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Economics is as old as the human race: it is probably the first art
which man acquired. When some cavemen went out to hunt while
others remained to defend the fire or when skins were traded for flint
axes we had economics. But economics as an academic discipline is
relatively new: the first major book on economics Adam Smith's "The
Wealth of Nations" was published in 1776. Since that time the subject
has developed rapidly and there are now many branches of the
subjects such as microeconomics, international economics and
econometrics as well as many competing schools of thought.
There is an economic aspect to almost any topic we care to
mention of education. Economics is a comprehensive theory of how
society works. But as such it is difficult to define. The great classical
economist Alfred Marshall defined economics as "the study of I man
in the everyday business of life".
This is rather too vague a definition. Any definition should take
account of the guiding idea in economics which is scarcity. Virtually
everything is scarce; not just diamonds or oil but also bread and water.
How can we say this? The answer is that one only has to look around
the world to realize that there are not enough resources to give people
all they want. It is not only the very poor who feel deprived, even the
relatively well-off seem to want more. Thus when we use the word'
scarcity' we mean that.
All resources are scarce in the sense that there are not enough to
fill everyone's wants to the point of satiety.
We therefore have limited resources both in rich countries and
poor countries. The economist's job is to evaluate the choices that
exist for the use of these resources. Thus we have another
characteristic of economics: it is concerned with choice.
Another aspect of the problem is people themselves; they do not
just want more food or clothing, but specific items of clothing and so
We have now assembled the three vital ingredients in our
definition, people, scarcity and choice. Thus we could define
economics as:
The human science which studies the relationship between
scarce resources and the various uses which compete for these
The great American economist Paul said that every economic
society has to answer three fundamental questions. What, How, and
For whom?
What? What goods are to be produced with the scarce resource:
clothes, food, cars, submarines, television sets?
How? Given that we have basic resources of labor, land, how
should we combine them to produce the goods and services which we
For whom? Once we have produced goods and services we then
have to decide how to distribute them among the people in the
One alternative definition of economics is that it is the study of
wealth. By wealth the economist means all the real physical assets
which make up our standard of living: clothes, houses, food, roads,
schools, hospitals, cars, oil tankers, etc. One of the primary concerns
of economics is to increase the wealth of a society, i.e. to increase the
stock of economic goods. However, in addition to wealth we must
also consider welfare. The concept of welfare is concerned with the
whole state of well-being. Thus it is not only concerned with more
economic goods but also with public health, hours of work, with law
and order, and so on.
Modern economics has tried to take account not only of the
output of economic goods but also of economic such as pollution. The
wealth welfare connotation in thus a complex aspect of the subject.
In the twentieth century there has grown up a new economic in
order, known as collectivism.
Collectivism is the system whereby economic decisions are
taken collectively by planning committees and implemented through
direction of resources either centrally or at local level.
Under this system planning committees are appointed and they
provide the answers to our three central questions. Thus committees
take the decision on whether, for example, more cars or more tractors
should be produced. They solve the "How?" problem by directing
labor and other resources into certain areas of production and, at the
end of the day, they decide the "For whom" problem not by pricing
but by allotting goods and services on the grounds of social and
political priorities.
We have usually associated collectivism with communism.
Recently the upheavals in Eastern Europe have led to many states
attempting to throw off collectivism and replace it with more marketorientated arrangements. However, China stil remains collectivist and
China has one quarter of world's population.
By a mixed economy we mean one in which some economic
decisions are taken by the market mechanism and some collectively.
To this mixture we might also add a dash of tradition and command.
When we use the term mixed economy it is usually applied to
economies where there is a significant component of both collectivism
and free enterprise.
Despite the wave of privatization in the UK and elsewhere
significant economic decisions are still taken collectively. Education,
health care, defense and social security remain in the section of the
economy. In the UK 40 per cent of all exnenditure is undertaken by
the state. In countries such as the Nether-lands and Sweden over 60
per cent of the economy is state-directed.
We study economics in the belief that through understanding we
will be able to increase the wealth and welfare of society, and with the
conviction that knowledge is better than opinions, analysis better than
supposition. What we understand about economics is terribly
important; it influences us all. We can put this need no better than it
was put in 1936 by John Maynard Keynesin the closing words of the
most influential economics book of the century: The General Theory
of Employment, Interest and Money.
Between 1921 and 1939 the average level of unemployment was
14 per cent; it never fell below 10 per cent and in the worst years was
over 20 per cent. Conventional economic theory concentrated on the
demand for resources. This held that if there was unemployment it
was because wages were too high.
Keynes was English and worked for Cambridge University. His
views on the economy, however, were so radical that they were not
accepted by governments. In his most famous book The General
Theory of Employment, Interest, and Money Keynes analysed the
workings of the economy and put forward his solution to
Keynes maintained that it was not the demand for individual
resources which was important but the level of total (aggregate)
demand in the economy.
Management of the economy.
The objectives of economic policy.
Whatever political party is in power three main objectives of
policy are pursued.
• Control of inflation.
• Reduction of unemployment.
• Promotion of economic growth.
