Economic Dimensions Flashcards
Market economy
All economic activities are performed by private people and companies
Government doesn’t interfere in economic activity
Personal freedom
Liberal economic policy
Defense used to justify the volatility of a market economy
Economic growth progresses over time
Advantages of a market economy
Competition - promotes quality goods, low prices, greater consumer choice
Incentivizing productivity and efficiency - increases economic flexibility to respond to market forces
Innovation - industry increases technological change and innovation to continue profiting
Disadvantages of a market economy
Price fixing/collusion - companies can conspire to keep prices artificially high to reduce competition
Dramatic fluctuations - prone to fluctuations between boom and bust (low and high employment) leading to economic uncertainty
Manipulative advertising - influences consumers to purchase products
Why are anti-trust laws enacted?
To prevent monopolies. This protects competition and its benefits for consumers
Why are monopolies bad?
Don’t allow for competition in a free market
Keynes
Advocated for a more significant role for government in the regulation of the economy
During prosperity:
Limit inflation by raising taxes, using a central bank to raise interest rates, and decrease government spending
During recession:
Stimulate the economy by lowering interest rates and taxes and increasing government spending
New Deal
Series of programs focused on relief to unemployed, reform to the economy, recovery from the Depression
First wave of programs focused on short-term efforts for all groups (more jobs, etc.)
Second wave of programs focused on redistributing power among businesses, consumers, farmers, and workers. Strong safety net, large-scale public works projects
Canada’s response to Depression part 1
Conservative prime minister Bennett didn’t initially intervene. He was elected on a platform that included projects to provide relief for unemployed
Established relief camps but soon cut government spending, believing that laissez-faire would lead the economy out of the crisis
Central bank was created to use interest rates to regulate the economy
Used a controversial section of the Criminal Code to disrupt Communist Party activities
Canada’s response to the Depression part 2
Economy wasn’t recovering, so government introduced programs similar to those of the New Deal
Mackenzie King was elected and government became much more involved in the economy and created public institutions and social programs characteristic of a welfare state and modern mixed economy
Crown corporations created to produce goods for the war effort - 80% was exported to Allied countries, contributing to success in the war and helped the economy. Employment in manufacturing increased by 50%
Padlock Law
Passed by Duplessis in 1937 in Quebec to suppress communist activities
Allowed the government to padlock any building used for communist meetings or activities for a year
Postwar consensus
End of WWI to end of the 1970s
Despite political differences, successive governments of the collectivist Labour Party and individualist Conservative Party maintained programs that made up the new British welfare state
Quebec and provincial government under Duplessis
Undertook ambitious public works projects after WWI. Established its own provincial income tax and used funds to expand infrastructure, schools, hospitals
Introduced the highest minimum wage
Strong opponent of organized labour. Provincial police often used to break up strikers’ picket lines. Anti-communist Padlock Law was struck down by the Supreme Court
Not a strong supporter of most social programs, since he preferred lower taxes
After his passing, Quebec strengthened social programs characteristic of the modern welfare state. nv
Economic Crises of the 1970s
United States withdrew from the Bretton Woods Agreement, which used the gold standard to set the exchange rates for currencies of most industrialized countries. Most other countries followed
World currencies were allowed to freely float on worth markets, leading to inflation and slowing economic activity
Fourth Arab-Israeli war occurred, and oil monopoly imposed a 5-month embargo on the US and Netherlands. Price of oil quadrupled, causing gas shortages and rationing in the US. Made goods more expensive, causing a rise in the rate of inflation and causing economy to slow
Stagflation
Recession and high inflation occur at the same time
Monetarist theory
Control of a country’s money supply is the best means to encourage economic growth and limit unemployment and inflation
Money supply is controlled through the regulation of interest rates
Most closely associated with Friedman
Milton Friedman
Inflation is primarily the result of an excess supply of money produced by central banks. When money supply is increased, consumer spending also increases, causing demand to rise, and inflation to increase
The amount of money issued by the central bank should be linked to economic indicators such as rate of inflation
Friedrich Hayek
In order for a collectivist society to function, government would have to maintain an extremely high level of control over society. Excessive government control of economic aspects of life would inevitably lead to government interfering in aspects of social lives, which is a danger to the liberty of the individual
It would be impossible in a centrally planned economy for the central planners to have sufficient information to make rational decisions. They don’t have enough information about demand to make appropriate decisions
Strongly influenced Thatcher
Friedrich and Hayek
Like Adam Smith, believed that the price system/free market is the only way to balance supply and demand while maintaining individual liberty
Reagonomics
Less government involvement
Reduced income and business taxes, reduced regulations, increased government spending on the military. Trickle-down economics
Trickle-down economics justification
By lowering tax rates, especially among the wealthy, economic growth will be encouraged through increased investment
The benefits of increased investment and government defence spending would trickle down through the economy to the working class
Wasn’t effective
Thatcher
Reduced government involvement and increased economic freedom and entrepreneurship
Sold much of the social housing, privatized many utility companies
Similarly to Reagan, didn’t like labour unions. Used the state to confront strikers, using police to storm picket lines
How monetarism works
When the money supply expands, it lowers interest rates. Banks have more to lend, so they’re willing to charge lower rates
Consumers borrow more to buy items like houses
Decreasing money supply rais
Neo-conservatives
Revival of classical liberalism
Emphasize fiscal restraint, believe government should privatize economic interests, restrict social spending, deregulate the economy
Promotes supply-side policies that promote business profitability
Dogmatic, prepared to use extreme measures to achieve their goals of free markets and democracy
Fiscal policy
Government spending
Expansionary fiscal policy
Grow the economy during downturns
Increase government spending, decrease taxes
Government spending greater than taxes
Contractionary fiscal policy
Contract the economy during periods of inflation
Decrease government spending, increase taxes
Government spending less than tax revenue - surplus
Problems with demand-side economics
Government spends too much
Large government deficits
High taxes
People become too reliant on the government - cradle to grave
Government becomes too big
Supply side policies
Deregulation
Decrease government spending
Cut taxes
Privatization
Return to capitalism for trickle-down
How do benefits trickle down?
Increased competition, innovation, higher output, increased business investment, higher incomes, more jobs
Results of supply side
Decrease in regulations, hurts vulnerable population, decrease social spending, increased income gap, more boom/bust cycles, business fraud
Welfare captalism
Initiatives in classical liberal economic system combined with government legislation to give workers protection
Welfare state
More government intervention, shift to modern liberalism
Taxes are the source of government revenue
Redistribution from rich to poor
Regulation
Square Deal
Theodore Roosevelt
Protect the public
Sherman Antitrust Act to dissolve monopolies and protect workers and consumers (Elkins and Hepburn Acts)
Trade union act
Implemented by FDR - right to form unions
Fiscal policy vs monetary policy
Taxes and government spending, interest rates
