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Macroeconomics 1.0 Overview & Concepts (cont'd) |
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Macroeconomics evolved out of the basic analytic instruments first developed in microeconomics, specifically the model of supply and demand developed by Alfred Marshall in the last part of the 19th and early part of the 20th centuries. In fact, our modern concept of macroeconomic analysis only began with the work of John Maynard Keynes in the 1930s. Accordingly, before beginning macroeconomics it is necessary to refresh our understanding of the basic mechanisms of microeconomic analysis. 1. Opportunity Cost, Scarcity & Relative Prices It is assumed in micro that human wants, needs and desires always exceed the available means to satisfy them, i.e., scarcity is a permanent condition. Such wants, needs and desires (as well as the means to satisfy them), are not just physical and/or financial, but also psychic. Put another way, scarcity is a permanent human condition and choice between both means and ends must be made. An excellent expression of the infinity of wants, needs and desires can be found in Maslow's "Need Hierarchy". Maslow (1908-1970) proposed that human beings reach fulfillment through satisfying a series of needs beginning with basic physiological ones like food, water and shelter and rises to increasingly abstract ones like love, self-esteem and personal expression. Only when primitive needs are satisfied can the individual progress up to higher levels in the hierarchy. Thus only the person reaching self-actualization will fully utilize one's potential. Put another way, once lower needs are satisfied, higher needs rise to consciousness and demand attention. They can be just as pressing as physical ones. Furthermore, ongoing satisfaction of lower needs is required to maintain the process, i.e., basic needs must be continuously satisfied. How to satisfy infinite wants, needs and desires subject to scarce resources requires a choice between alternatives, e.g., a pensioner choosing between food or medicine. The choice of the best alternative, however, implies that the next best alternative is not chosen. Put another way, the cost of choosing one alternative possibility is the next best alternative foregone. This is called 'opportunity cost'. All economic costs are opportunity costs serving to distinguish economics from accounting or business costs.
Monetary units (dollars, cents, francs, marks, pounds, yen, etc) are useful in determining economic or opportunity cost but they do not necessarily reflect 'real cost'. Monetary cost refers to the price paid on a market. Real cost, on the other hand, includes costs that are not necessarily reflected in market price, i.e., they are externalities or rather external to market price. A number of factors can lead to a difference between monetary and real cost. Thus real or opportunity cost includes the value of time involved in purchasing a good or service. If one works at an hourly job, one is paid a wage per hour that when multiplied by the number of hours worked equals one's income. This income does not, however, allow for the cost of getting ready for and re-creating after work and commuting both to and from work. Accordingly, the 'real' wage per hour would account for such external costs. Similarly, the market price of gasoline may not reflect costs associated with polluting the environment and contributing to so-called 'global warming'. Such additional costs are paid by society as a whole and are called 'external costs', i.e., external to market price. They must be included to calculate the real, economic or opportunity cost of a good or service. This is another example of the difference between economics and accounting cost. Carbon credits and other tradeable pollution permits are innovative ways to reconcile the two.
Assuming market price does reflect real cost we can determine the opportunity cost of different goods and services by calculating 'relative price'. Relative price is the ratio of one price to another. For example if the price of a Coke is $1.00 and chewing gum $0.50 the relative price of Coke is $1.00/$0.50 or 2, i.e. you could buy 2 packs of chewing gum for the price of one Coke. There are, of course, thousands if not millions of different goods and services all with different and changing market prices. Accordingly, relative price is usually expressed in terms of the price of a standard 'basket' of goods and services measured by a 'price index' over time. Thus we divide the monetary price of a good or service by the price index. The resulting 'relative price' tells us how much of the standard basket we must exchange to buy the given good or service. In the micro theory of supply and demand, price means 'relative price'. Thus when the price of a good or service falls, we do not mean its monetary but rather its relative price to other goods and services, i.e. it's opportunity cost declines. In macro theory concern focuses on the aggregate price level rather than the prices of specific goods or services. The question of relative 'international' prices is even more complicated. One widely used way of measuring 'purchasing power parity' in different countries is the 'Mac Index' which measures the number of hours of work required to buy a 'Big Mac' in different countries.
