HCJ3: Economics

It's something that's in the news every day, something that people are employed to study and in terms of the theoretical side of it, I haven't got much clue about. I know a bit about how it works in a practical way, like how inflation effects how much money I have left in my pocket after a night out or after doing a weekly food shop.

Adam Smith

He wrote 'Wealth of Nations' which asked the question of why one country is richer than another. There is one clear reason to this, liberalism. Almost all countries across the world are free, people can do what they want and go where they want, obviously there are consequences for illegal actions, but people can do as they please. Free trade plays a big part too, for example a British company can buy goods from a company in Asia, sell the goods on and make a profit. The system of capitalism works and whether you agree with the system or not is another matter.

An example of a country where free trade is a relatively new thing is China. The Great Wall of China was built to prevent the Mongolians from attacking the country. This also prevented the economy from growing. In the early 1980s, China opened itself up to the rest of the world in terms of trade, links have been greatly improved since then and now China is financially one of the world's biggest countries.

Adam Smith believed that the 'hidden hand of the market' would make people richer. Smith assumed that individuals will always try to maximise their own good and through entrepreneurship, society as a whole is better off. He also thought that people calculate what they can get out of a particular situation, especially financially, but this can lead to unintended consequences that can damage the market.

David Ricardo

He set out of the 'Labour Theory of Value', which said that an object is more valuable because of the labour that has gone into producing that object e.g. diamonds are more valuable than matchsticks because the amount of work to excavate diamonds than it does to make matchsticks. If diamonds were as readily available as matchsticks, they wouldn't be particularly desirable.

Thomas Malthus

His view of the world was pretty bleak, he said that one day humans will starve to death. It's probably true and could well happen in my lifetime, which is pretty scary!

Karl Marx

His ideas on society are closely linked to the economy. He said that wages paid to employees of a company will go down as more people are employed, a pretty fair statement consdiering that if a company has fixed amount has to pay workers, then the amount an employee earns will obviously go down as more people are employed. He also said that people who work in a factory, for example it makes tables, each worker makes one table each day worth £10. The factory owner takes £5 profit from each table being sold, a worker now only has £5 to spend. If he or she wants to buy one of the tables they have made, they can't because they only have £5. The problem with the capitalist model of society and the economy is over production and under consumption.

Another example of this is the MG Rover car company. One of the reasons it went bust was that it was making more cars than it could sell, therefore spending a lot more money than it was making.

Factories now use machines to do the job a person previously did, the job might not get done as well, but it gets more tables (for example) off the production line and this means more money for the factory owner. Capitalism has revolutionised the global economic system, but some would argue that it has gone too far.

1844

Robert Peel nationalised the money supply by creating the Bank of England, this was the world's 1st central bank. This allowed for the expansion of paper currency.

1848 & 1849

After the French Revolution, a economic crisis in Britain was averted because markets were expanded, people emigrated and the process of electrification took place.

New supplies of gold from Australia and South Africa kept the monetary system sufficient. Gold is central to the classic economic policy of 'sound money' as it allows the price system to be purely nominal value. It has no 'money effect' on the economic system.

Basics of the Keynesian system of economics

When you hoard some cash rather than spending it, income in the rest of the economy goes down by the exact same amount, which then has a knock on effect on your income. A recession ensues, this is a period when we work and produce less than we would like, and as a result get paid less too.

My understanding of it is this: There are two people in the world, person A makes £100 a week by selling bread to person B at £1 a loaf and person B makes £100 a week by selling chocolate to person A at £1 a bar. The total income in this economy is £200, which corresponds to 100 loaves of bread and 100 bars of chocolate.
If person B decides to save £20 out of his £100 and keep it in cash. As a result, person A's income falls to £80 and the total income in the economy is now £180 - with the economy producing 20 chocolate bars fewer than before. In the following week, person A only has £80 to spend which means that person B's income also falls to £80 and they end up buying fewer of my loaves.

In the end, both person A's and B's incomes are lower and they both produce and consume less than their potential. The economy is in recession.

The problem with the Keynes model

Keynes' model would allow the Government to dabble in the economics of the private sector, a scary thought for some individuals in free market economies. The system would alos let politicians spend moneyon projects that would try and correct economic conditions. In my opinion, an economy needs to dip in order to get stronger. Another problem with the Keynes model is that it calls for specific govt spending, but polticians may ignore this and spent money on anything.

TB 2012.