These objectives are not dispute; they are concerned with the
good housekeepings of the economy. Different governments may,
however place different degrees of importance on individual
There are three areas of action in which the government can
pursue its economic policies: fiscal policy, monetary policy.
Fiscal policy.
The term "fiscal policy" is used to describe the regulation of the
economy through government taxes and spending. The most important
aspect of this is the overall relationship between taxes and spending. If
the government spends more money in a year than it collects in taxes,
the situation is referred to as a budget deficit.
Monetary policy. This is regulation of the economy through
quantity of money available and through the price of money, i.e. the
rate of interest borrowers will have to pay. Expanding quantity of
money and lowering the rate of interest should stimulate spending in
the economy and is thus expansionary or inflationary.
The factors of production. The sum total of the economic
resources which we have in order to provide for our economic wants
are termed tie factors of production. Traditionally, economists have
classified these under four headings. They are:
-primary factors;
a) labour
b) land
c) capital
-secondary factors d) enterprise.
The first two are termed "primary factors" since they are not the
result of the economic process; they are so to speak what we have to
start with. The "secondary factors" however are a consequence of an
economic system.
Labour may be defined as the exercise of human mental and
physical effort in the production of goods and services.
Included in this definition is all the labour which people
undertake for rewards either in the form of wages and salaries or
income from self-employment.
I.and. Land may be defined as all the free gifts of nature.
As such land constitutes the space in which to organize
economic activity and the resources provided by nature. Thus include
within the definition are all mineral resources, climates, soil fertility.
The sea since it is a resource both for fishing and mineral exploitation
would also fall within the definition of land. The economists,
therefore, use the word land in a special way.
In practice it may be very difficult to separate land from other
factors of production.
Capital. We define capital as the stock of wealth existing at any
one time
As such capital consists of all the real physical assets of society.
An alternative formulation would be: Capital is all those goods which
are used in the production of further wealth. Capital can be divided
into owned capital, which is such things as buildings, machinery, and
working, or circulating capital which consists of stocks of raw
materials and semi manufactured goods.
Capital is a secondary factor of productions which means that it
is a result of" the economic system. Capital has been created by
current consumption, i.e. people nave refrained frorn consuming all
their wealth immediately and have saved re-sources which can then be
used in the production of further wealth Suppose we consider a very
simple economy in which the individual's wealth consists entirely of
potatoes. If the individual is able to retrain from consuming all the
potatoes, these may he planted and thus produce more wealth in the
• Indivisibilities. These may occur when a large firm is able to
take advantage of an industrial process which cannot be reproduced on
a small scale. For example, many of the modern colour printing
processes are not available on a small scale.
• Increased dimensions. In some cases it is simply a case of
"bigger is better". For example, an engine which is twice as powerful
does not cost twice as much to build or use twice as much material.
This is partly due to area volume relationships. For example, if we
square the dimensions of a ship we will cube its volume i.e. its ability
to carry cargo, while we will only square its resistance to motion.
Hence large ships are much more efficient than small ships, which at
least partly accounts for the trend towards bulk cargo carriers.
• Economies of linked processes. Technical economies are also
sometimes gained by linking processes together, e.g. in the iron and
steel industry, where iron and steel production is carried out in the
same plant, thus saving both transport and fuel costs.
• Commercial. A large-scale organization may be able to make
fuller use of sales and distribution facilities than a small-scale one. For
example, a company with a large transport fleet will probably be able
to ensure that they transport mainly full loads, whereas a small
business may have to hire transport or dispatch part-loads. A large
firm may also be able to use its Commercial power to obtain
preferential rates for raw materials and transport. This is usually
known as bulk buying.
Due largely to the work of the great economist John Maynard
Keynes it has been customary to divide economic theory into
microeconomics and macroeconomics. As its name implies
microeconomics is concerned with small parts of the economy and the
interrelationships between these parts, while macroeconomics is
concerned with the behavior of broad aggregates affecting the whole
economy. A microeconomics topic therefore might be explaining
movements in the prices of shoes or whether there has been
underinvestment in manufacturing vis a vis the service sector.
Macroeconomics topics come under the four headings of inflation,
unemployment, the balance of payment, and growth.
Since the late 1960s there has been a reaction to the macro/micro
distinction; monetarists and neo-classicists in particular have
attempted to explain all economic phenomena in terms of theories
based upon explanations of how individual markets function.
The market approach is commonly considered "capitalist". But
this is a misunderstanding. The market approach can equally be
"socialist". Whether ownership is in capitalist hands or not is no
longer primary. What matters is managerial autonomy and
accountability. What matters is whether resources are being allocated
to produce results and on the basis of results.
The prevailing idea that the U.S. economy is capitalistic because
ownership is private is a misunderstanding. Decisive ownership of
American big business is in the hands of the people - that is, in the
hands of the mutual funds and pension funds who are the fiduciaries
for the middle class and workers. Big business in the U.S. has not
been nationalized, but it has largely been socialized. In terms of the
classical definition, the U.S. is, at best, a mixed and may steadily be
approaching a socialist economy in which the public owns the means
of production. But the U.S. manages largely on the basis of local
autonomy of the enterprise and allocates resources on the basis of
results. It is still a market economy.