2. Futurity, Expectations & The Price Bargain Time plays a critical role in economic analysis. In fact there are two distinct forms of analysis based on time: static and dynamic. Static analysis involves an economic variable or phenomena in a specific fixed moment in time. Dynamic analysis involves analysis through time, that is from the past to the present, or from the present into the future. Two great economists enhanced economic understanding of Time. John Maynard Keynes introduced the concept of 'expectations'. Over time people's changing expectations of what tomorrow will bring causes their actions to change today. Similarly, John R. Commons introduced the concept of 'futurity' meaning people live in the future but act in the present. The difference between what we plan to do tomorrow and what we actually do today in expectation of tomorrow introduces a constantly changing dynamic to economic analysis, especially macroeconomic analysis. For example, if we expect interest rates will fall tomorrow, we hold off borrowing money today. But when tomorrow does comes and interest rates do not fall our plans must be changed. Another important concept introduced by Commons is the 'price bargain'. Essentially Commons noted that the evolution of the concept of property has led away from the idea of tangible physical property towards increasingly intangible property specifically the buying and selling of the 'expectation of profits'. Thus business assets such as 'good will' and intellectual property are playing an ever increasing role in the so-called 'knowledge economy'. For further information please see Chapter VII: The Price Bargain from Common's seminal 1924 work "The Legal Foundations of Capitalism".
All things being equal, the higher the price of a good or services, the smaller the quantity demanded. This is the Law of Demand. Among other things the law reflects the substitution and income effect of a price increase on the quantity of a good demanded by consumers. i - Substitution Effect: when the price of a good increases it does so relative to all other goods. Although each good is unique it has substitutes - other goods that will serve almost as well. As the opportunity cost of a good rises, people will tend to buy less of it and more of its substitutes. ii - Income Effect: when the price of a good rises, all things being equal, it rises relative to income. Faced with a higher price and an unchanged income, the quantity of at least some goods and services must decrease. The demand curve (and schedule) shows the relationship between the price of a good or service and the quantity demanded. In effect the curve shows consumers' 'willingness to pay' and 'ability to pay' to obtain a given quantity of a good or service. All things being equal, the demand curve will be downward sloping reflecting the law of demand: the higher the price, the lower the demand; the lower the price, the greater the demand. Assuming other prices remain constant and other factors do not change, there will be movement along the demand curve as the price of the good or service changes. The demand curve can, however, shift, if other prices or other factors change (MBB Micro 10th & 11th Ed. Fig. 3.3; PB Fig. 4.9). A shift in the demand curve can result due to changes in: i - Price of Related Goods or Services; ii - Income; iii - Expected Future Prices; iv - Population; and, v - Preferences.
All things being equal, the higher the price of a good or services, the greater the quantity supplied. This is the Law of Supply. The supply curve (and schedule) shows the relationship between the price of a good or service and the quantity supplied by producers. In effect, the curve shows the minimum price producers' will accept to provide a given quantity of a good or service. All things being equal, the supply curve will be upward sloping reflecting the law of supply: the higher the price, the greater the supply; the lower the price, the less the supply. Assuming other factors do not change, there will be movement along the supply curve as the price of the good or service changes. The supply curve can, however, shift, if other factors change (MBB Micro 10th & 11th Ed. Fig. 3.7; PB Fig. 4.10). A shift in the supply curve can result due to changes in: i - Price of Factors of Production; ii - Price of Other Goods; iii - Expected Future Prices; iv - Number of Suppliers; and, v - Technology.
Markets are any arrangement that enables buyers and sellers to get information and to do business with each other. Put another way, markets are where demand meets supply. Markets can be described by reference to, in addition to other things: - whether they are geographic or commodity-based; - whether or not they are in equilibrium and, if so, what type of equilibrium; - their sensitivity to change (elasticity) in prices and incomes; and, - whether or not anyone - consumer, producer or government - can influence price or, more generally, the terms of trade or exchange. In a market, price acts as a regulator of the quantity of goods and services demanded and supplied. If the price is too high, consumers will demand less than producers are willing to supply. If the price is too low, consumers demand more than producers are willing to supply (MBB 10th & 11th Ed. Micro 3.6; PB Fig. 4.8).
