Economic Growth & Economics

Economic Growth & Economics

Economy

It is the state of a country or region in terms of the production and consumption of goods and services and the supply of money.

Types of Economy

Depending upon the dominant view of the time in a particular country, different forms of production patterns evolve, and different economic systems finally emerged, providing alternative ways of organizing an economy.

The three models of economic systems that we see coming up are basically the different stages in the evolutionary process for our experiments, which define a better way of organising our economy.

1. Capitalistic Economy

Origin and Ideas of Adam Smith

• The capitalistic form of economy has its origin in the famous work of Adam Smith— The Wealth of Nations (1776). Adam Smith (1723-1790), the Scottish philosopher-economist professor at the University of Glasgow, whose writings formed the basis of classical economics, had stressed certain fine ideas which were to take root among some of the Western countries, and finally, capitalism took birth.

• Smith raised his voice against the heavy-handed government regulation of commerce and industry of the time, which did not allow the economy to tap its full economic worth and reach the level of well-being.

Key Concepts: Division of Labour and Laissez Faire

• Stressing 'division of labour', an environment of 'laissez-faire' (non-interference by the government), he proposed that the 'invisible hand' of 'market forces (price mechanism)' will bring a state of equilibrium in the economy and a general well-being to the countrymen.

• For such an economy to function for the public well-being, he has acknowledged the need for competition in the market.

Spread of Capitalism

• Once the USA attained independence, the ideas of Adam Smith were made part of its public policy, just one year after The  Wealth of Nations was published.

• From here, the idea spread to other parts of Euro-America—by 180,0 the economic system called 'capitalism' was established, which was later known by different names—Private Enterprise System, Free Enterprise System, Market Economy.

Role of Market Forces

• The decisions of what to produce, how much to produce, and at what price to sell are taken by the market, by the private enterprises in this system, with the state having no economic role.

• As Keyneshads suggested that the capitalist economy should move a few steps towards a socialist economy, Prof. Lange was suggesting just the same in the case of the state economies.

2. State Economy

Roots in Karl Marx’s Ideas

• Rooted in the ideas of historical change proposed by the German philosopher Karl Marx (1818-1883), more specifically, this kind of economic system first came up in the erstwhile USSR after the Bolshevik Revolution (1917) and got its ideal shape in the People's Republic of China (1949).

• This form of economic system also spread to other countries in Eastern Europe. Here we see two versions of the state economy—the socialist economy in the erstwhile USSR and the communist economy in pre-1985 China.

Socialist and Communist Economy

• While a socialistic economy emphasized the collective ownership of the means of production (property and assets) and it also ascribed a large role to the state in running the economy, a communist economy advocated state ownership of all properties, including labor, and absolute power to the state in running the economy.

• Though for Marx, Socialism was a transitional stage to communism, it never did happen in reality.

Criticism from Both Sides

• The socialist and communist economies used to criticise the capitalistic economies for being based on exploitation.

• In response, the capitalist economies called them the practitioners of 'state capitalism', where the states were the sole exploiters.

3. Mixed Economy

Great Depression and Failure of Laissez-Faire

• The belief in the self-correcting quality of the market and the 'invisible hand' of Adam Smith got a major setback in the early 20th century during the 'Great Depression (1929)'.

• The impact of the depression spread from the USA to other economies of Western Europe, escalating large-scale unemployment, a decline in demand and economic activities, and lockouts in industrial enterprises.

• The prevailing Smithian macro ideas failed to check the crisis.

• A new approach was needed, which came in the famous work The General Theory of Employment, Interest and Money (1936) by the English economist at Cambridge University, John Maynard Keynes (1883-1946).

Keynes’s Criticism of the Invisible Hand

• Keynes questioned the very principle of 'laissez-faire' and the nature of the 'invisible hand'.

• He even opined that the invisible hand brings equilibrium to the economy, but by strangulating the poor.

• He suggested that prices and wages are not flexible enough to employ all.

Government Intervention

• Questioning the limitations of the market mechanism, Keynes suggested strong government intervention in the economy.

• To get the economy out of the depression, he suggested an increase in government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demand for goods and services, as this was the reason behind the depression.

Emergence of Mixed Economy

• As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.

• As a follow-up to the Keynesian advice, many trend-setting economic policies were initiated throughout the capitalist economies. One very important initiative that came out was the government's active role in the economy.

• The essential goods and services that were till date being purchased by the people as 'private goods' were soon made available by the state 'free-of-cost', giving people more spare money to create demand for the goods and services which were part of the market.

• The mixed economy arrived in this way, and the classical capitalistic economy was challenged by it.

Suggestions for State Economies

• On the margins of the developments given above, it is interesting to note the developments in the state economies of the time.

