Download 20th Century Economics

I. 20th Century Economics
Selected data, theory, norms and policies
(overview)
I.1 Some
th
20
Century Data
I.1.1 Long term growth trends
Real GDP p.c., 1870 – 2001: USA, CND, AUS, J
30 000
1990 International Geary – Khamis dollars
25 000
20 000
15 000
10 000
5 000
0
1870
1880
1890
1900
1910
1920
USA
1930
Canada
1940
1950
Australia
1960
Japan
1970
1980
1990
2000
Real GDP p.c., 1870 – 2001: USA, CND, AUS, J
1990 International Geary – Khamis dollars
logarithmic scale
100 000
10 000
1 000
1870
1880
1890
1900
1910
USA
1920
1930
Canada
1940
1950
Australia
1960
Japan
1970
1980
1990
2000
Real GDP p.c., 1870 – 2001: F,D,I,UK
1990 International Geary – Khamis dollars
logarithmic scale
100 000
10 000
1 000
1870
1880
1890
1900
1910
1920
France
1930
1940
Germany
1950
1960
Italy
1970
UK
1980
1990
2000
Real GDP p.c., 1870 – 2001: A, B, NL, CH
100 000
1990 International Geary – Khamis dollars
logarithmic scale
10 000
1 000
1870
1880
1890
1900
1910
Austria
1920
1930
Belgium
1940
1950
Netherlands
1960
1970
Switzerland
1980
1990
2000
Real GDP p.c., 1870 – 2001: DK, FIN, N, S
100 000
1990 International Geary – Khamis dollars
logarithmic scale
10 000
1 000
1870
1880
1890
1900
1910
1920
Denmark
1930
Finland
1940
1950
Norway
1960
Sweden
1970
1980
1990
2000
Real GDP p.c., 1870 – 2001: ARG, S
100 000
1990 International Geary – Khamis dollars
logarithmic scale
10 000
1 000
1900
1910
1920
1930
1940
1950
Argentina
1960
Sweden
1970
1980
1990
2000
Real GDP p.c., 1870 – 2001: ARG, S
1990 International Geary – Khamis dollars
25 000
20 000
15 000
10 000
5 000
0
1900
1910
1920
1930
1940
1950
Argentina
1960
Sweden
1970
1980
1990
2000
GDP p.c. in 1900 and 2001 and average
growth rate
1990 International Geary-Khamis dollars
30 000
3,50
3,00
25 000
2,50
20 000
%
15 000
1,50
10 000
1,00
5 000
0,50
1900
2001
AGR (%)
en
tin
a
M
ex
ic
o
ea
A
rg
K
or
di
a
In
ut
h
So
es
h
gl
ad
U
SA
B
an
U
K
Ja
N
pa
et
n
he
rla
nd
Sw s
Sw ede
n
itz
er
la
nd
Ita
ly
ad
a
D
en
m
ar
k
Fi
nl
an
d
Fr
an
ce
G
er
m
an
y
C
an
tr
B
el
gi
um
0,00
ia
0
A
us
GK$
2,00
What are the factors of long term
growth?
Evidence for most of the developed countries:
• Remarkable GDP growth in 20th century
• Striking difference with other parts of the
world
Factors of growth:
• Labour supply and productivity
• Capital available (conditioned by national
savings)
• Capital/labour ratio
• Technological progress and innovation
Remark on inflation: USA, 19001998
Source: Blanchard
Growth and inflation in 20th century
• Growth: since 1870 a substantial increase,
especially since 1950
• Price levels: until the outbreak of WWI, the
price level stable and average inflation close to
zero; between WWI and WWII much lower
stability, but average still zero
• After WWII: permanent growth of price level
• Hypothesis: strong long-term growth must be
accompanied by always positive inflation?
