Jun 18, 2019

>Journal of the K-12 Revolution: Essays and Research from Minneapolis, Minnesota<, Volume V, No. 10, April 2019 >>>>> Article #1 >>>>> Economics: Micro-Fundamentals of an Excellent Liberal Arts Education


Economics is typically divided into two categories, Microeconomics and Macroeconomics.  The fundamentals of the two courses of study are given as follows.

 

Microeconomics

 

Microeconomics is the major category of economics concerned with individuals (consumers, investors, workers, wage earners, and family members) and business firms.

 

Topics studied in microeconomics include important matters relevant to individual business firms, such as markets for goods and services, supply and demand for certain goods and services (during a given period and over time), prevailing conditions in certain industries (housing, automobiles, durable goods, and nondurable goods), hourly wages and salaries paid to employees, capital expenditures (labor, equipment, buildings, advertising), stock market performance of individual firms, corporate income and sales taxes as they affect performance of business firms, and business profitability as affected by government policy and market conditions also falls within the study of microeconomics.

 

Important matters pertinent to individuals that fall within the scope of microeconomics include consumer decisions and the reasons for them;  consumer confidence;  individual investments in stocks, bonds, and real estate;  wages and salaries earned by employees;  working conditions;  and household budgets.

 

Key Terms in Microeconomics

 

1)  goods >>>>>  industrial or agricultural items sold to consumers in stores;  examples include 

groceries, shoes, cars, appliances, and pharmaceuticals (medicines)

 

2)  services >>>>>  actions taken by business operators in behalf of consumers willing to pay 

for satisfaction of wants or needs;  examples include hair styling,

restaurant-provided food, auto repair, landscaping, and plumbing

 

3)  wage >>>>>   payment to a worker calculated on a per hour basis, generally paid weekly or biweekly

 

4)  salary >>>>>  payment to a worker calculated on an annual basis, generally paid monthly

 

5)  market >>>>>  consumers considered together for their willingness to buy certain goods or services

 

6)  producers >>>>>  those who manufacture goods and provide services

 

7)  consumers >>>>>  those who use (consume) goods or services provided by others

 

8)  supply >>>>>  the amount of a good or service provided by producers

9)  demand >>>>>  the amount of a given good or service sought by consumers

 

10)  the economy >>>>>  the system whereby businesses supply goods and services to meet consumer

 demand, and whereby workers are paid for their labor

                                                               

11)  consumer confidence >>>>>  the level of optimism or pessimism felt by consumers as to the present and future of the economy

 

10)  Consumer Confidence Index >>>>>  a calculation of consumer confidence in a given year as

compared to consumer confidence that prevailed in a base year (base year is currently 1985); the comparison is given on a scale in which the base year is assigned the number of 100.

 

11)  durable goods >>>>>  a good that lasts a long time, such as cars, washing machines, and ovens

 

12)  nondurable goods >>>>>  goods that are consumed quickly, such as food and pharmaceuticals

 

13)  stock >>>>>  a share in a company sold to investors, paid back in dividends

 

14)  bond >>>>>  a loan to a private company or government, to be repaid in principal and interest

 

15)  principal >>>>>  the original amount provided by a lender

 

16)  interest >>>>>  the percentage that a borrower agrees to pay to a lender for the use of her or his

money, in addition to repayment of principal

 

15)  real estate >>>>>  land that has commercial value and thus is bought and sold

 

Fundamental Concept in Microeconomics:  the Law of Supply and Demand

 

The fundamental concept in microeconomics is the Law of Supply and Demand.  This law predicts that producers will provide the amount of goods and services demanded by consumers.

 

Under ideal conditions, supply and demand are in equilibrium;  that is to say, producers provide the exact level of goods and services that consumers demand, according to their wants and needs.

 

Under less than ideal conditions, supply and demand are out of sync (not in equilibrium, not in balance, not well-matched).  This disequilibrium occurs when consumers want more of certain goods and services than producers can provide;  or when producers provide more of certain goods and services than consumers are willing to buy.  Under conditions in which supply and demand are not in sync, inflation or deflation occur.  These concepts are covered in the following section on macroeconomics.                                

               

Macroeconomics

 

Macroeconomics is the major category of economics concerned with aggregate production and consumption, the functioning of the national economy taken as a whole,  and involving policy made at the national level of governance.

 

Topics studied in macroeconomics include federal fiscal and monetary policy in drawing up the federal budget, the resulting structure of the federal budget, as well as national debt and national deficit.  Monetary policy requires the release of money by the Federal Reserve System into the economic system of consumers and producers;  inevitably, this policy responds to and affects conditions of inflation and deflation, and conditions of recession and depression.

