Economics

This study seeks to evaluate second best quota agreements that do not include research and development elements in a situation where the member countries are heterogeneous. This paper compares contexts in which the assigned emission quotas are tradable against a context in which they are not. The authors argue that marginal costs of abatement vary across countries for the second best agreement where countries are heterogeneous. The researchers explain that abatement costs are influenced by research and development activities that are undertaken by all the firms in all of the participating countries and that for second-best optimum in countries that are heterogeneous, the abatement marginal costs vary across countries. They also argue that the second-best outcome cannot be attained in situations where the emission quotas are tradable.

In order to achieve the purpose of the study, the researchers first explain the gaps in the existing literature that caused them to conduct the study. The study is based on the findings of a research conducted by Golombeck and Hoel (2006), which concentrated on an international environment where countries which are identical are assigned emission quotas but where the agreement does not include research and development policies(Golomek  Hoel 2008 198). However, this study, unlike the one conducted by Golomek and Hoel which focused on identical countries, it seeks to examine the case of countries which are heterogonous. The study therefore developed out of insufficiency in literature on cases of heterogonous countries as the existing literature mostly concentrated on identical. This serves as a justification for the study.

This study  uses the standard economic theory which argues that a climate that is international has to address both negative as well as positive environmental externalities for it to attain the first-best outcome. The researchers are however quick to note that neither the EU quota nor the Kyoto agreement include elements concerning research and development investments. It is on this observation that the researchers decided to evaluate an international climate that does not also include research and development policies. The researchers explain that lack of the research and development policies in the international climate is a shortcoming symbolising an imperfection which might mean that welfare is lower in cases where quota trade is allowed than when this trade is not permitted.

This paper is divided in five sections. After the introduction is the second section which discusses the formal model the researchers used in their study. This model consists of identical firms but located in two countries that are different in size. The third section of the article discusses first-best social optimum which refers to the levels of research and development investments as well as abatements that minimize the total social costs in each of the firms. In the fourth section, the researchers examine an international agreements optimal design under the constraint that the agreement is not characterised by research and development policy elements. The researchers assume that the climate agreement is planned by the member countries with the intention of minimizing social costs. The international climate agreement s referred to as second best because of the fact that it has been devised under the constraint not to include research and development policy elements. This section also explains why the second best agreement cannot imitate the first-best agreement and why quotas should not be traded under the second-best agreement. The fifth and final section of the study discusses the how the model can be extended to other differences in countries other than size and the results attained using the formulas derived by the model.

Background
This study is built from Golombek  Hoel (2006), which concentrated international climate agreements in situations where member countries are identical and receive emission quotas with agreements that do not include policies on research and development. The current paper extends this study to eterogeneous countries. This study identified differences in size, technology diffusion abatement cost function and in assessment of climate damages. It however only focussed on difference in size where it draws from Golombek  Hoel (2006) that the second-best optimum for such a situation is characterised by abatement marginal costs surpassing the Pigovian level in all the participating countries. This conclusion is in relation to the fact that the agreement does not include research and development policies.

While the findings of Golombek  Hoel (2006), generalized that abatement marginal costs in heterogeneous countries for second best optimum should surpass the Pigovian level, this paper sought to specify exactly how these costs differed in the context of heterogeneous countries.  It is on the findings of this study on identical countries that the current research which focuses on heterogeneous countries was developed.

Theory of the Writer
This study draws its argument from the Coase theorem, which argues that tradable emission quotas yield efficiency despite the preliminary allocation of quotas. This is attributed to the fact that cost minimizing agents will ensure cost-effectiveness through trade until all marginal abatement cost differences between sources are done away with. According to the theorem, trade in emission quotas is advantageous both nationally and internationally if there exists an international agreement that regulates the emission of greenhouse gases into the atmosphere through quotas. Examples of such agreements are the Kyoto agreement allows the participating countries to trade in quotas but with some restrictions. The European Union quota trading scheme whose purpose is to help the European Union countries achieve the Kyoto commitments also permits different firms located in various European Union countries to trade in quotas.

One of the conditions for quota trade to be beneficial to the participating firms or countries is that any imperfections that might be existing elsewhere in the economy remain unaffected by trade in quotas otherwise quota trade might lower welfare. This paper therefore focuses on trade as opposed to no trade situations where countries have signed up an international climate agreement that allocates emission quotas to each of the participating countries.

It is important to note that in evaluating international climate agreements that allow member countries to trade in quotas against other contexts that do not allow trade, these authors base their arguments on the assumption that abatement costs are influenced by research and development activities all firms al the member countries undertake. This is simplified as abatement technologies tend to be endogenous. To be specific, the authors assume that the abatement costs of a firm are to a great extend affected by the investment it has put in its own research and development and to some degree by the research and development investments made by other firms, both local and foreign in the same industry.

This research focussed on various factors that make countries different from each including differences in diffusion of technology, differences in the size of countries, differences in how climate damages are evaluated and abatement cost function differences. The researchers concentrated mainly on the difference in country size as a factor which they then used to explain all the prepositions derived from its evaluation are also valid under the other mentioned differences.

The authors argue that the second-best optimum in countries that differ in size are typified by marginal costs of abatement that exceed the Pigovian level in all the participating countries. This argument is based on the findings of the study conducted by Golombek and Hoel (2006), which is the foundation of this research. This finding is turn associated with the fact that the climate agreement does not include research and development policies. Each of the participating countries will therefore overlook technology spillover to and from other countries and instead concentrate on an RD policy that provides less research and development than that which is socially optimal. In conceiving the second-best agreement, the participating countries consider that the stricter emission requirements imply that a country will have to undertake more research and development during the next stage. Setting the emission requirements that are so strict that they cause the marginal abatement costs to surpass the Pigovian level is therefore a way of compensating for domestic research and development subsidy that is too low.

Though Golombek and Hoel (2006) generalise that in second best optimum, marginal abatement costs have to surpass the Pigovian level, this is not the case in a context involving heterogeneous countries as the study seeks to explain that that marginal abatement costs generally vary across countries that are heterogeneous in a second-best optimum. This study also seeks to illustrate that it is not possible to conclude (it is not obvious) whether marginal costs of abatement should be highest in large countries or small ones.

The Model
The model used in this study is a static framework that disregards all kinds of uncertainties. The model is build from a study that involves only two countries domestic and foreign. The model considers two firms in the economy which are denoted as m  m which are identical, in this model, m is located within the mother country (is domestic) and m is located in the foreign country. The countries only differ from each in size which is represented by the total number of firms (Golomek  Hoel 2008 199). This model assumes that the domestic country is larger than the foreign country, mm. The findings of this factor (difference in size) will later be extended to other differences in countries where they will be proved to hold.