Japan conforms even less to the traditional identification of
ownership as the determinant. If anyone in Japan can be said to own
the big companies, it would be their employees and especially their
manages. Since they cannot be dismissed but have lifetime
employment, they are what the law calls the beneficial owners even
though they have no legal title. Yet, Japan is clearly not a socialist
The most searching discussion of market economics in the last
fifty years has not been conducted in the free-enterprise countries or in
the free-enterprise camp. It has been the discussion of what is known
as socialist competition, that is, competition in an economy in which
the means of production are not owned by private capitalists. This
discussion goes back to the years immediately following World War I
when the Social Democrats, newly in power, expected to nationalize
German business. They set up a powerful Socialization Commission
to work out the transition on the from a capitalist to a socialist
economy. The economists on the Socialization Commission were
themselves mostly committed socialists. But they had also
experienced first-hand the inefficiency, ineffectiveness, and
wastefulness of Germany's planned economy during World War I.
Instead of a blueprint of a socialist economy, they produced what can
only be called a "capitalist manifesto".
Economics is a social science studying economy. Why study
economics? In fact, people do it for countless reasons. For many
people concern for the economy goes no further then the price of
tuition or the fear of losing a job. Many others, however, are becoming
aware that their job prospects and the prices they pay are somehow
related to national trends in prices, unemployment, and economic
growth. Although few people think in terms of price indexes and
graphs, most of us now recognize the importance of major economic
events. And that's why so many people worry about such abstractions
as unemployment rates, inflation, economic growth, etc.
As a scholarly discipline, economics is two centures old. The
first scientist who made extraordinary contributions in economic was
Adam Smitt. He was born in a small fishing town near Edinburgh,
Scotland. At the age of 28, Adam Smitt became Professor of Logic at
the University of Glasgow. Some time later, he became a tutor to a
wealthy Scottish duke. Then he received a grant and with the financial
security of this grant, Smitt devoted 10 years to writing his work "The
Wealth of Nations" which founded economic science. It was published
in 1776. His contribution was to analyze the way that markets
organized economic life and produced rapid economic growth. He
showed that a system of price and markets is able to coordinate people
and business without any central direction. Almost a century later, as
capitalist enterprises began to spread, there appeared the massive
critique of capitalism: Karl Marx's "Capital". Marx proclaimed that
capitalism was doomed and would soon be followed by business
depressions, revolutionary upheavals and socialism.
In 1936 John Maynard Keynes published "The General Theory
of Employment, Interest and money". Economics was supposed to
help government monetary and fiscal policies to tame the worst
ravages of business cycle. Later in the 80's and 90's, the fundamental
insights of A. Smith were discovered again.
What exactly is the subject that the economists from Smith to
Marx to the present generation have analyzed?
Economics is the study of how societies use scarce resources to
produce valuable commodities and distribute them among different
No brief description can offer clean guidance to the content and
character of economics but numerous writers have attempted that. A
notable economist of the last century Alfred Marshall called
economics "a study of mankind in the ordinary business of life".
Another notable economist Lionel Robbins, in the 1930's, described
economics as "the science of choice among scarce means to
accomplish unlimited ends". During much of modern history,
especially in the nineteenth century, economics was called simply "the
science of wealth".
The scope of economics is indicated by the facts with which it
deals. These consist mainly of data on output, income, employment,
interest rates, prices and related magnitudes associated with individual
activities of production, transportation and trade.
There are four major economic goals that are generally accepted.
These goals are:
• Full employment;
• Price stability;
• Economic growth;
• An equitable distribution of income.
In each case, the goal itself is formulated through the political
process. The economist's job is to help design policies that will
allocate the economy's resources in ways that best achieve these goals.
In 1776, new technologies were being invented and applied to
the manufacture cotton and wool, iron, transportation and agriculture
in what came to be called "The Industrial Revolution".
Adam Smith was keenly interested in these events. He wanted to
understand the sources of economic wealth, and he brought his acute
powers of observation and abstraction to bear on this question.
His answer was: a) the division of labour; b) free domestic and
international markets.
Smith identified the division of labour as the source of "the
greatest improvement in the productive powers of labour". The
division of labour became even more productive when applied to
creating new technologies.
The economy comprises millions of people and thousands of
firms as the government and local authorities, all taking decisions
about prices and wages, what to buy, sell, produce, export, import and
many other matters. All these organizations and the decisions they
take play a prominent part is shaping the business environment in
which firms exist and operate.
The economy is complicated and difficult to control and predict,
but it is certainly important to all businesses. You should be aware
that there are times when businesses and individuals have plenty of
funds to spend and there are times when they have to cut back on their
spending. This can have enormous implications for business as whole.
When the economy is enjoying a boom, firms experience high
sales and general prosperity. At such times, unemployment is low and
many firms will be investing funds to enable them to produce more.
They do this because consumers have plenty of money to spend and
firms expect high sales. It naturally follows that the state of the
economy is a major factor in the success of firms.