 

Macroeconomics also involves matters pertinent to Gross National Product (GNP), Gross Domestic Product (GDP);  standard of living;  median income;  taxation as affecting workers, businesses, and industries;  sectoral divisions indicating categories of the national economy include the primary sector (agriculture);  secondary sector (industry);  and tertiary sector (service).

 

Terms most likely to need clarification are given below:

 

 1)  federal fiscal policy >>>>>  policy made by decision-makers at the national level as to

                                                        expenditures and revenue

 

2)  federal monetary policy >>>>>  policy made by decision-makers at the national level as to

                                                                                supply of money from the Federal Reserve

`              `                             

3)  Federal Reserve System >>>>>  the system of 12 banks into which national currency printed at the

National Mint is deposited and from which currency is released through loans and transfers

 

4)  federal budget >>>>>  structure of expenditure and revenue identified by policy makers at the

national level of governance 

 

5)  balanced budget >>>>> situation in which expenditure and revenue are in equilibrium (perfectly

matched or in sync)  

 

6)  national deficit (federal deficit) >>>>>  situation for a given year in which the federal government has less revenue than expenditure;  this was $476 billion fiscal year 2014  

 

7)   national debt (federal debt) >>>>>  accumulated national deficits resulting in total federal

government expenditure exceeding total revenue;  this was about $18.15 trillion

in fiscal year 2014 

 

8)  inflation >>>>>  situation in which prices rise because demand exceeds supply;  or because banks and consumers hold dollars for which the availability for needed or wanted goods and services are not available

 

9)  deflation >>>>>  situation in which prices decline because supply exceeds demand;  or because banks and consumers hold too few dollars to pay for needed or wanted goods and services

 

10)  fiscal quarters >>>>>  division of the year into three-month groups  for measuring economic growth

 

11)  economic growth >>>>>  percentage increase of the Gross Domestic Product, annually or quarterly

 

12)  Gross Domestic Product (GDP) >>>>>  total value of goods and services provided within the nation

 

13)  Gross National Product (GNP) >>>>>  total value of goods and services provided by domestic

companies for sale within the nation or in foreign countries 

 

14)  standard of living >>>>> quantitative measure of the ability of consumers to pay for the goods and services that they want or need

 

15)  median income >>>>>  the level of income that falls exactly at the middle in a distribution of

income from highest to lowest (or lowest to highest)  

 

Fundamental Aspects of Macroeconomics:  Fiscal Policy, Monetary Policy, and Economic Growth

 

In the realm of macroeconomics, the most important are those pertinent to fiscal policy, monetary policy, and economic growth.

               

Fiscal Policy

 

Fiscal policy at the national level (federal governmental level) concerns decisions made in constructing the federal budget. 

 

Federal Budget

The exact composition of the federal budget varies but features broad structural similarities from year to year.  The following figures are from a budget proposed during winter 2015 during the Obama administration:

 

(Winter 2015)

 

Spending >>>>>              $3.9 trillion

 

Revenue >>>>>                               $3.5 trillion

 

Deficit     >>>>>                                $0.4 trillion   ($400 billion)

 

Taxes are by far the largest source of revenue for the government, comprising approximately 94% and include the following:

 

Federal Government Revenue

 

Personal Income taxes     >>>>>                               46%

 

Payroll taxes                         >>>>>                                31%

 

Corporate taxes                  >>>>>                                14%

 

Excise                                      >>>>>                                   3%

 

Subtotal                                  >>>>>                                94%

 

Other                                       >>>>>                                   6%

Federal Government

Revenue________________________________

 

Total                                         >>>>>                             100%

Federal Government

Revenue

 

On the spending side, the Mandatory (Entitlement) Programs of Social Security, Medicare, and Medicaid comprise approximately 47% of all expenditures. 

 

Mandatory spending as a whole (including interest on debt, immigration reform, and programs falling under the category, “other”) totals 71% of all spending. 

 

Defense is the largest category of discretionary spending at approximately 16% of all federal government expenditures as proposed in the Obama budget;  discretionary spending as a whole takes approximately 29%. 

 

Federal government spending falls into two broad categories:

 

discretionary spending >>>>>  optional spending on programs deemed to be important

 

mandatory (entitlement) spending >>>>>  spending that must meet a certain dollar amount as

                                a result of payments fixed by congressional statute (law passed by the U. S. Congress)

                                                              

Note >>>>>

 

Entitlement spending refers especially to the programs of Social Security, Medicaid, and Medicare.  

 

Mandatory spending is typically understood as the broader term covering entitlement spending and all other spending fixed by congressional statute.

