A SHORT COURSE IN WESTERN ECONOMICS FOR THOSE EDUCATED AS MARXISTS Changing Attitudes in China and the USSR With the surprising and unanticipated declaration of Deng Xiao Ping eight years ago with respect to Communism and Capitalism, namely, that it doesn't matter if a cat is black or white so long as it catches mice, and his subsequent liberalization and reintroduction of market forces into the economy of the People's Republic of China -- as well as the later belated acknowledgement by President Gorbachev that Marxist economics has failed in the Soviet Union, there is widespread interest on the part of those educated in the Marxist approach to economic thinking to take a new look at Western Economics. The motive for this is not hard to understand. Communist economics is bankrupt -- not only in ideas, but in performance; while the operation of the Market System where liberal economic forces have been permitted to work their wonders has brought unparalleled prosperity to Europe, North America, Japan, and the Newly Industrialized Countries of Asia and Latin America. Meantime, consumers in communist countries have for years been standing in queues only to find nothing in stock when they finally reach the sales counter. Deng and Gorbachev, dedicated communists from their early years, have only lately been weaned from Marxist fundamentals. They were preceded by several years by a growing number of other former Socialist/Marxist leaders in Africa, South America, and South-east Asia who have been exploring the verities of Economics as developed and applied by the Classical and Neo-Classical Economists of Europe and North America with such notable success over the past hundred years and more. Marx in Western Economic Thought It may be surprising to some to learn that while Marxism has until recently rejected Western economic analysis out of hand, Karl Marx has always been accepted by Western Economists as an Early Classical economist who provided significant insights into the workings and shortcomings of Capitalism -- or, as it might more analytically and correctly termed, Market Economics. Marx early recognized the importance of the Business Cycle, though he gave exaggerated importance to its destructive effects without recognizing its upside. He also was among the first to understand the alienative effects of the repetitive drudgery of the production line as well as the powerful voice Labor Unions could have in meliorating this socially destructive situation. Finally, Marx early recognized the potential danger of monopolistic ownership, though without appreciating the possibility of liberal governments permitting labor unions to countervail the power of factory owners; nor, taking for granted his own view that governments were no more than tools of the propertied class, their willingness to intervene legislatively to limit monopolistic tendencies then at work. These insights have gained Marx a permanent niche in Western Economic History. On the negative side, however, his enormously wrong and disastrously misleading analysis of the role of profits and entrepreneurship in the economic process (based, to be sure, on the still partial and defective insights of such Classicalists as David Ricardo) more than offset these positive contributions. Marx viewed the entrepreneur only as unethical exploiter of labor rather than identifying his essential contribution as creator, innovator, organizer, and catalyst of the production process; and he mis-characterized profit only as robbery of the productive labor of others rather than seeing it as barometer of the relative efficiency of management, principal source of funds for future investment (itself producing more and better paid jobs), and engine of general prosperity. While Western Economics soon progressed beyond Ricardo's defective Labor Theory of Value, Marxism did not, presuming that its Founder had fully plumbed the depths of "Scientific Socialism". Moreover, the quasi-religious awe in which Communism came to hold the sacred and infallible writings of its Founder effectively brought meaningful economic inquiry among Communist devotees to an end. Important Post-Classical Innovations in Western Economic Theory Meantime, in the West, as the insightful thinking of the French economist Leon Walras became more widely diffused, the profession came to understand the complex inter-relationship of every factor of production and element of the distributive process. What has come to be called "General Equilibrium Theory", has taken us light years beyond the limited early insights of Marx and the other Classical Economists with respect to these matters. Wage and Value Theory advanced under the productive contributions of the Austrians Carl Menger and Eugen Bohm-Bawerk, explaining satisfactorily for the first time, by means of a powerful insight regarding marginal cost, marginal productivity, and marginal price, why price and value are not identical, and why price may substantially exceed the cost of labor required to produce a good without involving exploitation. And finally, why the labor of the earliest and most productive worker is worth no more to the productive process than that of the last-hired and least productive individual laborer of a given class, leaving potential non-exploitative profits for the early and most apt entrepreneurs. Marginal analysis, it turns out, is little more than insightful application of Ricardo's theory rent: why the price paid for marginal land necessary to meet agricultural demand leaves substantial surplus for the owners of better endowed land in the form of rent. But like so much scientific progress, what looks so self-evident in retrospect, was years in finding thinkers like Eugen Bohm-Bawerk and Carl Menger to explain it clearly and simply for the understanding of the masses. And it took Joseph Schumpeter to recognize the powerful creative side of cyclical downturns (which Schumpeter termed "Creative Destruction"), liberating the resources used by