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 ( and post- 2007)

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 World- Wide.

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?