30-Second Economics E-Book

Donald Marron

• Herausgeber: Icon Books
• Kategorie: Fachliteratur
• Serie: 30-Second
• Sprache: Englisch

Seitenzahl: 145

Veröffentlichungsjahr: 2011

Beschreibung

Keynesian Economics, Free Market Capitalism, Monetarism, Game Theory and the Invisible Hand. Sure, you know what they mean. That is, you've certainly heard of them. But do you know enough about these economic theories to join a dinner party debate or dazzle the bar with your financial knowledge? 30 Second Economics takes the top 50 economic theories, and explains them to the general reader in half a minute, using nothing more than two pages, 300 words and one picture. Economics will suddenly seem a lot more fun than the economy, and make a lot more sense, and along the way you'll meet founding fathers of modern economics such as Adam Smith, David Ricardo and Alfred Marshall. From Marxism to Mercantilism, plus everything in between, this is the ultimate 'crash' course in economic theory.

Leseprobe

30-SECOND

ECONOMICS

The 50 most thought-provoking economic theories, each explained in half a minute

Editor

Donald Marron

Contributors

Adam Fishwick

Christakis Georgiou

Katie Huston

Aurelie Marechal

Published in the UK in 2011 by

Icon Books Ltd

Omnibus Business Centre

39–41 North Road, London N7 9DP

email: [email protected]

www.iconbooks.co.uk

© 2010 by Ivy Press Limited

The editor and contributors have asserted their moral rights.

No part of this book may be reproduced in any form, or by any means, without prior permission in writing from the publisher.

This book was conceived,

designed, and produced by

Ivy Press

210 High Street, Lewes

East Sussex, BN7 2NS, UK

www.ivypress.co.uk

Creative Director: Peter Bridgewater

Publisher: Jason Hook

Editorial Director: Caroline Earle

Art Director: Michael Whitehead

Designer: Ginny Zeal

Concept Design: Linda Becker

Illustrator: Ivan Hissey

Profiles and Glossaries Text:

Nic Compton

Picture Researcher: Katie Greenwood

Digital Assistant: Emily Owen

Digital ISBN: 9781848314498

CONTENTS

Introduction

Schools of Thought

GLOSSARY

Classical

Marxism

Keynesian economics (positive)

profile: Friedrich von Hayek

Neoclassical synthesis

Austrian school

Economic Systems

GLOSSARY

Free market capitalism

Market socialism

profile: Milton Friedman

Central planning

Mercantilism

Shock therapy

The Washington consensus

Economic Cycles

GLOSSARY

Keynesian economics (normative)

Monetarism

profile: John Maynard Keynes

The Phillips curve

Permanent income hypothesis

Rational expectations

Time consistency

Financial accelerator

Financial instability hypothesis

Lender of last resort

Growth

GLOSSARY

Neoclassical growth

New growth theory

profile: Thomas Malthus

Creative destruction

Human capital

The rule of law

Limits to growth

Global Trade

GLOSSARY

Comparative advantage

Heckscher-Ohlin trade model

New trade theory

profile: David Ricardo

Optimal currency area

The impossible trinity

Purchasing power parity

Choice

GLOSSARY

Rational choice

Game theory

profile: Gary Becker

Public choice

Expected utility theory

Prospect theory

Tax & Spend Policies

GLOSSARY

Tax incidence

Excess burden

profile: Alfred Marshall

Supply-side economics

Crowding out

Markets

GLOSSARY

The invisible hand

Marginalism

profile: Adam Smith

The tragedy of the commons

Property rights

Polluter pays principle

Adverse selection

Moral hazard

Efficient market hypothesis

Rent seeking

Resources

Index

Acknowledgments

INTRODUCTION

Donald Marron

Economics wants to be the physics of the social sciences. Physicists examine how fundamental natural forces shape everything from the movements of subatomic particles to the orbits of heavenly bodies. Economists, in turn, study how fundamental social forces explain everything from the price of bread to the wealth disparity between the United States and Zimbabwe.

