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Classical economics would teach us that if left alone the economy would tend to find its own equilibrium, which in the classical sense also means full employment of the nation’s resources. Holding that the best government is one that governs the least, classical economics abhors government intervention in many areas of the economy and allows only such basic government functions as enforcing property rights, national defense, public education, and the like. All other questions about production, exchange and distribution will be answered in the classical economy not through government fiats but through free interplay of market forces.
Classical economics also assumes that self-interest is natural to humans. Businessmen do not produce the things that people need out of kindness but because of their desire for profit in providing those things. The same is true with labor. Nobody works because one wants to help the capitalist earn more profits but mainly to get for himself the income in salary or wage that one needs in order to buy what he wants in life. In classical economics therefore, when individuals pursue their respective interest, the best interest of society is also served and harmony is achieved.
Classical economics has also one of its tenets the importance of all factors of production (land, labor, capital and entrepreneurship) as well as all economic activities (agriculture, industry, and services) in producing and contributing to the wealth of nations as opposed to the mercantilists who thought mainly of wealth as a result of more commerce or trade or the physiocrats who believed wealth as mainly coming from the use of land.
Such was the happy scheme of things in the classical world that Adam Smith described in his book, An Inquiry into the Nature and Causes of the Wealth of Nations. Published in 1776, it was the first work to establish political economy, or what everyone calls economics today, as a separate field of study.
Alas, the free interplay of market forces did not always end well for many nations that believed in the tenets of classical economics. Such was the case with the coming of the Great Depression in the US in the 1930s where up to a fourth of its workforce was thrown out of work due to a severe decline in demand for goods and services. This confused many people, who, before the 1929 October crash of the stock market, were repeatedly told of the continuously booming economy that characterized the so-called Roaring Twenties.
Franklin D. Roosevelt who was elected US president in 1932 came out with the New Deal. He was correct in the sense that the New Deal created many opportunities for employment, particularly in government projects, but it was also negated by his economy measures in many areas of government activity. Coupled with the tight monetary policy that made investment very costly and that explained why it took only up to the coming of the Second World War for the US economy to finally gain new traction for faster economic growth.
The war, of course, means more government expenditures and control of the economy which were contrary to the tenets of classical economics. But the thing is that when the war ended, the rapid growth of the US did not stop when government stimulus was continued. The same government stimulus or intervention in the economy that allowed the US economy to run at high gear during and after the end of the war was also applied in war-ravaged European countries after the war, thus in turn, leading to their rapid recovery or at least for Western Europe that escape from the clutches of Communist Russia.
The logic behind the new found strength of the US economy and the rest of the world that followed its example after the war was not to be found in Smith’s Wealth of Nation but in another economic classic - John Maynard Keynes’ The General Theory of Employment, Interest, and Money published in 1936. In this book, Keynes looked into the problem of prolonged depression and came out with the recommendation to expand government expenditures to counter the downward thrust of declining consumption and investment that came with the depression or recession.
Alas too, not all also ended well with Keynesian economics that gives primary role to the government in influencing the level of economic activity. It came with stagflation or the presence of both rising prices and unemployment that the Keynesian stimulus package could not tackle at the same time or tackle only one at the expense of worsening the other. Margaret Thatcher was prime minister in England and Ronald Reagan the President of the US when this new situation came.
Together, the two were able to influence many nations, including the Philippines, to deregulate their economies, open themselves to the world market or globalization, and privatized government businesses – in other words back to the classical tenets. But like what happened in the past, suddenly there is a global recession again that many thought could even rival that of the 1930’s in severity if we fail to act in the right way.
So now comes the rebirth of Keynesianism, but how long will this last?
