Important appropriateness of  development of modern economy is its cycled  character. Puriny every structural crisis of the world economy new opportunities are formed. Capital of the countries, which were leaders during last cycle, is being devaluated. Qualification  of lab our forces in field using old technologies are being ruined, while the countries, which managed to create innovational potential proved to be in the center of attracting capital which is independent from the old production. Consequently, the countries that implemented  scientific-technical and industrial capital investment policy in prospective fields will be given a competitive advantage. The realization of  this policy in the phase  of structural crisis gives its authors the opportunity to achieve  economic growth on the  basis of competitive advantage.

Basic scientific and radical innovations are recognized as the main means of overcoming structural crisis, that are implement thought acquiring new achievements and rising the effectiveness of traditional development .

In order to move to the stable stage of economic develop it’s important to increase innovational-investment act vitas and to involve new technological directions and basic technologies at trajectory  of firm economic development. The economic policy that is oriented at encouraging  investment, in innovations provide modernization of economy, also gives rise to its competitiveness.

Innovative way of development in investment policy. Thus, the main importance is given to the innovative type of development, that implies the growth of government role in exercising investment policy. Highly development countries. Take the responsibility of financing fields like fundamental  science and high-risk research, as well as the development of scientific research infrastructure. Spreading new ideas and educating population. The implementation of this functions takes place against the background of high-scale investments. that creates favorable conditions  for production growth on the basis of scientific innovations.

Currently, the government tries to develop institutions that will support vestment in new  technologies, stimulate innovative activities, encourage progressive technological changes, that unities financial tab our and informational recourses.

Currently government  tries to create development institutions , which will support investments in new technologies, stimulate innovative activities, encourage progressive technological changes, that unites financial, lab our and informational resources. The state may avoid the responsibility of developing   the production activities , where special markets and competitive relations are formed. At the same time it must encourage new, high-risk directions of investment activities, that pave the way to creating production on the   basis introducing scientific and technical achievements.

For example the wave of economic regulations that spread from developing countries in the late 8 th lost century covered the traditional branches of economy but it had no connection with high-technological sector, conversely the importance of direct state support institutions for innovation activities were risen. At the same time, the importance of working out state strategy for scientist technical and social economic development grows. The state aims at creating enterprises , that will manage to gain com putative advantage over the companies of inner and foreign markets. They  must consentrate their resourses on prospective  fields of production.

The direct instruments of state influence are oriented at supporting  private initiatives and innovative enterprises that will stimulate investment activities in certain fields and production initiatives.

The necessity of financing science and its current condition:

Active investment process, especially in scientific and technological fields, innovative and scientific-technical activities lays in the foundation for economic growth. Nowadays the decline in scientific technical potential is caused by  the fact that there is no more unity between scientific researches and their usage  former. scientific staff has been dismantled  and number of intellectuals have left the country.

Consequently, the country becomes more dependent on foreign trader.

So, in order to create favorable conditions for economic growth capital renewal is essential, but it’s very complicated, because of  the decrease in state financing and absence of ordering production, Science and education have no inner resources for development.

During the last few years there has been significant  reduction of scientific and educational research expenditures. As a result, the share of expenditures in GWP spent on science in 1999 amounted to 0,97%, which is twice less than in 1990. In 2006, the expenses spent on educational field amounted to only 1,5% of the GWP, which is the lowest index among the transitional countries.

Significant reduction of company’s demand on innovations resulted in increase of financing Scientific field from the state budget. Budgetary expenditures on scientific-research and construction work have been absolutely reduced and they are tend to decline against the GWP as veil as the budgetary share of the expenses. The degradation of Scientific potential is proved by sharp decline in expenditures used in research and construction work pond it resulted in dropping behind highly developed countries. Expenditures on Scientific research in the USA (1998) amounted to 794% per person, in Japan – 715. in Germany 511 and 611in Russia, whilst in Georgia it only amounted to 2,8%.

Due to the sharp decline in financing the Scientific field, renovation of scientific facilities detoriorated. The salaries in Scientific field were decreased, The coefficient of renewing main foundations in Scientific technical field significantly dicreased. According to the latest statistical data, 311 ml. Gel was invested in renewing main capital, that amounted to 60% of all the capital invested, in Georgia Instead of renewing Countrys technical market, most of the capital was invested  in activities connected to local market. 29% of this capital was invested in real estate and construction worth.24% in transportation and communications The problem of heeping, supporting and developing fundamental and research centers of science aggravated. During the Soviet era 20% of production was created in the USSR, but now Georgia’s shave in the  World scientific production in only 0,3%.Implementation of innovations require a wide range of activities, from doing research to producing new output. Priorities of innobative activities change at every stage of economic development.

In order to achieve economic growth in current conditions in the country. it is necessary to develop scientific innovations that create new and don’t take into consideration current directions of technological development This lays the foundation for putting so-called innobative multiplication into motion. which is connected to investments and results in production increase. that creates improved scientific innovations. They exchange old technologies. Introduction of this innovations is exercised by new investments, that encourage the further growth in production. Thus, innovative multiplication makes good influence on production growth and takes the economy out of depression and leads it to a long-term development stage.

Distribution of investments on Scientific – technical works.

It’s relatively typical for developed countries to distribute private and state capital investments even on scientific and technical works. For example, The USA’s private investment share in innovative market amounts to 50%. Similarly, according to the figures of state Expertise, 10% of innovations is given a strategically important status and accordingly they are financed from government sources. Japan finances 33% of all scientific research, 73% of scientific-research and constructive works is implemented on the basis of self – financing in the USA, in Germany this index amounts to 70%, in Japan and UK 62%, France and Italy 57%, So the only possible mechanism for promoting social and economic development is it’s technical modernization and move to innovative type of development.

Technical modernization of equipments and their reconstruction requires attracting important investments in innovative field. Here it is important to activate state policy on scientific and technical branches and to work out important directions for scientific-industrial development of economy. AT the same time, the state, that takes important part on technical modernization of the economic sector must take the responsibility of financing fundamental sector of science and high-risk researches, restore activity of  science financing from the state budget and develop scientific infrastructure. In order to define the proportions of sharing investments its essential to focus on cyclical development of economy and, on Intensive types of re-production, that is reflected on the statistical law of dividing expenditures, for example, spending on fundamental research, applied work, capital investment amounts to 1:3:9:27.

Statistical law of resource division in accordance with scientific-technical potential is used at the production development stage where scientific and technical progress is achieved by practical laws, which help to solve the problems of production stabilization and development.

The reason of decrease in scientific potential the decrease in scientific potential in post communist countries is  caused by lack of restructuring  scientific organizations privatization of research centers has   not brought any desirable results. The reason for this is that enterprises don’t order them to do research. Simultaneously,  scientific staff has got older, the last tend years science suffered from loosing its intellectual potential. In this case, it will  be reasonable to merge different scientific organizations and some research institutions must be transferred to enterprises to manage , in this way  scientific technical potential will become much  stronger.

The sources and ways of funding science restructuring research institutions and dividing it into firms with developed financial, economic marketing and commercial infrastructures will increase the practical use of research work results. Contract based applied science makes the realization of  scientific technical projects they will be implemented at the expense of the state budget, non state expenses attracted by Ventura, sharing  other financial mechanisms. The question of mobilizing these sources  can be solved on the basis of aimed, scientific and technical programs on regional and federal levels in accordance with the market demand.