The authors acknowledge that all firms do invest in technology but ignore patents. They also argue that technology diffusion from a firm to other firms is not perfect in spite of technology spillover. Thus only (0    1) of another firm s research and development investments are useful for any firm. The researchers assume that for a particular domestic firm, its level of technology () is determined by its own investments in research and development (), the other firms  (in the same country) amount of  research and development investments and the amount firms in the other country have invested in research and development.
Y  X   (m   1)   m    ..1

In the above equation, an additive technology spillover structure is assumed where by   the assumption that a firm s technological level is dependent on the sum of all firms  research and development investments is corrected by technology diffusion parameters denoted as (). According to literature, this is the method that is used to standardise modelling spillovers.

The technology level of an individual foreign firm denoted as Y is likewise given by
Y  X   (m   1)   M   2
In the event there no environmental policies hence no abatement, emission levels in all the firms will be identical. This is denoted as E. By denoting abatement in every firm as a and in each domestic firm be a, actual emissions are given by the formulae E  a in domestic firms and E  a in foreign firms.

The model assumes that the abatement costs for all firms are dependent both on the technology level as well as the level of abatement of the firm. For domestic firms, abatement costs are denoted as c (a, y). It is also assumed that the properties of the function c (a, y) include ca (0, y)  0, c (0, y)  0, and ca (1, y).

In this analysis, the researchers assume that each country s emissions are set via international agreement. Because each country has identical firms, the emission levels per firm are given as 1m and 1m of the exogenously emission levels that have been set for the domestic and foreign country respectively. Research and development investments price is normalised to one. The researchers however assume that research and domestic investments are subsidised by the domestic government by a rate denoted as  while the government abroad subsidises by .

An individual domestic firm chooses research and development investments (X) in order to minimize its total cost of productionoperation. Taking other firms  expenditures on RD as given and its abatement as given (a1m), the firm minimizes its cost by
C (a, Y)  (1- ) X        ..3

Regarding X, the term in equation 3 is net research and development expenditures. Technology level denoted as Y is given by equation 1. Since all domestic tend to solve similar problem, the values they choose will be the same at equilibrium, (Xx and Yy).

The first order condition is given by
  cy (a, y)  1-           .4
A domestic s technology level is given by y y (a, ). This is based on the above equation which implies that technology of this firm is determined only by a and .

At equilibrium, it was found that X   and Y  y for domestic firms (in the home country) while in the foreign country X   and Y y (Golomek  Hoel 2008 201).
By solving equation 1 and 2, it was found that the values for  and  at equilibrium are
  hy  ky  6
 hy  ky   7,
Where k  k  0 and (for where for m  m) h  0 (Golomek  Hoel 2008 201).

The constants in equations 6 and 7 imply that since foreign firms have similar problems and assuming that foreign subsidy remains constant, a firms optimal technology level is not altered. In the event a rise in domestic subsidy increases a domestics firms optimal technology level by lets say one unit, to support the new level, RD investment in the domestic firm must increase by h. since increase in technology tends to increase the technology level of other firms in foreign countries through spillover, whereas at the same time the optimal technological level of foreign firms has not changed, research and development in every foreign firm decreases. From equation 7, this reduction is given by k  0 (Golomek  Hoel 2008 201).

The researchers acknowledge that greenhouse gas emissions is harmful to the environment. The environmental damage costs incurred by each country are determined by the total emissions from the two countries denoted as (m (E  a)  m (E  a)). This model also acknowledges that a large country will suffer more than a smaller one from climatic changes. The model uses the number of firms in a country to represent its size. The marginal damage experienced by each firm is assumed to be the same in both countries and is denoted as d. The marginal cost of damage in the domestic country is will be md while that in the foreign country will be md. The total cost of environmental damage in the home country is given by md m (E _ a)  m (E  a) while that in the foreign country is given as md m (E  a)  m (E  a).

The researchers used this model to explain the firstbest and second -best quota agreements under two models namely the first-best model and the second-best model respectively.

The First-Best Model.
This model is used to evaluate the first-best social model which refers to the model whose outcome minimize total social costs which include the research and development expenditures as well as environmental costs and the total abatement costs. The optimal result will be characterized by equal research and development expenditures as well as abatement levels in all firms. Based on this and using the already defined equations, the first best optimum is given by minimizing the equation
(m  m) c (a, y)    d m (E   a)  (E   a)         .equation 8.

With respect to technology and abatement levels in the two countries, and subject to equation 6 and the fact that y - y, the condition for the first-order with respect to abatement is given by
Ca (a, y)  (m  m) d ..equation 9.

Marginal abatements should therefore be equalized throughout the firms and the common value should be equal to that obtained by summing the marginal environmental costs of the two countries (domestic and foreign).

First order condition regarding technology level is given by
-cy (a, y)  h  k  1   (m  m - 1)-1               equation 10.
This equation implies that when technology level in all firms is increased, a firm s marginal benefits of  increased technology (-cy (a, y)) should be equal to that firm s  marginal costs of increasing technology which is equal to h  K because all firms invest in research and development whose price has been set to 1.

The researchers had earlier suggested that one way of implementing the first-best solution is by imposing a common tax, denoted by ((m  m ) d) and setting technology subsidy that is common to all countries. Using equation 4, the technology subsidy in both countries is gotten by
F  1   (h  k)  1- 1  (m  m - 10-1             . equation 11.

From this equation, it can be deducted that increase in technology level in all firms results in constant marginal costs of increasing technology level in any of the of the firms. This constant is (h  K). This implication reflects linear structure that characterises technology spillover functions in equations 1 and 2 (Golomek  Hoel 2008 202).
The Second Best Model

This involves pure quota agreements in which the climate agreements are not characterised by research and development elements. In this model, the researchers assume that both member countries have agreed to an international climate agreement that spells out emission quotas distribution between countries. It is also assumed that this agreement is second best in that the signatory members determine the emission quotas amount allocated to each country such that the total social costs are minimized based on behavioural constraints on firms as well as governments.

Each country goes on to maximise on its individual utility after the agreeing on the emission quotas and the allocated number of quotas. Each country will determine its domestic subsidy on technology depending on the response of domestic firms to the subsidy and the agreed upon emission level (explained by equation 5). In setting the domestic subsidy on technology, each government considers that each of the domestic firms refuses to acknowledge that is own research and development has a spillover effect on the technology levels of other localdomestic firms. Likewise all countries consider the fact each country will refuse to acknowledge the research and development spillover effects to foreign firms.