less-capable- managers during economic recessions enabling the next generation of able entrepreneurs to gain control over these factors, converting them to new products and processes during the cyclical trough for delivery to the market at least cost, setting in motion the next recovery phase. This process was seen by Schumpeter as a powerful force for renewal and efficiency, bringing the economy to new heights during each expansion. Each such cycle, Schumpeter saw, plays the essential role of clearing out deadwood, creating more jobs and more wealth following every period of brief cyclical disruption. Finally, it took the great Cambridge Economist Alfred Marshall, best remembered for having first introduced mathematical analysis to Economics, to recognize that the profession had perhaps gone wrong in oversimplifying the factors of production to only Land, Labor, and Capital. Marshall argued -- apparently too briefly for this important point to be understood or accepted -- that the profession should add a fourth factor, Entrepreneurship, recognizing this as the scarcest and most essential element in production. A paper published in Encyclia by the present author argues that had the profession listened more carefully, heeding Marshall's suggestion more promptly, Marx's claim that he had plumbed the depths of "scientific socialism" (as noted effectively bringing economic inquiry to an end in the Soviet Union for many years), and his disastrously misleading arguments about entrepreneurial crime and exploitation, might have been countered more successfully by liberal economists at an early stage, avoiding Communism's march down a dead-end road for over seventy years. To be sure, Western Economics does not yet understand every aspect of the economic process. We are as yet still grappling with the attempt to relate our rather complete grasp of statics to Real World dynamic processes (though Chaos Theory is providing new insights in this regard). And we cannot always effectively prescribe for even what is understood. There exists what Economists call "the learning effect". Human intelligence reacts differently to every repetition of events, attempting to avoid their most telling effects, while in the process bringing on new and unforeseen repercussions. Another paper by the present author argues that the new field of Chaos Theory is bringing us to understand that despite the best possible forecast of events based on the most meticulous data gathering and state-of-the-art mathematical techniques, the smallest random variation can result in a radical "pump up" of events bringing on catastrophically unpredictable results. The typical example given in the literature is a cyclone in Kansas being set off by the wafting of a butterfly's wings in Central China. A typical apposite real world case might be the Great Depression of the '30s initiated, it is now understood, by myriad relatively minor events whose chance conjuncture was at the time totally unforeseeable. Finally, it is unrealistic to assume, as some unsophisticated politicians and businessmen seem determined to do, that markets are mystically capable of resolving every human problem of supply and demand in an efficient, acceptable, and ethical fashion. What is truly impressive is that markets are able to resolve as many problems as they do. Indeed, one of the notable findings of Western Economics is that the greatest engine of efficiency is to turn the market lose to work its magic on as many human problems as possible with least intervention, conserving the limited resources of government to explore solutions in those areas (generally ones where monopolistic influences are rife or questions of social justice are overriding), or where market solutions do not apply -- or do not apply effectively or well. Indeed, most Western Economists are anxiously engaged in trying to devise new and previously unthought of ways to tailor or organize markets to handle such limited areas of imperfect competition, tax inequity, or difficult distribution. The endemic problems of Marxism appear, on the other hand, to have arisen precisely because profit (the chief barometer of efficiency) was misdiagnosed as economic crime and Marxist economies were thus compelled to operate without the discipline of market forces, most often in a heavily subsidized manner which served long to disguise their gross inefficiency, thus wasting scarce resources year after year. And because scarce entrepreneurial talents were suppressed as enemies of society with crude political reliability becoming the criterion for top managerial and planning positions, the Soviet and Chinese economies became dependent on grossly ineffective planning and managerial direction from ungifted and inexperienced politicians possessing neither the talents nor discipline of real world business. Welfare Theory Western Economists have since early days understood the difference between Positive and Normative Economics. Positive Economics relates to the science of decision making to maximize or optimize a desired goal: output, efficiency, market penetration, current sales, or profit. Sometimes these go together, but not necessarily, and not always. Once maximum (or optimum) wealth (or utility, or satisfaction) has been created, there arises the question of distribution. Other things being equal, while distribution should also be done in the most efficient manner, as was shown by the English Neo-classical Economist Pigou, distribution usually engages important Normative issues reflecting values, ethics, and social preferences, as presently demonstrated in the dispute between Japan, the United States, and Western Europe over different distributive systems. Taking the most generous position, it can be acknowledged that once efficiency has been achieved in the allocation of resources and the production of goods and services, there is still room for Communistic normative views regarding welfare (as with the American or European-style "minimum