They can be implemented in the    form of portfolio investments using stock marked tools. Providing  the state with grants and sale guarding institutions by investment agency and trust management has practical  us eye. For forming non budgetary recourses for financial    innovations it is necessary  to use amortization funds on renovation in the part, where production expenses, especially those. spent on research and innovations. are taken into consideration as well as the expenses of wearing out financial expenses , that is included  in the production cost and is reflected on the production prize. In addition to that revenues that  came from selling scientific-technical production, or having the right to own intellectual and industrial units as well as the revenues from scientific and technical units and selling the right to own them must  be considered, too.

The role of innovation foundations .

Practical usage of abovementioned sources is implemented according to the special rules and amounting , on the basis of used methods. The expenses received from these sources are transferred  to a separate  sub account `innovation foundation”  Greeting. State funds for innovations which is aimed at realizing prospective directions  of science  and technical development enables to  work out modern competitive production and organize its production. besides using state budgets expenses,   other  market mechanisms for attracting investments are used as well .

Nowadays mechanism for investing in innovations are used only in case banking structure , which mobilizes recourses and regulates this use in science is taken  into consideration banking  structures directed at investments, accumulate vast sums through creating consortiums and other financial and investment institutions, in order to attract own funds for innovative programs of investment. On condition of Budgetary deficit banks au the phases of innovative   cycle and provide insurance service. Participation of banks in the field creates extra   stimulus for different firms. No other structure manages and controls innovative recourses as the banks.

Effective use of stock market instruments provide opportunities  to attract investments in innovative field. Its main aim is to divide investment recourses among fields and provide inner and foreign  investment flows in more prospective sectors of national economy. Transitional economy doesn’t provide the conditions for populations to transform their savings  into innovative investments and provide economic growth. Monetary potential saved in the country is practically unused. According the same data the amount of savings is much more higher than in the USA and west European countries. In order to invest funds existing in the country in essential sectors of economy it is necessary to make the forms of collective investment perfect, it includes. investment share  funds, credit contacts joint stack and commercial funds . After that government should control their activity and they must draw their . attention to new forms of scientific-innovative and investment forms.

Main stages of innovative development.

Innovative development of economy as any process must be oriented at its stages, levels and phases. First of all the technological basis of the field  whose production has more demand on the market must be renovated. At the  same time the market is expanding  with importing goods, introducing innovations that is oriented at modernizing  recourse-saving technologies and improving consuming qualities. So at this stage our main aim is to create infrastructural and institutional grounds for firming scientific technological  potential. than we have to organize the enterprises that produce and sell new technological range-that enables the country  to restore its positions on the world market of scientific technologies.  Simultaneously the role of the country in production and investment activities that is directed at commercializing innovations must be strengthened. Little  by little of will move from supporting  quantity aspects of scientific technical field to quality aspects and to new  forms of engineering, that use  modern informational technologies.

Main directions of state investment innovative policy of the state in future main directions of  state innovative investment policy are: 1. choosing national priorities of innovative field development for realizing innovative projects, choosing the projects of technologies that influence production growth and rise in country’s  competitiveness. 2. Coordination of activities of  legislative and  executive bodies to work out complex approach to solve this question concerning country’s innovative development, effective functioning of innovative systems and implementation of state’s innovative investment strategy.

3. maintaining and developing scientific and industrial-technological potential of fundamental science, working out employee’s training system for maintaining and developing modern scientific and technological level and developing science to a higher level.

4. Providing favorable economic and financial conditions for activating innovative works, developing ventral, engineering and investment-industrial activities and for rising competitiveness creating  favorable conditions for investing in innovation field enables  modernization of scientific and technical basis of national industry as well as rising the competitions of the country.

New directions of innovative activities and priorities of innovation policy consists of three stages. At on initial stage the main goals are reproduction of the technical basis of the field whose production has stable demand on the market than market expands by producing the goods that replace the imported ones  innovations  are oriented  at modernizing the enterprises, that  use the recourse-saving technologies and improve consuming qualities. So at first it’s necessary to create economic infrastructural and institutional basis for moving to investment stages of state development. At the second  stage the enterprises  that realize the technological order are created. After that the production is introduced on inner and foreign markets that  makes production competitive in the sector where national product were not presented before, and it creates new scopes for demand, where national products dominates to must the demands. At this stage country’s activities are directed at attracting high-scale private investments, creating necessary infrastructure for investment-development their support and perfection.

At the third stage the following important questions must be solved. Country’s support for innovative infrastructure, creating conditions for demand on national products, informational support to enterprises making stable contact with science and industry.

New ways of implementing scientific-innovative  and engineering activities.

A State focuses on new forms of scientific innovation and engineering, that use modern informational technologies and little by little they move from quantity aspects to quality ones, that are implemented in the following way:

1. Maintaining and developing scientific and industrial potential and using them in achieving modern technological level.

2 Choosing rational strategy and priorities for developing innovative field. Implementation  of critical technology and innovative projects in the fields that  influence the effectivness of production and their competitiveness.

3. Creating favorable economic and financial condition for activating innovative works, legal industry and competitiveness.    

-           To implement this measures following practical activities must be exercised:

The process of providing information must be radically improved and commercial structures must be involved in developing scientific educational and innovative activities.

- reconstructing the part of research and project institutions and closing the places working ineffectively.

- Creating the system at venture investment. state support of venture business in scientific technical field is necessary until the industry get interested in them.

- Developing the system of noon. state innovative risk and private  supplly, creating insurance groups within the framework of financial-industrial groups, that will undertake high-risk insurance, that is linked with creating innovative production. insurance companies, together will share the risk.

- Using modern methods for prognosing engineering and scientific production marketing.

-  Developing small innovative business by creating favorable conditions and infrastructure for setting up small enterprises and their functioning.

- Creating suitable legislation, that will regulate relations in intellectual  property field, work out normative acts that are directed at exercising state policy. It foresees involving the results of scientific-technical results in industrial circulation, that is implemented at the expence of the state budget.

- making typical state contracts in order to balance legal interests of the participants in the process from the point of using scientific-technical results.

Thus, following the innovative way of development, must not be the only factor white  working out investment policy. In connection to that, the role of country is defined by creating the mechanisms, which forms national innovative system and develops innovative production.

Creating favorable conditions for developing innovations provides modernization of technological basis of the economy and grows the competitive of national production.

- Preparing typical state contract for balancing legal interests of those who participate in the process of using the results of scientific-technical work.

So the main factor while working out investment policy is to move economy to the innovative way of development. In this regard a country’s main role is to create the mechanisms, that will provide the formation of national innovative system and development of innovative business, that will make the modernization of economy’s technological market of the economy possible and will give risk to competitiveness of national production.

The formation of adequate investment activity model in the market system of economy provides replacement of investment recourse division with new forms of investments. For its part it has to work out the investment policy, that will accord with changed economic conditions.

Official concept of reforming Georgia’s market economy is based on simple monitory principles. Their realization was expressed in size minimizing the country’s role, robotizing foreign economic activities, privatizing state property and forming market structures.

The principles, boundaries and forms of state participation in investment activity

Analysis of Georgian-economic conditions shows that solving important problems in country’s investment development is impossible only on the basis of self regulation, that is distinguished with its low quality. A state needs to strengthen its role in the field of investments, correct economic policy.  At the same time state participation boundaries in the investment process must be defined by taking the way of economic development, that is characteristic to the period of moving to market economy, into consideration conditions of strengthening the state role in the investment process.