 

Federal Government Spending

 

Mandatory Spending (Entitlement Programs), Total All Expenditures

                                                      

Social Security                     >>>>>                                24%

 

Medicare                               >>>>>                                14%

 

Medicaid                                >>>>>                                  9%__

 

Subtotal                                  >>>>>                                47%

 

Other                                       >>>>>                 24%

Mandatory

Spending

 

Mandatory Spending        >>>>>                 71%

 

(as total of all federal

government spending)

 

Discretionary Spending

 

Defense                                >>>>>                  16%

 

Non-Defense                    >>>>>                  13%

 

Subtotal                               >>>>>                  29%

 

(as total of all federal

government spending)

­­­­

Total                                      >>>>>               100%

Federal Government

Spending

 

 

Monetary Policy

                             

Monetary policy concerns the amount of dollars available in the economy for purchases, investments, and loans.  While matters of the federal budget do affect the money supply, the number of dollars available in the economy is powerfully influenced by the Federal Reserve System, frequently termed simply, the Federal Reserve, or by the even shorter appellation, “The Fed.”

 

The Federal Reserve System

                                                                   

The Federal Reserve is comprised of twelve (12) districts in major urban centers across the United States, each functioning as a kind of supra-bank for the member banks in its district.  Banks that are federally insured by the FDIC (Federal Deposit Insurance Corporation) and thus part of each district’s network of banks, are required by law to maintain a certain percentage of the money deposits in reserve, either at its own bank or at the district federal reserve bank.  The amount required for each bank varies according to the size and value of the holdings of the bank, but in recent years the ratio to total deposits in the bank has fallen between 8% and 18%. 

 

The Fed monitors the health of the economy as measured in job growth;  percentage of the work force employed;  expansion of activity by small businesses, medium-sized firms, and corporations;  and the relationship of wages to prices. 

 

When prices rise significantly faster than wages, this condition is one indicator that inflation has become a problem.  Generally a 2% annual rate of inflation is acceptable as long as unemployment is not much higher than about 5%.  If unemployment rises above 5%, wage growth also tends to lag, and prices rising faster than the 2% level would become a problem. 

 

Sustained stagnation in wage growth, business inventories, housing construction, and automobile production serves as an indicator that the economy needs stimulation.  While free market purists dislike heavy government spending, in recent times (including, notably, the period during 2009 when recession [two successive quarters of no economic growth or negative economic growth] hit the economy) the federal government has in fact acted to inject money into the economy.  At the level of fiscal policy, government spending stimulates the economy with investments in infrastructure and social programs in ways that create jobs and motivate entrepreneurs to expand businesses.  At the level of monetary policy, the Fed acts to inject additional dollars into the economy in three main ways:

 

First, the Fed can reduce reserve ratios of its member banks so as to increase the amount of money available to those banks to lend to individuals and businesses.

 

Second, the Fed can set interests rates low, so that its member banks may borrow at lower cost from the federal district bank (one of the twelve---  the one located in a bank’s district.)

 

Third, the Fed (as an institution operating at the national level) is authorized to buy---  paying generously in making the purchases---  U. S. Treasury bonds from current holders, who deposit the

money in their own banks, which then have more available to lend to individual customers who want to buy cars, houses, and other major items;  and to businesses that seek to hire more workers, purchase equipment, build new facilities.

 

Conversely, if the economy shows signs of overheating---  with inflation high and businesses seeming to expand recklessly---  the Fed may act along the same lines as given above---  but in the opposite direction---  1) raising the reserve ratios;  2) increasing interest rates;  and 3) selling bonds at favorable rates, so as to bring dollars off the private market and into the Fed’s own vaults.

 

The Nobel-prizewinning economist Milton Friedman was a monetarist who thought that the Fed would do better to expand the money supply at a slow, steady rate,---  theoretically decreasing uncertainty---  rather than alternately to increase or decrease the money supply.  But ever since the Great Depression, most economists have agreed that some flexibility in decreasing or increasing the money supply is necessary.

 

Three Great Economists:   Adam Smith, Karl Marx, and John Maynard Keynes

 

Adam Smith (1723-1790)

 

Adam Smith is the author of the masterpiece of economic theory, The Wealth of Nations (1776), which details his key ideas.  Smith asserted that there is an Invisible Hand that guides a capitalist economy---   an economic system in which entrepreneurs are at liberty to assume the personal risk of starting businesses and to fail or succeed according to their judgments as to purchase of equipment, hiring of workers (labor), investment in new buildings, and prices charged.  Smith took the lead at the early historical stage of capitalist development in calling for a laissez faire economy in which the government mostly stays out of private enterprise, sticking with the provision of public order (domestic security through municipal police forces and international security

through an appropriately strong army) and a national infrastructure of transportation and communication networks.  Smith was very optimistic about the future of the capitalist system.