However, during periods when people have less to spend many
firms face hard times as their sales fall. Thus, the economic
environment alters as the economy moves into a recession. At that
time, total spending declines as income falls and
Scientists and engineers, trained in extremely narrow fields,
became specialists at inventing. Their powerful skills speeded the
advance of technology. Machines started performing repetitive
operations faster, and more accurately than people.
But, said Smith, the fruits of the division of labour are limited by
the extent of the market. To make the market as large as possible,
there must be no impediments to free trade both within a country and
among countries.
Smith argued that when each person makes the best possible
economic choice based on self-interest, that choice leads as if by an
invisible hand to the best outcome for society as a whole
unemployment rises. Consumers will purchase cheaper items and cut
expenditure on luxury items such as televisions and cars.
Changes in the state of the economy affect all types of business,
though the extent to which they are affected varies. In the recession of
the early 1990's, the high street banks suffered badly. Profits declined
and, in some cases, losses were incurred. This was because fewer
people borrowed money from banks, thus denying them the
opportunity to earn interest on loans, and a rising propotion of those
who did borrow defaulted on repayment. These so called "bad debts"
cut profit margins substantially. Various forecasters reckoned that the
National Westminster Bank's losses in the case of Robert Maxwell's
collapsing business empire amounted to over $ 100 millions.
No individual firm has the ability to control this aspect of its
environment. Rather, it is the outcome of the actions of all the groups,
which make up society as well as being influenced by the actions of
foreigners with whom the nation has dealings.
The words «the economy» are words we hear or read almost
every day. For example, we may be told that "the world economy is in
the doldrums", or "European economy is making little progress out of
recession", or "the UK economy is beginning to recover", or "the
Scottish economy has held up relatively well during the recent
But what is mean by the economy? What is an economy? What
happens in one? How dies an economy work?
The economy is a social mechanism, which answers these three
questions. The economy means a system for the management, use and
control of the money, goods and other resources of a country,
community or household.
Opportunity cost is the forgone benefit of the next best
alternative when scarce resources are used for one purpose rather than
another. If We use some of our limited resources for one purpose, we
must give up the opportunity to use these resources for other purposes.
Thus, the term "opportunity cost" refers to the most desirable of the
alternatives not chosen. If, for example, a piece of land could be used
for an office building, a sport stadium, a department store, or a parking
garage, the opportunity cost of using the land for a department store is
the loss of only the most desirable of the forgone alternatives. It is
either the loss of the office building or of the sports stadium or of the
parking garage - not all three; which of these is the most desirable can
be determined only by more careful investigation. If a young college
graduate chooses to become an accountant rather than a lawyer or an
architect or an engineer, opportunity cost refers only to the loss of the
most important of the forgone — alternatives.
Trade-offs involve accepting or choosing less of one thing to get
more of something else. Individuals who choose one good or service
instead of another, or more of one thing and less of another, are
making a tradeoff Society also makes trade-offs, e.g.., between its
need for more energy and its desire to preserve the environment
Evaluating trade-offs, when done carefully and systematically,
involves comparing the costs and benefits of decisions that affect
different groups within the economy; e.g.., the rich vs poor, city
residents vs rural residents, etc.
Most choices and trade-offs are not all-or-nothing propositions;
instead, they typically involve small changes at the margin - a little
more of for a little less of that. Decisions about small changes at the
margin are made more often than decisions about big changes, and the
former are usually easier to access then the latter.
1. Everybody should master the tools of the trade. To analyse
economic issues economists use both models and data.
2. A model or theory makes a series of simplifying assumptions
from which it deduces how people will behave. It is a deliberate
simplification of reality. Models are frameworks for organizing the
way we think about the problem. They simplify by omitting some
details of the real world to concentrate on the essentials. From this
manageable picture of reality we develop our analysis of how the
economy works.
3. An economist uses a model in the way a traveller uses a map.
A map of London misses out many features of the real world-traffic
lights, roundabouts - but if you study it carefully you can get a good
picture of how the traffic is likely to flow and what will be the best
route to take. This simplified picture is easy to follow, yet helps you
understand real world behaviour when you drive through the city in
the rush hour.
4. The data or facts interact with models in two ways. First, the
data help us quantify the relationships to which our theoretical models
draw attention. It may be insufficient to work out that all bridges
across the Thames are likely to be congested. To choose the best route
we need to know how long we would have to queue at each bridge.
We need some facts. The model is useful because it tells us which
facts are likely to be the most important. Bridges are more likely to be
congested than six-lane motorways.
5. Second, the data help us test our models. Like all careful
scientists, economists must check that their theories square with the
relevant facts. Here the crucial word is "relevant". It is this that
prevents a chimpanzee or a computer sifting through all the facts in
the world to establish the single definitively correct theory. For
example, it turns out that the number of Scottish dysentery deaths is
closely related to the actual inflation rate in the UK over many
decades. Is this a factual coincidence or the key to a theory of inflation
in the UK? The facts alert us to the need to ponder this question, but
we can make a decision only by recourse to logical reasoning.
In this instance, since we can find no theoretical or logical
connection, we regard the close factual relationship between Scottish
dysentery deaths and the UK inflation as a coincidence that should be
ignored. Without any logical underpinning, the empirical connection
will break down sooner or later.