Analyzing the possibilities of strengthening state role in investment process, we must take into consideration the fait, that counting’s participation in the process has same boundaries, these boundaries are defined by real financial possibilities, on  the other hand the country must encourage the process of attracting investment rather than blocking them. State participation in investment process is not the same as turning economy to administration process. It implies the increase of a long-term policy of the state, effectiveness of particular activities in the conditions of encouraging investments.

The topic of state participation pineapples in the investment activities is closely linked with limiting necessary financial potential for investment promotion Approximate calculations show that in order to restore the amount of investment to the pre-reform level, foreign investment growth is possible. According to 2002-2012state program in the next five years 10 $ are expected.

As we have at ready mentioned the role of the country as the investor in the market economy is maintained for the fields that are vital and important. More importance is given to regulating the investment process in the way, that creates favorable regime for private investors activities.

The conditions existing in Georgian economic investment strategy is oriented at moving from stable investments to creating necessary investment environment for private investors. These two parts that are essential for the state investment policy must support prosperous fields of production and the policy must have systematic character. 

Defining strategic priorities of investments.

 On defining strategic priorities we must take into consideration competitive advantage exiting on the world market, that is reflected on high-technologies. The brunches which maintain potential advantages are: energy sector, turism, agricultural machines and technologies, food etc .

Investing in innovative production will encourage new directions for investment flow, rising production level and encouraging economic growth. This approach is well known in the world products. Our priority must be effective programs that meet inner needs in economy, in this regard we  have to support national enterprises, and the development of vital brunches of economy.

At the same time it must be taken into account that in the world integrated economy, development of investment cannot be stable and increasing source of profit in producing rival products only in the inner market.

Significant  condition of effectiveness in the state investment policy is to work out the conception of structural alteration in industrial sector. It’s especially concerns about such prioritative approaches according which must be defined the reform strategy and mechanism of industries from different groups, supporting forms and methods from the state, organization models of industrial structures in accordance with real, amongst them institutional conditions in the world economy.

The basis of economic growth and quick development can be large corporations, that have scientific – technical potentials in mobilizing resources and effective  integration possibilities in the world industrial unions. Small business industries, that have really important meaning for the function of market economy, nowadays are singled out with extremely low technical level and lack of investment resources, that make it necessary  to quest  their place in industrial chains of the large structures. The formation of stable and effectively developing, diversificational, corporative unions and financial-industrial groups demand state supporting reinforcement of corporative circle from the state, amongst  them even by means of participation of corporations in the capital. Development of corporative forms will help the realization of long term industrial programs, and create conditions for the stable economic growth.

Stirring to activity of stake investment politics. At a modern stage, stirring to activity of stake investment about the stable economic growth in the basic condition of Georgian economy. Essential approaches of stake investment politics are: the reinforcement of supporting in prroritative tendencies of economic development formation of justifiable and economic conditions of stimulating the interest of investments in the real sector of economy and the agreement between central and regional investment politics.

State investments and supporting in prioritative tendencies of economic development. The realization of up-to-date tasks of economic development demands more active state backing of investment field. Simultaneously, the importance of state investment must be growing up not as mush from the standpoint of size of centralized sources, but from the positions of state guarantees, insurance and orient list of private investors.

The problems of investment budgetary financing. Budgetary financing of investment activities has still been happening on the basis of these approaches that essentially limit the state influence on the course market alterations and structural changings in economy.

Herewith, these shortcomings are not as mush conditioned by restricted possibilities of budgetary system, as by complicated and wrong strategies of sharing centralized investments and the lack of effective control of their usage.

Failures in the state investment politics make it necessary to solve this problem, as afterwards not having orientation or having defective one becoming the problem investors. Analysis confirms the existence of distinct dependence between state priorities and investment motivations of private investors. that must surely be taken into account while working out on perspective tendencies of investment politics. Otherwise  it will be impossible to make ground for stake investment politics and for the agreement of investors’ interests of different levels. Reserved dimensions will again have more passive character and will not guarantee planned results. It must also be mentioned that insufficient or unsystematic backing of separate manufacturers or regions, falls down stimuli of accumulation and afterwards self-financing process and it prevents the formation of business executives market behavior.

While analyzing the problem about the possibilities of manufacturers’ investment support it is impossible not to take into consideration the extreme restriction of budget/ At the same time, modern conditions, the increase of levels in the realization clearness and confirmation of investment politics and consideration of budget planning reality are not less important.

In Georgian economy. where unreliable forms of calculation dominate. it is difficult to male real prognoses about the mass index of money. Budgetary politic is being worked out in the conditions of complicated factors, that aggravates the difficulty of real budget formation and fulfillment of the received one.

State investments, as in the realization of economic growth of prioritative factor; usage of international experience will not be perspective without mentioning up-to-date conditions of Georgian state finances and the inevitability of budget  system alternation. e.g. one of the successful example of economic reforms is the experience of Germany. Its budget system is well formed and it is manifested clearly in the distinction of current and investment expenses in the control of pure usage of budget sources in establishment and protection of maximum size of budget deficit financing at the expense of credits with the sum of for seen investments expenses. This method is called “golden rule” and is established the 115th article of the basic law of Germany.

In Georgian economy, as it is clear from the results of reforms, the compensation of the growth of state non-productive expenses was not happening, correspondingly with the growth of budget investment expenses. On the contrary, it was one of the factors, that conditioned the reduction of state centralized investments and weakening of state investment function. In accordance with, the usage of state investments as the factor of economic growth, requires essential changing’s in the organizations of budget politic and budget system.

While working on the budget, it is necessary to define the prioritative tendencies and use the forming principle of the normative that define the levels of budget, according to the singled out tendencies; division of current and investment budget on the normative basis, denial the possibility of exceeding expenses over incomes while planning the budget; strict definition of sources, how to cover the investment budget deficits. It is also necessary of budget on the usage of sources in control realization technology, in order to reinforce the frscal role of budget fulfillment.

An  important problem, connected to the usage of state investments is their low effectiveness compared with the private ones. While sharing the state Financial resources, used tendencies do not help to increase the effectiveness of investment and restructure national economy.

In the organization of investment process, lack of systematic ground and insufficient quality of budget planning caused permanent  failures in financing the state investment programmers.

This fact approves  that, it is necessary to reinforce the role of selective approach, gather state investments towards the strictly defined prioritative approaches, keep strict control and select competitive projecting during state investment.

Selecting mechanism of investment projects on the basis of competition/ In market economy, where basic criterion of investment is the effectiveness of investment, it is impossible to use the old technologies of sharing unpaidly, among enterprises in centralized capital investments, which don’t stimulate industries to improve their effectiveness, as direct state investments are less effective compared with the private ones. Thus, the most acceptable approach is the state supporting to private investments.

State supporting to private investments is realized in these investment  projects by means of the partial participation of the state, which have passed the competitive casting. The goal of centralized investment resources on the competitive basis is the reinforcement of investment assets, mobilization of private national and foreign investor’s capital towards the prioritative approach in economic development, and the growth of effectiveness in all forms of property such as commercial, budgetary and national-economic investments.

A new rule of financing investment projects in the financial ensuring of investment competent project, gives the right to investors to choose the participation forms. These forms can be as follows:

State investment revocable two year-term credit; its payment percent for the usage, compiles ¼ of central banks refunding rate;

to strengthen the port of these shares of an oncoming enterprise in the state property, that is sold in the market from the income of investment project during two years and the income obtained in this way goes to the state budget.

While taking decision about giving funds from central budget, a leading criterion is to insure the setting of object (industrial powers) into action in the given term, in the conditions of decreasing funds, attracted from the state budget and to increase the effectiveness of the usage of centralized resources.