welfare net") to enter into the economizing process at the distribution stage: i.e. to determine who gets what and how much. This is already being done in the Capitalist countries of Europe and the United States through Food Stamps, educational grants, low-cost loans, medical programs, public housing grants, and subsidies to mothers and children. But this is also precisely where one of the major unresolved problems of Economics arises. The Production Function for any product can be readily described by the trade-off of factors necessary for producing various mixtures of goods and services. And the Consumption Function consists of no more than the tangencies between a Utility Function and a Production Function (more of which later). But as Pigou has shown, each human being has a different Utility Function. That is, each individual has an idiosyncratic set of preferences -- as was recognized as far back as Roman times: De gustibus, non disputandum -- and as can be observed by taking any group of ten kids to an ice cream store where each kid will insist on a different size and flavor of cone or dish. Despite repeated attempts by the best minds over many years, it has proved theoretically impossible to simply aggregate the Utility Functions of groups of people, asserting "this is what people want". Grosso modo societies do get by, agreeing with respect to social wants and needs (roads, schools, defense, public parks and playgrounds, and social welfare) that the vote of the majority will rule. But, even this simple rule of thumb doesn't always work. It is recognized that "hard cases often make bad law". And the American political thinker John Calhoun, who made the one original American contribution to political theory, argued that a simple majority vote is not enough to bring along any substantial minority with particularly deeply held contrary views (this was the theoretical basis for the "nullification theory" of States Rights, rejected as national policy as a result of the outcome of the American Civil War). There are still individuals with such set views that they refuse to pay taxes because of opposition to one or another social program which they cannot in conscience support. The issue of nullification is again emerging as a reality in the contemporary breakup and attempted restructuring of the U.S.S.R.) The present author, extending the logic of Harvard Professor Edward Chamberlain, whose Monopolistic Competition for the first time explained the logic of branded products and the phenomenon of advertising, wrote The Theory of Social Product Differentiation to explain the willingness of some countries to protect higher cost domestic production of certain products to further a sense of national identity or defend a strongly desired national lifestyle. For example, virtually every Third World nation maintains its own national airline, always heavily subsidized, despite the fact that better and cheaper service could usually be offered by one or another of the existing international airlines. Even Canada requires higher cost special editions of international news magazines, insisting that they carry no foreign advertising. And Switzerland restricts foreign property ownership to certain Cantons. The Theory of Social Product Differentiation  argues that this is just one further evidence of group willingness to pay a somewhat higher price for a product meeting a specific personal taste (variant utility function) or to deny themselves certain benefits in return for a specific non-material consideration, and should be accepted by economists and governments, as with the more familiar commercial preference for Post Toasties over Kelloggs corn flakes, or Ford over Chevrolet automobiles, rather than being attacked as crude "protectionism" or aberrant neo-mercantilism. The power of this thinking -- if not a full understanding of the formal theory -- was demonstrated by France's intransigence during the critical final stages of the GATT Uruguay Round trade negotiations when its negotiators held fast for an exception to free trade rule for French motion pictures, TV, and music in order to create a protected reserve for French culture against the powerful inroads of American film and TV products, which seem to be sweeping the world. Policy Goals and Policy Instruments The late Professor Otto Eckstein of Harvard University, Founder of Data Resources Inc.uncarpeted of Cambridge, Massachusetts, used to tell his classes that every national economic goal could be classified as falling within one of six categories: Sustained High-level Growth, Full Employment, Efficiency, Equity, National Security, Price Stability. He invited his classes to add to the list if they could. In thirty years actively engaged in International Economic Affairs, I've been able to add only one item to the list, though I think it an important one: the desire to preserve a Preferred National Lifestyle. Over time each of these Economic Policy Objectives must be reassessed and re-prioritized. At one time (obviously during periods of war or high international tension) National Defense will naturally have highest priority. In periods of extended peace, possibly High Level Growth will be accorded top billing. In moments of recession, a desire for Full Employment may most powerfully affect voters' choice of political leadership. And following excessive inflation (as in post WW-I Germany) monetary reform and Price Stability may assume overriding importance (affecting the fate of Europe and much of the rest of the world for the next generation). For much of the post-Great Depression period in Great Britain and the United States (at least until the era of Ronald Reagan and Margaret Thatcher) Social Equity ruled as a primary objective of voters and politicians. Unfortunately, as Nobel Prize Winner Jan Tinbergen of the Netherlands has shown, at least one Policy Variable must be directed towards achieving each Policy Objective. And there are precious few available Policy