For a particular amount of emission quotas (a particular abatement level, a, a country s choice of subsidy for technology,  corresponds to choosing technology level y (based on equation 5). For a particular abatement, the domestic country minimizes
m c (a, y)     equation 12

Regarding its own level of technology which is subject to technology restriction expressed in equation 6 and using the expression for technology subsidy given above, the first order condition is expressed as
-cy (a, y)  h .equation 13

The research and development marginal benefits when only the domestic spillovers are considered should correspond to the marginal costs of research and development investments expressed as (-cyh-1  1). Based on equation 4, the optimal level of technology in each country can be implemented using the subsides
Q  1  h for domestic firms and Q  1  h

It had previously been proved that h  h  0 as m  m. The largest country will therefore have the largest subsidy. This is attributed to the fact increased technology level in the particular country benefit more firms domestically. The researcher came up with the following prepositions based on the second-best module and the equations derived using the module.

The largest country will have the highest equilibrium technology subsidy (Golomek  Hoel 2008 203).
From discussion of equation 7 and by comparing equations 14 and 15 with equation 11, k and k are negative hence technology subsidy will be lower than in the first-best optimum in both countries.

The concept of Deregulation involves the simplification of government rules and regulations constraining the operation of market forces in the economy. Deregulation has been implemented by in most utility sectors in the United States. Electricity companies in particular have advocated and lobbied for deregulation in several states including Texas and California. The case for deregulation establishes that fewer and simpler regulations will lead to a raised level of competitiveness, improve productivity, efficiency and lower prices. (Sullivan,  Sheffrin, 2002). Instead as evidenced in the California Energy Crisis of 2000 and 2001, it has caused wildly volatile wholesale prices and undermined reliability of the electricity supply. The rising electricity prices and blackouts in California were in fact consequences of a poorly designed deregulation structure as well as market manipulation by vested interests.

In the spring of 2000, a series of blackouts hit California, cutting off power to 100,000 customers and plunging the city into darkness. During the crises the wholesale price of electricity suddenly rose five-fold. This jump in the price and the swell in demand following the power failure quadrupled the profits of the companies that generated electricity. Electricity trader Enron Corp was one of the biggest profiteers from the crises. A similar scenario occurred in 2000 and early 2001, when rolling blackouts affected more than a million Californians and spiked up prices.

In the aftermath of the crises it was discovered that it was a result of market manipulation by electricity companies who used existing loopholes in a partially deregulated industry to make profit at the cost of its customers.  Was the California debacle a lesson strong enough to deter all consequent attempts to decentralize electricity or was it a singular instance of a poorly designed deregulation structure which should be avoided in all future implementations of deregulating electricity. The answer to this can be found by analyzing how the partial de-regulation contributed to the California Energy Crises as follows
Californias deregulation experience began in 1996, when the states three dominant utilities Pacific Gas  Electric, San Diego Gas  Electric and Southern California Edison joined forces to campaign for a deregulated market. (Sweeney 2002) They proposed a strategy which involved partial deregulation.

Under this proposal the distribution and generation function would be separated by each company and construed as separate independent functions. Thus the industry would be divided into two distinct classifications electricity producers and electricity distributors. The Distribution function would continue to be regulated and subject to a price cap. However the producing function would be deregulated and not be subject to any kind of restrictions. The presumption was that partial deregulation would encourage competition among companies, increase energy options available to customers and lower prices.

However partial deregulation did not achieve the objective it was designed for as it did not completely free the market from all controls. This put the company engaged in distributing electricity in a tough situation. On one hand government regulations capped the price that energy distributors could charge. On the other hand deregulation of the market the freedom to increase the   cost of energy. The retail price cap which protected the  end user  from any price fluctuation created an inelastic demand curve in which demand was not responsive to price. Thus any hike in the cost of producing electricity did not affect the retail price paid by the end user. The artificial market structure did not allow the distributor to pass the higher prices on to consumers without approval from the public utilities commission.

Structure
This partial de-regulation procedure created a very different structure for the electricity industry. A fully deregulated environment would have attracted companies which competed against each other and help lower prices. But already lowered or capped prices discouraged companies from entering the industry and also did not support the development of competition in the industry at both the distributor level and the producer level. As a result the anticipated entry of new firms did not happen. Since new entrants did not enter the de-regulated industry and reduce the cost of producing electricity the prices charged to distributors by producers did not reduce.  Instead, with increasing demand for electricity, the producers of energy charged distributors more for electricity. The distributor could not pass this cost on to the consumer and this is what created the unique market structure that developed into one of the causes of the California crises

Conduct
Partial deregulation created an industrial structure which allowed electricity producers to manipulate markets to create price increases which would increase their profits. A lot of manipulative misconduct governed the electricity whole sale market as a result of the greed exhibited by electricity generating companies. In the existing market scenario electricity wholesale prices exceeded retail prices, end user demand remained unaffected, and utility distribution companies were forced to purchase electricity at a loss. This situation allowed independent producers acting out of greed to manipulate a price rise in the electricity market by withholding electricity generation. (Beder, 2003) When producers stopped generating electricity there was no supply in the market and this caused wholesale prices to rise steadily. Producers then capitalized on these prices by making huge profits. This in fact is what happened in the first series of blackouts which rocked California in the spring of 2000. At the time no regulatory body stepped forward to monitor and regulate this practice by electricity producers. As result this exercise happened two more times before the authorities noticed that the huge price increases in whole sale electricity were being caused artificially by the electricity producers themselves. In this particular industry collusion rather than competition characterized the conduct of electricity producers. Rather than working against each other to lower prices, they worked together to increase prices and capitalize on revenue. There were no established antitrust policies to regulate these activities and they went undetected for a long time.

Performance
Though one of the objectives of partial deregulation was to protect consumer welfare and enhance overall efficiency it failed to do so in the long run. Government had to pay from taxpayers funds to sustain the crisis caused as a result of the electricity shortage. Though the consumer was protected in the short run from incurring a hike in retail prices they still had to pay greedy energy companies tax payer dollars to secure electricity. Thus the retail price cap did not really work in the interests of the consumer. The partial de-regulation structure did not contribute to overall market efficiency because it still constrained the free functioning of supply and demand forces and did not encourage competition in the market. Instead r it fostered corrupt and manipulative practices and encouraged them to flourish
I feel that the major flaw of the deregulation scheme was that it implemented an incomplete eregulation system.  If the government had deregulated both the production and distribution function in the electricity industry I personally feel that it would have achieved its goal of increasing competition and lowering prices more effectively. I also feel that the government should have raised retail prices and abolished the cap after the initial crises in the spring of 2000 instead of justifying it as a freak occurrence. If the government had launched investigations after the initial power failure and taken more decisive actions perhaps the crises would not have repeated it later on. While setting up the partial deregulation system the Government also neglected the need to set up a preventive or watchdog body to monitor and deter market manipulations from occurring.