The obligatory conditions, to present investment projects for the competition are:

In the total amount of money, spent on project realization, the share of centralized investment resources must not be exceeded more than 20%, it must be ensured at the expense of private investor’s own, attracted and borrowed funds.

In total amount of common expenses, investor’s own share mustn’t be less than 20%.

In the field of investors’ supporting, new approaches such as connection to the certification of investment projects, giving state guarantees, creating the budget for development are used.

Certification of investment projects, defines the possibility of increasing state supporting share up to 50%, while such analogies are not producing industrial products for exportation about 30% – for importation, with less price.

In the conditions of budget funds restriction, many investors consider the state guarantees of certified projects, as the most desirable form of state supporting. Guarantees secure about refunding not the total amount of money of risk, but part of it, in case of failure the effective investment project realization, due to the reasons that are not in investor’s compensation; On its side, investor must present counter-guarantees, amongst-mortgage.

Development budget can be formed as the special instrument, that collects investment resources of state budget in order to finance investment projects and attract the funds of private investors.

Development budget resources can be used for partial financing of investment projects, at the initial – competitive, valuable and refundable stages, also the borrowed funds for giving state guarantees on the competitive basis. (When upper limit of guarantees compiles 40% of borrowed funds).

In the competition of procuring the funds for development budget, such investment projects should be taken, that satisfy the following conditions:

Correspondence of development budget to the goals;

Security of positive meanings of pure discounting income;

In the total amount of money for project realization, investor’s own share mustn’t be less than 20%, but for large projects (more than 50 million $ – less than 30%.)

In the countries of developed economy, as a rule, examination of investment projects is made by experts, invited by investors themselves or by the participant financial institutes of project financing.

Selective, restricted supporting of prioritative approaches in industrial development by governments and the competitive selection of effective projects gives distinct results. Foreign experience proves that, such measures, as a rule is an efficacious stimulus of investment attraction and helps to realize projects.

Governance of state property in the state economic sector.

Governance of state property, as the factor of investment effectiveness in the state economic sector. Activation of the state role in the investment field, implies the development of state governance, reaching quantitatively higher level, restructurization of state sector and development for investment providence.

In must be said that, in the countries even under developed market economy, the governance of state sector is fulfilled under strict state governance control, from the interests of national economic development. State sector fulfillers the supporting function only for vitally important and unprofitable industries, but also stimulates local industries.

State sector, must distinctly occupy the leading positions in achieving priorities of economic development and form the potential of economic growth. Simultaneously, investment projects of state industries must be drawn up according to the demands of competition and effectiveness. It is essential that, invested funds to be used purposefully and the movement of financial flows be controlled strictly by the state.

Herewith, while realizing state activities in the real field (amongst in the field of investments), stimulation in  the activities of analogical faces in  non-state sector and not their restriction must surely be taken into account, as enterprises under  the state support are stable on the one hand, but less effective on the other side.

Activation of the state investment role must not be manifested only in effective investment projects of science-capacious industries, high technologies and vitally important fuelds by direct participation. More important constituent part of investment supporting of society in the conditions of market relation development is the encouragement of economic subjects’ investment activities and it must be oriented on progressive structural alteration. This implies the working out of optimum methods of economic regulation, development of accumulation mechanisms and active assistance to turn them into industrial investments.

Formation of institutional-legal and economic surroundings for the stimulation of investments in the real sector of economy.

Greating the available conditions for increasing investment actives by the state, requires purposeful influence on reproductive processes at macro and micro-economic levels. This. most important sphere, where the activation of the state investment role must be manifested effectively and in a new manner, at a new stage of economic reforms is – monetary-credit field.

Monetary-credit methods for investment stimulating. Insuring the growth of stable investments, first of all implies the augmentation of economic monetarism, era diction of money disproportions, reduction of interest rate, renewal of taxation system, depolarization of national currency and its role augmentation.

The increase of economic monetarism is possible by means of restriction of monetary-credit emission. While defining the level of danger of its inflation results, it must be mentioned, that inflation can also be caused by the other factors, besides emission. Thus, struggle against it, cannot be defined only at the basis of emission restriction. First of al it is necessary to provide the functioning of manufacture solidly. The growth of monetarism level in the real sector of Georgian economy is the most indispensable condition, that on its  side is the leading, deflationary factor.

Essential condition to protect against  the inflated results of monetary-credit emission is to create and put in motion such mechanisms, that change macroeconomic conditions and direct money-flows for supporting manufacture. During the process of using such approach, the size of emission defines the objective demand of industrial sector of economy, expert the funds moved to financial markets.

While defining the parameters of purposeful growth of money, calculation of the structure of money delivery is vitally important. Different channels of money emission have heterogeneous sensibility towards the inflation.  Therefore, expansion of money delivery is possible by payment of promissory notes of non financial industries, by means of banks refinancing and under the purposeful direction of emitted sources to finance the industrial investments. Less inflation channel of emission  is financing industrial investments by the state institutes of development.

Basic instrument for the regulation of money flows, is purposefully the state influence on the dynamic of interest rates. e.g Project supporting of the most importantly acknowledged industries for the purpose of investment activation is possible with preferential rates and by credits. Movement of preferential credits, this time must be realized by state banks system of development and the strict control establishment must expel the usage of funds aimlessly and financial speculations.

Experience of the countries under market economy shows that, regulation of interest rates is generally effective method to reinforce business activity in the period of crisis, when disbalance of economic systems situation is deepening. After achieving balanced progress in economic balance and financial sectors, generally the necessity of state interference in economy is lessening and accordingly the role of state influence on the dynamics of interest rates, formed on money markets is also decreasing.

The usage of state regulation is distinctly cyclic. In the conditions of sharp structural disproportions, when the working of market mechanism can’t provide the keeping, on the one hand, development  of surplus production and devaluation of main capital off, but  on the other hand augmentation of investment activity, the role of state influence on economy, amongst in the field of purposeful control on money flow is expanding, but while moving to the stable growth of economy-decreasing  . It is proved  by the practical analysis about getting over the structural depressants  (post war) in Western European countries and in the USA, and by the restoration of economy in France and Germany.

State regulation of interest rates was applied in the countries, under developed market economy (post war-in Japan, during along period –in France and in the USA during the period of so called `Roosevelt’s new policy, as well as the range of those developing countries , that showed the solid high tempers of economic growth (India, China, South – Eastern Asian countries etc). Important scales of accumulation here was reached for the purpose of national manufacture development, as a result of active influence on interest rates ( on its side, accumulation made it possible to hasten the speeds of economic development) also, for this purpose, direct and indirect methods for the purposeful regulation of money flow and inner accumulations convert into investment were used, namely for the formation of development state banks, loan-saving association and other  specialized credit institutes, through founding district  normative of credit politics for non-state banks and rates of preferential taxation.

For example, in Japan, investment financing and production growth conditions were formed through the state control strengthening on using the population savings and interest rates, which were gathered in postal-saving institutions and banks, afterwards their remittance to the state institutes, long-term crediting banks and truste savings banks took place.

Savings transt formation mechanism into investments in the USA was based on the wide development of loan-savings associations, that attracted the savings of private sector for giving purposeful credits to the range of housing construction and industrial branches.

In many developing countries, stable growth of economy was conditioned by localization of the greater share of money flow in the state banks, that locate mobilized savings in industrial investments and crediting resources, in accordance with the installed priorities of social-economic development.

