Transcript ECONOMICS

ECONOMICS:
an Introduction
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What is Economics all about?
Even someone who is not familiar with the discipline probably has
an idea of the main topics that Economics is concerned with
A first list of these topics, could be the following:
• markets, competition, market structure
• consumption , production
• labour market
•inflation
• public spending, taxes, public debt,
• stock market
• multinationals, globalization, foreign investment
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But a mere list of topics is not enough
The list (even if enriched) is not enough to define the
economic science.
These topics are not the sole interest of economics but they
also concern:
• Other disciplines (sociology, law, etc.)
• Social actors (enterprises, banks, trade unions, etc.)
• Institutions (either local, national or international)
It is necessary to specify the point of view and the method
that the economist chooses to use while studying these
topics.
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What is Economcs?
Economics is a social science which studies the choices of the
economic agents and the interaction that establishes itself
among the single choices.
In other words, it studies the modality through which individuals,
organizations and enterprises employ scarce resources to
produce various types of goods and services, as well the ways in
which they are distributed among the subjects (families,
enterprises) to satisfy their present or future needs.
Economics assume that the choices of the agents are:
• based on a criteria of rationality
• aimed to maximize objectives of individual interest (profits,
utility, etc.)
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General Principles: Scarcity
Scarcity of resources happens everytime that, given
the needs of a society at a given time, the means
available to satisfy them are not sufficient.
A consequence of scarsity is that society,
institutions, organizations and individuals are almost
always forced to choose within a limited set of
possibilities between objectives and scarce
means applicable to alternative uses.
Scarce means any resource acquire a value (price)
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General Principles: Reliable information
It is assumed that all the data relative to
the prices pf any good and to the
available technologies are known and
available a-priori both to the entreprices
to produce goods, and to the consumers
to by them.
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General Principles: Rationality
A fundamental principle on which most of the
economic analyses is based on rationality of
choices.
Rationality assumes that economic agents
behavior use standard criteria as it is assumed that
everybody is perfectly capable of assessing the
costs and benefits following to each available set
of alternative scenario.
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Microeconomics and Macroeconomics
Economics is articulated in two major sub-disciplines:
microeconomics and macroeconomics
MICROECONOMICS emphasizes the individual dimension of the
various economic problems (choice of the single consumer, choice
of the single firm, the functioning of a given market, the
determination of a price, etc.)
MACROECONOMIA studies the functioning of the economic
system as a whole (national product, consumption, saving,
investment, employment and unemployment, inflation etc.)
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Microeconomics
The main topics it deals with are:
1. Consumer Choice Theory
How a rational consumer decides to spend his own income in order to
maximize the satisfaction (utility) that he draws from his purchases
2. Theory of Production
How a firm chooses the inputs to be used and in which quantity, as well it
decides about production mix
3. Market Structure
Characteristics and degree of market power held by sellers and buyers
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Macroeconomics
The main topics it deals with are:
1. National Income
How to determine a country’s GDP, national consumption, saving,
investment, public expenditure, etc.
2. Employment
Causes, typologies (structural, conjonctural), consequences
3. Political economy
Fiscal policies (taxes, transfers, public investments) , as it is run by the
State
Monetary policies (interest rate, currency exchange rate, as it is run by
the Central Bank
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Main Schools of Thought
Classical School
(1600/1700, until the second-half of the 1800s)
Main authors : abate ferdinando Galiani, Adam Smith, Thomas
Malthus, David Ricardo, Stuart Mill, Karl Marx
Economics is a social science that studies questions such as
capital accumulation, income distribution
Marginalist or Neo-classical School
(since 1870 circa)
Main authors : Jevons, Walras, Marshall, von Hajek, Friedman,
Say, Philips
Economics studies how to obtain the best result in the presence of
a given amount of resources available
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Main Schools of Thought (2)
Keynesian School
(since 1930 circa)
Main Thinkers: Keynes, Galbraith, Stiglitz, Dornbusch, Phelps
Growth is no longer driven by offer, but rather sustained by
demand, even public
Development different from growth
(since 1950 circa)
Main thinkers of development: Lewis, Kuznets, Bauer, Myint,
Streeten, Sen, Yunus
The problems of the economies in the developing world are
concerned not only with economic aspects but also institutional
and social ones; unlike growth that is concerned with economics
and is concentrated in the developed countries
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The State and the Market
Periodically, in conjunction with major economic events that
raise the attention of the public opinion, the scientific and
political community interrogate themselves on the role of the
free market
The discussion aims at understanding the extent and the
modalities of State intervention in the market mechanism
At the extremes of this debate, there are on the one hand the
supporter of State intervention and on the other the liberal
oriented economists
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Comparing the two positions
Supporter of State intervention as:
• outcome by market allocations may not be socially
acceptable
• the market, if left unregulated and free to follow its own
rules, does not function well
Market supporter
• most efficient mechanism
• autghomatic capacity to increase well-being
• moral qualities (i.e.: meritocracy)
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Origins of Liberalism: Adam Smith
The father of liberalism is considered Adam Smith who
published in 1776 “The Wealth of Nations”, the birth of
modern economics
The Smith’s theories designed the modern economic
thought by discovering the superiority of the free market to
any other structure
Among the many ideas put forward by Smith, one was
particularly successful: that of the famous metaphor of the
“invisible hand”
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The « Invisible Hand »
The metaphor of the invisible hand is the basis of the liberal
view of the market economy
The market (as if it were guided by an invisible hand), if left
free to operate according to its own rational logic, produces
