Economic Liberalism, Welfare State, and Investment Dynamics
Economic Liberalism Before World War I
Before the First World War, economic liberalism was the dominant economic ideology. It advocated for minimal state intervention, encapsulated by the motto “laissez-faire, laissez-passer: the world works alone.” However, the state still played a role due to three key factors:
- The unequal initial distribution of property.
- The existence of collective basic needs.
- The existence of natural monopolies.
This era was characterized by the concept of a “guardian state,” whose purpose was to ensure the system’s functioning, prevent interference with its operation, and mitigate some of its most significant consequences. Economist John Maynard Keynes argued that in a situation of widespread economic downturn, natural market mechanisms could not be expected to produce a recovery. Therefore, he believed the state should intervene by spending or taking action to stimulate businesses and consumers.
The Welfare State: Concept and Challenges
The welfare state concept posits that it is the state’s responsibility to achieve full employment, provide a comprehensive social security system, ensure universal access to education and health services, and guarantee a fair standard of living. The beneficiaries of this system fall into three categories:
- Those who have previously contributed to social security (e.g., pensions, unemployment, or disability benefits).
- Those who receive universal benefits (e.g., health and education).
- Those who receive compensatory benefits due to being disadvantaged.
The future of the welfare state faces two main challenges: an increasing dependency ratio (a growing population over 65 years old and therefore dependent on the state) and escalating healthcare needs, as older individuals require more care.
The keys to sustaining the welfare state are economic growth and job creation. Each new employment contract generates a contribution to the state in the form of taxes.
Investment: Types and Determinants
Investment refers to the acquisition of capital goods used to produce other goods. There are three types of investment:
- Replacement: Replacing worn-out equipment and machinery.
- Renewal: Replacing functional but obsolete equipment with more modern alternatives.
- Extension or Expansion: Acquiring new equipment to increase production capacity.
Investment demand is influenced by three variables:
- Interest rates: If a loan is needed for investment, businesses must consider interest rates to determine if the investment will be profitable based on the anticipated increase in production.
- Capacity utilization: If a business is not using its full potential, it is illogical to invest. For example, if a cafe has three coffee makers and only two are in operation during peak times, it doesn’t make sense to buy a fourth.
- Confidence in the future: Businesses need to be confident that interest rates will not rise in the future and that their investment will pay off due to increased demand.
The multiplier effect occurs when an investment generates positive effects as long as the money is spent, producing more value than the initial cost. For example, if someone spends 100 euros on potatoes, the farmer might spend 90 of those 100 euros on fertilizers. The fertilizer producer might then spend a portion of that 90 euros to improve their operations, and so on, ultimately generating more economic activity than the initial 100 euros invested.