Improving the structure  of mass of money is also connected to the cutting down  the share of cash, that is in circulation, for what it is necessary to set up strict  restrictions about the cash payment in all the field of economy, to continue calculation through computers and widen barren forms of  payment circulation. Taking these measures will expense the business economic field of banking sector and will be propitious for investment potential growth of the banks.

One of the basic task of payment system, at modern stage is its complete renewal, restriction of barter transaction, driving a great part of taxation means out of circulation, as they don’t  play a part of complete recourse in the formation of saving potential. Main ways to solve this problem are following: realization of inter imputation for financing fixed and circulating capitals, reduction the price of credit resources and security of plural debts.

For increasing the regulation effectiveness of money circulation and expel the activation possibilities of such emissive mechanisms, which are not accompanied with the expansion of goods delivery, it is necessary to strengthen the control and currency regulation.

Formation of effective infrastructure of financial market.

A) The influence on the investments activity of banks.

Looking through the previous system of regulation (in accordance with the selective priorities of economic politics) requires changings of the forms and methods in the banking sector and restructurization of banking system in economy, by meant realization of investment functions of the banks. Restructurized banking system must comply the requirements of armful investing  through high trustworthiness and guidance. It must also ensure the appropriate level of credit delivery resources by means of available interest rates for manufacturing fields.

In the growth of investment activity of banking system, it is essentially important to create the system of investment encouragement and insurance. State guarantees existence is one of the condition just for this. Cutting down the normatives of reserve assignments and preferential taxation are also belonged to these activities.

B) Creation of the system of deposit guarantees.

World experience shows that, the establishment of deposit guarantees is the inevitable component for vast mobilization of the population savings. It potentially increases separate institutes as well as the liquidity of the whole system and is the reliable means against taking deposits unexpectedly and frequently out of the banks.

One of the first systems for deposit insurance was formed in the USA in 1933-34, as a result of additional stabilizers investigation in marketing economy. Nowadays, these systems operate in the range of developing countries (Argentina, Colombia and so on).  Herewith in Great Britain, in the USA and in Canada, they are performed with independent state corporations, but in France and Sweden and private banking links. In Austria, Great  Britain and the Netherlands in the case of broken credit organizations, private deposits are given; In Germany deposit delivery of credit institutes are addressed to, while in Canada – deposit delivery, managing the property of bank and giving crediting guarantees are addressed to.

                                                          Economic Dr of Science,

                                                          professor Lamara Qoqiauri

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About Author

Lamara Qoqiauri
Date and place of birth: October 6, 1948
Working place: Tbilisi Iv. Javakhishvili State University
Tel.: (+99532) 79-07-10; (+99532) 760595
Web-site: www.nino.skola.dlf.ge
e-mail: qoqiauri@yahoo.com
Address: Tbilisi, Varketili, 159, Gakhokidze St.
Working experience
A republican department of Georgian State Bank (National Bank) ———from 1970 1976
Tbilisi, 3/5, Kirov (now Leonize) St. – Accountant economist, An inspector of providing accountant-loan operations, cash fulfillment of budget.
A republican department of “MshenBank ————————————— from 1976 – 1977
As a Chief economist
Tbilisi Iv. Javakhishvili State university —————————————— from 1977 – till now
As a Laboratory assistant of a cathedra, Research worker, Associate professor, Professor.
Gori Economical Institute (now State university)
English private school-college “Nino”- Owner
Education/training
Tbilisi, Komarov high school of physics and mathematics
Tbilisi, technical school-college of finances and economy
Tbilisi, Iv. Javakhishvili State University, Faculty of economy (evening department)
Post-graduate course of Georgian scientific academy of economy and logistics
Tbilisi State University, Economical faculty
Nongovernmental association of private schools
Qualification
Scientific status – Professor
Doctor of economical science
Doctor of economical science, professor.
Accountant-economist of Bank
Candidate of economical sciences, associate professor
Published works
Quantity of works -108
Monographs between them – 14
Manuals between them -5
Quantity of works during last 10 years – 84
Quantity of works in the referred magazines- 43

SCs and STs: Educational Realization

- Ramaiah Bheenaveni*

-

The world of today, by and large, is comparatively a rapidly changing one and the changes have been in a variety of directions. Not long ago society was through of as a reality sub-generis far beyond the control of individuals to change it –and education as a process of inducting new entrants into society. The idea that societies can be changed and, that too, education can be vital instrument of social transformation is increasingly felt. Geared to the preservation and perpetuation of tradition in the past, education is now being used to bring about social transformation in a large scale. This represents a kind of dilemma in respect of the social role of education in traditional societies.

Ignoring this dilemma, many social scientists today re inclined to believe that education is a powerful instrument of social transformation. The prevailing opinion in circles of social science is that education is an agency of modernization. It is argued that education promotes modernity in many ways but chiefly in two: (i) by sharpening the “critical awareness” of the people about the social structure in which they are placed, and (ii) by changing the consciousness of the people in a direction congruent with the dominant value of our age-rationality-which is also the mainspring of modernity. Following this reasoning, there has come up an impressive body of literature in recent years of documenting the impact of schooling on individual modernity in developing societies. The profound social changes that India has witnessed in the last few decades or so have affected its entire population, yet in some sections of its society their impact has been much more marked than in others.

Education is the key to development of any community. It can broaden the world view of the people, equipping them to meet the present day challenges. Education can be an input to their development. It can also build up inner strength of the people. Almost all studies have emphasized the importance of education in the development of the people. Ignorance is the biggest reason for weakness and knowledge is power. In the development effort, education has a pride of place in the priorities of the people. This is particularly so when the two systems of unequal strength come in contact. Education brings knowledge to he community and keeps in acquiring a new strength to enable it to face the new challenges which naturally come by when the process of change unfold unforeseen forces.

The role of education as an investment in human resources has been increasingly recognized all over the underdeveloped and developed countries. Education has special significance for the weaker sections of society, which are facing a new situation in the development process to adjust themselves properly to the changing circumstances. For them, education is an input not only for their economic development, but also for promoting in them self-confidence and inner strength to face the new challenges.

This position SC/ST education critically examines the contemporary reality of schooling of children belonging to Scheduled Caste and Scheduled Tribe communities who have been historically excluded from formal education – the former due to their oppression under caste feudal society and the latter due to their spatial isolation and cultural difference and subsequent marginalization by dominant society. There are thus sharp differences between these two categories of population in terms of socio-economic location and the nature of disabilities. However, there is also growing common ground today in terms of conditions of economic exploitation and social discrimination that arise out of the impact of iniquitous development process. Concomitantly, the categories themselves are far from homogenous in terms of class, region, religion and gender and what we face today is an intricately complex reality. Bearing this in mind this paper attempts to provide a contextualized understanding of the field situation of the education of SC/ST children and issues and problems that directly or indirectly have a bearing on their future educational prospects.

The educational effort so far as the SC and ST communities are concerned has to be somewhat different than for the general areas. In case of advanced groups and areas, demand for education is already there. Establishment of an educational institution itself is sufficient to attract the children from the advanced communities because their parents are interested in their education. This is not the case with the poorer section of the community. The message has as yet not reached the more backward rural and tribal areas where the citizen is still not very much aware about the practical utility of education. Thus, a number of socio-economic factors are coming in the way of members of SC and STs in sending their children to schools. In many cases, it is sheer economic hardship. Therefore, the universal educational programmes at the elementary stage in the case of these communities have to be much more than mere opening up of educational institutions. The students belonging to these communities may have to be provided with free textbooks, mid-day meals, and in the case of girls, even a pair of uniform. As the children grow, they become economic assets to the family. It may be necessary, therefore, that they are provided suitable scholarships and stipends in higher classes. It has to be ensured that if we cannot compensate the family, at least education should not be a burden on a poor family. In the case of tribal areas, it may be necessary that at middle school and high school levels adequate hostel facilities are also provided, as an institutional network itself will not be of much help. It is commonly observed that in some tribal areas much of the institutional capacity remains under-utilized.