In production, efficiency refers
to the ratio of outputs to inputs. To measure efficiency one must
therefore be able to calculate both inputs and outputs. This is most
easily done in the production of goods rather than services, especially
in manufacturing, e.g. cars produced per worker.
In the case of many goods and most
services produced by government, however, neither inputs nor outputs can
be readily calculated. Accordingly, a less stringent test--cost
effectiveness--is usually more appropriate. Surrogates or proxy
indicators of inputs and outputs are used. For example, the "recidivism
rate" per parole officer (percentage of repeat offenders) can be used as
an imperfect proxy for output rather than the more difficult to measure
concept of "rehabilitation" measured in human, social, and/or economic
terms. Similarly, average salary per parole officer can be used as a
crude surrogate for inputs rather than the more difficult to measure
"opportunity cost" of relevant financial, human, information, and
physical resources in alternative applications, e.g. early education
rather than later incarceration. Equilibrium is a condition which once achieved will continue indefinitely unless one of the variables (economic or non-economic) is altered (MBB 10th & 11th Ed Micro 3.6; PB Fig 4.8). In the case of markets, the equilibrium price 'clears' the market, that is the quantity demanded by consumers equals the quantity supplied by producers. More generally, economic theory recognizes three types of equilibrium: i - general equilibrium: can exist under perfect competition and monopoly or monopolistic competition. Under perfect competition, it is a static state where all prices are at their long run equilibrium, individuals are spending income to yield maximum satisfaction, and the demand and supply factors of production are equated. Under monopoly or monopolistic competition, it is the situation where there is no reason for firms to enter or leave an industry, or to expand or contract;
ii
- stable equilibrium: a condition which once achieved continues
indefinitely unless there is a change in some non-economic conditions.
Changes in economic conditions will be followed by reestablishment of the
original equilibrium. Example: ball resting at the bottom of a cup; shake
it and the ball returns to the bottom; and,
Elasticity refers to the sensitivity of a variable to change in another variable. Economic theory recognizes three principal types of elasticity: i - income elasticity of demand - with all prices constant refers to the percentage change in the quantity of a commodity demanded compared to a one percent change in income (MBB not displayed; PB 4th Ed. Fig 5.8; 5th Ed. Fig. not included); ii - price elasticity of demand or supply - refers to the percentage change in the quantity of a commodity demanded or supplied compared to a one percentage change in its price (MBB Micro 10th Ed Fig. 5.1 & Fig. 5.3; PB 4th Ed. Fig. 5.3 & Fig. 5.11; 5th Ed. Fig. 4.3 & not displayed). The amount demanded or supplied can increase: a) more than proportionately, i.e. elasticity is greater than one - at the extreme a horizontal demand or supply curve is perfectly elastic - a small increase in price results in a large change in the quantity demanded or supplied; b) proportionately, i.e. elasticity is equal to one (unitary elasticity); or, lc) ess than proportionately. i.e. elasticity is less than one (inelastic) - at the extreme, a vertical demand or supply curve is perfectly inelastic - any change in price results in no change in the amount of the commodity demanded or supplied; and, ii - elasticity of substitution or cross-elasticity refers to the percentage change in the amount of an input substituted for another in response to a change in their relative prices (MBB not displayed; PB 4th Ed. Fig. 5.7; 5th Ed. Fig. 4.7). Similarly, the percentage change in the amount of a commodity substituted for another by a consumer in response to a change in their relative prices.