By creating a system in which utility distributors were forced to charge fixed prices, while electricity providers were free to raise prices the Government set up an industrial structure which was not well aligned to the market forces of supply and demand. Other state governments such as Pennsylvania have fared better in their deregulation venture because they have opted to deregulate both utilities and providers.

Conclusion
The California Energy Crises plays a significant role in defining deregulation practices in the American Energy markets. It offers several invaluable lessons to future proponents and State government who wish to adopt deregulation in their energy sectors. One clear lesson which can be drawn from the California Experience is that partial deregulation will not achieve the objectives of deregulation and therefore should be avoided. The second lesson is that governments should conduct extensive investigations as well as constantly monitor unfair or manipulative market practices that may develop as a result of the deregulation. Proponents of deregulation have emerged stronger and many States have developed successful deregulated energy sectors in aftermath of the California Crises

The article argues that although every body in the world agree with the argument that pollution of the environment is undesirable, in some cases pollution is beneficial. Pollution of the environment provides an opportunity cost such as pollution abatement. The article argues that the social marginal cost of pollution abatement is equal to social marginal benefit, hence pollution is optimal. Moreover, the level of pollution should be reduced to a level that provides lower opportunity cost. It is difficult to measure the benefit accrued from an environment with minimum pollution. It is difficult to quantify the health implications of polluted air or water. The relationship between carbon dioxide emission and global warming is a scientific speculation and there is no substantial information to gauge the expected environmental damage as a result of environmental pollution. It is also not easy to quantify the aesthetic pleasure associated with a cleaner environment.

Global warming as a consequence of greenhouse gases emission especially carbon dioxide has generated a great debate all over the world. The Kyoto Protocol of 1997 imposed strict measures to reduce these emissions. However, the United States was the only developed nation that opposed the treaty. The introduction of EPA in the same year, which restricted the emission of particulate matter, has attracted some debate. However, there is no evidence that the measures which are very costly will in any way be beneficial to the public. A debate on whether some amount of arsenic levels in water can be allowed has been very controversial. Some critics argue that it is very costly to implement strict policies to reduce the levels of arsenic in water while the supporters argue on the basis of health benefits associated with low arsenic levels in water (Economic Resource Center, Para 4).

Article Critique
The article criticizes the basic principles which form the foundation of quest for a cleaner environment. The article is arguably wrong in arguing that the benefits associated with cleaner environment are not measurable. The benefit that can result from a cleaner environment can be measured in terms of the adverse effects of environmental pollution. The author fails to first understand the basic objectives of stronger environmental standards. The stricter regulations that are aimed at reducing environmental pollution are based on the highest marginal benefit and the lowest overall cost. By maintaining a cleaner environment, the world economy gains more as compared to when the economy in one way benefits from high industrial production which result into higher cost due to the adverse effect of environmental pollution.

The optimal policy is therefore a policy that seeks to reduce the level of population. The article is therefore wrong in speculating that environmental pollution creates opportunity costs that are associated with abatement. The high output can in no way be compared to the impact to the environment. The high inputs are the short term benefits accrued from environmental pollution but the consequences will affect many generation. For example, the increase in carbon dioxide emissions since the industrial revolution has resulted into increased concentration of carbon dioxide in the atmosphere reaching over 300ppm. As a consequence, the world is faced with global warming which has reduced food production, melting of the ice sheets, change in climate and desertification. Scientists estimates that the effects of the climate change will be up to 1.34 percent or higher by mid 21 century. On the other hand, they estimate that if the stricter measures to reduce environmental pollution are implemented the benefits accrued will surpass the cost in the long run. The worlds benefit as a result of reduced environmental pollution has been estimated to be equivalent to over two hundred and seventy dollars.

The article is also wrong in underestimating the adverse effects of environmental pollution on public health. It is indisputable that the health conditions of the public are greatly affected by the prevailing climatic conditions. Disturbance of the ecosystem associated with environmental pollution has a negative effect on human health. Although it is difficult to assess the impact of pollution on human health, it is not wise to rule it as a factor like the article does. The extreme weather conditions such as floods and global warming are associated with death and increased cases of diseases. Increased cases of malaria, yellow fever, cholera and other vector borne diseases have been as a result of climate change. Poor quality of air has resulted to increased cases of respiratory diseases which is directly as a result of increased emissions of gases to the atmosphere (EPA, Para 1b). The article is also wrong in underestimating the cost associated with high concentration of arsenic in drinking water. Although the semi metallic element occurs naturally and can easily get into drinking water, high concentration as a result of pollution may be detrimental to the public health. The cost associated with implementation of strict policies to reduce its concentration are lower compared to the cost of short term and long term effects on the public health. The long term effect of the element includes different cancers. The effect of arsenic in drinking water is therefore difficult to assess in the short term but the costs of high concentration of arsenic will surpass the benefits in the long run.

In general, the article is wrong in arguing against the marginal benefit as opposed to the cost of effectively implementing strict environmental protection laws. Proper and effective implementation of environmental protection policies will aid in economic growth as opposed to the authors misconception. Lisa Jackson, a US Environment Protection Agency (EPA) administrator argues that pollution of environment poisons the economy, makes the consumer base weak and creates unfavorable atmosphere for investment. He argued that strict environmental policies will in no way affect the economy negatively because the laws will create the need for appropriate technology. The laws will encourage innovations and invention and therefore result in minimal reduction in out put at the long run. Pollution in the last three decades has resulted into very obvious impacts that do not require scientific analysis. For example, acid rains and lead poisoning. Jackson argues that reducing the six most dangerous gas pollutant by fifty four percent over the last thirty years has not affected the gross domestic product which has grown with up to one hundred and twenty six percent during the same period. The article therefore does not put into account the economic benefits that results from innovation brought about by strict laws. The new innovation will lead to production of cheaper and environmental friendly sources of energy. Innovation has been referred to as a sweet spot by those who support stronger pollution measures, where environmental and economic interests of the world meet.

Analyzing the business economic environment
A business Environment is a set of Political, Economic, Social and Technological (PEST) factors that are not in a control and influence of the Businesses but has all sorts of Impact on them  (Kotelnikov). Business environment is classified into three major categories Internal Environment, Operational environment and the external environment. The Internal and the operational environment are created by the enterprise itself (Kotelnikov).
 