Special state institutions were set up for the advancement of SC/ST and various legislations, social policies and programmes were drafted which were geared to their economic and political development and achievement of equal social status. It has been difficult however, to identify these categories in terms of criteria laid down by the state. The ‘problem’ of the scheduled tribes has been a vexed one, given the various levels of social and cultural distance and varying degrees of voluntary or forced assimilation exploitation and/or displacement. In fact, it has been pointed out by Galanter that just where the line between Scheduled Tribes and non-Scheduled Tribes is to be drawn has not been clear. There are problems of overlap with caste and controversy whether a specific group is more appropriately classified as a ST or SC. Policy however treats the SC and ST groups homogenously. Moreover it rests largely on the assumption that mainstreaming is progress, while paying lip service to preserve distinctive cultures, especially of tribals who are coerced into assimilation.

Education was perceived as crucial to processes of planned change. It was seen as the key instrument for bringing about a social order based on value of equality and social justice. Expansion and democratization of the education system was sought, the two primary egalitarian goals of which were the universalisation of elementary education and the educational “upliftment” of disadvantaged groups. The State’s special promotional efforts have undoubtedly resulted in educational progress for the SC/ST especially in regions where policy implementation combined with the dynamism of reform, and most crucially with anticaste, dalit, tribal and religious conversion movements.

The last two decades have spelt the decline of the Welfare State under the powerful impact of global economic forces and neo-liberal economic policies. The egalitarian ethic underlying planned change and development is being rapidly decimated. The ideology of the Indian State’s New Economic Policy emphasizes the pre-eminence of markets and profits. In the context of an elite directed consensus on the inevitability of liberalization and structural adjustment, the predominant problems and debates of education have undergone major shifts. Structural adjustment have provided the legitimacy and impetus for a number of educational reforms that pose a direct threat to the mission of universalizing elementary education and equalizing educational opportunity for SC/ST, especially those left behind. The state is withdrawing from social sectors of education and health and delegating its social commitments and responsibilities to private agencies and non-governmental organizations. There is already enough indication that basic educational needs of the SC and ST are getting seriously undermined under the new dispensation adversely affecting life chances of vast sections of those who have yet to make the shift to first generation learning.

Urban migration, education, occupational change and religious conversion have been pursued by the scheduled castes as key strategies of socio-economic emancipation, status change and acquisition of a new social identity. They have achieved varying degrees of success. Anti caste and dalit movements have provided the bases for political consciousness and assertions of new self-consciousness and new self-respecting collective identities grounded in both moderate-reformist and radical ideologies. Contemporarily, the rigours of pollution, social practices of untouchability and social relations of servility vary greatly in different parts of the country. The widespread upsurge of atrocity signifies continued caste based oppression. Caste and occupation were closely interlinked in the traditional socio-economic order, and the lowest manual and menial occupations were reserved for the SC. The link has gradually been broken but not completely. There have been shifts to caste free occupations. Changes took place with the arrival of new opportunities in rural employment and petty business as well as through education based occupational and social mobility in rural and urban contexts. However, economic exploitation and economic disadvantage and continued concentration in menial occupations continue to sustain and reinforce the degraded social position of the majority of the SC. Rural SC are predominantly landless and impoverished agricultural labour. Women are multiply subordinated.

By modernization is meant a process of long range social and cultural change, often regarded as leading to the progressive development of society. It is a multifaceted development specifically leading to the industrialization of economy, and increase in the geographic and social mobility and, the secularization of ideas, which give rise to secular, scientific and technical education. It also means a change from ascribed to achieved status and a higher standard of living. Thus, modernization is a question of changes in the social structure, norms and value orientations, and as such it demands certain norms and value orientations, and as such it demands certain adoptive devices. As a consequent of this modernization SC and STs are egger to adopt the new trends of modern culture which is possible only by the modern education.

State Provision for Education of SC and ST and Recent Trends in Their Educational Progress

State commitment to the education of SC/ST children is contained in Articles 15(4), 45 and 46 of the Indian Constitution. Article 15(4) underscores the state’s basic commitment to positive discrimination in favour of the socially and educationally backward classes and/or the SC and ST. Article 45 declares the state’s endeavour to provide free and compulsory education for all children until they complete the age of 14 years. Article 46 expresses the specific aim to promote with special care the educational and economic interests of SC/ST.

In its effort to offset educational and socio-historical disadvantage, the Indian state conceived a range of enabling provisions that would facilitate access to and ensure retention of SC and ST children in school. In the initial Five Year Plans, the focus was on making available basic educational facilities such as schools especially in remote areas and providing scholarships and books. Both Central and State governments took up the responsibility of special educational provision. The scope of enabling interventions expanded considerably after the Fourth Five Year Plan.

Special schemes pertaining to school education of SC/ST children currently include: i) free supply of textbooks and stationery at all stages of school education ii) free uniforms to children in govt. approved hostels and Ashrams schools, and in some states also for children in regular schools; iii) free education at all levels; iv) pre-matric stipends and scholarships to students at middle and/or high school stage; v) special scheme of pre-matric scholarships for children of castes and families engaged in unclean occupations like scavenging, tanning and flaying of animal skin; vi) girls and boys hostels for SC/ST students and lodging facilities in hostels of backward classes including SC/ST; vii) ashram schools for tribal children started with the intention of overcoming the difficulties of provision in remote regions and also rather patronizingly to provide an environment “educationally more conducive” than the tribal habitat. In addition, several states have instituted schemes such as scholarships to SC students studying in private schools, merit scholarships, attendance scholarships for girls, special school attendance prizes, remedial coaching classes, reimbursement of excursion expenses and provision of mid-day meals. The last has been recommended as an integral element in schooling by the Working group on Development and Welfare of the Scheduled Castes.

Conclusion:

Education has always been considered an instrument of social change. In present day society education has been considered a sound economic investment and that is the reason why in all the developed and developing societies greater attention is being paid to education. The role of education is to transform a static society into one vibrant with a commitment to development and change.

In out national perception, education is essential for all. This is fundamental to our all round development such as material, psychological, spiritual and so on. Obviously, it implies that education of the Scheduled Tribes is fundamental to the development of the people of this area, and hence, it is essential for them also. Education is a potent agent not only for the social and psychological changes but it may influence productivity and economic development also, and, that is the reason why, for the last few years in the literature on development there has been much talk about the relationship between education and economic development and about education as investment. Educational will also help in the socialization of a child, and the development of the human personality, social mobility, occupational change, and the rise of professions. Education is not only a means of adjustment into the society and all round development, but it is also an end in itself. Education affords protection of life. In addition to its relation with moral values, it is closely associated with socio-economic development. Education is, therefore, very significant for the development of a country and in spite of having many severe problems, the developing countries provide high priority to education. India is, undoubtedly, one among them.