The economic concept of equity evolved out of English legal history. At the same time that the Common Law began another unique Anglosphere legal institution emerged – Equity. With the Norman Conquest of 1066 all rights and privileges of the previous regime were abrogated by right of conquest. In effect William the Conqueror had carte blanche to shape a kingdom without accounting for pre-existing feudal rights and obligations. Unlike other European kingdoms, it was his exclusive unqualified and personal domain. He was absolute Sovereign. Nonetheless, what he conquered was a patchwork of Angle, Saxon, Jute, Danish, Viking and Celtic settlements, regions, laws and languages. The new King divided up his new Property, after accepting fealty, to a new Anglo-Norman aristocracy. The new local rulers, while subject to the King, also, in effect, inherited rights and privileges acceded to traditional rulers under local legal systems. Some were honoured and survived to become incorporated into Common Law. William’s new subjects, however, soon brought to his attention (and that of his successors) inequities in a supposedly unified kingdom. At the extreme, in one jurisdiction theft of a loaf of bread cost a hand; in another, two days in the stocks hit by rotten vegetable and insults thrown by one’s neighbours. It was not guilt or innocence they cried but fairness of punishment before the King. This is arguably the root of Equity – a separate and distinct strand of jurisprudence parallel to the Common Law of precedent. Over time responsibility for hearing calls for mercy was transferred to the King’s Lord Chancellor and a court of his own – the Court of Equity also known as the Court of Conscience or of Morality. In fact until Sir Thomas More (a lawyer) became Chancellor in 1529, all had been men of the cloth. Two aspects of Equity played a critical role in the Sovereign’s ability to control his vassals. These were trusts and tenant-landlord disputes. Trusts (from which modern charities and financial trusts evolved) generally concerned widows and orphans left to the mercy of a local lord. The most famous is Lady Marion of the Robin Hood legend who was an orphan and ward of the King. With respect to tenant-landlord disputes, Equity balanced the feudal local lords by judiciously connecting the King to his subjects. This was called the ‘rent bargain’ by J. R. Commons (1924). It stabilized the social system of post-Conquest England. While Magna Carta (1215) and subsequent developments increasingly limited the King, Equity and Common Law continued to develop as parallel systems of courts with precedence given to Equity. It was not until 1873 in the United Kingdom that the two systems of courts merged. Nonetheless the two strands of Anglosphere jurisprudence continue to this day in all Common Law countries with Equity retaining precedence. The economic concept of Equity arguably derives from legal Equity. In fact the Chancellor of the Exchequer (who in Canada call 'the Minister of Finance') exercised a concurrent jurisdiction in Equity with the Lord Chancellor’s Court. There are two economic definitions of Equity, each reflecting its historical roots. First, there is Equity as the capital of a firm which, after deducting liabilities to outsiders, belongs to the shareholders. Hence shares in a limited liability corporation are also known as equities. This links back to the historical treatment of trusts under Equity. Second, there is Equity as ‘fairness’. While often used with reference to taxation it is a general economic concept. With respect to taxation Equity has three dimensions: horizontal, vertical and overall burden. Horizontal Equity refers to ‘like treatment of like’. Vertical Equity refers to ‘unlike treatment of unlike’. Overall Equity refers to the accumulated impact of all forms of taxation. Crudely, it is the difference between earned and disposable income after all taxes – income, excise, sales, et al.
11. "Let Us Assume" & ceteris paribus Another expression often used by economists is 'let us assume'. Consider the joke about the economist, mathematician and physicist marooned on a desert island with crates of canned food and no can opener. The physicist says: I can start a fire an blow the top off". The mathematician says: "And, I can calculate the trajectory of the food so we can catch it." The economist says: "Let us assume we have a can opener". Laugh, laugh, laugh, stupid economist. But consider. The physicist has no equipment to measure the energy content of the fuel for the fire and cannot determine the temperature at which the can will blow. The mathematician cannot, therefore, determine when the can will blow and what will be the trajectory of the food. The economist, on the other hand, looks for a sharp rock to act like a can opener. One of the most important and regularly used assumptions of economics is ceteris paribus or 'all other things being constant'. Thus in analyzing a given economic phenomenon economist usually begin by assuming all other factors or forces are held constant and thus remain the same as the phenomenon under investigation emerges. Ceteris paribus is a Latin expression meaning 'all other things being equal'. This is a critical assumption used in economic analysis. For example, if the price of a good or service changes, analysis of its effect would be difficult, if not impossible, if, for example, the price of substitutes changed at the same time. To determine the effects of a price change, economists assume all other prices remain constant (in the first round).
