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UNIT VI
National Economics Simplified
Adam Smith (1723-1790)
• An Inquiry Into the
Nature and Causes of
the Wealth of Nations
• What is it that
actually makes a
nation wealthy?
Adam Smith (1723-1790)
• An Inquiry Into the
Nature and Causes of
the Wealth of Nations
• What is it that
actually makes a
nation wealthy?
• The productive power
of its people!
Adam Smith says:
• “It was not by gold or by silver, but
by labour, that all wealth of the
world was originally purchased.”
Adam Smith (1723-1790)
The Invisible Hand of
self-interest will
adjust the market
appropriately to
benefit both
producers and
consumers.
David Ricardo (1772-1823)
• Success in stocks
and loans
• Excited by
“Wealth”
• Monetarism
• Law of Diminishing
Returns
David Ricardo (1772-1823)
Law of Comparative
Advantage
Why we should trade
with others even
when we are
perfectly capable of
producing the good
ourselves.
David Ricardo (1772-1823)
Law of Comparative
Advantage
In simplified form, we
don’t care how many
hours the “other guy”
has to work, as long
as we get a lower
price.
Internationally,
You see that this is not much different from
the U.S. working a 40-hour week to produce
computer software, while folks in Sri Lanka
work 96-hour weeks stitching sneakers or
soccer balls.
(Remember this when you see the quote from Lester
Thurow)
David Ricardo (1772-1823)
Theory of Rents
Economic Rent is the
payment above what
it takes to keep land,
labor, or capital in its
current use.
(Would Willie Mays really
play baseball for free?)
David Ricardo (1772-1823)
Theory of Rents
Workers, Capitalists,
and Property Owners
form a complex
equation, in which
the Owners always
profit more than is
reasonable.
David Ricardo (1772-1823)
“This would be the
happiest country in
the world, and its
progress in
prosperity would be
beyond the powers
of imagination to
conceive, if we got
rid of two great evils
– the national debt
and the corn laws.”
John Stuart Mill (1806-1873)
• The Paradox of Taxation
• Suggested “Workfare”
• Government should
generally stay out of
Economics
• Fought for women’s
suffrage, poor rights, and
“enhanced humanity”.
Karl Marx (1818-1883)
Created
Dialectical
Materialism
• Thesis – A rich
minority gets richer.
• Antithesis – The poor
majority gets poorer.
• Synthesis – The poor
overthrow the rich.
Karl Marx (1818-1883)
• Communist Manifesto
• “Workingmen of all
countries unite!”
• (They have nothing to
lose but their chains.)
• Das Kapital
• Foolish Bourgeoisie
• Revolting Proletariat
Karl Marx (1818-1883)
Where’d Marx go
wrong?
Ignored Idealism
Felt Desperation
Didn’t see Middle Class,
welfare spending, or
the value of
Entrepreneurship
The NEW Institutionalists
• Economics can be applied to the Law!
– Does Rent Control help the poor?
– Criminals pay attention to Cost/Benefit ratios!
– Why does the Drug War fail?
John Maynard Keynes
(1883-1946)
• The General Theory
of Employment,
Interest, and Money
• Income determines
spending.
• Savings are the
enemy of economic
expansion.
• The Multiplier Effect
John Maynard Keynes
(1883-1946)
• The General Theory
of Employment,
Interest, and Money
• Fiscal Policy can
stimulate an economy
(Prime the pump,
govt. spending, cut
taxes = boost to
economy)
Repeat after me…
• Fiscal Policy is
• Monetary Policy is
The Monetarists Strike Back
• The government is not a very good driver.
• Growth has little to do with fiscal policy.
• The velocity of money is most important.
Milton Friedman leads the charge
• Consumption is
impressively stable.
• Monetary misuse has
accompanied every
major recession and
every large inflation.
• Crowding out results
from Keynesian fiscal
policy.
Harry Truman, Comedian
“I certainly wish I could
find a good onearmed Economist.”
“Why?”
“Because I am damn
tired of those who
say, ‘On the one hand
we could… but on the
other hand…’ ”
Arthur Burns
(Fed Chair 1970-78)
“…most economists
move from platform to
platform…”
• “The important factor
in the business cycle
is not the stock of
money, but the rate
of turnover of
money.”
3 Ways the FED controls the Money
Supply
• Prime Rate
–If it goes up…
• Reserve Ratio
–If it goes up…
• Open Market Operations
–If sales go up…
Arthur Burns
(Fed Chair 1970-78)
• “We have millions of
decision-making units
in this country.”
• “Let’s give them a
chance to do their
part.”
• “The economy
contains recovery
forces of its own.”
Yo-Yo-nomics?
A long-standing
Economic principle says
that we can control the
economy to some degree,
but not fully. If we
Expand too rapidly, we
will get Inflation, and any
attempt to decrease the
inflation will cause
Unemployment.
Pick Your Poison.
Paul Volcker
(Fed Chair 1979-87)
• “Sometimes the
technical analysis runs in
the same direction as
the psychology, so
making policy is easy.
But sometimes they run
in opposite directions.
And the psychology
often runs to extremes.”
Paul Volcker
(Fed Chair 1979-87)
• “Sometimes
it means
there is no
right policy.”
Alan Greenspan
• “…put Keynes’ head
on Friedman’s body.”
• Found the way to cut
inflation, decrease
unemployment, and
steadily grow the
economy with shrewd
monetary policy.
Alan Greenspan
So,
WHAT
WENT
WRONG?
George W. Bush
George W. Bush
Lester Thurow (1938- )
• The Zero-Sum Society
• How tax cuts with
military spending
“wrecks” the
economy
• How we benefit by
improving the
economies of Third
World countries
Lester Thurow says:
• “A passion for building a world-class economy that is
second to none in generating a high living standard for
every citizen is exactly what the United States and every
other country should seek to achieve.”
• “Change requires individuals who recognize that new
things can be done and who take the initiative to get them
done ... The existing bureaucracies, public and private, will
not take on the job of changing what is.”
• “Natural resources have dropped out of the competitive
equation. In fact, a lack of natural resources may even be
an advantage. Because the industries we are competing for
- the industries of the future –are all based on brainpower.”
Who ARE We Listening To?
Jim Cramer
Jim Cramer