Contemporary Economics Theory Thought

Contemporary Economics - A Greater Role for Government

Contemporary Economic Theory and Thought

Beginning in the late 1920s, after Joseph Stalin seized political power by ousting both Leon Trotsky (Lenin's chief lieutenant during the 1917 Bolshevik civil war) and economist Nikolai Bukharin from contention, Russia was led to an era of unprecedented industrialization. Up to that time, Russia was primarily a rural, agricultural, and less developed country. All communist leaders and economists agreed that rapid industrialization via extraction of surplus from agriculture was necessary. In November 1929, Stalin's government enacted a policy of promoting agricultural collectives as a means of increasing agricultural productivity and expediting industrial expansion. Despite heavy resistance from rich peasants, the government's collectivization efforts succeeded, and by 1938, economic concentration and industrialization had occurred at unprecedented rates. This Soviet experience was significant because it contributed to economic thought in the area of development economics for third world countries.

The adverse effects of the Great Depression resulted in a loss of faith in the automaticity of laissez-faire capitalism, and many began to advocate either fascism or socialism. Resultantly, Keynes's recommendations for increased government intervention and regulation were highly accepted. In fact, capitalism was virtually saved, at least so it seemed, by World War II because of massive military spending. However, by the 1950s, neoclassical economic theory was once again on the defensive. The three main tenets including the 'invisible hand' leading to harmony and efficient allocation of resources, automatic market adjustment to full-employment equilibrium, and marginal productivity theory of distribution (i.e. income to be received based on individual creation of value or marginal contribution) were back in full swing. Incessant criticism of neoclassical ideology, however, had an effect to permanently and distinctly split neoclassical economics into two separate traditions. On the one hand, persistent complaints by small businesses regarding fair competition, especially as large corporations seemed to reap most of the available benefits from increased government expenditure and contracts, helped keep the laissez-faire arguments alive. On the other hand, the combination of an increasing acceptance of the potential effectiveness of Keynesian policy and the explosive growth of literature relevant to the new field of "development economics," led to a widespread loss of faith in traditional laissez-faire ideology.