The theme of this book is that economists have been succeeding, but economics will never be physics. Over the past two centuries, economists have developed a host of theories – many described in the pages that follow – that explain how markets work and sometimes fail, how consumers, workers, firms and politicians make decisions, and why economies grow or stagnate.

Those theories have their limitations, however, because humans are less predictable than particles and planets. Economies are complex (more like ecosystems) and so our understanding of them sometimes falls short; our near-universal failure to foresee the worst financial and economic crisis in eight decades is a sorry but perfect case in point.

The science of economics is thus still a work in progress; and it may end up resembling biology more than it does physics. But economics isn’t just a science. Many economists, myself included, believe that our insights into how the world works have implications for how the world should work in general. As a result, the scientific theories of economics blur into political theories of the good society.

Both sets of theories – the scientific and the political – can have great impact. As John Maynard Keynes once put it: ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’

Many of the top fifty theories in economics can indeed be traced to economists who are defunct, at least in the biological sense (including Keynes himself). But the theories themselves remain vibrant. As Keynes warns, however, important theories are not always right. So mixed among the most important theories you will find a few that are almost certainly wrong, despite their influence. See if you can find them.

Each 30-second theory is presented alongside a 3-second crash for those in a particular hurry, in addition there is a 3-minute boom for those who want to delve a little deeper. The first group of economic theories, Schools of Thought, examines the large-scale forces – markets, inertia, history – that determine how the macroeconomy actually works. Economic Systems then presents theories of how economies should be structured – with greater and lesser faith in markets – and how struggling economies can improve. In Economic Cycles, we look at the factors that drive economic ups and downs and the possible role of government in smoothing them. Growth examines how the proper blend of capital, labour, resources, ideas and social institutions can foster prosperity. Global Trade looks internationally, explaining how products and capital flow around the world. Choice peers into our heads in order to see how individuals make decisions in the marketplace, in the home, and in the public sphere. Tax & Spend Policies examines the sometimes surprising effects of government tax and spending policies. Markets, finally, documents the remarkable power of market forces, from the miracle of the invisible hand to the tragedy of the commons. Along the way, each section presents a quick profile of some of the most important economists, from Adam Smith to John Maynard Keynes to Milton Friedman.

How should you enjoy this book? Well, the individual essays are great for sampling but, as with potato crisps, you probably won’t be able to stop with just one theory. Enjoy.

SCHOOLS OF THOUGHT

SCHOOLS OF THOUGHT

GLOSSARY

aggregate demand The total demand for goods and services within an economy at a certain time. This can be influenced by government either through monetary policy (that is controlling the amount of money in the economy) and/or fiscal policy (that is increasing/decreasing the amount of government expenditure).

exchange value The theoretical value for which a product or service can be traded—as opposed to the actual value for which it is traded, which is its price. Exchange value can be described as the quantitative value of a commodity, as opposed to use value, which is its qualitative value.

fiscal policy The way in which government uses public spending and taxation to influence a country’s economic performance. Thus, a government may choose to tax more and invest in social security and public works, such as roads and hospitals, to create employment, and to increase salaries. Or it may choose to reduce public spending in order to reduce taxation, so that people have more money to spend in the first place. It’s swings and roundabouts!

Keynesianism A school of thought created by the British economist John Maynard Keynes in the 1930s. Unlike most economists of the day, who believed that the market mechanism produces the most efficient outcome, Keynes believed that the market needed to be tempered by government intervention. He advocated the use of countercyclical fiscal policies, whereby the government pumps money into the economy when times are hard, but reduces spending when times are good.

laissez-faire An economic approach that advocates minimum government intervention (from the French, meaning “let it be”). Proponents of this approach believe that the market will achieve the most efficient outcome and that government regulations distort the reality of the market, leading to inefficiency.

monetary policy The way in which government uses the supply of money—or, more specifically, interest rates—to influence a country’s economic performance. Generally, low interest rates tend to increase the amount of money in circulation, which can help stimulate an economy during a recession; high interest rates tend to reduce the supply of money and can be used to reduce inflation.