Now referring to one of the most important external factors that is The Economic dimension of Environment in a business (Rajput Brotherhood). It refers to the aggregate of the nature of the economic system of a country, structured and the detailed analysis of the economy to economic policies of the government, the organization of the capitalist market, the nature of the factors best utilization, business cycles, the socio-economic infrastructure etc (Kotelnikov). A successful Entrepreneur Visualizes all those external factors that directly affect the business and rectify its market situation and tries to Increase the productivity (Maximum output with Minimal Cost incurred).

Analyzing Economic Resources
In economics goods are classified as Tangible products like food items, cars, televisions, Money, tables etc and the services include all Intangible stuff like education, Insurance and most importantly tourism, mentoring etc. One of the major methodologies regarding all economic resources is that they are Scarce (Or limited) in supply (Riley, 2006). All tangible resources specifically are scarce like oil, coal, machines, trained Humans etc and as there is a shortage of it they have a price in order to have its value and these scarce resources would not be utilized by every second person and go out of resources earlier than expected. As budgets are limited too that are the cash that a person has in hisher pocket people are forced to make a choice when buying or having a desire to utilize the resources, hence they the thing that they choose become their asset and the thing left out in a choice becomes its Opportunity Cost(Next best alternative Forgone)  (Riley, 2006). Economics has now categorized the economic resources that are used to produce such goods and services into four major parts that are following

Land
Land does not include a fallow or an unproductive place but it land in economics refers to all those natural physical resources present on earth (Riley, 2006). In other words it is said to be all gifts of nature like Minerals, fisheries, oil fields etc. Taking an example of Mining, mining is a process to dig coal out of the earth. That part of earth is a fertile farm land that is exploited in order to have coal with suitable climatic conditions for work and that nature or product to grow. Some countries are gifted with richly endowed natural resources and then specialize themselves with the extraction and production of such resources. The development of the North Sea oil and gas in Britain and Norway is one of the popular examples of Land. Countries that lack in the presence of natural resources heavily depend on imports in order to fulfill their need (Riley, 2006).

Labor
It is the Human input that contributes mainly during the production processing stage. Though its a human input and theres a quotation about the humans that All fingers of a hand are not of the same size hence there is different output produced with different personnel. Main reason for this to occur is specialization, education, experiences and natural instincts in people that differ from one another (Riley, 2006). Hence the size and quality of a labor force is a major contention for the countries to grow economically because as everyone knows the better the output be, the more value will that output gain as compared to the others. Some of the examples of the Labour are semi-skilled labour, unskilled labour, skilled and Professional Labour (Specialized).

Capital
Capital for an economist is not the amount of investment made by an individual in a business in monetary terms but it is an investment in capital goods (man made resources) that are used to make other consumer goods and services in future (Riley, 2006). Capital is divided into two more parts that are fixed capital and working capital. Fixed capital includes machines, plant and equipments, new technologies and other buildings. Working capital refers to finished or semi finished goods that are to be consumed or are further processed to be made finished consumer goods. In order to improve the productivity of labour new technologies are introduced with latest machineries that are the said to be capital inputs and it also includes Infrastructure which is an essential element of economic system as infrastructure includes roads, railways, technology, telecommunications e.g. cables and satellites to enable web process and docks etc.

Enterprise
An entrepreneur manages, innovates with a use of all the above factors of production in order to produce an output in a way that all resources are effectively and efficiently utilized to have a maximum productivity in order to earn profits as they are willing to assume to all emotional, economical, financial and psychological risks associated with organizing for production and operating a business  (Riley, 2006).

Economic System
An economic system is a mixture of production, consumption exchange and distribution of goods and services of an economy. It is composed of people and institutions, including their relationships to more productive resources, such as convention of a property. Modern day economic systems include free market (Capitalist system), planned economy (socialist systems) and mixed economies. Free market economy is a producer and consumer based economy, that is there are private investors in the market that produce goods and services in a market and as theres consumer sovereignty, hence, the producers try to produce more of the goods that are recommended by the consumers. United Kingdom is a major developed capitalist economy with the standings of sixth largest in terms of GDP and seventh largest in purchasing power parity in the world (2008-2009 estimation). Since the recession has adversely affected the whole world, and the same way it affected United Kingdom, so, it has forced big firms like Cadbury to be taken over by other foreign firms with Kraft being the highest bidders for Cadbury (one of the biggest firms in UK) in 2009. The government had great concerns with its economy and also tried to nationalize some of the firms to turn it into a mixed Economy where both, market and planned, economies take place but it failed and now UK is up to the task with a free market economy to boost up their economy. There are a number of investors with in the market as well as foreign markets though it has been history that UK companies have never been taken over or merged by foreign investors and the foreign investments had been previously termed as closed but the recession has forced them to open up their market for the foreign investments to increase number of companies, more brand names to exist, more productions to occur in the market and build up their economy up to the mark that it would be as it was before the time of world economic recession.

Market Structure
Market structure is a way how market how number of firms effect in every sector of a market. There are four types of market structures. One of them is perfect competition in which there are numerous firms producing a product in a particular sector of a market. Here the competition is stringent and the change in price of one firm greatly affects its competitors. In this sort of structure there are NO barriers to entry or exit and normally firms use to enter into competition gain experience and back out but the problem is that it focuses a bit too much on a certain product and it sometimes turn out to be monotonous for the consumers but the quality that the firms provide is very high as compared to the other structures. Second is Monopoly, where there is just one firm in a particular sector producing a product and there are artificial barriers to entry and exit. Artificial barriers are those barriers that a firms reputation and strength builds up in the market. As there is only one firm producing a product it is very tough for the other firms to enter and gain the same amount of consumers. In this type of structure the quality provided most of times is very low by the firms as there is no competition and they know that consumers have no other option but to buy their product but firms in this sort of structure mostly keep high prices and can keep the quality high in order to keep their reputation up to the mark in the market and capture the market further by improving and expanding further. Third is monopolistic competition that is an imperfect competition that is theres a competition between differentiated products. Firms usually behave like monopolies in the short term, but in the long run other firms enter the market and gradually turn it into a perfectly competitive market and no business has a total control over the market price and consumers perceive that there are non price differences among the competitors products with few barriers to entry and exit. In the short run they have the same benefits and constraints as the monopoly market has and in the long run they equate perfect competition with the only difference in the characteristic of Non price competition.

In UK every sector includes perfect competition like the industry and the automobile sector and only the mobile sector had a monopoly but now many competitors have entered the market and switched now to perfect competition.

