HCJ3 Economics Seminar Paper

HCJ3 Week 6 - Seminar Paper - Economics

Economics

Adam Smith (1723 – 1790) published “The Wealth of Nations” in 1776; it asked and discussed why some countries are richer than others. His ideas can be summarised by saying that richer countries have 3 characteristics:

1.       Liberty – people are free to go and do as they please (within the law) and can calculate the risks and benefits of transactions they make.

2.       Free trade – people are not forced to produce certain things by the government but are free to produce what they wish.

3.       The ‘hidden hand of the market’ – people pursue their own self-interest to maximise utility (see Utilitarianism). This is beneficial through the law of unintended consequences (where our actions have impacts that we had not intended or considered).

However, Smith’s theory was widely criticised as it lead to the alienation of people through labour division. He also suggested that unemployment was only ever temporary; this became very unpopular during the depression in the 1920s and 30s.

David Ricardo (1772 – 1823) accepts most of Adam Smiths’ works. However, he differs to Smith in his idea of value. Smith suggests that there are two types of value: use and exchange. Whilst something may be useful, it is not necessarily got a high exchange value as it may be quite plentiful. Ricardo suggests that this is wrong; things like water (high use, low exchange) have a low price as very little labour is needed to produce it. He says that natural objects have no real value until humans interact with it and force value upon it; this is called labour power. He also says that, whilst supply and demand will have a factor on the price in the short term, the overall price for something tracks the amount of labour that goes into it.

Thomas Malthus (1766-1834) believe that population needed limiting as eventually it outstretched the supply of food, housing and jobs.

In his theory:

Population increase > ‘bad times’ > economic expansion > ‘good times’ > population increase > ‘bad times’ > etc.

This cycle drives the economy and other developments (such as in technology) forward. For this reason, Malthus was against the poor laws and for the Corn Laws as these interferences would prevent the cycle continuing properly.

However, history did not continue in the way he had predicted. His ideas failed to take into consideration that each extra person was an extra labourer to produce food, housing, and so on. Neither had he thought that the productivity could increase so dramatically with the use of new technology.

Karl Marx (1818 – 1883) theorised that Capitalism is unsustainable due to the ‘iron law of wages’; due to the need to create profits, the wages of labourers are insufficient to purchase the items they create. He says that capitalism exploits the working class through the surplus theory. The theory suggests that if a labourer earns the wages he needs to sustain himself each week by working 20 hours but is contracted to work 60, the other 40 are surplus labour and he money for working them is surplus value, which is how profit is created. The money the worker would earn in this time, essentially, goes to the employer. Instead of earning £15/hour for 20 hours work, labourers earn £5/hour for 60 hours work and the extra money becomes profit. The flaw in this, of course, is that Marx assumes that, no matter how much profit a company is making, it will only pay its workers enough to live off of. However, this is not the case of employers in developed countries which should have been the most affected and led the revolution. He also hadn’t considered the ‘credit’ system, where you can borrow money and repay it over time from banks.

In classical economics (like Adam Smith’s), money is said to have no effect on people’s actions and works merely as a scoring system. However, modern economic views suggest there is a “money effect” where the use of currency changes people’s behaviour.

John Maynard Keynes (1883 – 1946) says that saving money reduces the money in the economy, so your income also goes down. In a simplified version of this:

There are two people in the world, person A makes £100 a week by selling widgets to person B at £1 a widget and person B makes £100 a week by selling thingies to person A at £1 a thingy. The total income in this economy is £200, which corresponds to 100 widgets and 100 thingies.

If person B decides to save £50 out of his £100 and keep it in cash. As a result, person A’s income falls to £50 and the total income in the economy is now £150 - with the economy producing 50 thingies fewer than before. In the following week, person A only has £50 to spend which means that person B's income also falls to £50 and they end up buying fewer widgets.

Critics of this point out that this system would allow legislators to interfere with the ‘private sector’ & potentially affect the free market. He also doesn’t consider the complexities of modern banking, where savings are invested to try to create more money and help the economy.

Utilitarianism

Jeremy Bentham (1748 – 1832) was influenced by Hobbes’s negative outlook on human nature; his utilitarian outlook in “An Introduction to the Principles of Morals and Legislation” (1789) says the mankind is governed by pain and pleasure. He suggests that legislation needs to be able the gauge the value of pleasure and pain; it is the business of the government to promote the happiness of society by rewarding & punishing accordingly. As punishment is such an evil, in his opinion, it should only be used it if promises to exclude a greater evil. It should also work as a deterrent and should not be harsher than is necessary to deter the offender, the public or both from acting in such a manor in future.

He was less concerned with the morality of each individual and more interested in offering guidance to leaders and legislators on managing communities. He suggests that:

A: 

Is better than

B:

As, overall, you score more ‘happiness points’. Of course, this is dependent on if you focus on “most people” or “most happy”, therefore legislation needs to be supplemented by some sort of limit on the amount of inequality & degree of misery for the worst off.

John Stuart Mill (1806 – 1873) was a student of Bentham as a child. As such, many of his ideas are very similar to Bentham’s. However, he tries to improve them by ranking happiness rather than assuming all pleasures are of an equal value. He also emphasises the importance of setting limits to the constraints systems could put on individuals and their independence, though does not offer many ideas as to how to fix restrictive legislation.

In his book “Principles of Political Economy” (1848) he states that everyone should be taxed equally as progressive taxation penalises the hard working and those who save more of their money. He also says that we should have an almost entirely free market with the price being dependent on supply and demand rather than any government regulation. He made exceptions, however, on things like alcohol on utilitarian grounds. Later, his views began to bend more towards socialism: he suggested abolishing the wage system for a co-operative one.

Mill promoted economic democracy; in a capitalist economy, workers should be able to elect their managers. He also thought that population control was essential in the working class to improve their conditions and ease the competition for jobs as more competition means lower wages.

Currency and Inflation

Currency is a “unit of purchasing power” or a medium for exchange. It is, essentially, an I.O.U. for more stuff. Originally, it was backed by a “gold standard” where each sum of money was worth a certain amount of gold and could be exchanged in a bank; this is no longer the case.

Inflation is when currency becomes less valuable over time due to 2 factors:

·         People’s perception of money

·         Supply and demand (which has the bigger impact)

Printing more money increases inflation: doubling the number of notes in circulation halves their worth. This is bad for people on a fixed income, such as pensioners. For people who earn a wage, however, this has less of an impact as their wages increase at the same rate.