rational expectations The assumption, used in many economic models, that people or companies make decisions by rationally evaluating the likelihood of possible future outcomes and the benefits or costs of those outcomes. This theory is useful, but can be misleading since people are not always rational or forward-looking when they make decisions.

stimulus policy The use of government policy to reinvigorate a flagging economy. This typically takes the form of spending on public works and/or tax breaks. Critics argue that this distorts the market and disadvantages private enterprise.

supply and demand This is the fundamental model of a market economy. It stipulates that the greater the demand for a product, the higher its price will be, until supply outstrips demand. At this point, the price will fall until an equilibrium is achieved between quantity and price.

use value The utility of a commodity within society. This is measured by the need or desire for that object. A classic example is a diamond, which, as an object, is of little real use, and yet its use value in most modern societies is nevertheless very high. Use value can be described as the qualitative value of a commodity, as opposed to exchange value, which is its quantitative value.

CLASSICAL

the 30-second theory

Writing in the 18th century, Adam Smith argued that the natural functioning of the market would always ensure stability and prosperity. For Smith, the market provided a site for the fulfillment of the natural human tendency to “truck, barter, and trade,” while the market’s “invisible hand” reconciled these individual activities to maintain an equilibrium. In bringing together all the transactions made by individuals, the market also brings together their rational responses to moments of crisis. In essence, the market responds rapidly to any shocks without the need for state intervention. Government stimulus policies only restrict the market’s ability to form a new equilibrium: They artificially boost incomes at times of crisis, temporarily supporting an increasingly unstable equilibrium. Such policies come at great expense to the taxpayer, and only store up problems for the future. Robert Lucas Jr. recently extended such insights in regard to the impact of economic policy. He argues that the “rational expectations” of individuals toward a specific policy will affect the way they react and so determine the impact of the policy itself. Policy cannot fool individuals into particular responses. Instead, only if the credibility of government is sufficient can policy modify individuals’ behavior against that brought about by market adjustment.

3-SECOND CRASH

The rapidly adjusting market ensures equilibrium, stability, and prosperity.

3-MINUTE BOOM

This school of thought places great emphasis upon the ability of markets to adjust to economic shocks. Yet periodic economic crises call into question just how rapidly markets can actually adapt. Rather than stable equilibrium, these crises highlight the potential for dangerous disequilibrium. How does the classical school of thought account for such problems and what solutions does it suggest? Can the market alone sustain equilibrium, stability, and prosperity, or is government intervention a necessity?

RELATED THEORIES

NEOCLASSICAL SYNTHESIS

KEYNESIAN ECONOMICS (NORMATIVE)

THE INVISIBLE HAND

3-SECOND BIOGRAPHIES

ADAM SMITH

1723–1790

ROBERT LUCAS JR.

1937–

30-SECOND TEXT

Adam Fishwick

“In the midst of all the exactions of government, capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition.” ADAM SMITH

Leave the market to its own devices and it will naturally find a point of equilibrium that will bring stability and prosperity.

MARXISM

the 30-second theory

Writing in the shadow of the 19th-century Industrial Revolution, Marx sought to unravel modern industrial capitalism. He argued that every commodity—an item produced for sale—has both a use value and an exchange value. For example, a chair has both a use (it provides a comfortable place to read this book), and an exchange—or monetary—value (it cost more than you had hoped from the furniture store). Marx used this insight to argue that labor, too, was a commodity and was integral to the growth of capitalism. The laborer’s use value is the ability to produce commodities, and in return the laborer is provided with a fair exchange value, or wage, which meets his basic costs of living. Yet when the laborer’s use value is combined with the machines owned by the employer, the commodities produced are worth more than the laborer’s exchange value; in this way a surplus is generated, which the employer takes as profit—this, Marx argued, is “exploitation.” Such profit then provides the means by which capitalism can grow and expand, powered by the continual expansion of exploitation. Marx claimed that such an expansion also produced the antagonisms within such a system that would eventually lead the workers to seize control of the means of production—the machines and the factories—and establish a socialist economy.

