Mark Olenski.
Smith did not focus on the role of the entrepreneur, but later market theorists did, making the entrepreneur – the one who brought the means of production together in a way to produce goods and services – a key component in this approach. Finally, Smith and other market theorists emphasized the importance of open trade. David Ricardo earned a place in economic history for positing that if a nation concentrates on producing those products in which it has a comparative advantage over other nations – advantages that climate, natural resources, cheap labor, or technology give it – and if it trades with other nations that are also concentrating on those products that they have the greatest advantage in producing, then all will benefit.
A market approach holds that government has a crucial but limited role in maintaining an environment in which economic transactions can flourish. Under this approach, government would confine its activities to providing for domestic tranquility that would ensure that private property is protected and contracts are secure; providing certain services, such as defense; enforcing private contracts; and helping to maintain a stable supply of money and credit. The reason some nations are poor, according to the market approach, is that they have not been successful in competing with other countries within the bounds of the basic rules listed above.
Advocates of the market approach point to the wealth of the United States and Western Europe as evidence of the correctness of their view. Even Karl Marx said that the hundred years of rule by capitalists were the most productive in the history of the world. And although an uneven distribution of income occurred in Western Europe during its early period of industrialization, the distribution of income later became much less uneven. This indicated that the new wealth was being shared by more and more people.
Nations such as Japan and West Germany, which came back from the devastation of World War II to create extremely strong economies by following the basic principles of the market approach, are also cited as evidence of the validity of the approach. Examples can also be found among non‐western countries that have achieved such impressive economic growth by following the principles of this approach that they have moved into a separate category of the economic development: the newly industrializing countries. Many of these economies, such as China, South Korea, Taiwan, and Singapore, achieved their high economic growth at first mainly by exporting light manufactured products to the developed nations.
Finally, advocates of the market approach point to the decisions of Eastern Europe and other countries, during the 1980s, to adopt at least some market mechanisms in their efforts to reform their economies. Even China – the largest remaining communist government – has adopted many important aspects of the market approach, which is widely believed to contribute substantially to China’s impressive economic growth.
Critics of the market approach point to the high rates of unemployment that have existed at times in Western Europe and the United States. At the present time, high unemployment rates are still found in a number of nations that have followed the market approach, despite impressive increases in their GNP. Much of the industry that has come to the South has been capital intensive; that is, it uses large amounts of financial and physical capital but employs relatively few workers. The more recent economic shocks resulting from the global pandemic have also exposed the inequalities and fragilities of market‐based economies.
There is evidence from Brazil, which has basically followed the market approach for the past several decades, that the distribution of income within growing economies became more unequal during the period when the countries were experiencing high rates of growth. The same thing happened in China in the 1990s. The rich got a larger proportion of the total income produced in these countries than they had before the growth began. And even worse than this is the evidence that the poor in these countries, such as Brazil, probably became absolutely poorer during the period of high growth, in part because of the high inflation which often accompanied the growth.38 (High inflation usually hurts the poor more than the rich because the poor are least able to increase their income to cope with the rising prices of goods.) The economic growth that came to some nations following the market approach failed to trickle down to the poor and, in fact, may have made their lives worse. High inflation was halted in Brazil in the 1990s, as was the trend for income inequality to worsen. At the end of the century the distribution of incomes in Brazil continued to be highly unequal. The poorest 20 percent of the population received about 3 percent of the income in the country, and the richest 20 percent received about 62 percent.
Critics of the market approach have also pointed out that prices for goods and services set by a free market often do not reflect the true costs of producing those goods and services. Damage to the environment or to people’s health that occurs in the production and disposal of a product is often a hidden cost, which is not covered by the price of the product. The market treats the atmosphere, oceans, rivers, and lakes as “free goods,” or as a global commons, and, unless prohibited from doing so by the state, it transfers the costs that arise because of their pollution to the broader community. In the language of economics this is called a “negative externality,” a term rarely discussed in public. Some critics believe this flaw in the market system is what is really responsible for our changing the climate on Earth, to be discussed in detail in Chapter 6.
And finally, critics point to the cycles of positive and low or negative growth that are a normal part of the market approach. An extreme case of this was seen as recently as 2008/2009 when a near collapse of market economies started in the United States and spread to Europe and other parts of the world. A major recession occurred in the United States, which was only prevented from turning into a depression by major intervention by the state. Many economic analysts attributed this failure of the market system in the United States to a lack of regulation by the government or state.
The State as Economic Actor
Approaches to economic development that envision a role for the state beyond that described in the previous section vary widely. Advocates of Marxist‐Leninist thought in early twentieth‐century Russia built a communist state, the Soviet Union, which functioned as the only economic actor, overseeing a centrally planned economy and directing the production and distribution of all goods, services, and labor. In a socialist country most of the means of production – land, resources, and capital – are publicly controlled to ensure that the value obtained from the production of goods and services is used to benefit the nation as a whole. The prohibition on the private control or ownership of these so‐called factors of production leads, according to this approach, to a relatively equal distribution of income, as everyone, not just a few individuals, benefits from the economic activity. Central planners set prices and invest capital in areas that are needed to benefit the society.
Some state‐focused approaches to economic development envision a strong role for the state beyond direct central planning. With respect to the global distribution of wealth, one explanation popular among those who take a state‐based approach to economic development attributes the causes of poverty in the world to international trade. According to the state approach, the root of the present international economic system, where a few nations are rich and the majority of nations remain poor, lies in the trade patterns developed in the sixteenth century by Western Europe. (“Dependency theory” is the name given to this part of the state approach, popularized by Immanuel Wallerstein.39) First Spain and Portugal and then Great Britain, Holland, and France gained colonies – many of them in the southern hemisphere – to trade with. The imperialistic European nations in the northern hemisphere developed a trade pattern that one can still see clear signs of today. The mother countries in “the core” became the manufacturing and commercial centers, and their colonies in “the periphery” became the suppliers of food and minerals. Railroads were built in the colonies to connect the plantations and mines