I.1.2 Short term fluctuations
GDP growth USA, 1951-2003
10
USA
US averages
8
6
4
%
2
0
-2
-4
51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03
time
GDP growth EU15, 1956-2003
8
EU growth
EU averages
US averages
6
4
% 2
0
-2
-4
56
58
60
62
64
66
68
70
72
74
76
78
80
time
82
84
86
88
90
92
94
96
98
00
02
time
03
01
99
97
95
93
91
89
87
85
83
81
79
77
75
EU
73
71
10
69
67
65
63
%
61
Unemployment EU15 a USA
12
USA
8
6
4
2
0
Growth and public deficit, USA 19512003
2,0
1,0
10
General G. Balance - %GDP
Growth in %
8
0,0
6
-1,0
-3,0
2
%
4
%
-2,0
-4,0
0
-5,0
-2
-6,0
-7,0
-4
51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03
time
Growth and current account deficit
“Asian tigers”
10,0
8,0
6,0
4,0
2,0
%
0,0
-2,0
-4,0
GDP growth
Current Account Deficit
-6,0
-8,0
85
86
87
88
89
90
91
92
93
94
time
95
96
97
98
99
00
01
02
03
Growth, inflation, CAD - Czech
Republic
10,0
60,0
GDP Growth (% )
%
Current Account Deficit (% of GDP)
Inflation (% )
5,0
50,0
0,0
40,0
30,0 %
-5,0
-10,0
20,0
-15,0
10,0
-20,0
0,0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
time
I.2 Economic Theory and Economic
Policies
I.2.1 Descriptive Theory and Models
Microeconomics (1)
• On the level of individual agents and markets
• Assumptions about behaviour (people
maximize utility, firms maximize profit)
• Walrasian general equilibrium:
– People maximize utility given the income
constraints, consumption on the utility possibilities
frontier
– Firms maximize profits given their technology
constraints, output on the production possibility
frontier
– Perfectly competitive markets, agents behave
according fully flexible prices
Microeconomics (2)
– Full information about the markets and prices, that are
known before transactions take place
– Firms and workers have stable expectations
– Simultaneous equilibrium on all markets (D=S)
– Production factors are paid their share: rent for land,
wage for labour and interest for capital
– Pareto optimality
Macroeconomics
• Describes the economy on the highest level of
aggregation
• Focus on macroeconomic aggregates, namely
GDP (GNP), consumption, savings,
investment, money, inflation, unemployment,
public finance deficit, current account deficit,
public debt, exchange rate, interest rate and
others
• Confines the analyses to following five
sectors
Sectors on macroeconomic level (1)
• Households: all population, own and
provide factors of production (labour,
land, capital) to the firms, receive
payments (income) from them and
generate expenditures for goods and
services (for final consumption)
• Firms: “own” technology, employ factors,
produce goods and services for final
consumption (households, government,
export) or for intermediate use (other
firms, incl. foreign)
Sectors on macroeconomic level (2)
• Government:
– Collects taxes
– Manages activities that society expects from it:
• spends on goods and services for public purpose
(e.g. defence), on employees in state
administration, even owns some firms (that
produce goods and services) – “produces” public
services
• finances transfers and social benefits
• Financial sector: provides transmission services that
channel money from savers to borrowers (incl.
government)
• Foreign sector: purchases goods and services (exports),
sells goods and services (imports), generates flows of
capital out and into the domestic country (FDI in or
out, debt financing, equity capital)
Theory and models
• Formalized relationship among economic
variables (linked to statistical indicators)
– Forms: verbal, graphical, mathematical
• Building blocks:
– Markets and agents
– Focus of the model: endogenous variables
– External environment: exogenous variables
Structure
• Structure of the model (based on theory):
system of equations
• Solution of the system: equilibrium
values of endogenous variables
• Concept of equilibrium: state of the rest,
does not have to be equality between
supply and demand
– Disturbance: either change in exogenous
variables or a random shock
Time, static and dynamic models
• Static model
– Equilibrium: given exogenous variables, the model
determines endogenous variables in a specific time
moment
– Comparative statics: given the change in exogenous
variable(s), the endogenous variables adjust between
two specific time moments, multipliers
– Time length between the two moments: short,
medium or long term model
• Dynamic (growth) model – determines the development
of endogenous variables in time (growth trajectory)
– Initial conditions
– Assumptions about the time development of
exogenous variables
• Most of our course: static model
I.2.2 Normative theory and policies
Towards “the norms” (1)
• Theory seen as a provider of the policy
tools for the state to steer the economic
performance in the “desired” direction
• What is “desired”? – according social,
political and other norms in the society,
different policy goals are determined and
can be classified into three groups:
– General: growth of GDP (GDP per capita),
full employment, low inflation, low debt,
balanced budget, stable exchange rate,
proper distribution of the welfare, etc.
Towards “the norms” (2)
– For the business: macroeconomic stability
and implied social and political stability,
strong demand for products, export
promoting exchange rate, protection against
imports, low interest rates, etc.
– microeconomic: fulfil the assumptions that
ensure competition, free movement of prices,
minimal distortion of markets, private
ownership of productive resources
Norms, policies and the state
(1)
Consequently, the role of state:
• Efficient allocation of the resources ⇒ cultivating
the markets
• Control of inflation and unemployment ⇒
stabilization policies
• Ensuring economic growth ⇒ long term growth
policies
• Attempting to achieve a fair distribution of wealth
across the society ⇒ welfare policies
• Ensuring the society’s needs (police, defence, legal
system, coping with the externalities, etc.) ⇒ other
policies, primarily not economic ones
Norms, policies and the state
(2)
In modern history – 3 approaches how to meet the norms
• Capitalism, free market and political democracy:
laissez faire, price as basic signal for production
decisions (what, how, for whom), private ownership,
minimal government and governmental policies.
