Why Economies rise or fall Flashcards
Angus Maddison: Scottish economist whose writings are the standard by which growth statistics are measured
Economic growth for 5% for more than 5 years are extraordinary. Medium growth rate is 2%, separating top half and bottom half growing economies. if less than 1%, that’s slow growing economies.
The path to riches is not one single path, but many paths.
self-organized/self-corrected free market by classical economy create a lot of problems such as injustice, monopoly. this was the reason where US government stepped in and create central banks, create rules of law to limit the flaws of free market and regulate it.
before the industrial revolution, there is one critical piece why it happened was agricultural revolution. The Agricultural Revolution of the 18th century paved the way for the Industrial Revolution in Britain. New farming techniques and improved livestock breeding, improved crop yields led to amplified food production. This allowed a spike in population and increased health. The new farming techniques also led to an enclosure movement.
During industrial revolution, people received incentive to have their own ideas. they save not for precautionary reasons but for being rewarded for saving to reinvest. people can make own their choices to learn new skills. specialization increase further improved productivity.
Amercian’s self-correcting economy stopped at 1929 great depression. there came the entire new view of modern economy. it started to adopt the mid road between fully self-correcting free market to fully state-organized.
Why there was great depression?
great depression challenged the notion of free market’s self-correcting mechanism and the conventional faith in price self-adjustment process. John Maynard Keynes said” the failure of aggregate demand required government to act.”
The saving rate in US is lower than its peer economies, mainly driven by confidence in US economy (there were only 3 quarters of negative growth between 1987 and 2007) and the stability of its system. due to the interest rate in US, there was no high penalty for not saving or high reward for saving. People spend a lot of money in houses and in consumption out of their short-run mentality. People don’t feel the need to be long-sighted.
Why is the world so willing to lend to reckless U.S. economy? how to explain the global capital inflow?
when the global capital begins to shake, when the bubble began to burst and finally became painful obviously, the extraordinarily rising housing prices could not sustained, when the economy crumbled, as the pessimism spread, as profit fell, in 2008 and 2009, US engaged the most massive stimulus plan and break from self-correction in its economic history: US doubled money supply in a week to support the banks and boost confidence. the Congress passed over a trillion dollar stimulus plan to create confidence. this was the result of both ideas from John Maynard Keynes and Milton Friedman.
US mega power status coincides with end of WWII. starting WWII, US and EU started to diverge and developed two different economic systems. there was no battles on soil of US. before WWII, continental EU was already social liberal and already created social safety net. while in US. even after 1929 great depression, US increased its social safety net but still was pretty much in a model of free market with little government intervention. after WII, most strong EU economies were devastated by the war.
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Adam Smith’s main study
1. nature of wealth: wealth is the things produced by common people not the gold owned by kings
2. necessity of market: self-interests motivates people to trade and bargain and market is the best mechanism to create greater wealth
3. benefits of specialization: it can improve productivity
he believes in free trade and inevitable income inequality.
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Karl Marx:
he created the word “capitalism” in his book “das capital”. capitalism is economic system that centers on private property, market and profits.
Karl Marx’s 4 key ideas: Class society Development of capitalist industry Rise of the working class or proletariat Inevitability of socialism
KM and Adam smith shared the same view that industrialization set a stage for better living standards but KM pointed out the conflicts between classes while AS didn’t. KM believed workers in industrials will form trade union to throw off capitalism and form socialism to distribute wealth to workers.
A lot of socialists in EU got their ideas from KM. such as British labour party came from trade union, an idea from KM.
there is no purely market or socialist economy.
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what are the key differences between American and Europe economies after WWII?
- regulation level: EU has a much stronger regulation for economy
- protection for labor force and unemployment: EU is much stronger, labor union is stronger, so the work hour is lower in EU and have more vacations
- EU has expanded benefits for health care and education. most have full-scale health care.
- higher taxes in EU
- slower economic growth in EU
