Development FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
The theory of Mercantilism was the first major economic theory known in the world. It drove the economic system during the 16th to 18th centuries in the known world. It was based on the idea that a nation’s wealth will increase only if government regulated all the nation’s commercial interests. The government, according to mercantilism, should take care of all the economic activities of a country. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism is an economic theory and practice where the government seeks to regulate the economy and trade in order to promote domestic industry – often at the expense of other countries. Mercantilism is associated with policies which restrict imports, increase stocks of gold and protects domestic industries. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism involves: •Restrictions on imports – tariff barriers, quotas or non- tariff barriers. •Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as bullionism) In the sixteenth/seventeenth century, it was believed that the accumulation of gold reserves (at the expense of other countries) was the best way to increase the prosperity of a country. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism involves: •Granting of state monopolies to particular firms especially those associated with trade and shipping. Subsidies of export industries to give competitive advantage in global markets. •Government investment in research and development to maximize efficiency and capacity of the domestic industry. Allowing copyright/intellectual theft from foreign companies. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH
Theory 1: Theory of Mercantilism
Mercantilism involves: •Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class. •Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Theory of Mercantilism Mercantilism: Examples • England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade. •All colonial exports to Europe had to pass through England first and then be re-exported to Europe. •Under the British Empire, India was restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by Gandhi. •In seventeenth-century France, the state promoted a controlled economy with strict regulations about the economy and labour markets FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Theory of Mercantilism Mercantilism: Examples • Rise of protectionist policies following the great depression; countries sought to reduce imports and also reduce the value of the currency by leaving the gold standard. •Some have accused China of mercantilism due to industrial policies which have led to an oversupply of industrial production – combined with a policy of undervaluing the currency. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Theory of Mercantilism Modern Mercantilism •Undervaluation of currency. e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive. A criticism often levelled at China. •Government subsidy of industry for unfair advantage. Again China has been accused of offering state supported subsidies for industry, leading to oversupply of industries such as steel – meaning other countries struggle to compete. •A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and US policies to ‘Buy American.’ •Copyright theft FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory Laissez faire is the belief that economies and businesses function best when there is no interference by the government. It comes from the French, meaning to leave alone or to allow to do. It is one of the guiding principles of capitalism and a free market economy. It is the belief that each individual's self-interest to do better, strong competition from others, and low taxes will lead to the strongest economy, and therefore, everyone will benefit as a result. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory History:
Laissez faire is often associated with the well-known
economist Adam Smith and his book Wealth of Nations (1776), which noted that human beings are naturally motivated by self-interest, and when there is no interference in their economic activities, a natural and more efficient balance in society exists. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory History:
In the 18th century, French economists became upset
with taxes and subsidies that were being imposed on their businesses. They believed that governments should leave the individual businesses alone, except when social liberties were infringed upon. In the 19th century, this philosophy became mainstream in the U.S. It wasn't long after this that the 'free market' approach started to display problems, such as large gaps in distribution of wealth, poor treatment of workers, and lack of safety in the workplace. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory History:
By the mid-19th century, governments in most
advanced countries became more involved in protecting and representing the safety and concerns of workers and the general population. This was the beginning of many of the factory laws and consumer protection laws that are being established and modified today. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory Key Takeaways
•Laissez-faire is an economic philosophy of free
market capitalism. •The theory of laissez-faire was developed by the French Physiocrats during the 18th century. •Later free market economists built on the ideas of laissez-faire as a path to economic prosperity, though detractors have criticized it for promoting inequality. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 1: Laissez-Faire Theory •Laissez-faire is an economic philosophy of free market capitalism.
•The theory of laissez-faire was developed by the
French Physiocrats during the 18th century.
•Later free market economists built on the ideas of
laissez-faire as a path to economic prosperity, though detractors have criticized it for promoting inequality. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 3: Socialism Socialism is a populist economic and political system based on public ownership (also known as collective or common ownership) of the means of production. Those means include the machinery, tools, and factories used to produce goods that aim to directly satisfy human needs. Communism and socialism are umbrella terms referring to two left-wing schools of economic thought; both oppose capitalism, but socialism predates the "Communist Manifesto," an 1848 pamphlet by Karl Marx and Friedrich Engels, by a few decades. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 3: Socialism In a purely socialist system, all legal production and distribution decisions are made by the government, and individuals rely on the state for everything from food to healthcare. The government determines the output and pricing levels of these goods and services.
Socialists contend that shared ownership of resources
and central planning provide a more equal distribution of goods and services and a more equitable society. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 3: Socialism Common ownership under socialism may take shape through technocratic, oligarchic, totalitarian, democratic or even voluntary rule. Prominent historical examples of socialist countries include the former Soviet Union and Nazi Germany. Contemporary examples include Cuba, Venezuela, and China. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 3: Socialism Due to its practical challenges and poor track record, socialism is sometimes referred to as a utopian or “post-scarcity” system, although modern adherents believe it could work if only properly implemented. They argue socialism creates equality and provides security – a worker’s value comes from the amount of time he or she works, not in the value of what he or she produces — while capitalismexploits workers for the benefit of the wealthy. FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 3: Socialism Socialist ideals include production for use, rather than for profit; an equitable distribution of wealth and material resources among all people; no more competitive buying and selling in the market; and free access to goods and services. Or, as an old socialist slogan describes it, “from each according to ability, to each according to need.” FOUR THEORIES THAT EXPLAIN ECONOMIC GROWTH Theory 4: Entrepreneur-centered theory In 1934, an economist named Joseph Schumpeter explained that economic growth is started by people (whom he called entrepreneurs) who produce goods not only for personal profit but also for the good of everyone around them. He called entrepreneurs the backbone of the economy. Entrepreneurs, according to him, are people who find joy in creating or producing goods; who find self fullfilment in getting thigns done; and who have strong need for achievement. This entrepreneur-centered theory is widely used to answer the needs for socio-economic development.