The Ideology of Economics

It might be argued that an ‘ideology’ expresses dissatisfaction with the current state of the world and aspires to change it, whereas a ‘philosophy’ might be said to simply aspire to understand the world as it is. As such, much of economics is grounded in an ideological belief, which in turn can be anchored in the worldview of individuals and collective groups.

However, before detailing some of the key ideas that have influenced the socio-political framework in which many economies now operate, we might begin by outlining a few concepts that have influenced the ‘evolution’ of the global economy. One of the fundamental mechanism of any economy is based on the idea of a formal ‘transaction’, which when viewed collectively defines the amount of ‘trade’ within given ‘markets’, both local and global. However, the ‘price’ associated with any transaction is often quantified in terms of the ‘supply and demand’ for a given ‘asset’, i.e. good, services or commodity, at any point in time. The idea of supply and demand, which leads to fluctuation in the price of an asset, can also be quantified in terms of ‘surpluses’ and ‘shortages’. A surplus is normally bad news for the seller as prices will fall as supply outstrips demand, while a shortage is bad news for the buyer when prices rise as demand exceeds supply. While this might be perceive simply as an issue of basic economics, it is also a socio-political issue when shortages of essential goods and services have a long-term impact on individuals or nation-states. As such, shortages of essential resources can lead to conflict and instability, when the economics of the ‘marketplace’  becomes a barrier to the quality of life and/or the distribution of wealth. However, while the last statement appears to be a logical consequence of an unfair distribution of wealth, the following graphic appears to suggest it is not necessarily the case.

Within the context of a ‘capitalist’ or ‘socialist’ marketplace, we might describe a ‘free market’ as one where the price for goods and services is driven by the idea of supply and demand. This is the preferred ideology of a capitalist system, which attempts to minimise the role of government or any other centralised authority. In contrast, a ‘regulated market’ is one in which some central authority, e.g. the government, intervenes to affect the price, possibly in the form of a tariff or some other restricting factor. This approach is often the preferred ideology of a socialist system that may, in idealistic principle, only be seeking to protect certain groups, e.g. the poor, from exploitation or unnecessary hardship.

Adam Smith: A Capitalist Ideology?

Adam Smith (1723-1790) was born in Scotland and was possibly the first modern economist, who published his most famous work The Wealth of Nations’  in 1776, the same year as American independence. Given the timing and underlying nature of this work, Smith is often seen as an advocated of capitalism in which people are allowed to freely pursue their own ‘self-interest’ without government repression. However, Smith’s work also raised some important caveats against the capitalist system in that should the pursuit of self-interest lead to oppression and greed, then government should still have the right to intervene. So, although Smith accepted the right to self-interest in the individual, he was not so naïve as to believe that the ‘self-interest’ of all individuals are always in the ‘collective interest’ of society, as a whole. For example, he was highly sceptical of the motivations of many businessmen and did not believe that their self-interest always aligned with the public good, e.g.

  • He cited that much of business law had been passed to keep prices, wages, and profits higher than they would be given true free market competition and that these laws were supported by businessmen to increase their profits at the expense of the public.

  • Smith also argued that any time businessmen meet together they are likely to conspire against the public good and stated that: ‘people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices ’.

  • Smith was also highly sceptical of the motivations of people who make their living from stock profiteering: ‘the proposal of any new law or regulation….comes from men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public’.

So while Adam Smith supported the idea of what might be seen as a capitalist ‘free market’, he also recognised that businessmen will, in their self-interest, try to limit competition, such that other mechanisms are necessary to maintain a competitive free-market system, i.e. some form of regulatory body is still required.

Karl Marx: A Socialist Ideology?

Karl Marx (1818-1883) was a German economist, who appears to taken an even more pessimistic view of human nature when describing his economic ideology. For Marx believed that once the capitalist entrepreneur had established the means of production, all subsequent value results from the labour involved in the production. As such, Marx's argued that the profits of capitalism is anchored in the exploitation of the work force and the very notion of a profit-oriented organization. At this point, much of Marx’s economic ideology might be seen in terms of a more expansive political doctrine, where the management or ‘bourgeoisie’ always exploit the work-force, such that it comes to reflect a more fundamental class struggle. Marx then went on to argue that this class struggle must intensify as businesses grow in size in order to exploit the efficiency of scale and withstand cyclical downturns in the economy. Therefore, unless addressed by a different economic ideology, capitalism would simply drive society towards a two-class system of a few wealthy capitalists and a mass of underpaid, underprivileged workers.

Note: Today, you are left to consider for yourself whether he was really that far off the mark in this specific respect!