Britain lives by manufacture and trade. For every person
employed in agriculture eleven people are employed in mining,
manufacturing and building. The United Kingdom in one of the
world's largest exporters of manufactured goods per lead of
Apart from coal and iron ore Britain las very few natural
resources and mostly depends on imports. Its agriculture provides only
half the food it needs. The other half and most of the raw materials for
its industries such as oil and various metals ( copper, zinc, uranium
ore end other) have to be imported Britain also has to import timber,
cotton, fruit and farm products.
Britain used to be richly forested but most of the forest were cut
down to make more room for cultivation. The greater part of land is
used for cattle and sheep breeding and pig raising. Among the crops
grown on the farms are wheal, barley and oats. The fields are mainly
in the eastern part of the country. Most of the farms are small ( one
third of them is less than one hundred arses ). Farms tend to be bigger
where the soil is less fertile.
In the past century Britain secured a leading position in the
world as manufacturer, marchant and bankes. After World War I the
world demand for the products of Britain's traditional industries textiles, coal and machinery - fell off, and Britain began expanding
trade in new engineering products and electrical goods.
The crisis of 1929 - 1933 brought about mass unemployment,
which reached its peak in 1931, Britain's share in the world industrial
output decreased. After the crisis production and employment
increased following some revival m world trade and as a result of the
extensive armament program.
During World War II Britain's economy was fully employed in
the war effort. Massed raids of German planes on British industrial
centres caused considerable damage to Britain's industry World War II
brought about, a further weakening of Britain's might. Great Britain is
no longer the leading imperialist power it used to be. It has lost its
colonies which used to supply it with cheap raw materials.
Britain produces quality expensive goods, which has always
been characteristic of its industry. A shortage of raw materials, as well
as the light cost of production makes it unprofitable for British
industry to produce semi - finished goods or cheap articles. Britain
mostly produces articles requiring skilled labour, such as precision
instruments, electronic equipment, chemicals and high quality
consumer goods Britain produces and export cotton and woolen
goods, leather goods and articles made of various kinds of synthetic
(man - made ) materials.
The original basis of British industry was coalmining, and the
early factories grew up hot far from the main mining areas Glasgow
and Newcastle became great centres of engineering and ship -building.
Landcashire produced cotton goods and Yoorkshire woolens, with
Sheffield concentrating on iron and steel. Birmingham developed light
engineering. There appeared a tendency for industry and population to
move to the south, particularly to the London area (Britain's industry
is now widely dispersed). Great progress was made in the
development of new Industrie's, such as the aircraft, automobile,
electronic industries and other. A number of atomic power reactors
were made. Great progress was made on the development of the
The United States is rich in natural resources, the main being
iron ore, coal and oil. The nation produces more than 100 million tons
of iron a year. Four fifth of the ore mined in the USA comes from the
Great Lakes region. Though a great deal of the ore has been used up,
its resources have been not exhausted. Most of the coal mined in the
USA is used by power plants to produce electricity. Coal is also used
in the chemical industries for the manufacture of plastics and other
synthetics. The production, processing and marketing of such oil
products as petrol (called "gasoline" or "gas" in the USA) make up
one of America's largest industries. The basic metals and minerals
mined in the United States are zinc, copper and silver. Some of the
main crops grown in the USA are wheat, maize, cotton, tobacco and
fruit. Cattle breeding and pig raising make up an important branch of
American's agriculture. To make the farmer's work more productive
scientific methods of farming are employed and modern technique of
freezing, canning and packaging farm products is used. The United
States is a highly industrialised country with various branches of
heavy industry prevailing, namely, the mining metallurgical,
automobile and chemical industries as well as engineering. Many
branches of light industry are also developed, among them are the
textile, food and woodworking industries.
A great deal of attention in American industry is devoted to
research and emphasis is made on the use of labour - saving machines.
In the past few years the number of workers has increased only a few
per cent, while the number of scientists and engineers in the plants has
almost doubled.
Mechanisation and automation do away with thousands of office
jobs, intensify production and increase labour productivity. But they
also brine about a further growth of unemployment.
New industries are created as new discoveries are made in
phisics, chemistry and other sciences. Atomic energy, for example,
has created a wide range of new industries. Electronics has become a
major industry.
Throughout American industry great emphasis is being made on
management training. A great number of schools are training young
people to become industrial leaders.
American industry is distributed univenly. Most of the industrial
enterprises are located in the eastern part of the country. But industry
is spreading out as there is a tendency to build factories far removed
from the home plant and closer to natural resources and markets.
Good transportation facilities and rapid communications systems
make it possible for the main plants to keep in touch with branch
The leading US exports are industrial machinery, electronic
equipment, textiles, grain, iron, coal, oil products and chemicals.
