CAPITALISM:

PUBLIC FINANCE
AND FREE
ENTERPRISE
1. Adam Smith
“CLASSICAL ECONOMICS” - SYSTEM OF
ECONOMIC THOUGHT INITIATED BY ADAM
SMITH.

HIS BOOK: AN INQUIRY INTO THE CAUSES OF

THE WEALTH OF NATIONS BECAME THE
FOUNDATION OF A NEW GENERATION OF
WRITERS, DESIRING TO BUILD A NEW SCIENCE
OF POLITICAL ECONOMY.

FREE ENTERPRISE OR CAPITALISM AS THE

“IDEAL” POLITICAL AND ECONOMIC SYSTEM.

MAN IS MOTIVATED BY SELF-INTEREST,

PROVIDED THE MORAL BASIS FOR THE
ASCENDANCY OF THE CAPITALIST.

SMITH FAVORED COMPLETE FREEDOM FOR

BUSINESS ENTERPRISE AND STRONG
SMITH DEVOTED BOOK V OF HIS WORK TO “PUBLIC
FINANCE” - TAXATION, BUDGETING AND
BORROWING FROM THE NINETEENTH CENTURY TO
THE EARLY PART OF THE TWENTIETH CENTURY.

SMITH PUT TAXATION ON SCIENTIFIC AND

EQUITABLE BASIS. THE STATE SHOULD OBSERVE
IN DERIVING ITS INCOME MORE EFFICIENTLY, YET
EQUITABLY.

HE STRONGLY ADVISED AGAINST THE LARGE

SCALE BORROWING. BORROWING SHOULD ONLY
BE RESORTED TO IN EXCEPTIONAL
CIRCUMSTANCES AND SHOULD BE REPAID AS
SOON AS POSSIBLE.

HE WAS CONSEQUENTLY AGAINST DEFICIT

SPENDING AND ADVOCATED THE CONCEPT OF A
BALANCED BUDGET.
FOR HIM GOVERNMENT TENDS TO BE WASTEFUL
AND IRRESPONSIBLE SINCE IT IS NOT MOTIVATED
BY SELF INTEREST.

ITS ACTIVITIES SHOULD BE MINIMIZED AND THE

PRIVATE SECTOR SHOULD PROVIDE FOR THE
NEEDS OF SOCIETY THROUGH THE MARKET
MECHANISM.

HIS DOCTRINES ADVOCATED LIMITED

EXPENDITURES.

THE CONTRIBUTIONS OF ADAM SMITH TO

CAPITALISM ARE NOT LIMITED TO PUBLIC
FINANCE ALONE. AS A MATTER OF FACT, HIS
IDEAS ON THE LATTER WERE LARGELY SHAPED BY
HIS STAND ON THE MORAL “RIGHTNESS” OF
CAPITALISM AND THE PERCEIVED FUNCTIONS OF
GOVERNMENT UNDER SUCH A SYSTEM.
John Stuart Mill
A LAISSEZ-FAIRE ADVOCATE - HIS CORRELATION OF
THE FUNCTIONS OF THE STATE TO PUBLIC
EXPENDITURES.

GOVERNMENT ACTION USUALLY INVOLVED ADDED

EXPENSES WHICH WAS USUALLY DEFRAYED OUT OF
COMPULSORY CONTRIBUTIONS LEVIED UPON THE
PERSONS AND PROPERTIES OF THE STATE.

GOVERNMENTS WOULD INTERFERE AS LITTLE AS

POSSIBLE WITH THE PRIVATE AFFAIRS OF THE PEOPLE

“THE BUSINESS OF LIFE IS BETTER PERFORMED

WHEN THOSE WHO HAVE AN IMMEDIATE INTEREST IN
IT ARE LEFT TO TAKE THEIR OWN COURSE,
UNCONTROLLED EITHER BY THE MANDATE OF LAW
OR THE MEDDLING OF ANY PUBLIC FUNCTIONARY.

GOVERNMENTAL INTERVENTION AS IN PUBLIC

EXPENDITURES FOR THE WELFARE OF THE STATE.
Keynesian Public
Finance
PRIOR TO THE 1930’S, LABOR COULD BE FULLY
EMPLOYED CONTINUOUSLY AND THE RESOURCES OF A
COUNTRY COULD BE UTILIZED MOST EFFICIENTLY IF
GOVERNMENT ACTIVITIES WERE KEPT AT A MINIMUM.

GOVERNMENT WAS NOT SUPPOSED TO INTERFERE WITH

THE FREE ENTERPRISE SYSTEM, EXCEPT FOR MINIMAL
REGULATORY FUNCTIONS.

HOWEVER, THE ECONOMIC DEPRESSION OF THE 1930’S

CHANGED ALL THESE VIEWS.

TO THEIR DISMAY, ECONOMISTS REALIZED THAT

INDUSTRIALIZED ECONOMIES WOULD NOT RESPOND
ANYMORE TO THE PRESCRIPTIONS OF THE CLASSICAL
ECONOMISTS.

