Diagnostic Paper: Relevance of Economic Theory

Economics, simply stated is the study or systematic inquiry of human activities that are generally categorized under production, consumption and distribution (sometimes also pertained to as exchange) of goods and services. The etymology of the word is credited to the Greeks, which back then meant ‘household management’. As per other bodies of knowledge, economics is considered to be eclectic to the point that appropriately defining its boundaries is shrouded with controversy. It touches if not includes other disciplines such as but not limited to: mathematics, sociology, psychology, accounting, geography, and political theory. Due to its complexity, it is said that attempts at creating economic models is tremendously difficult because collective human behavior is not completely predictable. Also, even economists are divided with regards to whether to treat this subject matter as an art or a science. All in all, the nature, magnitude and implications to individual and social welfare is the primary focus of policy prescriptions that have been produced from the study and application of this field.
More important than defining and acknowledging the existence of economics is knowing and understanding its relevance in the micro, national, macro and global scale. Ever since its emergence as a separate discipline in the 18th century, it is undeniable that people have seen more clearly the significance and impacts of economics from the personal to international level. The cognizance of such became the reason why national governments adhere to and employ various theories that have been fashioned/ refashioned and extensively debated upon economic theories.
Roughly classified into 4 categories, the more popular of the numerous theories that have been conceived fall under classical. Marxist, neo-classical and Keynesian. Classical economics was a by-product of post-mercantilist practices and served its purpose as a new phase or a refreshing beginning that was chiefly concerned with macroeconomic phenomena. Economists such as Adam Smith, John Stuart Mill, David Ricardo and Thomas Malthus are some of the more well-known figures and proponents of this time. Smith’s claim of absolute advantage was one of the main arguments that attacked mercantilism. He was in support of free trade and division of labor as a means by which a country can increase its income. Perhaps the statement “if a foreign country can supply us with a commodity cheaper than we ourselves can make, better buy it from them” can be used roughly as one of the bases that various economies have employed. To this extent even the Philippines has imported from other countries such as China commodities that are produced more cheaply as compared to when the country produces them. Shoes, accessories, bags and countless other merchandize flood our markets and eventually our homes with its origins extend way beyond our borders. Although Smith, claimed that exceptions to free trade include military security, and tax imposition on imports to protect/ encourage local industry, this seems to be one of the aspects that our government is guilty of neglecting. The Philippines, together with other countries are guilty of unbridled reception of products sometimes to the disadvantage (or eventual demise) of local producers and industries; the production of footwear in Marikina being one of my cases in mind. It is true that international trade is rather indispensable due to the fact that resources are scarce and that a country may not be as geographically, demographically and technologically endowed as others. Benefits of trade include, improvement of the standard of living, acceleration of economic development, stimulation of production, generation of foreign exchange earnings (to buy capital investment that we have no capability of producing as well as paying off our burdensome debts), promotion of product specialization, increases consumer satisfaction among others.
Still on classical economics, Ricardo formulated the theory of comparative advantage in which he states that: a country should export the goods in which it has the greatest comparative advantage and should import the goods in which it has the greatest comparative disadvantage. It is said that this analogy can be applied to a person who is both a nurse and a doctor at the same time. This person has a greater comparative advantage as a doctor and thus confine his/her activities to such. This brings to mind the exceptional case of health workers in the Philippines wherein skillful doctors opt to become nurses abroad. The theory of comparative advantage tells us, although it may seem inconsistent with the analogy at first, that the exodus of health workers is a comparative advantage in a micro scale because they earn more abroad than in domestic hospital and also because our country has comparative advantage on the labor market which is said to be more profitable (due to remittances) that we export.
Next we move on to Marxist economics. Traditionally and philosophically speaking, Marxist theories are founded based on dialectical materialism wherein there would be an initial thesis which will generate its own antithesis then a synthesis. Marxism became controversial because it directly attacked the capitalist system at a time when capitalists were so engrossed with reaping, spending and advertising the fruits of their ingenuity. The theories of Karl Marx per se inspired other thinkers, representative of other countries to formulate their own indigenized version of an advertent defense/ counterattack of the prevalent capitalist system. USSR, Eastern Europe, Cuba and China are some of the countries who have/ had a history adopting the belief that the state is not independent from society and economics. They aimed to change the economic base which would thus alter the society’s political-legal superstructure. In the Philippines however there are progressive organizations who study and subscribe to the beliefs propagated by Marxists, socialists and communists alike. These organizations deliberately oppose and protest the government’s advancement of economic reform because it would worsen the effects of free trade, globalization, economic imperialism and neo-colonialism in the country. Although their advocacies may not be that popular in the policy-making procedures of government they serve the purpose of making people aware of the economic inefficacies of government (sometimes also that of other governments) or in other cases serves as an equalizing agent that reminds legislators to include ordinary workers, farmers (non-capitalists) into consideration.
Moving on to neo-classical economics whose chief concern is to dissect and explain microeconomic phenomena. The major assumption is that market forces tended to ensure that the economy will maximally employ its resources without leaving anything idle which shifted attention to a more basic perspective. It is said that neoclassical economics is heavily mathematical in nature that only those who were well versed in the complexities of numbers could understand nevertheless it gave more room for governments to encourage small scale economic activity. In Bangladesh for example, there is a bank that understands the economic value of small scale lending to “financially-incapacitated” people. It has been lauded for its innovative and practical practices objectives and also because it recognized the significance of microeconomic development as the foundation behind a stronger economy. In the domestic scene, the current administration is promulgating micro-entrepreneurial measures to aid market proficiency and encourage the exercise of the productive potential/capacity of common citizens.
Lastly, Keynesian economics rejects the theory that the free market will provide employment for everybody. It advocates tax cuts and government spending on public works during periods of recession and create jobs even at the risk of running a budget deficit. On the other hand, when the economy booms, it is said that governments should stop spending or increase taxes to reduce demand then use the budgetary surplus to pay off debts. In essence, Keynesian economics deals with problems with substantial gravity such as issues on debt, unemployment, and taxes which even when addressed separately still requires stringency. The Philippines or any other developing country for that matter is particularly laden with the complexities of these concerns.
The four major categories and a simple demonstration of their utility and relevance in the national an international scale have been stated. In reality, governments need to employ a combination of these theories because there is no one theory that addresses the multi-dimensional/faceted problem of stabilizing or improving the economy.

(References are available upon requests)