Efficient allocation of the resources. Minimal role for
the state. (Alleged) deficiency: production gaps
(unemployment) and unjust distribution of the wealth.
• Central planning (socialism). Consumption decided
and resources allocated through the planning system,
not according price signals. State ownership. Equal
distribution of the wealth. Deficiency: inefficient
allocations, gaps in productivity, political dictatorship.
Norms, policies and the state
(3)
• Mixed capitalist economy. Prevailing
private ownership, cohabitating with the
state ownership of certain assets. An
attempt to complement free market with
governmental policies to cope with the
deficiencies of the free market. Inclinations
towards welfare state policies.
Examples for government
interventions …
• Provision of essential services (e.g. basic
education, defence)
• Transfer payments (e.g.unemployment
benefits)
• The existence of natural monopolies
• External social costs (e.g.drugs) and benefits
(e.g. free vaccination) of the society
• Support to industry and commerce
• Aggregate demand management
… as translated into policies
•
•
•
•
•
•
•
Fiscal policy
Monetary policy
Exchange rate policy
International trade policy
Supply-side policy
Price and income policies
Employment policy
Policies in this course
• For mixed capitalist economy and mainly
stabilization policies
– but some overlapping of the policies, e.g. supply side
policies are strongly relevant for the long term
economic growth (i.e. dynamic model)
– exception: chapter on socialism and transformation
• However, “non”- economic policies directly linked
to macroeconomic limits (budget deficits,
indebtedness, etc.)
– and provide feedback to economic policies (education ⇒
long term growth
• Historical approach – trip through 20th century
I.3 Too much or too little of
Government?
Policies: The Easy Definition
• To create appropriate conditions for
sustainable economic growth and the
improvement of the well-being of the
population in the long run.
• To understand, preview and soften the
fluctuations around the trend (to soften the
business cycle) in the short- and medium run.
• Basis: market economy, the government
intervenes to remedy market deficiencies
• The crucial question: how much governmental
intervention is needed to achieve the goals
above?
Some examples (1)
Best illustrated by following examples:
• Was the growth difference between 0-1800 and 18012000 result of some organized „governmental“
activities?
– The power of markets?
– Adam Smith, invisible hand
• Was the Great Depression a result of the market
failure?
– Many believe yes (but not all).
• Was an extraordinary growth after WWII a result of
a careful economic policy of the governments?
– Many macroeconomists 40 years ago convinced that yes
(but in reality, it was not)
Some examples (2)
• Was the state intervention responsible for
the high US inflation in 60‘s, EU high
unemployment till today or Japanese
problems in the 90‘s?
– Very probably yes.
• Was the lack of market coordination
responsible for Asian crises in 1997 or for
burst of telecom bubble and subsequent
US economy slowdown in 2000?
– Maybe yes.
Adam Smith
• 1723 – 1790
• Political economist and
philosopher
• 1751 – professor of logic
at Glasgow University
• 1759 – Theory of Moral
Sentiments
• 1776 - An Inquiry in the
Nature and Causes of the
Wealth of Nations
No clear answer
• The existence of the state is a fact,
the degree of state intervention into
economic affairs is matter of
discussion
• The dividing line among the
economists and the politicians as
well.
• Markets have power and do not fail,
only people do fail.
Concluding remark
• Policy definition above is more pragmatic than
theoretical
• Theoretical approach: the criteria and
intervention defined over more profound
discussion of:
– Market failures
– Social preference function
• Problems with the link to individual
preferences
• We do not discuss these issues in this course,
with some exceptions
Literature to Lecture I
Microeconomics:
• Any text from VSE or IES FSV UK
• Varian, H.R.: Microeconomic Analysis.W.W.Norton&Company,
New York, 1984 (2nd and subsequent editions plus Czech
translation).
• Henderson, J.M., Quandt, R.E.: Microeconomic Theory. McGraw
Hill, 1958 (and subsequent editions).
Macroeconomics:
• Any text from VSE or IES FSV UK.
• Mankiw, G.N.: Macroeconomics, Worth Publishers, New York,
1992 (and subsequent editions).
• Blanchard, O.: Macroeconomics, Prentice Hall, 1997 (and
subsequent editions).
Long-term data:
• Maddison, A.: The World Economy, A Millennial Perspective,
OECD, 2001.
Economic Policy
• Acocella, N.: The Foundations of Economic Policy, CUP, 1998 (this
goes beyond our course, but Chapter 1 provides a good theoretical
summary, see also references to Frisch, Tinbergen and Theil).