THEY DISCOVERED THAT ECONOMICS UNDER THE

CAPITALIST OR FREE ENTERPRISE SYSTEM ARE SUBJECT
TO CYCLICAL FLUCTUATIONS AND TO THE RAVAGES OF
THE INFLATION, STAGNATION AND RECESSION.
IN 1936, THE WHOLE DIRECTION AND EMPHASIS OF
MODERN CAPITALISTS ECONOMICS WAS CHANGED
BY THE APPEARANCE OF A SINGLE BOOK. THE
GENERAL THEORY OF EMPLOYMENT, INTEREST,
AND MONEY WRITTEN BY THE ENGLISH ECONOMIST,
JOHN MAYNARD KEYNES.

IN THIS BOOK, KEYNES DEMOLISHED THE DEARLY

HELD ECONOMIC VIEWS OF ADAM SMITH AND HIS
SUCCESSORS.

ON PUBLIC FINANCE ISSUES, HE INSISTED THAT THE

GOVERNMENT COULD AND SHOULD INFLUENCE THE
PRICES OF GOODS AND SERVICES, THE AMOUNT OF
CONSUMPTION, THE DEGREE OF EMPLOYMENT AND
THE DISTRIBUTION OF NATIONAL INCOME OF
THROUGH TAXATION, BORROWINGS AND THE
PURCHASE AND SALE COMMODITIES AND LABOR.
KEYNES DEVELOPED THE CONCEPT OF FISCAL POLICY AS A
TOOL FOR CORRECTING IMBALANCES IN THE ECONOMY
WITH ITS IMPORTANCE AS A STABILIZING AND
COMPENSATORY TOOL.

TAXES WOULD INFLUENCE CONSUMPTION AND

REDISTRIBUTION OF INCOME AND WEALTH AS WELL

FUNDS WOULD BE EXPENDED NOT ONLY FOR THE PURPOSE

OF DISPENSING LIMITED SERVICES BUT TO AFFECT INCOME
AND EMPLOYMENT LEVELS AS WELL.

BORROWINGS WOULD BE ENGAGED IN NOT MERELY TO

BALANCE THE BUDGET BUT TO FULFILL ECONOMIC
OBJECTIVES LIKE MOPPING UP EXCESS LIQUIDITY AND
TRANSFERRING OF RESOURCES FROM ONE SECTOR TO
ANOTHER.

DEFICIT FINANCING WAS THE MOST CONTROVERSIAL AT

THAT TIME. IT DIRECTLY CONFRONTED SMITH’S HALLOWED
VIEWS ON THE BALANCED BUDGET.
 
THE IMPACT OF KEYNES ON MODERN PUBLIC FINANCE IS
FELT NOT ONLY IN THE INDUSTRIALIZED COUNTRIES BUT
IN LCD’S AS WELL.

HIS CONCEPT OF AGGRESSIVE ECONOMICS AND

MACROECONOMICS, AND HIS BASIC TERMINOLOGIES -
FISCAL POLICY, MONETARY POLICY, DEFICIT FINANCING,
COMPENSATORY FINANCING -ARE NOW PART AND PARCEL
OF PUBLIC FINANCE VOCABULARY.

KEYNES’ IDEAS ARE SAID TO HAVE REVOLUTIONIZED

PUBLIC FINANCE IN THE SENSE THAT HE COMPLETELY
CHANGED THE EARLIER THEORIES OF FREE ENTERPRISE
ECONOMISTS.

HE INTRODUCED THE CONCEPT OF GOVERNMENT

MANAGEMENT OF THE ECONOMY WITHIN THE CONTEXT OF
THE CAPITALIST SYSTEM. ON THE OTHER HAND, CRITICS
OF THE CAPITALIST SYSTEM SAY THAT HE IS A
REACTIONARY IN THE SENSE THAT HIS THEORIES “SAVED”
CAPITALISM FROM COLLAPSE.
 
Socialist Public
Finance
SPARKED BY THE INDUSTRIAL REVOLUTION,
CAPITALISM SPREAD QUICKLY THROUGHOUT EUROPE
AND THE UNITED STATES.

IN THE PROCESS, PRODUCTION OF GOODS AND SERVICES

ROSE PHENOMENALLY; MARKET EXPANDED AND
COLONIES INCREASED. AT THE SAME TIME, THE DRIVE
FOR PROFIT RESULTED IN EXPLOITATION OF THE
UNORGANIZED WORKING CLASS.

IT WAS AGAINST THE BACKDROP THAT COMMUNISM

EMERGED AS A DIRECT CHALLENGE TO THE CAPITALIST
PHILOSOPHY ESPOUSED BY ADAM SMITH.

KARL MARX (1818-1883) WROTE HIS DAS KAPITAL, IN

ANSWER TO SMITH’S WEALTH OF NATIONS

 
REFLECTION PAPER:

AMONG THE THEORISTS/PHILOSOPHIES IN

EARLY PUBLIC FINANCE, WHO/WHAT DO YOU
THINK HAS THE MOST IMPACT (POSITIVE OR
NEGATIVE) IN PUBLIC FINANCE IN THE
PHILIPPINES? EXPLAIN YOUR ANSWER.

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