an unexpected result that is also desirable at the same time:
it maximizes the wealth of the entire society
Such a result is reached without anyone explicitely pursuing
a collective goal. Rather, the collective goal is reached
thanks to the selfishness of individuals
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Consequences of the free market
The consequence of such an assumption is all too obvious:
the market works well only if it is left free
(hence the famous expression “laissez faire”)
Therefore, the market, not only did not need any help, but if
anything, just needs to be freed of obstacles and
regulations that might prevent its action
It is interesting to note that in this last consideration, one can
find an argument that is often made in favour of the market,
even nowadays:
the market must be left free, it must not be caged
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The role of the State in the economy
The founder of the theory of the role of the State in the
market is John Maynard Keynes, who published in 1936
“General Theory of Employment, Interest and Money”
The innovative idea is that the role of the State is
fundamental. Indeed, the market can, according to Keynes,
produce results that are not optimal, and the State’s role
is to help the market
The duty of the State is on the one hand to mitigate and
control the economic cycles and on the other hand to
bring the market to a better situation (especially in terms
of unemployment) than the one that the market itself would
have been able to realize if operating alone
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Current Schools of Thought
• Liberalism
– monetarists
– neo-classical school
• State intervention
– keynesian school
– neo-keynesian school
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Intermediate Positions (1)
In reality, the contrast between market and State is played within the
realm comprised between the two extreme positions, most radical in
their nature. Hereafter are a few examples:
• Antonio Martino pure liberal and intellectually close to the School
of Chicago and to his most notable inspiration Milton Friedman, he
trusts the free market as a source of economic and social progress
•Jagdish Bagwati considers economic integration as positive,
provided that the distortions be corrected without introducing duties
• Anthony Giddens considers that the growing liberalization creates
problems that globalization may, instead, contribute to solve
• Lawrence Summers considers that, within the market, the State
must insure the reduction of inequalities through fiscal harmonization
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Intermediate Positions (2)
• Amartya Sen e Peter Singer view risks but also positive
opportunities in the market dynamics, underlining the necessity for
regulation that bring businesses and individuals towards a virtuous path
• Joseph Stiglitz argues in favour of the importance of the role, not
only of the national State but also of the international institutions in
regulating the markets
• Edward Luttwak e Giulio Tremonti underline the risks that the global
market, if it is not properly regulated, might impose upo the workers of
the developed world (low salaries, unemployment) and upon the
environment
• John Gray does not believe that the anglo-saxon model of economic
liberalism can be applied to systems that are different from the western
one historically speaking and advocates for national solutions
• Paul Krugman (2008 Nobel Prize) underlines the need for global
governance to make markets work, and that it be entrusted to the IMF
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The market in the face of crisis
- origins of the financial crisis 2007/08
Since the 1980s, liberal pressures and the dissemination of new and
revolutionary communication technologies have produced an enormous
expansion of the financiary activities at the international level.
This has been, on the one hand, one of the cornerstones of globalization
but on the other it has also brought about the huge expansion of a
market less stable and predictable than the real markets.
From the 1970s to the 1990s, the volume of trade grew exponentially:
suffice it to say that since the early 80s to the mid 90s, the trade volume
produced by mutual funds, pension funds and institutional investors has
increased tenfold.
The conjunction between the expansion of financial wealth, the
introduction of new derivative contracts and the growth of the debts of
advanced countries has led to finance taking over the real economy.
These phenomena are at the origin of the widespread crisis exploding in
2011, slowing down the global economic growth, causing recession and
unemployment.
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Financial Markets
• They move volumes of wealth built on the trade of derivatives
and other products that are detached from economic
activities, whereby every turbulence generates psychological
repercussions not only on the stock markets but also on the
loans to businesses
• They are maneuvered by investment banks and big investors,
but are a cause of growing concern for the small savers
• They are particularly volatile, and above all, moody:
perceptions of the market compared to hypothetical scenarios
may give rise to chain reactions
• They influence real activities through banks and other financial
intermediaries
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Reasons of the actual crisis
Many have denounced the end of a financial system exempt of
rules of supervision and surveillance
On the other hand, the same liberal view, while it encourages
private activity, also places it in a balanced interaction between
market and institutions
The present crisis originates in a guilty lack of governance,
representative of the liberal culture that was indulged in during the
times in which the strong economic growth facilitated financial
activities (Fed, Grennspan)
But investment banks, and not only, have taken advantage of this,
thrusting on much higher leverage ratios than those of the
commercial banks, eventually bringing about the creation of highrisk financial products
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The actual crisis: potential solutions
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Public participation in the capitals of banks in crisis, provided it goes
to fuel the loan supplies (EU’s approach)
Government guarantee both on deposits and interbank loans
Lighten the regulatory capital requirements of Basel 2
Appeal to FDI by promoting cooperation agreements with Sovereign
Funds
Greater flexibility in the budgetary constraints imposed by the
Maastricht Treaty, revising a view that is only concerned with
budgetary discipline and inflation
Boost the demand, by reducing the tax burden on families, in order
to send a strong signal to the recovery of purchasing power
Review the rules regulating the financial and stock markets in order
to fight the speculative designs that preceed the speculation in real
terms over the economic and patrimonial consistency of businesses
Lower the minimum requirement for OPA in businesses to avoid
hostile participations
Intervention of the European Stability Mechanism (ESM)
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