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1993, there were over 200,000 displaced persons in Armenia; later a larger part of them left for Russia, Ukraine, and America.11
In Georgia, political and later military conflicts were very specific: aggressive separatism gradually developed in the South Osset Autonomous Region and the Autonomous Republic of Abkhazia, contrary to widespread sentiments. This allowed the so-called national leaders to realize their ambitious interests. The deliberately provoked wave of nationalism and confrontation produced, as I have written above, 234,000 forced migrants-refugees.
C o n c l u s i o n
In the 21st century, the refugee problem remains one of the most painful issues in many countries of the world; it is in fact of an international nature. This means that the academic community and political circles of the world should provide clearer definitions of the terms related to the forced migration processes caused by socioeconomic and military-political factors. This will make it easier to adequately identify what should be done to settle all the problems of migrants, irrespective of the motives that caused migration, and to coordinate international and national efforts in this sphere.
' Ibid., p. 18.
Rozeta ASATIANI
D.Sc. (Econ.), professor, Tbilisi Institute of Market Economy and Law
(Tbilisi, Georgia).
GLOBALIZATION AND ECONOMIC THEORY
Abstract
This article examines the origin of economic theory, analyzes the distinctive paradigms underlying economics as a branch of science that is more concerned with the quantitative side of the market economy, and explains the similarities and differences between economics and eco-
nomic theory. In the author’s opinion, this will help to develop the economic (and not only economic) world view of the Caucasian peoples, who are facing difficult problems, and will promote a more scientific approach to the processes generated by globalization.
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I n t r o d u c t i o n
Special attention in this article is paid to the formation of civil society and a social market economy, a task set before economic theory by current transformation processes caused by globalization. At the same time, the events of the last decade of the 20th century—the collapse of the communist system, with many countries (including the republics of the Caucasus) taking a new path of development—created totally new problems which had to be explored and analyzed. In addition, the process of creating a global economy required an ability to develop strategy and chart the future course of events, and this is an area where economic theory plays a special role.
The Place and Role of Economic Theory in Creating a Global Economy
In the final third of the 18th century, economic theory developed (especially due to the English classical school) into a system of knowledge about the economic foundations of society. Later on, it provided a methodological basis for all economic disciplines that emerged through the diversification of economic science and came to play the main role in explaining socioeconomic processes and phenomena. The categories and concepts developed by economic theory and the patterns and regularities it revealed laid the groundwork for functional and sectoral economic sciences.
With the development of capitalism, economic theory was enriched with new concepts, schools and avenues of research. Nevertheless, classical liberal theory was the priority trend in economic science and the basis of economic policy in the leading capitalist countries until the 1930s. The economic scene in that period was dominated by microeconomic paradigms and the individualistic concept of public welfare, which focused attention on the individual firm and on the problems of minimizing its costs and maximizing its benefits.
The “Keynesian Revolution” as an echo of the world economic crisis of 1929-1933 triggered significant changes in the economy of the major capitalist countries, which accelerated the transition of capitalism to a new qualitative state and the creation of a new economic system in the form of a market economy. That is why many well-known economists in the world regard The General Theory of Employment, Interest and Money by John Maynard Keynes as a turning point in economic theory and in the economic policy of the major capitalist countries.
The economic system pivoted on private property gave way to a system based on plurality of ownership where the market remained the determining factor. The Keynesian model of macroeconomic management based on demand theory pushed aside the “Smithian” concept, which until then had dominated economic theory and economic policy in the major capitalist countries. Such radical changes in economic science and practice created a market with a totally different content than in previous economic systems, where it played a relatively secondary role while priority was given to economic relations: first slave-owning (between the slave owner and the slave), then feudal (between the feudal lord and the serf), and finally capitalist (between the capitalist and the wage worker). Nor do we exclude the 70-year “socialist experiment,” where the market was also in evidence, though based on different paradigms. But here as well it was pushed into the background: so-called socialist relations of production based on the political economy of socialism were decisive.
In the modern economy, where the state is no longer a “night watchman” but a macroeconomic regulator, it is the market based on plurality of ownership that provides the foundation for new economic relations.