Sales Promotion, element of the marketing process that can close
the sale of goods or services to a potential customer by providing the
incentive to make a positive purchase decision. Sales promotion,
advertising, and salesmanship are the major techniques used in
merchandising products to the public. Salesmanship often takes the
form of a face-to-face encounter between the buyer and seller; the
presentation is set up to convince customers that the product on sale is
essential to their satisfaction. The lack of personal feedback between
buyer and seller is sometimes considered a drawback of the
advertising approach. Selling by telephone, although it is significantly
less effective than personal selling, is still considered an important
method of merchandising. In the 1980s, a growing promotional
technique involved in-home shopping programs using cable television
The traveling salesman appeared late in the 19th century both in
Europe and in the U.S. The early itinerant peddler carried his goods on
his back or on his horse, working his way from a port city through the
hinterlands. With the coming of the railroad and the assurance given
to sellers by new credit-reporting systems, salespersons with their
sample cases moved across the land. Persuasive skill was less
important in those days of unsatisfied demand, and orders were readily
forthcoming. By 1900, however, with the increasing supply of
manufactured goods, buyers became more discriminating in their
purchases. Greater attention was given to training the sales force and
to providing buyer incentives. The growth of industrialization and
urban living led to the development of merchandising as a major
business endeavor. The use of sales promotion practices has
experienced steady growth in the 20th century.
The techniques of sales promotion are used both to motivate
salespersons to improve their performance and to induce consumers to
purchase goods and services. Although sales promotion works most
closely with advertising, it is also related to other elements of
marketing: production services, packaging, price, and distribution. At
the manufacturing and wholesale levels of distribution, the methods
used to motivate personnel to meet specific goals usually fall into two
categories—sales incentive prizes (such as merchandise, travel, or
cash awards) and sales contests. Both are based upon the salesperson
reaching an objective above the normal sales quota.
Consumer promotions encompass a wide variety of techniques,
including sampling of goods or services, store redeemable "moneyoff" coupons to encourage the trial of products, special price-reduced
packages, mail-in premium merchandise offers, cash or coupon
refunds by mail, special product packaging, contests, and sweepstakes.
During recessionary periods, when the demand for consumer
expendable dollars becomes more competitive, there is greater
participation in refund, coupon, and premium offers. More than half
the households in the U.S. take advantage of some sales promotion
offers each year.
Sales promotion, now fully recognized as a vital element in the
marketing mix, has become a multibillion dollar industry. In recent
years, sales promotion expenditures have exceeded monies spent on
advertising and there are strong indications that this pattern of growth
will continue to maintain its economic edge.
Unemployment, enforced idleness of wage earners who are able
and willing to work but cannot find jobs. In societies in which most
people can earn a living only by working for others, being unable to
find a job is a serious problem. Because of its human costs in
deprivation and a feeling of rejection and personal failure, the extent
of unemployment is widely used as a measure of workers' welfare.
The proportion of workers unemployed also shows how well a nation's
human resources are used and serves as an index of economic activity.
The most common method of measuring unemployment was
developed in the U.S. in the 1930s; it is followed by many other
countries on the recommendation of the International Labor
Organization. In a monthly survey of a sample of households
representing the entire civilian population, information is obtained
about the activity of each person of working age (16 years of age or
older in the U.S.). To ensure precision and ease of recollection, the
interviewers ask what people were doing in a single week. A person
who did any work during that week for pay or profit, worked 15 hours
or more as an unpaid worker in a family business, or had a job from
which he or she was temporarily absent, is counted as employed. A
person who was not working but was looking for work or was on a
temporary layoff and available to take a job is counted as unemployed.
The number of unemployed is then divided by the number of people in
the civilian labor force (that is, the sum of the employed and the
unemployed) in order to calculate the unemployment rate. In the U.S.,
statistics for states and local areas are based partly on the same survey
and partly on estimates of unemployment built up from
unemployment-insurance records; these records, however, do not
include all the unemployed, since many people who are seeking work
are not eligible to receive unemployment compensation (see
Unemployment Insurance).
In some countries, instead of a special survey, unemployment
estimates are developed from data on the number of people who are
looking for work through the public employment offices or the
number receiving unemployment compensation payments.
Economists have described the causes of unemployment as
frictional, seasonal, structural, and cyclical.
Frictional unemployment arises because workers seeking jobs do
not find them immediately; while looking for work they are counted
as unemployed. The amount of frictional unemployment depends on
the frequency with which workers change jobs and the time it takes to
find new ones. Job changes occur often in the U.S.: A January 1983
survey showed that more than 25 percent of ail workers had been with
their current employers one year or less. About a quarter of those
unemployed at any particular time are employed one month later. This
means that a considerable degree of unemployment in the U.S. is
fractional and lasts only a short time. This type of unemployment
could be reduced somewhat by more efficient placement services.
When workers are free to quit their jobs, however, some frictional
unemployment will always be present.