3-SECOND CRASH

Capitalism requires profit, and profit requires exploitation. But can exploitation produce socialism?

3-MINUTE BOOM

The fall of the Berlin Wall in 1989 and the collapse of the Soviet Union are seen by many to have wholly discredited Marxism. Yet how can Marxism make a positive contribution to our understanding of the modern capitalist economy? If we look beyond the legacy of dictatorship offered by the Soviet years, Marx’s critique of capitalism can provide one starting point for understanding the inequities that still persist.

RELATED THEORIES

MARKET SOCIALISM

CENTRAL PLANNING

3-SECOND BIOGRAPHIES

KARL MARX

1818–1883

FRIEDRICH ENGELS

1820–1895

ERNEST MANDEL

1923–1995

ANTONIO GRAMSCI

1891–1937

30-SECOND TEXT

Adam Fishwick

“In one word, for exploitation, veiled by religious and political illusions, [capitalism] has substituted naked, shameless, direct, brutal exploitation.” KARL MARX

Marxism concludes that the inequalities brought about by capitalism will eventually lead to the workers seizing control in order to establish a socialist economy.

KEYNESIAN ECONOMICS (POSITIVE)

the 30-second theory

Economic growth is not a steady process. The long-term trend has been upward, at least in developed economies, but in the short term economic growth is punctuated by what economists call the business cycle. There are booms of economic activity when growth accelerates and employment is high; but there are also downturns, when economies contract, jobs become scarce, and unemployment rises. But what determines the extent of these swings? Classical economics affirmed that prices—including wages—respond quickly to changes in supply and demand, and that markets would, therefore, adjust rapidly to shocks. In classical theory, therefore, the business cycle shouldn’t result in mass involuntary unemployment. But John Maynard Keynes, looking back on the Great Depression, argued against this. He said that aggregate demand—the total effective demand in an economy—was a key driver of the business cycle. During a downturn, aggregate demand tended to drop, which made the cycle worse, leading to prolonged periods of unnecessary unemployment. This idea then led Keynes and his followers to conclude that by manipulating aggregate demand, governments might be able to influence the business cycle, smoothing it out and reducing the volatility of capitalist development.

3-SECOND CRASH

Business cycles are driven by how much people are prepared to spend. When demand falls, recessions follow.

3-MINUTE BOOM

This demand-side perspective focuses on an important aspect of the way economies work. But that can’t be the end of the story. Aggregate demand isn’t the only thing that determines the way the economy functions; in the long run, for example, investment and innovation are key. And once you’ve suggested that governments might be able to manipulate aggregate demand as a way to manage the economy, the theory doesn’t specify how—monetary policy or fiscal? Nor does it mean that they have the means to do that sufficiently well.

RELATED THEORIES

MONETARISM

SUPPLY-SIDE ECONOMICS

KEYNESIAN ECONOMICS (NORMATIVE)

3-SECOND BIOGRAPHIES

JOHN MAYNARD KEYNES

1883–1946

JOHN HICKS

1904–1989

30-SECOND TEXT

Christakis Georgiou

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” JOHN MAYNARD KEYNES

An economy in general may be growing, but there’ll be intermittent financial storms—government intervention can help weather these.

FRIEDRICH VON HAYEK

One of the defining moments of Margaret Thatcher’s rise to power took place in the summer of 1975, a few months after she had been elected leader of the British Conservative Party. Invited to attend a lecture on the “middle way” at the Conservative Research Department, she reached into her bag and slammed a book on the table, saying, “This is what we believe in.” The book was The Constitution of Liberty by Friedrich von Hayek. Nine years later, having provided the inspiration for half a decade of Thatcherism, Hayek was awarded the Order of the Companions of Honour by Queen Elizabeth II. This was followed by the Presidential Medal of Freedom, one of the top civilian awards in the United States, awarded by George Bush Sr. in 1991. It was an unexpected and belated triumph for the man whose ideas seemed to have been comprehensively refuted by John Maynard Keynes half a century before.