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Hence the new tasks facing economic theory. In order to study the operation of the existing economy, which has a totally new content, it is necessary to use new tools. In the 16th edition of Economics (1998), Paul A. Samuelson notes that when his textbook first appeared in 1948 the way had already been paved for depicting the revolutionary changes that had occurred in the economy. A new generation of students demanded explanations for current economic phenomena, but even the most popular economics textbooks were outdated, which was evident in lecture halls filled with bored students.1
One can say that market relations “removed the stigma” from capitalism, establishing plurality of ownership instead of the rule of capitalist private property. It was these radical changes in property relations coupled with government regulation of the economy that for the first time in mankind’s history turned the market into an effective economic mechanism. Such a market is a phenomenon which covers the entire reproduction process, creates an effective system of employee motivation and gives more scope for business activity. By developing horizontal ties, it rules out administrative interference in pricing and allocation of resources (thereby significantly simplifying the vertical hierarchical structure), discourages the use of economically inefficient structures and obsolete technologies, does not produce substandard products or provide ineffective services, and brings public and private interests closer together, sometimes even to the point of their identity, which ultimately affects economic growth in the country. It should also be taken into account that although the market is the key to an efficient economy, it has certain intrinsic defects and shortcomings. Consequently, it cannot resolve many of our everyday problems. Market competition is known to provoke inequitable income distribution and sharp material inequality. The market cannot protect the environment, resolve problems associated with natural disasters, reduce unemployment to its natural rate, prevent inflation or economic crises, etc.
It should be noted that the ongoing formation of civil society brings to the fore the social function of the economy, which basically does not interest the market but without which its principles cannot be implemented.
The need to explain and analyze these highly complicated processes called for new economic thinking and a creative approach. Economic theory, which certainly became “the Queen of the Social Sciences” (Samuelson), was faced with new challenges.
As we know, the 1974-1975 economic crisis, the severest one since the 1930s, created favorable conditions for a revival of the theory of minimal government (a “minimal state”). The focus shifted from dynamic equilibrium problem to factors determining the potential growth rate, to problems associated with efficient use of resources and with estimating the potential level of production. There was growing criticism of the Keynesian model of economic growth and a revival of the ideas of neoclassical theory, which found practical application in the economic policy of developed Western countries. The main propositions of supply-side theory and monetarism were reflected in the policy of U.S. President Ronald Reagan, which became known as Reaganomics, and Margaret Thatcher in Britain (Thatcherism).
Fundamental adjustments to Keynesian theory and to the policy of government regulation of the market economy based on a “two-handed” strategy (a combination of significant elements of both the Keynesian and the neoclassical approaches in relations between the state and the market) have influenced economic theory since the 1990s. There is a new school of thought, the “neoclassical synthesis,” which currently underlies economic policy in the developed countries.
So, economic theory, which arose in the days of mercantilism and matured in the period of physiocracy, had its origins in English classical political economy and developed with the emergence of new trends of thought, traveling a very difficult and interesting road of evolution. Its growing use promoted and, in a sense, accelerated the transition of industrial society to a higher historical stage:
1 See: P.A. Samuelson, W.D. Nordhaus, Economics, 16th edition, Irwin McGraw-Hill, Boston, 1998.
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the post-industrial era. Attention was focused on the creation of a new social community. This circumstance, which brought social interests to the fore, enhanced the potential of contemporary society and accelerated the humanization process. The state acquired the features of a “welfare state.” The order of the day was the formation of a civil society and a social market economy (and not a socially oriented one, which already existed in the developed countries). This was a step forward in establishing a new social order, and economic theory as a science dealing with the economic development of society once again encountered new problems. All the more so since the fast-moving phenomena and processes of the last decade of the 20th century (disintegration of the world socialist system, collapse of the communist regime, attainment of independence by many countries and choice of a new path of development) compelled economic theory to make a theoretical study of totally new problems whose solution goes beyond the limits of classical schemes developed by economic science throughout its history.2
We share the opinion expressed in economic literature that modern economic science cannot give a theoretically valid and exhaustive answer to many urgent questions of transition to a market economy as long as there is no economic theory of such transition.3 In the current conditions of rapid economic globalization, it is also very important to analyze the economic development of today’s society, determine its prospects and formulate an appropriate strategy. With the aid of such analysis and a search for ways to resolve these and other problems, economic theory will continue to be enriched with new ideas and schools of thought, helping to accelerate social progress.
Economics: Is It a Substitute for Economic Theory?
