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There are different theories of how or what contributes to the economic growth and development. As such there is great dispute between the different schools of thought. Which one is better, the invisible hand of the market or the ever so visible hand of the state? Should economic development be achieved through a cosmopolitan approach or a mercantilist approach? As there are multiple answers, this paper will examine pros and cons for both the laissez-faire economy and for the state policies. Although the free market gives an individual the chance to profit, it prevents the poor individuals to achieve their needs. Therefore, the government should intervene to provide citizens with the possibility to make themselves more prosperous but at the same time leading the economic development in the right direction.
Adam Smith and Max Weber argue that supply and demand, self-interest and competition should be given laissez-faire. The government should not preoccupy itself with the citizen's ability to spend money but should do its duty and keep the taxes low and stay uninvolved in the economy (Lecture 15 -January, Kopstein). Smith's invisible hand argues that the market will automatically select for the most beneficial outcome for the community, unlike the state policies, if given the chance to do so. On the other hand, there is Mercantalism, with Hamilton and List, which view relies on government aid to maintain comparative advantages.
Capitalism and Mercantalism had two very different uprisings. Mercantilism's development was triggered by Cosmopolitanism, "primarily in the writings of Friedrich List and Alexander Hamilton" (Lecture 15-January, Kopstein). Meanwhile, Weber states in his book The Protestant Ethic and the Spirit of Capitalism that Protestants lead to capitalism. He points out that a significant number of capital leaders and successful businessmen are Protestants (Weber Ch 1, 1). Protestants, through their hard work and savings, contributed significantly to the accumulation of capital (Weber Ch 5, 9). This made Protestants perfect entrepreneurs and their work philosophy spread around Europe which set the preconditions for Capitalism.
On one hand, Adam Smith and Max Weber believe in the self-regulating marketplace, the invisible hand. This approach focuses on the individual as the unit of economic advancement and argues that the global economy is not about dominance (Lecture 16-February, Kopstein). Instead, rationality is the key. The advancement of economy is a function of effort and there are certain forces that allocate resources in society that are not government driven. Each nation has its own resources with which it is able to produce goods and services at different opportunity costs. As such, a country should specialize on the good or service, which is at their comparative advantage (Lecture 15-January, Kopstein). That will benefit trade between countries and increase the economic growth of a nation. This will lead to the decrease in prices and the outcome will benefit globally by fostering the opportunity for people to access the products that are necessary for their survival. Such approach is not only rational but will also increase the standard of living.
On the other hand, Mercantalism has a different point of view with "that policy which each separate nation had to obey in order to make progress" (List, 49). Hamilton argues that the state must take an active role in developing a manufacturing economy as "domestic obstacles to industrialization, such as inexperience and capital shortages, can only be overcome by government intervention" (Classic Mercantilism, 36). As the state owns resources to which the access is denied to a normal citizen, the state must provide its citizens with a higher quality of living. Therefore, the state must provide backup to domestic industries (Hamilton, 40) so that these are able to compete in the world market. To support Hamilton's argument one should look at Hyundai Pony's success in the Korean domestic market which was do to the imposed tariffs on imported goods (Lecture 16-February, Kopstein) This made possible for the Korean company to collect information regarding consumer preferences which brought to their success in the world class car manufacture.
Other countries practice protectionism. With protectionism it is possible for the state to create more capable labors which will enhance the development of the industrial sector (Hamilton, 41). The state can encourage and provide with opportunities for change, hence built the nation's economy.
List argues against the liberal arguments of Smith as the Cosmopolitan view assumes "political stability and peace, even unity" (List, 51). This, List contends, "misses the key point that the world is driven by pointed nationalist rivalries" (List, 51). Therefore, List argues that the Cosmopolitan view, therefore, harms the unindustrialized countries in the production of unprofitable services and goods (List, 51). In addition to this, List argues that the developed industrial countries will even further develop while the poor nations will remain undeveloped due to the high rate of foreign investors investing in domestic investments rather than foreign. The undeveloped nations must be first artificially raised to a stage most similar to the other nations, List argues, and Mercantalism is capable of doing so, as one could also see in the previous example of Hyundai Pony.
At the same time, Mercantalism is able to hinder domestic economy and its advancement. The protection of those industries and firms that are inefficient in comparison to their foreign competitors is a gross mistake as this stops the effective resource allocation. Therefore, skilled workers apply for jobs in unsuccessful industries while losing opportunities to contribute more in those successful ones. As well, the increase of the workers lowers the price of labor. This leads to the lower cost of production per unit, unless a minimum wage is implemented. Accordingly, an increase of profit and capital to invest will result. Thus, Mercantalism can both produce a net increase and hinder the economic growth.
Further analysis suggests free trade does not equalize power leading to great inequalities. This is when the state policies should intervene. This is because of the system's preference towards workers with no families leading to owners enjoying their company's growth and the poor families the growth in poverty. Smith might argue that the increase of labor supply would lead foreign entrepreneurs to establish businesses in the country. This would lead to the increase of the price of labor and its demand. However, this is not so in reality, as List contends, where a person will be unwilling to make such risk.
Thus, Cosmopolitan approach will leave the low income families poor. On the other hand, Mercantalism is able to help the low income families through different state policies such as house vouchers and wage controls as well as many others. Regulation is one of the instruments that state use to achieve policy objectives and improve the quality of life of the citizens. As well, Mercantalist's heavier taxation will allow the government to use the revenue on programs to assist poor families.
One might conclude that there is a choice between a better off market and a better of population, but there should be a compromise. After the 2008 economic crisis, which economic philosophy should a country adapt? The pros and cons have been addressed in this essay and it is evident that a combination of both is necessary for markets to be back on track. The Keynesian compromise is the answer to the question as the "counter-cyclical stimulus allows the market to fluctuate in its Kondatieff cycle, with the government intervening to eliminate the absolute highs and lows of the cycle" (Lecture 17- February, Wong). This allows nations to take part in international trade, and also enables the nations to use protectionist laws for their local industries. Such an agreement stands along the Bretton Woods agreement. This agreement gave rise to the international banking and finance systems from which the future of the international trade can be set (Lecture 17-February, Wong).
However, is it possible in the today's world, after the economic crisis of 2008, to implement the Keynesian compromise? For such thing to occur re-negotiation has to take place. Some contend that economic advancement is a function of Cosmopolitanism, while others claim that it is a product of Mercantalism. Both approaches provide one or another form of economic advancement, however, not without adding problems as well. One may improve the quality of life of its citizens but hinder the economy; meanwhile the other might achieve economic prosperity better for the rich, but not for the poor. As such, a compromise is needed between the two to achieve complete economic advancement and to make the market system as strong as ever.