I would like to recommend this documentary made by PBS, “Commanding Heights“. It helped me understand the generalities of the construct of economies around the world. The chronological arrangement allows me to follow the story easily and understand the developments. I did study economics as a non-core subject in University, and so if I can follow, you should be able to. In fact, I would urge people who has no economics background to watch. You do not realise how much it can affect you!
The most valuable knowledge that I gained
There are generally 2 school of economic thoughts in a democratic society. One is known as the Keynesian economics and the other is Austrian School. The former is conceptualised by the British economist, John Maynard Keynes, who believed that government must intervene to manage inflation and stabilize the economy, cushioning booms and busts in the process. Opposing this idea, Fredrich Hayek, an Austrian, supported a free market mechanism and believed in minimal government intervention. In his opinion, the market forces will always balance out and price is the best signal to communicate to businesses for decision making (to produce more or less). Government intervention like price setting would hence interfere with the signal and produce inefficiency in the market. The documentary began with this difference in ideas and did well to evaluate the effects and outcomes of these 2 school of thoughts with real examples. In my opinion, a Keynesian economy is one that has slow and steady growth, without much fluctuations while a free market economy will see booms and busts that will be extreme and frequent. Businesses will come and go very frequently. This is what happened in the financial meltdown in 2008. The Credit Default Swaps (CDS) were not regulated by the government and it went out of hand. Banks over-leveraged and market forces disciplined them.
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Now think of a scale. On one extreme, it is socialism, where the government has total control of production. On the other end is free market economy. Keynesian economics will be somewhere in the middle, closer to the latter. I always have a principle, too much of anything is no good. Hence, a balance approach is always preferred. But this does not mean I support Keynesian economics. I am actually favoring the free market economics more, comparatively. If I can cut somewhere in between both of them, it would be where I want to be. Government intervention is necessary but should be very much limited. The reason why I prefer free market is because like what I have mentioned above, market is efficient to distribute resources and booms and busts would be more frequent and extreme. I love efficiency and hate waste. Secondly, with more frequent booms and busts, we can make more money with proper knowledge. Nobody can prevent booms and busts. It is a human trait and a larger scale, nature. Booms and busts are the result of humans’ greed and fear. Trying to stop booms and busts is equivalent to asking a person not to be greedy or to feel fear. Take a look at our economy, is it moving to more regulation or de-regulation? According to the documentary, there is a shift towards free market economy at the later part of the last century. Does this mean there will be more booms and busts? I would think so. Hence, better be equipped with the knowledge to deal with booms and busts, if not you will be a victim of it.
You can get the DVD from Amazon at USD$37.49. It comes in 3 episodes with sub-chapters and a total of 6 hours. The sypnosis taken from PBS website:
Episode 1: The Battle of Ideas
“A global economy, energized by technological change and unprecedented flows of people and money, collapses in the wake of a terrorist attack …. The year is 1914.
Worldwide war results, exhausting the resources of the great powers and convincing many that the economic system itself is to blame. From the ashes of the catastrophe, an intellectual and political struggle ignites between the powers of government and the forces of the marketplace, each determined to reinvent the world’s economic order.
Two individuals emerge whose ideas, shaped by very different experiences, will inform this debate and carry it forward. One is a brilliant, unconventional Englishman named John Maynard Keynes. The other is an outspoken émigré from ravaged Austria, Friedrich von Hayek.
But a worldwide depression holds the capitalist nations in its grip. In opposition to both Keynes and Hayek stand not only Hitler’s Third Reich but Stalin’s Soviet Union, schooled in the communist ideologies of Marx and Lenin and bent on obliterating the capitalist system altogether.
For more than half a century the battle of ideas will rage. From the totalitarian socialist systems to the fascist states, from the independent nations of the developing world to the mixed economies of Europe and the regulated capitalism of the United States, government planning will gradually take over the commanding heights.
But in the 1970s, with Keynesian theory at its height and communism fully entrenched, economic stagnation sets in on all sides. When a British grocer’s daughter and a former Hollywood actor become heads of state, they join forces around the ideas of Hayek, and new political and economic policies begin to transform the world.”
Episode 2: The Agony of Reforms
“As the 1980s begin and the Cold War grinds on, the existing world order appears firmly in place. Yet beneath the surface powerful currents are carving away at the economic foundations.
Western democracies still struggle with deficits and inflation, while communism hides the failure of its command economy behind a facade of military might. In Latin America populist dictators strive to thwart foreign economic exploitation, piling up debt and igniting hyperinflation in the process. In India and Africa bureaucracies established to end poverty through scientific planning spawn black markets and corruption and stifle enterprise.
Worldwide, the strategies of government planning are failing to produce their intended results. From Bolivia and Peru to Poland and Russia, the free-market policies of Thatcher and Reagan are looked to as a possible blueprint for escape. One by one, economies in crisis adopt “shock therapy” — a rapid conversion to free-market capitalism.
As the command economies totter and collapse, privatization transfers economic power back into entrepreneurial hands, and whole societies go through wrenching change. For some the demands and opportunities of the market provide a longed for liberation. Others, lacking the means to adapt, see their security and livelihood swept away. In this new capitalist revolution enlightened enterprise and cynical exploitation thrive alike. The sum total of global wealth expands, but its unequal distribution increases, too, and economic regeneration exacts a high human price.”
Episode 3: The New Rules of the Game
“With communism discredited, more and more nations harness their fortunes to the global free-market. China, Southeast Asia, India, Eastern Europe, and Latin America all compete to attract the developed world’s investment capital, and tariff barriers fall. In the United States Republican and Democratic administrations both embrace unfettered globalization over the objections of organized labor.
But as new technology and ideas drive profound economic change, unforeseen events unfold. A Mexican economic meltdown sends the Clinton administration scrambling. Internet-linked financial markets, unrestricted capital flows, and floating currencies drive levels of speculative investment that dwarf trade in actual goods and services. Fueled by electronic capital and a global workforce ready to adapt, entrepreneurs create multinational corporations with valuations greater than entire national economies.
When huge pension funds go hunting higher returns in emerging markets, enterprise flourishes where poverty once ruled, but risk grows, too. In Thailand the huge reservoir of available capital proves first a blessing, then a curse. Soon all Asia is engulfed in an economic crisis, and financial contagion spreads throughout the world, until Wall Street itself is threatened. A single global market is now the central economic reality. As the force of its effects is felt, popular unease grows. Is the system just too complex to be controlled, or is it an insiders’ game played at outsiders’ expense? New centers of opposition to globalization form and the debate turns violent over who will rewrite the rules.
Yet prosperity continues to spread with the expansion of trade, even as the gulf widens further between rich and poor. Imbalances too dangerous for the system to ignore now drive its stakeholders to devise new means to include the dispossessed lest, once again, terrorism and war destroy the stability of a deeply interconnected world.”
If you want to read more about the evolution of economic thoughts, wikipedia has a well organised page: “History of Economics Thoughts”
You can also find out more about this documentary on PBS website: “Commanding Heights“
Government intervention is necessary but should be very much limited. The reason why I prefer free market is because like what I have mentioned above, market is efficient to distribute resources and booms and busts would be more frequent and extreme.