Since the second half of the 20th century, especially since the 1960s and 1970s, the diversification, intensity and scale of the processes at work in the world economy led to the spin-off from economic theory of economics, international economics and public economics in the form of separate disciplines, a phenomenon we regard as quite natural. In the context of current realities, a study of these disciplines does not fit into the framework of economic theory. Economics, which emerged and developed in the light of the formation and progress of the market economy, gained wide currency in the second half of the 20th century. Economics is a science which studies how society chooses to employ limited economic resources that can have alternative uses to produce various goods and services required to meet its unlimited needs. It is theory oriented towards practice, a synthesis of market economy theory and practice.
Although economics relies on laws formulated by economic theory, it differs from the latter in its way of looking at the world and implies a paradigm shift, basing its analysis of economic phenomena and processes on the study of limited resources alone. In order to achieve the set goal, economics uses an alternative choice as an optimal tool. Economic theory, as the very heart of all economic sciences, as their methodological basis, is not confined to the framework of a single economic system. It studies the economic patterns of change in different epochs and global problems facing the whole of mankind, the sequence and specific features of society’s economic development, economic laws and basic causal relationships between economic phenomena and processes in various economic systems;
2 See: V.G. Papava, T.A. Beridze, Ocherki politicheskoi ekonomii postkommunisticheskogo kapitalizma, Delo i Servis, Moscow, 2005, p. 68; V. Papava, Necroeconomics: The Political Economy of Post-Communist Capitalism, iUni-verse, New York, 2005, p. 13.
3 See: V.G. Papava, T.A. Beridze, op. cit., p. 69; V. Papava, op. cit., pp. 13-14.
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it reveals general patterns and regularities, using them to set strategic guidelines for society’s development and to provide an objective scientific validation of the functioning of the economy. Economic theory integrates all of this into a single system.
The purpose of economics is not a study of society’s economic development as a whole, because economics is part of a single system. It is a science studying functional relations in the market economy, whereas economic theory studies organic relations in the economy.
Economics contents itself with a superficial analysis of economic development without exploring the inner essence of economic phenomena (which is exactly why it does not consider property relations) or the reasons for the social stratification of society, while economic theory studies these very problems.
Economics focuses on utilitarian objectives, and economic theory, on theoretical and methodological matters. For example, one of the main tasks of economics is to study and resolve the problem of proper medical care for each citizen in the conditions of limited resources and rapidly growing national income in the United States.4 Such concrete matters are not a subject of investigation for economic theory.
Economics is more concerned with quantitative analysis,5 and economic theory, with qualitative analysis. Economics makes wide use of econometric analysis, which cannot be said of economic theory. The latter is oriented toward cognition, seeking to get to the root of economic phenomena and to establish causal relationships, whereas the main goal of economics is to formulate practical recommendations for managing the economy. As we know, economic theory is not a book of recipes to be used in economic practice, but an intellectual tool, a thinking technique helping all those who have mastered it to draw correct conclusions.
We share the opinion that “modern economics is a set of theories advanced by different authors, each of which, taken separately, tries to reflect a certain fragment of economic reality.”6 Economics is an aggregate of separate fragments of economic reality and corresponding theories, which it peaces together to obtain a general picture of the economy. Economic theory, on the contrary, uses the aggregate to depict various fragments of economic reality.
Economics views production development problems from the perspective of costs and benefits, whereas economic theory analyzes the forms of historical development of social production. It can be said that economics avoids a comparative analysis of economic systems, studying the economic mechanism of a single economic system. As for economic theory, one of its avenues of research is a comparative analysis of economic systems (comparativism),7 which results in institutional theories (theories of convergence, industrial and post-industrial society, etc.).
Economic theory is concerned with the social dimension of production, with relations arising in the process of production rather than with people’s concrete economic activity in its superficial form. The social dimension of production (appearing as the social form of production) in different periods and in different geographic conditions spurs the development of various factors of production, which ultimately has an effect on economic systems. All of this is regulated by economic laws, which is why the objectives of economic theory are as follows: to investigate economic relations between people, to study the root causes of an existing phenomenon, and to try to understand the inner workings of the economy.
Economics regards ownership as people’s dependence on objects, and economic theory, as relations between people arising from the appropriation of resources and of the goods created due to this.
4 See: P.A. Samuelson, W.D. Nordhaus, op. cit.
5 Mathematical models used to explain economic phenomena and processes independently of “pure” theory cannot represent reality.
6 P. Leiashvili, Economic Theory and Practice at the Transition Stage, Azri, Tbilisi, 2002, p. 28 (in Georgian).
7 Comparativism was founded by L. Reynolds, P. Knirsch, and others. It gained wide currency in the U.S., Germany, Austria, Norway and other countries in the 1920s and 1930s.