Economics is a 'social science'. Like physics (Cottinham & Greenwood 1998), economics has its ‘Standard Model’, i.e., a generally accepted theoretical model of reality. Like physics, it is taught in geometric, mathematical and deductive terms using standardized textbooks in first and second year university courses around the world from Adelaide, Beijing, Budapest, Cambridge, Cape Town, Moscow, Paris, Saskatoon, Stockholm to Washington D.C. The Standard Model was developed during the last quarter of the 19th and first quarter of the 20th centuries particularly in the hands of Alfred Lord Marshall (1842-1924) at Cambridge University (Marshall 1920). Alternatively known as the Marshallian, Neoclassical or Perfect Competition Model, it fulfils Descartes’ requirement of a science in that it uses deductive logic from a set of key assumptions whose conclusions are subject to both geometric and mathematical proof. There are a number of limitation that flow from this description.
First, economics is not, like physics and chemistry, an 'experimental science'. Its theories and conclusions can not be directly tested by experimentation. There is no such thing as 'replicable laboratory conditions' in economics; the conditions under which economic activity takes place are constantly changing, evolving and cannot therefore be duplicated. The best that can be done is to compare the predictions of an economic theory or model with statistical or other 'empirical' evidence. Empirical evidence is derived from direct observation or experimentation, not theory or deduction. As experimentation is not really possible in economics, empirical evidence is limited to observation. Second, as a 'social' science, economics carries values; it is not 'value-free' as are, relatively speaking, the natural and engineering sciences. A bridge stands or falls depending upon the laws of physics which are, at least on our plane of existence, constant and unchanging. Economic theories, however, stand or fall depending upon the changing historical, cultural and technologic conditions of society. Truth is therefore relative rather than absolute.
Third, the inherent limitations of the social sciences
in general, highlights the fact that 'science' is more than just
experimental science, i.e. use of the experimental method. Science, in
general, means an organized and systematized body of knowledge. How
knowledge is collected, organized and systematized varies between the natural
and engineering sciences, the social sciences and humanities, and the
arts. Each way of 'knowing', i.e., ways of accumulating knowledge, varies
between these three primary forms of knowledge in contemporary society. To gain knowledge, economics uses two forms of logic: induction and deduction. Induction involves reasoning from the particular to the whole. Deduction involves reasoning from given premises or assumptions to a conclusion. Different schools of economic thought have traditionally emphasized one or the other. Thus the Historical School - German & English and the Institutionalists relied on inductive reasoning. The Marginalists and Neoclassical School relied on deduction. Keynes, in contrast, synthesized the two poles of economic thought, using both inductive and deductive reasoning in his methodology. In this course, deductive logic will be the primary engine of analysis. Given a set of assumptions deduce a conclusion.
Reflecting the binary nature of economics as a 'social' 'science', two types of statements and questions can be made. The first involve: What is? Such statements or questions are called "positive", i.e. they involve no value judgment. The second involves: What should be? Such statements and questions are called "normative", i.e. they involve a value judgment. For example, it is a positive statement to say that about 20% of Canadian live in poverty. It is a normative statement to say we should, for reasons of 'equity' (see Equity below), increase welfare allowances to help them.