Government Intervention
Government intervention in UK has now become a significant issue for the people of UK. As many economists measure rivalry by calculating a concentration ratio in the supermarket sector Tesco that used to control almost one third of the UKs grocery market, people had great concerns and wanted government intervention to intervene and investigate if the tactics of Tesco in capturing the market were legal (Socyberty, 2007). Government theoretically has the authority of intervening and forcing Tesco to sell off major stores and restrict growth into other areas but practically it has become impossible for the government to do that because Tesco is a powerful company and are doing NO harm all together to the economy of UK, hence, they are not stopped from creating the barriers in the market themselves and with small foreign companies are benefited too with collaboration with Tesco (Socyberty, 2007). UK has relatively open economy and the government has little intervention with larger mergers or acquisitions involving UK supermarkets.

Inflation
United Kingdom has three ways of measuring inflation but the method that UK government gives most preference is Consumer Price Index (CPI). This has replaced Retail Price Index (RPI). The estimations from both the methods give different values due to many reasons. Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of goods and services of UK (BBC News, 2007). Though the indexes used to calculate both are similar but each month thousands of prices for a selected goods and services are analyzed to check on any fluctuation. Some goods and services carry higher weighting that reflect the fact that people spend more on some items than others.

Every year the make up of the basket of goods and services and the weightings assigned to them are revised to take changes of spending patterns into account. For example now days people have intended to spend more on electrical goods, travel and leisure, while the proportion they have spent on necessity items such as food has fallen. CPI is often criticized as an exercise in official self-delusion of excluding most housing costs and giving lower Inflation rates. In 2008 CPI was up 3 from January to April, the RPI was up with 4.2 (BBC News, 2007). Alarmingly the CPI rose in April alone with 0.84, equivalent to an annual rate of 10 (BBC News, 2007). The RPI rose 0.925 in April with an annual rate of 11.1 (BBC News, 2007). On all measures, rise in energy bills and food prices were driving inflation higher. Currently the official measures do not reflect reality for hard pressed families, unofficial indices have been deprived. For years now, prices of computer and clothing have been held down by intense competition. That has kept total inflation of UK low - but now this is being swept aside by the tide of increases in oil and other raw materials.

Unemployment
The Unemployment refers to the number of people who are sitting back home not working anywhere and those people who are actively seeking employment. There are four types of unemployment Cyclical, seasonal, frictional and structural unemployment. Seasonal unemployment is for those people who work in the firms that produce seasonal products and remain unemployed rest of the year. The type of unemployment that exists because a job search takes time is sometimes referred to as frictional unemployment. A Persistent mismatch between labour demand and supply arising from e.g. shortage of skilled labour relative to available jobs or unbalanced growth in labour demand across regions or industries is a structural unemployment. In UK during 2009 the number of people claiming jobseekers allowance increased by a relatively small number of 23,800 in June to a massive 1.56 million (Seager, 2009). Not only that Unemployment shot up by a record 281,000 in the three months to may, with a jobless rate topping 10 in one region for the first time in this recession (Seager, 2009). This rise has taken jobless to 2.38 million, the highest level since 14 Years (Seager, 2009). Youth unemployment jumped to a 166 year high of 726,000 after a quarterly rise 95,000 the biggest on record and the number of people deprived of work for longer than 12 months rose by 46000 to 528000 the highest since 1998 (Seager, 2009).

Absolute and Comparative Advantage
Having absolute advantage over other country in producing a product means that a country is having an advantage in producing a product by utilizing lesser number of resources and a more number of outputs as compared to other. Having comparative advantage means that lesser resources are sacrificed in order to make that product or lesser time consumed. E.g. Suppose there are only two countries in the world, UK and US, and they are able to produce only two goods, wheat and cloth, using only one factor of production Labour. Each country is endowed with 10 units of labour i.e each has 10 workers. It all depends on how productive the two countries are in producing certain goods. This can be measured in two ways, wither by labour productivity (defined as output per labour) or by unit labour requirements (defined as units per labour per unit of output). One is just the reciprocal of the other.

Now the unit labour requirements are said to be For US Food (hrlb) 0.01 and cloth (hrlb) 0.02 and for Uk food is 0.02 (hryd) and cloth is 0.01 (hryd)  (Deardorff, 2003). Now we can clearly see that US requires 0.01 hours of labour to produce 1 pound of food, while UK requires twice that much. The corresponding labour productivities are 100 pounds of food per hour of labour in US and 50 pounds per hour in the UK. As far as cloth is concerned the numbers say that production of a yard of cloth requires 0.02 hours of labour in US and only 0.01 hours of labour in UK (Deardorff, 2003). So that productivities are therefore 50 yards of cloth per hour in the US and 100 yards of cloth per hour in UK (Deardorff, 2003). Now we can analyze easily that US labour is more productive in producing food than UK and UK labour has an edge in producing a cloth. In this case we say that US has an absolute advantage over UK in Food and UK has it in producing a Cloth (Deardorff, 2003). Now the countries can either produce completely the same product in which they have an absolute edge over the other or they can go with producing both the goods if they have a comparative advantage over the other in the production of cloth or food.

Terms Of trade
Terms of trade are an important aspect for a country as they tell the relative prices of a countrys imports and exports. The exports are the goods that are being sent to the foreign countries and the imports are the goods that are borrowed from the foreign countries. The balance of trade depends on exports and imports and countries usually find it out annually to check if their balance of trade gives surplus (ExportsImports) or deficit (exportsimports). For UK the Exports in 2008 were 442.2 billion and imports were 621.4billion giving a net deficit to the balance of trade of 179.2 billion (BBC News, 2007). The overall Gross Domestic Product GDP (the products that are made with in the country) in 2008 was 2.674 trillion with a rise in GDP growth in the fourth quarter of 2009 of 0.3 and GDP per capita income in 2008 was 43,785 (BBC News, 2007). Inflation in the final quarter of 2009 was 5.7 and unemployment was 7.8. UK being a popular country has ruled many countries throughout the previous centuries hence they have no trade barriers with any country but in order to block some of the imports and decrease their trade Deficit UK government has imposed Tariffs(amount of tax added to increase a products price) to discourage users from using the imported goods and plan to settle their balance of payments as well by increasing more of the intangible exports to various countries. Bank rate changes in march 2009 were 0.5 (BBC News, 2007). The exchange rates at the start of 2010 are pretty much good as compared to 1 pound sterling an American is 1.4957 better than the previous quarter and Euro is 1.10327 worse than the previous quarter as far as UK is concerned (BBC News, 2007). UK government hopes to have a better 2010 as far as its economy is concerned and hope that all deficits are turned into Surpluses.

