supply of land, pushes up         rents and holds down wages and profits.Then came Thomas Robert Malthus with his       book- Essay on the Principle of Population. He used the idea  of diminishing returns to   explain low living standards. Population, he argued, tended to increase geometrically,     outstripping the production of food, which increased arithmetically. The force of a           rapidly  growing population against a limited amount of land meant diminishing               returns to labor. The result, he  claimed, was chronically low wages, which prevented     the standard of living for most of the population from  rising above the subsistence level.

Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its     spending by saving too much, a theme  that  lay forgotten until John Maynard Keynes     revived it in the 1930s.

Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical  ecomists with his book- Principles of Political Economy,  on the predictability of the distribution of  income   produced by the market system. Mill pointed to a distinct difference between the market's two  roles: allocation of resources and  distribution of income. The market might be efficient in allocating  resources but not inistributing income, he wrote, making it necessary for society to   intervene.

 4.    By mid 19^th century, The Marxist School challenged the foundations of Classical theory. Whether  deserving  or not Karl Marx was perhaps unwittingly destined to play a major    role in economic though.Basically Karl Marx was of the opinion the inequality of   capitalism would inevitably lead to a revolution of  the oppressed  workers leading to the formation of a Communist state. In fact Karl Marx went to extraordinary length to explain   this principle. One of his principle works, Das Kapital could make claim to  be one of the most boring  books ever written. (Perhaps only beaten by Adam Smith’s Wealth of         Nations). However in F.Engels, Marx had a companion who was able to help romanticise the ideals of  communism. 

An advocate of a labor theory of value, Marx believed that all production belongs to labor because workers produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce. Marx predicted that capitalism would produce growing misery for workers as competition for profit led capitalists to adopt labor-saving machinery, creating a "reserve army of the unemployed" who would eventually rise up and seize the means of production.

5.   Marginalist:Classical economists theorized that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services.

Marginalists provided modern macroeconomics with the basic analytic tools of demand and supply, consumer utility, and a mathematical framework for using those tools. Marginalists also showed that in a free market economy, the factors of production -- land, labor, and capital -- receive returns equal to their contributions to production. This principle was sometimes used to justify the existing distribution of income: that people earned exactly what they or their property contributed to production. Contributors to the marginalist thought are:

Leon Walras-He revolutionized economics with his rigorous mathematical formulation of the mechanics of the price system.

Alfred Marshall-He demonstrated the tremendous theoretical power of demand and supply curves, and bequeathed to economics the critical distinction between the short run and the long run.

6.   Institutionalist economists regard individual economic behavior as part of a larger social pattern influenced by current ways of living and modes of thought. They rejected the narrow Classical view that people are primarily motivated by economic self-interest. Opposing the laissez-faire attitude towards government's role in the economy, the Institutionalists called for government controls and social reform to bring about a more equal distribution of income. Thorstein Veblen, one of the leading Institutionalists, is best remembered for his theory of "conspicuous consumption" which parodied the ostentation of the Gilded Age.

7.    Keynesian School

      Reacting to the severity of the worldwide depression, John Maynard Keynes in 1936 broke from the  Classical tradition with the publication of the General Theory of Employment, Interest, and Money.  The Classical view assumed that in a recession, wages and prices would decline to restore full  employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people's  incomes, would prevent a revival of spending. He insisted that direct government intervention was necessary to increase total spending. 

      Keynes' arguments proved the modern rationale for the use of government spending and taxing to stabilize  the economy. Government would spend and decrease taxes when private spending was insufficient and  threatened a recession; it would reduce spending and increase taxes when private spending was too great  and threatened inflation. His analytic framework, focusing on the factors that determine total spending,  remains the core of modern macroeconomic analysis.

      Most western countries adopted the principles of Keynesian but by late 1960’s, troubling inflation and  lagging productivity prodded economists to look for new solutions. From this search, new theories emerged: 

      Monetarism updates the Quantity Theory, the basis for macroeconomic analysis before   Keynes. It  reemphasizes the critical role of monetary growth in determining inflation.  

Rational Expectations Theory provides a contemporary rationale for the pre-Keynesian tradition of limited government involvement in the economy. It argues that the market's     ability to anticipate government policy  actions limits their effectiveness.

Supply-side Economics recalls the Classical School's concern with economic growth as   a  fundamental  prerequisite for improving society's material well-being. It emphasizes     the need for incentives to save and invest if the nation's economy is to grow.

These theories and others will resurfaced and be debated and tested. Some will be           accepted, some modified, and others rejected as we search to answer these basic         economic questions:

1. How do we decide what to produce with our limited resources?

2. How do we ensure stable prices and full employment of resources?

3. How do we provide a rising standard of living both for now and the future?

So, Mr. Limp there is a hell lots of theory and economic philosophical knowledge to be grasped within a short time. Economic understanding is not just coining the word….. “glokal” or professing himself to be the campaigner of Islamic banking in Malaysia but still adhering to the cronyism and corruption practice of the dimwits ( Second Finance Minister).