References:

1. Das, A.K. and R.N. Saha, (1989): West Bengal Scheduled Castes and Scheduled Tribes: Facts and Information, Bulletin of the Cultural Research Institute, No.32, Govt. of W.B., SC & TW Department, Calcutta

2. Nayar, P.K. , (1975) : “The Scheduled Castes and Tribes High School Students in Kerala, Dept of Sociology, Kerala University

3. Pratap, D.R. et al, (1971): Study of Ashram Schools in tribal Areas of Andhra Pradesh, Tribal Cultural Research and Training Institute, Hyderabad.

4. Mani, Gomathi, (1991) Education in the International Context, Sterling Publishers (P) Ltd., New Delhi, pp118-132.

5. Thomas, Joseph A. (2001): Dynamics of Educational Development: A Case Study of Selected `Backward’ Villages in Kerala, in Vaidyanathan, A. & Nair, Gopinathan, P.R. (eds.) Elementary Education in Rural India: A Grassroots View, New Delhi: Sage Publications, pp. 166-216.

6. Sujatha, K. (1994): “Educational Development among Tribes: A Study of Sub-Plan Areas in Andhra Pradesh, New Delhi: South Asian Publishers.

7. Muralidharan, V. (1997): “Educational Priorities and Dalit Society”, Kanishka Publishers, New Delhi.

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Article Source: ArticlesBase.com – Scs and Sts: Educational Realization

Alan Greenspan’s The Age of Turbulence contains a chapter titled The Modes of Capitalism which is full of revelations which Mr. Greenspan unfortunately failes to recognize. The chapter describes the various forms Capitalism has taken in a number of countries, mostly North American and European. Of course, that such various forms of Capitalism have been implemented in different countries is not news. But what Mr. Greenspan fails to notice is that similar chapters could not be written about physics, chemistry, geology, meteorology, astronomy, physiology, botany, astronomy, etc. but could easily be written about Christianity, Islam, Hinduism, Buddhism, and even astrology. The point is, science does not have sects, but ideologies do. Of course, economists shun the word sect, preferring instead the euphemism school in an attempt to gloss over the non-scientific nature of economics. Mr. Greenspan’s modes of Capitalism are nothing more than sects, and no endeavor that is comprised of sects is a science.

Mr. Greenspan’s attempts to explain the existence of these sects begins to reveal just how unscientific economists can be. He writes, “To me, the degree of willingness to take risks is in the end, the major defining characteristic that separates countries into the various modes of capitalism.” Mr. Greenspan ranks “the United States as the most ‘free’ of the larger economies” and believes, apparently, that therefore, Americans are less risk averse than people elsewhere. But there is not a lick, jot, fleck, or speck of evidence to support this belief. So although it may be true that the United States is the most free of the larger economies, other reasons for which there is considerable evidence can be cited as more likely explanations. The most obvious of these is differences in educational systems. It may be, for instance, that Americans support this freer economic system because they are poorly educated and therefore more gullible than people in countries that have better educational systems.

There is no question that the American educational system is inferior to the educational systems in many other countries. The will-publicized country-by-country comparisons that invariably show that American students are less competent in many areas of study need not be repeated. But there are far more telling examples of American educational inferiority. When graduates of some of America’s most prestigious universities, such as the current crop of presidential candidates, can openly reject evolution and when various branches of the national government routinely rewrite scientific studies to make them conform to the administration’s political ideology, the failure of the American educational system becomes evident. In America, ideology trumps truth.

An explanation of the failure of even America’s universities to educate their graduates is not hard to find. That America has had a long-standing anti-intellectual culture has been well documented. See Richard Hofstadter’s Anti-Intellectualism in American Life, for instance The American educational system is fractured. Local control of primary and secondary schools, often controlled by school-boards made up of poorly educated people who seek to promote personal agendas, is a tradition dating back to the nation’s founding. The makeup of state school boards is not different, and there are fifty of these. No common standards exist and even state-by-state comparisons are difficult to make. Then, too, American universities were not generally founded to educate people. They were founded to train people for professions; in effect, they were founded as vocational training rather than educational institutions. After the Civil War, the creation of the land-grant university system was explicitly designed for vocational training. As a result, students are taught how to carry out techniques, but rarely taught to critically examine the theories from which those techniques are derived. This description characterizes what goes on in most of the professional schools and colleges attached to our universities. It especially characterizes our graduate departments of economics. One small but revealing example provides anecdotal evidence that supports this view and the view that America’s universities promote ideology over truth is this: Gilles Raveaud, I believe, commenting on Greg Mankiw’s teaching at Harvard has written, “Some of the students I had at Harvard have described Mankiw’s course to me during private conversations as ‘massive conservative propaganda.’ One of them told me that he thought that Mankiw manages to ‘indoctrinate a whole generation.’ In 2003, a protest against a similar course then proposed by professor Marty Feldstein, an ex-adviser to President Reagan, led to the creation of an alternative intro economics course, taught by radical economist Steve Marglin. But while Mankiw’s course gives the required credits to students, Marglin’s does not.” Just as there is no honor among thieves, there is apparently no honor in universities that get huge donations from America’s capitalists who have gotten their fortunes by picking the pockets of consumers and employees and who would be loathe to see their ability to continue to pick those pockets restricted by some idealistic idea of truth.

Mr. Greenspan ignores completely one salient difference between American and Continental educational systems. In the American educational system, analytical thinking prevails. Everything is considered in isolation from everything else. Economic phenomena are examined as though they had no consequences to society in general. In Europe, however, phenomena are considered together as a gestalt. The consequences of changes in one social environment are related to the effects those changes have in other social environments. Whereas American economists think almost exclusively in terms of economic growth, Europeans think in terms of society as a whole. American economists can always find ways of excusing the adverse human consequences of an economic process; the Europeans emphasize the adverse consequences to society as being more important than the economic process. This distinction has been evident in economic circles since the formation of the so-called historical school, and Mr. Greenspan should have recognized it.

But Mr. Greenspan reveals something else about economics that is rarely called attention to—the delusions economists labor under in relation to the real-world economy. When Mr. Greenspan makes risk-taking the characteristic of the American economy, he is delusional. Certainly America has its share of risk-takers. Whether it has more or fewer risk-takers than other nations is questionable. But risk-taking does not characterize the American or any other economy. Economic risk-taken may be thought of as a characteristic of entrepreneurs. But entrepreneurs alone cannot make an economy; if everyone was an entrepreneur, no workers would exist to carry out entrepreneurial ventures. Kurt Wicksell in his Lectures on Political Economy nicely defines the entrepreneurial process: “He who borrows money at interest does not as a rule intend to keep it, but to exchange it at the first suitable opportunity for goods and services, by the productive use of which he hopes to be able to acquire not merely the equivalent of their price but a surplus value. . . .” Although that may be true of entrepreneurs, it is not why most people in today’s real economy borrow money. When people borrow to buy homes, automobiles, appliances, etc., they do not intend to use their purchases in ways that will create surplus value. In fact, these people are not investing at all. The money they borrow is a sunk cost for a place to live, a means of transportation, and other such uses. And although Americans have become a nation of borrowers, they have not become entrepreneurial risk-takers. Any economist who thinks of the economy in terms of entrepreneurial risk-taking is engaged in self delusion.