Gross domestic product (GDP) is the market value of final goods and services within a country in the current fiscal period. It can be measured in three ways the product approach, income approach, and expenditure approach. The product approach sums the output of all classes of products within a country. The expenditure approach works on the notion that all products must be bought by somebody therefore, the total goods and services purchased in an economy is equal to the GDP. In general, via the expenditure approach, GDP  C(Y, S)  I (r)  Government Spending (R, S)  X (trade surplus or deficit).

Consumption (C) is directly related to GDP the higher the consumption, the higher is the GDP. The same case can be said of investment (I) government spending (G) and net exports. Income (Y) is directly related to consumption (therefore to GDP) savings (S) is inversely related to GDP. The higher the savings, the lower is the marginal propensity to consume, thus, the lower is the GDP. Interest rate is inversely related to investment. The higher is the interest rate the lower is the level of investment. If actual government savings is higher than projected savings, then the lower is the GDP. Orthodox economic theory holds that consumption, investment, government spending are contributors to economic growth. However, the actual relationship between savings and investment has had not been thoroughly examine prior to the 1930s.

Modern economic theory holds that there is an inverse relationship between savings and investment. Before discussing the relationship between the two concepts, it may be prudent to present formal definitions. Savings is defined as disposable income minus personal consumption (Y  C). In other words, savings is the part of the income that is not consumed by immediately purchasing goods and services. Investment, on the other hand, is the commitment of capital to purchase financial instruments or assets in order to gain returns in the form of money, capital, or expropriated value. On the demand side, an increase in savings potential leads to a fall in consumption and therefore a fall in GDP (measured through the spending multiplier). Now, aggregate demand shifts leftward (lower demand schedule). Firms are induced to decrease investment level because of the fall in AD (aggregate demand). The AS curve also shifts leftward. The new equilibrium point, say, Y1 is lower than the previous equilibrium point, say Y. Suppose that interest rate is included in the analysis. An increase in interest rate induces individuals to increase savings. Individuals place their money in financial institutions, expecting higher returns. A higher interest rate decreases investment levels in the economy. Firms will not increase their investment schedules in the present as interest rates are high. If interest rates falls, then individual consumers will increase their consumption schedules and savings will fall. Firms and investors will borrow capital from financial institutions because the net interest cost is lower in the current period. Note that in general, savings and investment are inversely related.

What is the implication of this finding on current saving behavior Individuals do not save simply there is an expected high return in the future. Saving behavior is essentially based on speculative and rational motives. If there is an expected deflation in the future, then saving is necessary (increased purchasing power). If there is an expected inflation in the future, then saving is irrational (lower purchasing power). Savings is also dependent on income. According to the income hypothesis, as income increases, savings also increases. In short, there is a positive relationship between savings and incomes.

According to economists, savings potential in the United States increased over the last 30 years, after income levels increased 10 annually. Now, if there is an expected monetary expansion, individuals will increase spending in the present (because of higher purchasing power). Firms will increase their investment schedules because of the expected expansion (lower interest rate). If there is an expected contraction, individuals will increase their saving potential firms will decrease their investment schedules.

In the 1930s, there is a misconception that savings alone leads to economic recovery. This statement is both true and false. Savings may be considered an initial source of investment. Savings may also be considered a deterrent to investment. If the economy is at its potential, savings can actually be converted to investment in the form of capital. If the economy is in the recovery stage, savings is a deterrent to growth as far as overall investment is concerned. In the United States, increased government savings during the Clinton administration resulted to increased credit ratings. The increase in credit ratings was a signal that the United States was a good country for investment.

The relationship between savings and investment is clear-cut. However, in some countries, savings is positively correlated with investment (like Japan, Taiwan, and Singapore). Perhaps, there is a way around this dilemma. It may be possible to increase savings level and at the same time, increase investment. The net effect may be a higher or lower GDP. In any case, however, the conceptual relationship between savings and investment is not empirically absolute.

The history of the development of capitalism has always been discussed in the context of its economic motivations, and as well as the tremendous social upheaval that resulted from the birth into this new kind of economic capitalism. However, the book The Passions and the Interests Political Arguments for Capitalism before its Triumph by Albert Hirschman challenges such view and puts a new light into the picture. While works of Marx focused on how the development of capitalism has completely changed the social base of an older economic system (feudalism), and gave birth to new contending social classes, with one dominating and powerful and the other exploited and alienated and while Weber focused on the development of the protestant ethic, in which the belief in personal salvation also justified the correctness in pursuing material gain and self interest Hirschman puts into a light the different commentaries of philosophers regarding their political arguments on the development of capitalism, arguing that capitalism, along with its unique values and ethics, have in fact arisen mainly from political motives. In addition, Hirschman also argues that the development of the capitalist ethic was pushed by political motives, and developed gradually through time. According to Hirschman, the post Renaissance concern was mainly involved with the nature of man, in which moral guidelines, as well as the use of religious teaching s and perceptions, can in fact not serve as a guide in limiting or restraining the destructive passions of men(Hirschman 15). In this case, Hirschman further argues that it is the development of capitalism that has in fact been able to secure social order and harmony in society, one big reason why it has triumphed as a new economic system.

Hirschman actually noted that at first, the desire for personal economic wealth, including the pursuit of self interest and individual material gain, was actually treated as a very serious sin, especially in the Christian-oriented medieval society. In this case, Hirschman actually tries to solve the quizzical puzzle why at the onset of the development of capitalism, the values of self interest and the pursuit of individual material gain, have been accepted as the norm in society. According to Hirschman, the answer behind this fact is actually mainly political reasons.

The work of Hirschman traced his change from the post-Renaissance question, the nature of man, with particular interest on mans destructive nature. According to Hirschman, moral and religious explanations have failed to serve as an effective guide to limit such destructive natures of men, and that there where three main solutions to this problem that have arisen. Hirschman noted the first solution, which is the sovereign of Hobbes. According to Hirschman, Hobbes argued for a social contract, wherein people would both agree to a sovereign which has power over society to enforce social order and avoid chaos. The second solution, Hirschman noted, was the medium of civilization, which was actually expounded by the works of Vico. Hirschman noted that Vico actually argued for social institutions, such as the state, to be mediums of civilization, wherein men will actually learn and adopt how to behave and act in a civilized manner, which was essential in maintaining social order and harmony in society.

