Article #1
Economics
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),
and prevailing conditions in certain industries (housing, automobiles, durable
goods, and nondurable goods). Also
related to business firms and studied as aspects of microeconomics are matters
pertinent to hourly wages and salaries paid to employees, capital expenditures
(labor, equipment, buildings, advertising), stock market performance of
individual firms, and corporate income and sales taxes as they affect
performance of business firms. 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
` ` 1
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; and 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, and 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 ma de 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
President
Obama’s Proposal
(Winter
2015)
Spending >>>>> $3.9
trillion
Revenue >>>>> $3.5
trillion
Deficit
>>>>> $0.4
trillion ($400 billion)
(Note:
Actual deficit is $474 billion dollars, which would be rounded to
$500 billion. The deficit given
is that derived from subtracting revenue from expenditure for the figures given
by the White House and presented in a graphic by Tribune News Service and reprinted in the Star Tribune, Section A, p.3, February 3, 2015.
The discrepancy in the $400
billion and $475 billion figures apparently occurs due to rounding at various
points. The actual deficit of $475
dollars should be the term of reference in discussing the projected deficit
in the budget proposed by President Obama when the deficit is the main matter
of focus.
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.
Taxes are by far the largest
source of revenue for the government, comprising approximately 94%. 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; discretionary
spending as a whole takes approximately 30%.
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 Insturance 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.
Here a consideration of three
great economists will help to put issues of monetary expansion or retraction in
perspective.
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 posited the idea that the
Invisible Hand guiding the economy operates because entrepreneurs and business
managers in competition with each other will not charge prices notably higher
than the competition, or pay wages greatly different from those prevailing in
similar enterprises. This creates a kind
of equilibrium that is noted, too, for supply and demand: Businesses will act to supply the quantity
and types of goods that customers demand.
When customers show increasing interest in a product, businesspeople
raise inventories and increase supply;
when customer interest wanes, business people draw down their
inventories and decrease supply. The tendency
of supply to increase along with an increase in demand, and to decrease along
with a decrease in demand is called the Law
of Supply and Demand.
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 how a
capitalist economy would fare as time moved on:
He predicted that entrepreneurs acting in their self-interest would
contribute to the public good and would be ever more successful, expand their
operations, pay more workers to do more kinds of tasks, utilize machines and
mechanized processes, become ever more efficient in division of labor into
minute specialized tasks along assembly lines for factory production,----- and in these ways create perpetually
ascending wealth in the society.
If Smith was the optimist who
predicted ever greater success for capitalism, it was Karl Marx who asserted
that capitalism in fact would become caught up in contradictions that would
mean the decline and fall of that economic 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.
The smaller work provides a
good summary of Marx’s ideas derived from an intense study of history. He 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 primitive communism,
in which people were essentially equal in status and economic condition, the
rise of civilizations soon gave rise to slave society, in which an elite
administrative and military class appropriated the labor of the masses in a
tension between masters and slaves.
Those tensions eventually resulted in the decline of these societies,
which were replaced by feudal societies in which aristocrats were in
tension with serfs; the former claimed
rights over the labor of the latter, who lived in perpetual tenancy on land
owned by the aristocrats (lords, nobles, thanes). This socioeconomic order in turn gave way to capitalist
society, dominated by a new middle class of bourgeoisie, among whom industrial owners and managers exploited
the labor of the proletariat who
toiled for long hours in woeful factory conditions performing tasks at wages
set as low as possible in order to maximize the profit of enterprise.
Marx asserted the view that
profit is essentially surplus value,
the difference between the labor expended and the price for which a good was
sold. Labor is among the productive factors that represent the cost of production: raw materials, semi-finished goods,
equipment, and factory buildings necessary to produce the commodity. These latter
factors of production were the material part of the productive factors; it was the proletariat that made these
material factors profitable with their labor, which was expropriated by the
bourgeoisie in order to make a profit.
Marx held that the productive relations between exploiter
and exploited would once again become antagonistic enough that the capitalist
system would decline, to be replaced as in previous historical periods with a
new system. Capitalist decline would be
hastened as competition among enterprises grew ever fiercer and as certain
enterprises triumphed and became monopolies. Monopolization, along with increasing solidarity
within the proletariat, would result in an ironic centralization of economic
forces and processes, at odds with the individual spirit on which capitalism
theoretically thrives.
Thus did Marx predict that the socialization of labor and the centralization
of the means of production would
become incompatible with their capitalist integument
(encasement, wrapper, surrounding skin).
He theorized that the integument (encasement, wrapper, surrounding skin)
would be “burst asunder,” so that the “expropriator would be
expropriated.”)
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 as 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 came along
a century later to address some of the contradictions that Marx predicted for
capitalism, but in ways that would forestall the demise of the free enterprise system so as to sustain private,
not cooperatively owned, property.
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. In
the United States, 9,000,000 savings accounts were lost as banks failed; the value of economic production declined by
one-half; one-fourth of workers lost
their jobs; and one million people could
not pay their mortgages and lost their homes to foreclosure.
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 then provided the policy
recommendation that would prove to be the practical addendum to the optimistic
laissez faire theory of Adam Smith.
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.
10
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.
No comments:
Post a Comment