Seasonal unemployment occurs when industries have a slow
season, such as construction and other outdoor work in winter. It also
occurs at the end of the school year in June, when large numbers of
students and graduates look for work. At its seasonal high point
(January and February), unemployment in the U.S. between 1976 and
1986 was typically 20 percent higher than at the seasonal low
Structural unemployment arises from an imbalance between the
kinds of workers wanted by employers and the kinds of workers
looking for jobs. The imbalances may be caused by inadequacy in
skills, location, or personal characteristics. Technological
developments, for example, necessitate new skills in many industries,
leaving those workers who have outdated skills without a job. A plant
in a declining industry may close down or move to another area,
throwing out of work those employees who are unable or unwilling to
move. Workers with inadequate education or training and young
workers with little or no experience may be unable to get jobs because
employers believe that these employees would not produce enough to
be worth paying the legal minimum wage or the rate agreed on with
the union. On the other hand, even highly trained workers can be
unemployed; this happened in the U.S. in the early 1970s, for
example, when the large numbers of new graduates with doctoral
degrees in physics and mathematics exceeded the number of jobs
available in those fields. If employers practice illegal job
discrimination against any group because of sex, race, religion, age, or
national origin, a high unemployment rate for these workers could
result even when jobs are plentiful. Structural unemployment shows
up most prominently in some cities, in some occupations or industries,
for those with below-average educational attainments, and for some
other groups in the labor force. In June 1992, for example, when the
U.S. civilian unemployment rate was 7.8 percent, the rate in the state
of New York was 9.2 percent; аor teenagers 16 to 19, 23.6 percent; for
black workers, 14.9 percent; and for retail workers, 9.2 percent.
Cyclical unemployment results from a general lack of demand
for labor. When the business cycle turns downward, demand for goods
and services drops; consequently, workers are laid off. In the 19th
century, the U.S. experienced depressions roughly every 20 years. A
long and severe depression occurred in the 1890s, when
unemployment reached about 18 percent of the civilian labor force,
and four less-severe depressions occurred in the first quarter of the
20th century. The worst depression in U.S. history was in the 1930s;
at its height, one worker in four was unemployed, and some remained
out of work for years. See Business Cycle.
As a result of this depression, the U.S. government took steps to
alleviate unemployment. In the mid-1930s millions of jobs were
provided by public works and other special programs. Notable among
the federal agencies established to carry out these programs were the
Civilian Conservation Corps and the National Youth Administration,
which employed young workers on a wide variety of projects; and the
Work Projects Administration, which embarked on a broad program
involving both public-works construction and cultural and recreational
Another New Deal measure was the Social Security Act of 1935,
which set up the first comprehensive social-insurance system in the
U.S. (see Social Security). It introduced unemployment insurance,
providing workers who lose their jobs with a weekly compensation
payment. By maintaining the workers' purchasing power,
unemployment insurance reduces cyclical swings in demand, thus
helping trade and industry.
The enactment of various laws aimed at reviving business and
industrial activity resulted in a substantial improvement in U.S.
economic conditions and a decline in unemployment. Soon after the
outbreak of World War II in September 1939, the U.S. government
launched a program for expanding and modernizing the national
defense system. The program provided industry with a powerful
stimulus, and unemployment rapidly declined. After the U.S. entered
the war in December 1941, not only was the goal of full employment
attained, but a shortage of labor replaced the previous shortage of jobs.
In the postwar period a major new measure was passed by the
Congress. The Employment Act of 1946 proclaimed that the federal
government would take the responsibility for maintaining high
employment levels, economic stability, and growth; that is, the
government would coordinate its economic policies (such as those on
taxation, expenditures, foreign trade, and control of money, credit, and
banking) in such a way as to prevent serious depressions. A Council
of Economic Advisers was set up to monitor the economy and provide
advice to the president and Congress. Between 1945 and 1990 nine
cyclical swings in unemployment occurred; all were smaller than the
1930s depression. During this period the unemployment rate was as
low as 2.9 percent (1953) and as high as 9.7 percent (1982). Because
of cutbacks in the unemployment insurance program and changes in
the nature of employment during the 1980s, however, only 37 percent
of jobless workers received benefits in 1990.
Fears that the introduction of automation and other labor-saving
technology would increase unemployment have led some workers to
oppose such changes. Labor-saving methods, however, increase
output per worker and make possible rising levels of worker income.
In order to deal with the effects of technological change, the
government passed several acts, such as the Manpower Training and
Development Act (1962) , the Comprehensive Employment and
Training Act (1973) , and the Job Training Partnership Act (1982), to
set up programs designed to train the unemployed in those skills in
which there was employment opportunity.
A major policy issue is the relation of unemployment to
inflation. In theory, when demand for labor rises to the point at which
unemployment is low and employers find it difficult to hire qualified
workers, wages increase, pushing production costs and prices higher
and thus contributing to inflation; when demand declines and
unemployment increases, inflationary pressures on wages and
production costs are relieved. Confounding this theory, however, both
inflation and unemployment rates were high in the 1970s. The
government adopted policies to control inflation that involved
reducing demand in the economy in the expectation that one of the
costs of lowering inflation would be rising unemployment. Indeed, the
unemployment rate rose from 5.8 percent in 1979 to 9.7 percent by
1982 before dropping back to between 5 and 7 percent in the mid- and
late 1980s.
The post-World War II period in Europe was characterized by
sharp rises in unemployment resulting from the wartime destruction of
many industries, the addition to the labor force of large numbers of
war veterans, and a variety of consequent economic maladjustments.
U.S. aid helped the highly successful efforts of Western European
countries to rehabilitate their industries and provide employment for
their workers (see European Recovery Program).