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Economic theory is a bridge between the past and the future. It studies the historical prerequisites for an economic phenomenon, helps to generate trends, and charts the course of economic development. This is exactly why the subjects of investigation of economic theory and economics are the same, but are seen from different angles.
As regards political economy, in current Western literature this term is taken to mean the study of political factors which influence the economic policy of the state.8 The “new political economy” studies the patterns of interaction between politics and the economy as the basis for the latter’s successful development. That is why we think it is not right today to call economic theory political economy, as some authors suggest.9 The fact that this term was coined in the 17th century and took particularly deep root in Marxist political economy, which analyzed classical capitalism (something that a century later Marxists turned into a dogma), while the latter was associated with Lenin’s theory of imperialism and the “collection of recommendations” of artificially created, unrealistic (Soviet) socialism far removed from Marxist ideology—all of this entitles us to separate economic theory from political economy.
Whereas economic theory in the narrow sense of the term is a theory reflecting a certain line of investigation of economic phenomena and processes, in the broad sense it is a general theory of economic development which studies all areas of economic research, as well as the laws and patterns of production and distribution of tangible and intangible goods. Its leitmotif is an analysis of the behavior of businesses, households and authorities under alternative uses of limited resources with the emergence and development of society, a search for ways of their effective use in today’s economy (at micro, meso, macro and mega levels), and selection of optimal alternatives.
Economic theory fosters an economic world view. Without such a world view one cannot study other economic disciplines and, as a result, it is impossible to train highly skilled economists (and not only economists). As regards an identification of economic theory with economics or its replacement by economics, we think this in unjustified. We believe it is more appropriate to teach both disciplines at higher education institutions, as is done in many Western countries.
Attention should also be paid, in our opinion, to yet another question. As we know, the subject matter of Marxist political economy was a study of the development patterns of production relations. They are a Marxist category which, in contrast to economic relations, contains a dominant form of ownership, and the latter determines the position of classes in production, their mutual relations and the forms of product distribution. Such relations, which emerged in the process of production, distribution, exchange and consumption, existed at any stage of society’s development, including the administrative-command system, i.e., under state-monopoly socialism, prior to the formation of a market economy. And the market economy rules out the domination of any form of ownership whatsoever (at least in theory and law). As noted above, it rests on plurality of ownership, which is why there is no division into classes within it, while economic relations are a category with a different content.
As regards relations of production, one should think that the use of this term in studying current economic phenomena and processes is unscientific. That is why it is not used in contemporary Western literature and should not be used in the economic literature of the post-Soviet countries (including Georgia) either.
As we known, one of the methods of investigation used by economic theory is the dialectical method, which is based, for its part, on such methods as analysis and synthesis, induction and deduction, unity of the historical and the logical, from the simple to the complex, from the abstract to the concrete, and from the general to the specific. On their basis, Karl Marx in his Capital analyzed the
! See: P. Heyne, The Economic Way of Thinking, Sydney, Toronto, 1973 Obshchaia ekonomiches mo-media, Moscow, 1995, p. 15
8 f
9 Obshchaia ekonomicheskaia teoria (politekonomia), Textbook edited by V.I. Vidyapin and G.P. Zhuravleva, Pro-
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economic phenomena and processes of 19th century capitalism. In the 20th century, there was no systems analysis of this kind (economics is incapable of performing it), but in the new millennium such an analysis is absolutely necessary, because it will provide the basis for a theoretical system reflecting the economy of the 21st century. At the same time, it is also necessary to take into account the problems of the national economy and its theoretical generalization. Economic theory is not a cosmopolitan science, and the need to include in it the national factor as the dominant one is dictated by current realities.
Economic Theory and Some Aspects of the National Economy
As the current transition period in Georgia (and elsewhere) shows, the solution of economic problems according to the prescriptions of Western economists (or politicians) has not produced the required results. The view that economic policy successfully implemented in one country will be equally successful in another has also proved to be wrong, just as the idea that one and the same model of economic reforms is acceptable to all states. Liberation from various forms of colonial oppression and optimal reforms produced real positive results only in some countries.