Marx also assume that capitalist economics would eventually fail, presumably because of an intrinsic unfairness in the distribution of wealth, to be replaced by socialist economics within a communist inspired government framework. In this system, it was assumed that the ‘workers’ would end up owning the means of production and thus have no need to exploit its own labour force for profit. However, history suggests that centrally planned economies within a communist political infrastructure have proved to be far less efficient at producing and delivering goods and services. As result, the income and associated wealth of the work-force actually fell in comparison to those operating within a capitalist economic system.

Note: Again, you are left to consider whether this was a failure of socialist economics, communist politics or an inability to compete with capitalist economies on a global basis.

Today, many in the west may feel that Marx's ideology has been thoroughly discredited; although it is still possible to argue that that many of his ideas failed in practice, not necessarily in theory, as much of the intrinsic unfairness in the distribution of wealth still appears to remain within the global economy as a whole. However, it is possible that the failure of Marx’s ideology lies in the assumption that only ‘the bourgeoisie’ are motivated by self-interest, whereas human evolution might suggest that ‘the proletariat’ are not immune the human condition of self-interest.

Keynes: Hybrid Ideology? 

John Maynard Keynes (1883-1946) was a British economist, who examined capitalism and came up with some extremely influential ideas, which differed in context from those of both Adam Smith and Karl Marx. In brief, Keynesian economics, when first proposed, might be described as more of corrective theory to capitalism rather  than a new economic ideology, which it was believed might help address the economic downturn experienced during the American Great Depression (1929-1933). This theory was based on the idea of a circular flow of money, such that when spending increases in an economy, earnings also increase, which then leads to more spending and earnings. This circular flow therefore helps support the normal functioning of a healthy economy. However, when the effects of the Great Depression started to cause a downturn in the US economy, the natural reaction of many people was to start saving their money rather than spending it, causing a further slowdown of the economy, i.e. a long-term recession.

During the Great Depression, unemployment affected about 25% of the working population of the US and millions of people lost their life savings, as well as their jobs. In Keynes’ view, there was only one way out of this gridlock and that was for the government to start spending in order to put money into the economy and help stimulate the demand for goods and services. While President Roosevelt is often credited with adopting the ideology of Keynesian economics, history also shows that Roosevelt faced much criticism for what was seen as uncontrolled government spending leading to budgetary overspend. It should also be noted that many in the American political elite were against the idea of any form of ‘socialist’ economics. Today, there is still much debate as whether it was Keynesian economics that rescued the American economy or the simply the increase in production driven by the start of World War II, which also took millions of men out of the dole queue by conscription into the army.

Friedrich Hayek: Austrian Ideology?

Friedrich Hayek (1899-1992) was an advocate of what is now often labelled as ‘Austrian economics’, who held doctorates in law and political science. In many respects, Hayek might be seen as a contemporary of Keynes in terms of 20th century economics, but who held very different views to the problems and solutions required to  underpin modern economic markets. As indicated, much of Hayek’s work in the 1920-30’s was linked to the ideology of Austrian economics and the idea of business cycles plus capital and monetary theory.

Business Cycles: Modern history shows that most economies can experience major swings in fortunes. This means that in some years, the economy can ‘boom’ such that unemployment is low, but in other years, the economy can be ‘bust’ such that unemployment is high. These periods of ‘boom & bust’ define the ‘business cycle’.

One of the main arguments within Austrian economics is the assumption that only individuals make choices, not collective entities. Therefore, the role of economics in society is to help coordinate the actions of individuals and understand the unintended consequences of individual ‘self-interest’. In this respect, Hayek was arguing  along similar lines as Adam Smith, i.e. that a free-market itself would effectively coordinate the action and decisions of individuals, although caveats apply. As such, an economic market is not designed, or necessarily controlled, by anyone but rather evolves in response to human actions. If so, the question that needed to be answered was:

What causes a free-market to fail?

The earlier work of Adam Smith and Karl Marx might be described in the wider context of a ‘political economy’ that encompassed not only economics, but social and political perspectives. In contrast, the Keynesian approach, as only briefly outlined, might be seen as treating the disease after diagnosis rather than providing a preventive cure. In this context, Hayek argued against the Keynesian approach as he believed that the instability of the ’business cycle’ was actually being made worse by the increase in the normal circular flow of money due to the intervention of the central banks. According to Hayek, this intervention would only drive down interest rates and make credit appear cheaper, which then encouraged capital investments that did not necessarily help the underlying economy. Of course, the question we may need to consider at this stage:

Is any of these ideological positions really driving our present-day economies?