The last solution to this problem was the thesis of countervailing passions. This thesis was noted by Hirschman in the works of Hume, Spinoza, and even Bacon, in which the love of gain, a value that is before seen as sinful, can in fact serve as a very important way in countervailing the destructive passions that men are consisted of. In this case, then, Hirschman actually argues that capitalism, with its values of self gain, the prioritization of self interest, and the seek for individual material benefits was an important measure in countervailing the destructive nature of men, and in this case acts as an important part in maintaining social order. Hirschman in this case also noted the idea of Adam Smith, wherein the laissez faire economy, which consists of people pursuing their own self interest, will naturally lead into social harmony and social order, with the free market acting as a self regulating mechanism. In this case Hirschman noted that capitalism is key in ensuring stability and social order and harmony in a society. According to Hirschman, the idea of Smith actually showed that it undercut(s) the idea that passion can be pitted against passioninterests against passion.

In addition, Hirschman also argues that the political consequences of the development of capitalism have in fact proven that it leads to social order and social stability. Hirschman also noted in this case the Smithian categorization of doux commerce, in which the association of men to commerce, in their individual pursuit of self interest, highlights the development of human reducing their passions, including their destructive passions, to self interest, making them contribute significantly to social order. Hirschman concluded that this part of intellectual history, (Hirschman 69) must be properly put into light, so that the dominant violent and greedy economic origins of capitalism might be seen in new ways, and that the political arguments for capitalism might also be put into proper attention and significance. He said that this will be vital in making us know this non-articulated basic theory of capitalism.

I think that this is an excellent work for capitalism, especially due to the fact that the political argument highlighted in the book was surely needed to be put into the light for discussions regarding the development of capitalism. I appreciate the way that Hirschman actually attempted to look at the philosophical roots of the political motivations regarding the case for capitalism, as well as the need for social order which was contextualized in the often socially unstable period of the medieval ages. In addition, I also think that the attempt by Hirschman to bring the debate regarding the developments of capitalism was successful, for it gave a new light on how to interpret the social upheavals that where evident in the development of capitalism not just as an economic system, but a social system. Finally, I think that this work will surely bring more insights aside from the ones presented by Marx and Weber in their discussion of capitalism.

Among the giants in mainstream sociological theory are the three great continental sociologists Karl Marx, Emile Durkheim, and Max Weber. And one of the most common themes of these three sociological giants is their critical view on capitalism. However, this critical view is responded by the book of Albert Hirschman entitled The Passions and the Interests Political Arguments for Capitalism before its Triumph.

The book of Hirschman attempts to challenge the prevailing notions regarding capitalism, especially in its development, as expounded in the writings of Marx and Weber. In Marxs study of capitalism, alienation, exploitation, class struggle, and the tremendous social impacts of the shift from pre-capitalist economic formations to the development of the capitalism was emphasized. Meanwhile, Weber emphasized the role of the protestant ethics as the basis for greed and self interest which were vital to the development of capitalism. These interpretations are what Hirschman challenges in his book. In the first part of the book, Hirschman actually challenged the Weberian concept on the development of the protestant ethic, arguing that it developed in a gradual process through time. Hirschman argues that the capitalist ethic was resulted by the search of a medium that would secure social order. According to Hirschman, moralizing philosophy and religious precept could no longer be trusted with restraining the destructive of men, and that major solutions to the problem of the nature of men at that time involved the repressive sovereign of Hobbes social contract, the civilizing medium that was envisioned by Vico, and the thesis of countervailing passion (Hirschman 15). The work of Hirschman discussed the idea presented by Hobbes, in which a powerful sovereign who has the power to repress and restrict people was established as a social contract, especially to avoid chaos and maintain social order. He also discussed Vicos idea in which it is necessary for the state to become a civilizing medium to which civilized manner and conduct will be embedded to the people to ensure social order in society.

However, Hirschman emphasized on the third solution to social order, that is, the idea of the countervailing thesis. What was this all about Hirschman argues that the ethic of capitalism, especially in the values related to the pursuit of self interest and an emphasis on individual material gain, played an essential part in countervailing the destructive nature and potential of humans, which includes lust, envy, pride, and most especially, the ambition of great power. In this case, Hirschman noted the sovereigns in the medieval time who were involved in the lust of power, which led to abuse of the state. In this case Hirschman also expounded why the ethics of capitalism served to check this situation and ensure social order, visiting the ideas of the philosophers Bacon, Spinoza and Hume. According to Hirschman, these different philosophers actually argued that these destructive passions of men can actually be counter veiled into self interest, into the love of gain. It is through this idea that the ethics of capitalism naturally came out as a result of the clamour to address problems of social order and the abuse of the state, for it is through the pursuit of personal gain and self interest that men can go away with their destructive tendencies, which will surely result to a more orderly society. Such idea, argued Hirschman, was contrary to the often destructive and exploitative nature of the development of capitalism. This is in contrast to the views of Weber in the development of the capitalist ethic.

This argument followed up in the second main part of the book, wherein the political benefits from the development of this capitalist ethic was expounded by Hirschman. Hirschman focused on the point that in fact, the development of capitalism, including the development of commerce which harboured the peoples interest to seek for individual material gain, was instrumental in establishing a more stable and orderly society, as well as in being able to serve as an institutional check to the powerful sovereign state. Aside from citing the democratic political developments that was present in the shift from the medieval times to the development of capitalism, Hirschman also tries to follow the ideas of the philosophers Hume, Hobbes, Montesquieu, Mill and Stuart, in which the development of commerce, which characterized capitalism, was grounded not mainly in an economic rationale as expounded by Marx, but in a political rationale. He noted that Montesquieu believed in the role of commerce to develop institutions which will act as a check to the power of the state (arbitrage), while also noting Smiths argument that the pursuit of material gain will eventually harmonize society and its individual members (the laissez faire market). According to Hirschman, Smiths idea of men pursuing their own self-interest and harmonizing mens actions in society actually undercut the idea that passion can be cut against passion, or the interest against the passion, and that this situation leads to a narrowing of the field of inquiry (Hirschman 110, 112). In the final parts of the book, Hirschman actually argues that such political ideas which were essential in the eventual triumph of the capitalist system was not properly focused upon and given appropriate attention, and that passages in their writing that have not received much attention or scrutiny must in fact be paid attention to (Hirschman 70).

In my opinion, I think that the points being forwarded in the book of Hirschman is important, especially in bringing into light the possible political motivations which have contributed to the development of capitalism. This book has also made a great job in being able to put into light the political passages of the said philosophers arguing for capitalism. However, I also think that the downside of this book included the overall dejection of the important economic motives of capitalism, in as if its economic motives where just second to the political motivations for the development of capitalism. I think that certain sectors in society always has economic underpinnings in ensuring social order, and that the very basis of social order might even involve the protection of economic wealth, and the pursuit of it. I also think that in fact, political power is also motivated by maintaining and further acquiring material wealth, which is downplayed significantly in his work.