• It was Prof. Oscar Lange (1904-65), the Polish philosopher, who in the 1950s suggested the same thing for the socialist economy as Keynes had for the capitalist.

• Prof. Lange praised the state economy for many of its good things, but also suggested the inclusion of some of the good things of the capitalistic economy.

• He advised the state economies to adopt 'market socialism’ (the term was coined by him). His suggestions were outrightly rejected by the state economies, as such compromises in the socialist economic order were blasphemous at that time (this was ultimately a suggestion towards democracy from dictatorship).

• As Keynes had suggested that the capitalist economy should move a few steps towards a socialist economy, Prof. Lange was suggesting just the same in the case of the state economies. Democracies are flexible, thus they were able to go for an experiment that paid them in the coming times.

Economics

It is the branch of knowledge concerned with the production, consumption, and transfer of wealth.

Some Important Books/Theories of Economics

• The Wealth of Nations – Adam Smith

• Money Illusion – Irwin Fisher

• Capital and Growth – Sri J.R. Hicks

• General Theory of Employment, Interest and Money – J. M. Keynes

• Planned Economy for India – M. Vishveshwaraiy

• The Value and Capital – Sri J.R. Hicks

• The Canon (theory) of Consumer's Surplus – Marshall

• Big Push Theory – A. R. Rodon

• Datt & Sundharam's Indian Economy – Gaurav Datt and Ashwani Mahajan

Economic Growth and Development

Meaning of Economic Growth

• A term coming from the life sciences, 'growth' in economics means economic growth. An increase in economic variables over a period of time is economic growth.

• The most important aspect of growth is its quantifiability, i.e., one can measure it in absolute terms.

(As the IMF and the WB considered this yardstick of development as quoted in Gerald M. Meier and James E. Rauch, Leading Issues in Economic Development, Oxford University Press, New Delhi, 2006.)

Units of Measurement of Economic Growth

All the units of measurement may be applied to show it, depending on the economic variable, where the growth is being studied.

We have a few examples:

1. An economy might have been able to see growth in food production during a decade, which could be measured in tonnes.

2. The growth of the road network in an economy might be measured for a decade or any period in miles or kilometres.

3. Similarly, the value of the total production of an economy might be measured in currency terms, which means the economy is growing.

4. Per capita income for an economy might be measured in monetary terms over a period.

We may say that economic growth is a quantitative progress.

Growth Rate

To calculate the growth rate of an economic variable, the difference between the concerned period is converted into a percentage form.

• Growth rate is an annual concept that may be used, otherwise with a clear reference to the period for which it is used.

• Though growth is a value-neutral term, i.e., it might be positive or negative for an economy for a period, we generally use it in the positive sense.

• If economists say an economy is growing, it means the economy is having positive growth; otherwise, they use the term 'negative growth'.

Economic Development

Difference Between Growth and Development

• Economic growth was considered a cause and effect for the betterment of the lives of the people. This was the reason why economists till the 1950s failed to distinguish between growth and development, though they knew the difference between these terms.

• It was during the 1960s and in the later decades that economists came across many countries where the growth was comparatively higher, but the quality of life was comparatively low.

Indicators of Economic Development

For economists, development indicates the quality of life in the economy, which might be seen in accordance with the availability of many variables, such as:

1. The level of nutrition

2. The expansion and the reach of healthcare facilities— hospitals, medicines, safe drinking water, vaccination, sanitation, etc.

3. The level of education among the people

4. Other variables on which the quality of life depends

Link Between Growth and Development

Here, one basic thing must be kept in mind that if the masses are to be guaranteed with a basic minimum level of quality-enhancing inputs (above-given variables such as food, health, education, etc.) in their life, a minimum level of income has to be guaranteed for them.

• Income is generated from productive activities.

• It means that before ensuring development, we need to ensure growth.

Higher economic development requires higher economic growth. But it does not mean that a higher economic growth automatically brings in higher economic development—a confusion that the early economists failed to clear.

Final Thoughts

The economy represents the production, consumption, and transfer of goods and money within a country or region. Different economic systems, such as capitalistic, state, and mixed economies, illustrate the diverse ways societies manage resources and organize production.

Capitalism emphasizes private enterprise, market forces, and competition, while state economies focus on collective or state ownership and central planning. The mixed economy balances market mechanisms with government intervention to address limitations of laissez-faire approaches, as seen during the Great Depression.

Economic growth measures the quantitative increase in economic variables like GDP, per capita income, and production, whereas economic development assesses the quality of life, including healthcare, education, and nutrition. Growth is necessary but not sufficient for development; both must work together to ensure meaningful progress.

Key economists, from Adam Smith and Karl Marx to John Maynard Keynes and Prof. Oscar Lange, have shaped our understanding of these concepts through theories, measurement methods, and policy recommendations.