Variables -- not nearly enough to target each Objective. So at times, some economic policy objectives must remain beyond our reach -- usually those lowest on the list of current priorities. At present, it would seem, that the demand for Productive Efficiency -- too long left off the Soviet list of high priorities -- has brought down the system in the Soviet Union; while the yearning for a modicum of freedom and the evidently more satisfactory life style of the non-Marxist world is threatening leadership in the Peoples Republic of China. Much as some political leaders may regret it, it is evident that Economics and Politics are closely intertwined: if not in their body of knowledge and methods of analysis, then in their mutual dependence on freedom of individual choice and liberty of action to achieve and maintain social progress, stability and efficiency. As the present author wrote over twenty-five years ago in The International Economic Coordination Instrument: Examples Drawn from the OECD Experience , there is a significant economic dimension in every political decision (new public works programs -- highways, dams, river dredging; expansion of social welfare programs; war and peace; recognition or non- recognition of new nation states), and a political dimension to decision making in every field of public economics (monetary policy, trade policy, fiscal policy, tax policy). Politics is indeed the application of the economizing process in the field of social relationships, while Economics is the application of political choice in the realm of the material world important to making human life worth living. Retreading Third World Students of Economics While it will be found that the half dozen or so powerful analytical tools of modern economics are applied one way or another in virtually every sub-specialty of the discipline (and Economics could thus theoretically be taught on a conceptual basis), Western Economics has traditionally presented itself in a number of separate courses related to the way the Real World is organized: Elementary Micro-theory (the Theory of the Firm), Elementary Macro-theory (Public Policy), Intermediate theory, Foreign Trade, Money and Banking, Business Cycles and Forecasting, Finance, Comparative Systems, Economic History, and Development Economics. The author has found that students formed in non-Anglo-Saxon schools of economic study are not infrequently deficient in their understanding of the way each of these courses are related to each other and how they are to be integrated into General Equilibrium Theory. For example, very few students not schooled in the Anglo-Saxon/German/Scandinavian/Dutch (indeed, one might say in the OECD) tradition, understand the importance to an efficiently functioning economy of achieving a "neighborhood of equilibrium" (since no stable equilibrium is every possible in dynamic conditions) between the seven marginal conditions: marginal cost of capital, marginal cost of land, marginal cost of labor, marginal productivity of land, labor, and capital, and marginal price -- and bringing these into a relationship with marginal demand and marginal utility. This course was originally devised as a intensive review of each of these fields, with emphasis on their interrelationship, to assure that non-Anglo-Saxon students were up-to-speed before commencing work in advanced economics. European and Third World students who have taken the course have found it enormously useful in achieving a sound overview of modern economics, enabling them to appreciate the meaning and implications of opening up the economic systems of their countries in order to attain "neighborhoods of equilibrium" for the "seven marginal conditions" -- a situation which must obtain before an efficiently operating economy can be achieved: equilibrium among the marginal costs of land, labor and capital, equilibrium among the marginal productivity of land, labor, and capital, and equilibrium between the marginaL price of one's product and marginal demand for it. It will be noted that such opening up to competitive equilibrium is precisely what it missing from the contemporary Russian economy as a result of halfway reform measures which are only delaying a return to full employment and full productivity. As a prerequisite for the course, students are expected to have had at least Elementary Micro and Macro-theory, and Trade. Special Problems of Communist Students -- A Brief Course Outline There is of course no way that students raised as Marxists can have been prepared for Western Economics to this degree. Nor that enough time can be devoted to bring them fully up to speed in each of these sub-specialties. It is nevertheless believed that a rapid survey, integrating the most salient points of Macro and Micro-theory as these have been developed in Western thought -- with mention of each of the major contributors to emerging modern theory (a sort of mini-course in Economic History) -- to bring students beyond the primitive point at which Marxism diverged along its own dead-end track, will be helpful. We then turn briefly to the Theory of Money and Banking (essential because of the deficiencies of Marxist thought in this area); the contribution of Business Cycles to economic growth and efficiency; and Trade (to contrast Western understanding of Least Comparative Advantage with the Marxist concept of Trade as only a "vent for surplus" or device for exploitation and imperialism). The course ends with a brief review of Development Theory (again to contrast the role of foreign investment as an engine for economic growth and prosperity rather than merely as a tool of exploitation). Students are expected (about mid-course) to form small teams of two to four to undertake research studies on the development strategy of one of the more successful NICs for submission as a written report and for oral classroom presentation following the lecture portion of the course as object examples for Chinese regional development.