 

 

Karl Marx (1818-1883)

 

The two most famous works of Karl Marx were The Communist Manifesto and Das Kapital  (Capital).  The former work is a small in size, a pamphlet running about 30 pages.  The latter work provides enormous detail and demonstrates Marx’s prodigious powers of analysis.

 

Mark and his cowriter (Frederich Engels) wrote that history proceeds so as to feature two oppositional economic classes.  While there had been hunting-gathering and early agricultural societies living under conditions of egalitarian primitive communism, other historical stages had featured hierarchical class division and conflict, as follows:  slave society (master versus slave) feudal society (aristocrats versus serfs), and by Marx’s own day,  capitalist society, (bourgeoisie versus proletariat).  

According to Marx, each history operates according to a dialectic in which a thesis is counterpoised to an antithesis, with a resulting synthesis that is something entirely new.  This would be true as socialism replaced capitalism in a new synthesis.  But at the socialist stage a dictatorship of the proletariat would rule in behalf of the working class, each member of which would have its material needs met fairly, in accordance with the work that each laborer was reasonably able to provide.  Then, as humanity transformed itself through more cooperative endeavors, there would be a “withering away of the state” as communism replaced socialism and people satisfied all of their material and cultural needs in a supreme egalitarian spirit of cooperative labor.

 

John Maynard Keynes (1883-1946)

 

John Maynard Keynes wrote his The General Theory of Employment, Interest, and Capital during the Great Depression of the 1930s, a time during which capitalism seemed to be faltering.

Keynes wrote that such periods of severe unemployment were likely to occur as capitalist owners and managers proved far less able to adjust to changing market conditions than Adam Smith had predicted.  Keynes’s analysis of economic history instilled in him the conviction that there would be periodic upturns and downturns in the economy that occurred because market conditions pertinent to labor supply, availability and cost of key raw materials, and fluctuations in consumer taste and purchasing capacity would at times proved unpredictable.  During times of severe downturn, such as that of the Great Depression, labor might suffer prolonged periods of unemployment and “underemployment equilibrium” whereby highly skilled labor had to settle for low-skill and low-paid jobs.

 

Keynes held that government must step in to provide additional spending when private capitalists are reluctant to do so or prove unable to make those new investments that propel the free enterprise system.  Keynesian government spending policy undergirded the New Deal of Franklin Roosevelt and continues to provide the theoretical underpinning and practical policy for fiscal and monetary policy in the United States today.  Keynesian economics, especially with regard to the amount of government spending desirable, provides much of the context for debates concerning government fiscal and monetary policy.

 

Concluding Comments

 

A highly developed economy such as the United States experiences growth rates in GDP of about 3% when the economy is in a favorable period.  During such periods, key matchups---  product supply and consumer demand;  workers’ wages and retail prices;  investment willingness and production costs (including wholesale prices)---  are in sync.  During such times, there is a near-equilibrium with just enough dynamism to provide the conditions for economic growth.

 

In a less developed economy, a growth rate of 10% or more may indicate a rapidly industrializing and technologically advancing society.  Today, for example, the economies of Brazil, India, and the People’s Republic of China are experiencing high rates of growth amid conditions of increased production and technological advance.

 

When the economy stalls, the Fed acts in ways to stimulate the economy, and the executive branch of the federal government is likely to increase expenditure, with a likely outcome of deficit spending.  With regard to the level of spending, the following observations apply:

 

Economic conservatives favor little action on the part of the Fed and low expenditures by the federal government (except in matters of national defense).

 

Economic liberals (progressives) favor aggressive action on the part of the Fed and as high expenditures as they deem necessary for the federal government to stimulate the economy and thus raise employment.

 

Economic moderates (centrists, middle-of-the roaders) favor limited, carefully considered actions on the part of the Fed and limited, carefully considered expenditure by the federal government.

 

Liberals, moderates, and conservatives are typically envisioned along a continuum moving left to right.  A very few conservatives call for the kind of pure laissez faire capitalism proposed by Adam Smith in the 18th century.  But even the monetarist Milton Friedman once famously declared, “we are all Keynesians now.” 

 

The debate among liberals, moderates, and conservatives in the capitalist economy of the United States usually focuses on the amount of governmental economic stimulus necessary.  They tend to agree, however enthusiastically or reluctantly, that federal government spending and the policy of the Federal Reserve Board of Governors (now chaired by Janet Yellen and including six other members who determine Fed policy) is necessary to the success of capitalism. 

 

Economic history strongly suggests that it was the prescriptions of John Maynard Keynes, along with the ameliorating force provided by labor unions which saved the system extolled by Adam Smith from the decline and fall predicted by Karl Marx.

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