Economists observe economic phenomena such competitiveness, size of firms, concentration of economic activity, employment, wages, interests rates, prices and taxes. Such observations produce 'empirical evidence' - both statistical and descriptive. Some phenomena are subject to statistical measurement through government agencies such as Statistic Canada or by private agencies such as trade associations. Statistical measures are, however, subject to limitations. Thus unlike the experimental sciences where strict physical and technical factors limit the ability to measure a phenomenon, in all the social sciences there are technical AND social limitations. Consider the Census. The Census is something that North American economists rely on for in-depth measurement of a range of economic phenomenon including the census of the population (age and other demographic characteristics as well household expenditures and consumer capital goods), and the census of business enterprise. While there are all kinds of technical limitations to the Census, e.g. does it ask a question in such a way so as to elicit a meaningful answer, there are also social limitations. In continental Europe, for example, the Census of Population is not very reliable because of traditional suspicion of government, i.e. many, many people simply do not answer or will even lie. Similarly, different companies use different accounting methods and when they answer the Census of Business they do not necessarily answer in the same way. The bottom line: numbers have quality. They are collected using inherently imperfect methodologies. They have parents who have their own agendas and preconceptions about what they will find or what they want to find. In the physical sciences, this last point is often referred to as: experimenter expectations. However, what distinguishes social scientific statistical evidence from that in the natural & engineering sciences is that every bit is mediated by human beings from marketing survey to data manipulation. In the natural & engineering sciences statistical data is derived from instruments that once calibrated generate evidence without further human mediation and then data manipulation takes place. For a more detailed assessment of the methodological problems associated with economics and all the social sciences please see my: The Great Social Science Schism: Tales from the Methodological Woods as well as 1.0 Problem - Inadequacies of the Standard Model. Also: Boulding, K.E., The Limitations of Mathematics: An Epistemological Critique, Seminar in the Application of Mathematics to the Social Sciences, University of Michigan, December 15, 1955.
Heidegger argues that the essence of the contemporary world is objectivity resulting from the triumph of representation in Art during the Renaissance and in Science with Descartes in the 17th century. (The graphic space in which this course is conducted is 'Descartian Space' made up of the X and Y axis.) In effect, it is our ability to model or imitate nature, especially using mathematics including geometry that brings certainty of knowledge and perspective. Through representation everything in and of the world is brought before us from the perspective of object. We call them "models", "simulations", et al. The result is that we live in “The Age of the World Picture” (Heidegger 1938). This iconic conclusion is visible in the contemporary Natural & Engineering Sciences where confirmation through picture or graph makes "seeing believing'. Scientist do not watch a cascade of numbers as in the film The Matrix (Wachowski & Wachowski 1999) but rather they "read" their graphic representation as "lived" in a virtual reality. In Polanyi‟s terms we indwell in our representations. They can become more real to the observer than that which our native senses tell us. This is arguably one cause of the current 'Great Recession', i.e., the so-called 'quants' on Wall Street believed their complex math models were reality. The quality of the data (see Keynes, Chapter 12), among other things, make this impossible. Furthermore, in the Natural & Engineering Sciences the Laws of Nature are assumed fixed while in the Social Sciences including economics, human laws constantly change and evolve. An economic model is a description of some selected aspects of the economic world, for example, supply and demand. While induction is sometimes used, that is collecting empirical evidence, and then building a model of the whole from specific limitations, often deduction is used. A set of assumptions or premises are made and conclusions deduced from them. One thing both inductive and deductive model building share in common is 'reductionism'. Reductionism is the simplification of a given phenomenon by ignoring, eliminating or simply holding certain aspects related to the phenomenon constant. A model thus tries to explain how certain variables will react to changes in other selected variables, but not all possible variables. The world is simply to complex to be 'fully' modeled. There is, however, another approach to organizing economic knowledge: taxonomy. A taxonomy is a classification scheme. Examples include the National Accounts and all of its sub-divisions. Important concepts and phenomena are identified and evidence is sought to fill the slots. There is not necessarily, however, a functional relationship between categories. We know each is important but not how they relate to each other.