Mr. Greenspan is also delusional when he writes about creative destruction. Certainly, creative destruction does happen, but not nearly as often as Mr. Greenspan and other economists seem to think. As examples of creative destruction, Mr. Greenspan mentions the telegraph industry’s demise because of the introduction of the telephone, the tin can’s demise when the aluminum can became feasible, which he relates to the demise of the steel industry. Certainly some workers were displaced when the telephone industry replaced the telegraph industry and then the aluminum industry reduced the steel industry. And certainly such displacements cannot be avoided and no attempt should be made to avoid them. But that is not what is happening in America today. When Fisher-Price offshored the manufacturing of toys to China, it was not because the Chinese had developed new toy-making technology. In fact, those Chinese employ older technologies than those what would have been used in America to manufacture the same toys. When computer related industries offshore their helpdesks, it is not because new helpdesk technologies have been developed in the offshored countries. The technology used in offshore places is exactly the same technology that is being used in America or Europe or anywhere else. So although there is a phenomenon known as creative destruction, what is happening in America today is mere destruction. The other half of Mr. Shumpeter’s thesis is entirely absent, and for Mr. Greenspan to think otherwise is delusional.

Again, Mr. Greenspan writes, for instance, that “in a free society . . . the vast majority of transactions must be voluntary, which, of necessity, presupposes trust in the word of those with whom we do business. . . .” And “It is remarkable how much trust we have in the pharmacist who fills the prescription ordered by our physician.” But this is sheer delusion. People don’t trust the businesses they buy from. In the case of the pharmacist, people buy from him because there is no alternative. And does anyone trust the pharmaceutical firms that market the medicines we are prescribed? If they do, they must be wholly ignorant of the revelations that such firms hide from regulators, physicians, and consumers data of adverse effects and even life-threatening dangers. Do I exhibit trust in Microsoft when I purchase one of its operating systems or applications, knowing full well that what I am getting are poorly coded programs containing innumerable bugs and security lapses that Microsoft will attempt to patch by incessant releases of what it euphemistically calls Service Packs? Trust is something that does not exist in business; that is why contracts exist, and why firms such as Microsoft exempt themselves from all liability for damages within their contracts. If Mr. Greenspan trusts the firms he does business with, he is delusional.

But the unavoidable problem with Classical/Neoclassical economics, which Mr. Greenspan glosses, is its immorality. He writes that, “Clearly, not all activities undertaken in markets are civil. Many, though legal, are decidedly unsavory.” But he also writes, “When I was a child, jokes about the scruples of used-car salesmen were widespread, but in truth a flagrantly (italics mine) unscrupulous used-car salesman is one who will be out of business before long.” Mr. Greenspan fails to recognize that this statement is entirely meaningless. It does not say that businessmen are not unscrupulous; it does not say that competition puts unscrupulous businessmen out of business; it does not say just how unscrupulous a businessman must be to be flagrantly unscrupulous.

Everyone knows that businessmen routinely break even the most fundamental moral maxims, and any economist who denies this must explain the neologising and persistent existence of such phrases as Caveat Emptor, a pig in a poke, and letting the cat out of the bag. In an honest economy, these expressions would have no use. As a matter of fact, there is absolutely no reason to believe that people in business are any more honest than the population in general, and there is good reason to believe that business in a free-market promotes crime and vice, both of which are epidemic in the United States. It is no mere coincidence that when the Soviet Union collapsed and when Israel was persuaded by the Reagan administration to abandon its socialist traditions and free-market practices were introduced, both crime and vice emerged as important social problems.

In fact, free-market economics institutionalizes immorality, which is proven by the mere fact that puffery is an acceptable practice. Businesses that employ puffery to market products will, without batting an eyelash, discharge an employee who is found to have puffed up his resumé. I’m not talking about sophisticated moral philosophies such as Kant’s Categorical Imperative, but those simple maxims embodied in the Decalogue and the Golden Rule. These immoral practices of business are widespread and far-reaching and they contradict many of the favorite clichés of economists.

Mr. Greenspan claims, that free markets increase material well-being to a greater extent than regulated markets. But tell me, how does the marketing of bottled water, which is never tested and whose source is rarely identified, increase the well-being of the people who are snookered into buying it, especially when ordinary tapwater is regularly tested, comes from a well-known source, and is considerably cheaper? In fact, doesn’t it reduce that well-being, since the money wasted on it could have purchased something that provided a real material benefit? The same questions can be asked about numerous other products—the McDonalds hamburger, Taco Bueno’s tacos, pizza from numerous pizza vendors—the list is endless. But there’s more. The Fox affiliate in Dallas regularly runs a feature called “Deal or Dud.” The channel buys products heavily advertised on television and has them tested by ordinary viewers. If a product works as advertised, it’s called a Deal, if not, it’s called a Dud. Every so often the channel comes up with Deals, but most products tested are Duds. As a matter of fact, Mr. Greenspan’s book is itself a dud. It was not published because of the merit of its content; it was published merely because of the notoriety of its author. Mr. Greenspan’s name on the title page can be likened to other forms of puffery. So how does manufacturing and marketing products that don’t work increase the material well-being of consumers? And consider the snake-oils people are sold that are classified as dietary supplements? The manufacturers of these products could easily have them double-blind tested to determine their effectiveness. But they don’t. Is it because they know that if they did, the products couldn’t be sold?

Mr. Greenspan and other economists claim that the free market results in the most efficient allocation of capital. But how can anyone claim that the capital expended on the products mentioned in the previous paragraph is efficiently allocated? In fact, one could easily claim that it is completely wasted, as is the capital lost during economic downturns. So anyone who believes that American business are generally honest are as deluded as the insane person who believes he’s Napoleon.

Not only is free-market economics immoral, there is some evidence that it could not exist if the immorality were removed. In an impressive new book, The Social Conscience, Michel Glautier asks whether a caring society can exist in a market economy? His analysis suggests that recent and continuing changes to the market economy are putting the achievement of a caring society beyond reach. And the following passage comes from an abstract of a paper by Andrei Shleifer: Explanations of unethical behavior often neglect the role of competition, as opposed to greed, in assuring its spread. Child labor, corruption, “excessive” executive pay, corporate earnings manipulation, and commercial activities by universities all promote censured conduct. When unethical behavior cuts costs, competition drives down prices and entrepreneurs’ incomes, and thereby reduces their willingness to pay for ethical conduct. Unfortunately, both authors are ambivalent when it comes to drawing hard conclusions.

In a rational society, a distinction would be made between scientific enterprises, always keeping in mind that all science is a work in progress, and enterprises grounded in mere belief. The political system would defer to scientists in matters involving the former and allow the people to decide the kind of society they would prefer in matters involving the latter. So the choice of an economic system ultimately comes down to what kind of society people not only want for themselves but for their progeny in future generation. Do we really want an economic system that institutionalizes prevarication and encourages greed, crime, and vice? Those who answer this question affirmatively should, perhaps, have 666 tattooed on their foreheads.

In the second chapter of The Age of Turbulence, Mr. Greenspan writes that he “discovered that some of the scientists in the Manhattan Project subscribed to a philosophy called logical positivism. . . . The mathematician in me embraced this stark analytical credo. . . . The world became a better place, I thought, if people focused exclusively on what was knowable. . . .” Unfortunately somewhere alone the way, Mr. Greenspan lost this focus and became an apologist for the free-market system when he “decided to engage in efforts to advance free-market capitalism.” We are all now faced with the consequences of his decision.

Wise men know the importance of periodically asking themselves, What if what I believe to be true is wrong? It is time that our economists start asking themselves this question.

© 2008, John Kozy

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About Author

Retired professor of philosophy and logic who blogs on social, political, and economic issues at http://johnkozy.mindsay.com. Tries to avoid mere opinion and propaganda and emphasizes logic, facts, and evidence. All or any part of his articles can be cited or distributed.