Download EconomicTheoriesLecture20 11

Economic Theories
LHS Social Studies Department
Economics
• The study of
human efforts to
satisfy seemingly
unlimited wants
through limited
resources.
• TANSTAAFL –
There Ain’t No
Such Thing As A
Free Lunch
Economic Systems
• All systems make three major
decisions:
• What and how much should be
produced
• How goods and services should be
produced
• Who gets the goods and services
that are produced
Supply and Demand
Supply and Demand – Surplus
Supply and Demand - Shortage
Production Possibility Curve
Capitalism:
•
An economic system providing free
choice and individual incentive
• 5 Main Characteristics of Capitalism
• Private Ownership
• Free Enterprise (Private ownership of
the means of production)
• Competition
• Freedom of Choice
• Possibility of Profits
Adam Smith
• Scottish
Philosopher
• 1776 wrote “The
Wealth of
Nations”
• Laissez-faire
economics: “to
let alone”,
government
should keep its
hands off the
economy
Adam Smith
Keynesian Economics
• John Maynard Keynes
• “The General Theory of
Employment, Interest
and Money”
• Believed that the
government should
intervene in economic
downturns
• Government can act in
a counter-cyclical
manner to ‘un-stick’
prices and wages
Keynesian Economics
• Consumer Confidence is often driven
by ‘Animal Spirits’ (Bull and Bear)
• Goal of government policy should be to
reduce unemployment
• Debt doesn’t matter
• Theories popular (1932-1979 and post2007)
Keynes’ Formula
Y = F(K,L)
• A standard macroeconomic production function
assumes that output is a function of two main
classes of inputs, capital and labor. Technology
brings these inputs together to produce goods and
services. Thus, economists write the production
function as Y = F(K,L), where Y is output, K is
capital, and L is labor. Technology is embedded in
the function F.
Classical Economic Theories
• Friedrich von Hayek
/ Milton Friedman
• “The Road to
Serfdom”
• The only way to
preserve political
freedom is through
lassez-faire
capitalism
Friedrich von Hayek
Classical Economic Theories
• Low interest rates
cause economic
bubbles
• Goal of economic
policy is to control
inflation
• Unemployment will
remain low as long
as workers wages
are flexible
Milton Friedman
Mixed Market System
•
No nation in the world has a purely
capitalist system
Government influences the economy
in several ways
•
•
•
Largest employer and purchaser of
goods and services
Regulation
•
•
Pure Food and Drug Act
Aid Programs (Social Security,
Unemployment Benefits)
Socialism:
•
An economic system in which the
government owns the basic means of
production, distributes the products
and wages, and provides social
services
Socialism has three goals
•
•
•
•
Distribute wealth equally
Give society control of means of
production
Public ownership of land and factories
Democratic Socialism
•
People control the government
through free elections but
government owns basic means of
production and makes most economic
decisions.
•
Great Britain, Denmark, Norway
Communism
• Economic system in which the central
government directs all major
economic decisions.
• China, USSR, North Korea
• All industry and mass communications
are controlled by the state.
Karl Marx
•
Socialist historian and
philosopher who advocated
violent revolution
•
•
Wrote “The Communist Manifesto”
in 1848
Believed that the population is
divided into two classes:
•
•
Bourgeoisie: Capitalists, owners
of the means of production (the
rich)
Proletariat: Workers
Economics Simplified
• Capitalism:
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
Economics Simplified
• Socialism:
• You have two cows
• You give your neighbor one.
• Feudalism:
You have two cows.
Your lord takes some of the milk.
Economics Simplified
• Fascism:
You have two cows.
The government takes both,
hires you to take care of them
and sells you the milk.
• Communism:
You have two cows.
You must take care of them,
but the government takes all the milk.
Economics Simplified
• Enron
You have two cows.
You borrow 80% of the forward value of the two cows from
your bank, then buy another cow with 5% down and the rest
financed by the seller on a note callable if your market cap
goes below $20B at a rate 2 times prime. You now sell three
cows to your publicly listed company, using letters of credit
opened by your brother-in-law at a 2nd bank, then execute a
debt/equity swap with an associated general offer so that you
get four cows back, with a tax exemption for five cows. The
milk rights of six cows are transferred via an intermediary to a
Cayman Island company secretly owned by the majority
shareholder who sells the rights to seven cows back to your
listed company. The annual report says the company owns
eight cows, with an option on one more and this transaction
process is upheld by your independent auditor and no Balance
Sheet provided with the press release that announces that
Enron as a major owner of cows will begin trading cows via the
Internet site COW (cows on web).
Economics Simplified
• AN AMERICAN CORPORATION
• You have two cows.
• You sell one, and force the other to
produce the milk of four cows.
• You are surprised when the cow drops
dead.
Economics Simplified
• A FRENCH CORPORATION
• You have two cows.
• You go on strike because you want three
cows
Economics Simplified
• A JAPANESE CORPORATION
• You have two cows.
• You redesign them so they are one-tenth
the size of an ordinary cow and produce
twenty times the milk.
• You then create clever cow cartoon images
called Cowkimon and market them WorldWide.
Economics Simplified
• A SWISS CORPORATION
• You have 5000 cows, none of which
belong to you.
• You charge others for storing them
Economics Simplified
• A CANADIAN CORPORATION
• You have two cows.
• That one on the left is kinda’ cute...eh?