Having constructed a model of some economic phenomenon, economist then attempt to test its predictions against empirical evidence including statistical evidence and descriptive observation. If the predictions accord with the evidence, the model or theory is held to be true; if not, it is rejected. In fact, however, some theories in economics simply cannot be tested, for example, the theory of revealed preference developed by Paul Samuleson. In essence, this theory says the preferences of consumers is revealed by their actual behaviour in purchasing goods and services. However, it is simply not possible to track a large number of consumers over time holding all other things fixed, for example, income and education which affects taste. Furthermore, much of the statistical evidence collected by agencies such as Statistics Canada does not precisely fit the theoretical definitions used by 'academic' economists. Accordingly, much effort is put on 'massaging' available data to more effectively fit the definitions of the theory. This exercise can go too far. In many ways, economic models and theories are accepted not because the have been tested (because often they cannot be tested with available measurement technology). Rather, they are accepted because they are 'believable'. An instance were the mathematics of it all may exceed any testability is 'New Growth Theory'. Like other ‘new’ forms of economics such as the New Institutionalism (Coase 1992), New Economic History (North & Thomas 1970), New Economic Geography (Krugman 1983; Martin & Sunley 1996) and the New Economics of Science (Dasgupta & David 1994), New Growth Theory appears, at least to this observer, as an exercise in re-calibrating the Standard Model to include descriptive, empirical, institutional and historical evidence previously excluded because of its qualitative rather than quantitative nature. While welcomed, the professional urge remains to fabricate such new evidence into quantitative proxy indicators to be plugged into mathematical models. Romer thus calls for more sophisticated mathematical modeling without expectation of testing because “these kinds of facts tend to be neglected in discussions that focus too narrowly on testing and rejecting models” (Romer 1994, 19-20). So much for Positivism in econometrics! Beyond admitting additional sources of evidence, new growth theory introduces the concept that technological change involves non-rival ‘ideas’ that can “be stored in a bit string” (Romer 1996, 204), implicitly referring to computer programs, a form of soft-tooled knowledge. His concept, however, presents, to my mind, a confusion between information (measurable) and knowledge (immeasurable) and a failure to acknowledge the distinction between the short-run and long-run with respect to intellectual property, i.e., between knowledge residing in the private domain in the short-run but entering the public domain in the long-run. With respect to information and knowledge, the ‘bit’ abstracts from content and fails, as has been demonstrated, to provide a homogenous unit measure of knowledge, or what Kenneth Boulding called ‘the wit’ (Boulding 1966, 2). With respect to intellectual property, in the short-run technical knowledge is rivalrous and excludable to the degree that copyrights, patents and other state-sponsored intellectual property rights provide protection. In the long-run, however, all intellectual property rights expire and knowledge enters the public domain. Given new technical knowledge is continually being copyrighted and patented, one faces an ever moving horizon between rivalrousness and non-rivalrousness, a horizon that can never be reached. Or, put in terms of Lord Keynes’ famous aphorism: “In the long run we are all dead” (Keynes 1924).
- while focus on Labour, in fact, all factors of production subject to unemployment
definition - rate, seasonal, cyclical, structural
- discouragement and underemployment
- lost income and production as well as serious personal and social problem Economic growth refers to growth in income and production per person. It is important to note that economic growth is a means, not an end. Growth allows human beings to live more satisfying lives, to reach higher and higher up the 'needs hierarchy'. Unfortunately, we live in a time in which a 'value inversion' seems to exist. We often hear it said that "the end does not justify the means". In fact, with respect to economic growth "the means justifies the end". For example, if we look at various higher values in human society like education (as opposed to skills training) or the arts, today government and private support is justified not because these are considered as ends-in-and-of-themselves but rather because they contribute to economic growth. There are a number of reasons for this value inversion especially in the political process.
- GDP, real GDP & potential GDP, GDP per capita
-
limitations
- business cycle (peak, trough): recession
decrease in real GDP for at
least 2 successive quarters; expansion increase at least 2 quarters
- benefits and costs
- costs: growth requires foregone consumption; depletion of resources;
environmental degradation; social instability - effect is to devalue value of all uses of money: medium of exchange, unit of account, store of value and income earning assets
increase in price level (cost of same bundle of goods)
-
negative change: deflation
- cost: uncertainty (change in the rate of inflation), in effect changes
value of money; hyperinflation
- cost of controlling inflation
(Ue)
-
government: spend more than collect in taxes, difference in borrowing
with associated costs
- trade: import more than export
- cost: borrowing charges but can be benefits
- goals: lower Ue, increase growth, stabilize business cycle, keep
inflation low, lower deficits - tools: fiscal and monetary policy
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