Today, the United States as the world leader poses the following question to both developing and “misdeveloped”10 (i.e., post-communist) countries: if you want to join the global economy and to become stable and developed countries, you must carry out market reforms on the terms and according to the models we propose. At the same time, since the 1960s intensive globalization has entailed a sharp increase in income inequality between the world’s richest and poorest countries. Whereas in 1960 the top 20% of the world’s population living in the richest countries received 30 times more income than the bottom 20% living in the poorest countries, by 1990 the gap increased to 60 times, and in 1997, to 74 times. In 2002, the income of the richest 5% of the world’s population was 114 times higher than the income of the poorest 5%; and the 25 million richest Americans had as much income as almost 2 billion of the world’s poorest people. At present, the richest countries have over 80% of the world’s gross domestic product, etc.11 Paradoxically, the developed countries, which currently pursue a protectionist policy, strongly resist the attempts of the developing countries to follow their example. Exports from developing to developed countries are mostly subject to “peak tariffs” (almost 15%). For example, Bangladesh annually exports about $2.4 billion worth of products to the United States and pays 14% in tariffs, while France exports more than $30 billion and pays 1% in tariffs.12 Georgia, among others, has not pursued a protectionist policy, and this has had an adverse effect on the development of the national economy.
In order to improve our living conditions, we should try to understand the economic phenomena and processes underway both in Georgia and in the whole Caucasus and the Third World in general, to explain the causal relationships between them, develop new concepts and paradigms, and make theoretical generalizations, all of which should be reflected in the country’s economic policy. Unless we do this, decisions instead of us will be taken by a small group of foreign experts.
In Georgia (as in the whole Caucasus and in all post-Soviet republics), the market economy has been built in the same manner as socialism (developed socialism at that) or communism. If we assess
10 A. Lipowski, Towards Normality. Overcoming the Heritage of Central Planning Economy in Poland in 19901994, Adam Smith Research Center, Center for Social and Economic Research, Warsaw, 1998, p. 9.
11 See: Human Development Report 2003, UNDP, Oxford University Press, New York, Oxford, p. 39.
12 See: Ibid., pp. 155-156.
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this period as a whole, we can draw the following conclusion: the construction of a civil society in Georgia has come under threat, and the implementation of market principles remains at the level of propaganda.13
It is no accident that at the beginning of this article we looked at the origin of economic theory, which clearly shows the role of this science in economic policy. There is no Western country where effective economic growth got underway without the implementation of Keynes’s theory. After all, it is concerned with analyzing an economy in crisis and explains the causes of unemployment; on this basis, it suggests ways of pulling the country out of this grave social situation. The Keynesian multiplier effect was taken into account in the economic policy of many countries. So why is it that in the past 16 years the government of independent Georgia has not taken it into account? Nonacceptance of this “world miracle” entailed an alienation of most of the native population from property and business activity; a sharp rise in unemployment and poverty levels; and budget deficit coverage first by amounts transferred from the national bank and then out of proceeds from the sale of national assets, mostly to foreigners. This, for its part, provoked a worsening of the demographic situation and a rise in crime, resulting in prisons crowded with inmates, including juvenile delinquents, violations of human rights, etc. An erroneous economic policy put a significant part of the Georgian population in a difficult position, although this small country has a large potential and unique natural resources. But because of undeveloped economic relations it is among the lowest-ranking countries in terms of competitive advantages.
In this situation, in the process of economic reform in the Caucasus (and elsewhere) it is highly important to overcome the nihilistic attitude to economic theory and include this subject in college and university curricula. This will contribute to a proper understanding of the globalization process, promote a scientific approach to the formation of a global economy at the present stage of civilization, and help to formulate valid conclusions, which will ultimately make it possible to prevent unforeseen consequences.
C o n c l u s i o n
Globalization does not guarantee, but only creates opportunities for development,14 whose use primarily depends on world politics and only then on each particular country. That is why in the optimal realization of the benefits gained from globalization a significant role is played by economic thinking, in whose formation a special function is assigned to economic theory. Moreover, economic theory, as a science, from its emergence to the present day has provided the basis for the economic policy of developed states. Our historical excursion shows that this is a strict requirement. One of the main reasons for the failure suffered by other countries (including Georgia) is that in these countries this objective requirement either takes a distorted form or is not observed in practice; in addition, economic theory plays an inadequate role in building a new world order and civil society.
13 Various aspects of this problem are considered in: R. Asatiani, A Small Country Has No Right to Make Big Mistakes, Tbilisi, Sakhle Publishers, 2005 (in Georgian).
14 This question is considered in: R. Asatiani, “The Phenomenon of Globalization and its Influence on National Economies (A Case Study of Georgia),” The Caucasus & Globalization, Vol. 1 (3), 2007, pp. 43-51.