Most of the major nonsocialist industrialized countries had lower
rates of unemployment than the U.S. by the 1950s. In the 1960s,
when the U.S. unemployment rate averaged 5-6 percent, only Canada
had a higher rate (7 percent); Italy had a rate of 4 percent, and all the
other Western European industrial nations, as well as Japan, had rates
of about 2 percent or less. Attempts to explain these disparities
focused on social and economic differences among nations, including
the following: the more rapid growth of the labor force in the U.S.;
more years of schooling in the U.S., with many students working parttime and seeking jobs frequently; measures taken in European
countries to reduce seasonal unemployment by spreading work over
the year; European practices of placing youth in their midteens into
apprenticeship and other work-training arrangements that promote job
stability; legal restraints in some countries against laying off workers;
extensive retraining programs for unemployed workers to update their
skills; and greater attachment of workers to their jobs in both Europe
and Japan. By early 1992 Japan's unemployment rate was still low
(just over 2 percent), despite an economic slowdown, but the rate was
approaching 10 percent in Britain and France and generally exceeded
that rate in Eastern Europe, where formerly socialist economies were
adjusting to free-market capitalism.
The Soviet Union maintained no statistics on unemployment, nor
did it have unemployment insurance. Generally, workers were kept on
the payroll whether or not they were needed, making for a low
productivity rate. In early 1992, unemployment in Russia was reported
to be less than 1 percent, but the government was opening
unemployment offices, preparing for an increase as more people
began working in the private sector.
In developing nations in Asia, Africa, and Latin America a much
more serious and widespread problem, is underemployment— that is,
people are employed only part time or at work that is inefficient or
unproductive, with a correspondingly low income that is insufficient
to meet their needs. Much of the unemployment and
underemployment in developing nations has accompanied migration
from rural to larger urban centers.
In industrialized countries, with unemployment insurance and
other forms of income maintenance, unemployment does not cause as
great a hardship as it once did. Measures to stabilize the economy
have made economic downturns briefer and less severe. Workers are
still threatened by long periods of unemployment, however, and some
workers bear a disproportionate burden. The problem of modern
governments is how to get the benefits of economic flexibility and
rising productivity while reducing the number of unemployed
workers, keeping their spells of joblessness short, maintaining their
income, and helping them return to work with viable skills.
Free-Market Economy, economic system in which individuals,
rather than government, make the majority of decisions regarding
economic activities and transactions (see Capitalism) . Individuals are
free to make economic decisions concerning their employment, how
to use or accumulate capital, what expenditures to make, and whether
to use their resources now or to save them for later consumption. The
principles underlying free-market economies are based on laissez-faire
(non-intervention by government) economics and can be traced to the
18th century British economist Adam Smith. According to Smith,
individuals acting in their own economic self-interest will maximize
the economic situation of society as a whole, as if guided by an
"invisible hand." In a free-market economy the government's function
is limited to providing what are known as "public goods" and
performing a regulatory role in certain situations.
Public goods, which include defense, law and order, and
education, have two characteristics: consumption by one individual
does not reduce the amount of the good left for others; and the benefits
that an individual receives do not depend on that person's contribution.
An example is a lighthouse. One individual's use of light provided by
a lighthouse does not reduce the ability of others to use it. In addition,
the lighthouse owner cannot restrict individuals from using the light.
The latter illustrates the "free-rider" phenomenon of public goods—
both those who helped pay for the lighthouse and those who did not
will enjoy the same amount of light. The "free-rider" problem can be
eliminated if governments collect taxes and then provide public goods.
Government's role in a free-market economy also includes
protecting private property, enforcing contracts, and regulating certain
economic activities. Governments generally regulate "natural
monopolies" such as utilities or rail service (see Monopoly). These
industries require such a large investment that it would not be
profitable to have more than one provider. Regulation is used in place
of competition to prevent these monopolies from making excessive
profits. Governments may also restrict economic freedom for the sake
of protecting individual rights. Examples include laws that restrict
child labor, prohibit toxic emissions, or forbid the sale of unsafe
Proponents of free-market economies believe they provide a
number of advantages. They see free-market economies as
encouraging individual responsibility for decisions and they believe
that economic freedom is essential to political freedom. In addition,
many people believe that free markets are more efficient in economic
terms. Free markets provide incentives both to individuals to allocate
resources, such as labor and capital, among the most productive uses,
and to firms to produce goods and services that the public wants,
using the most efficient means of production.
Free-market economies are also criticized. Opponents believe
that a free-market economy cannot ensure basic social values, such as
alleviating poverty, or that the income distribution that results from a
free-market economy may not be equitable. A free-market economy
may also permit the accumulation of vast wealth and powerful vested
interests that could threaten the survival of political freedom.
Alternative economic systems include communism and mixed
economies. In communism, the government plans the economy and all
means of production are publicly owned. The economy of the former
Union of Soviet Socialist Republics was an example of a planned
economy: all decisions regarding production and distribution were
made by the government. In contrast, a mixed economy is one where
the government does some planning and owns or controls more
industries than in a free-market economy. Governments may own key
industries such as steel, aviation, and banking, while the individual
still plays an important role. Sweden and France are examples of
mixed economies.