Introduction to Economics - Example

Introduction to Economics Name Institutional Affiliation Date Precis for Chapter Four The economist, Ha-Joon Chang's book, is a masterpiece that eloquently brings out insights on the global economy. The work covers economic histories and theories, behavior, and strengths, and how economy impact in people's lives as consumers. Economics, in his works, is described as the study on production and distribution of economic resources by use of qualitative and quantitative analysis. Quantitative is the part that addresses statistics and calculations which qualitative is conclusions and inferences made from the statistical calculations. Ha-Joon Chang is a Cambridge economist and a consultant for the World Bank, so under his wing is experienced in modern day capitalism. The book supports that free markets are a gimmick since they are all affected by legal entities, that stability is not measured by low inflation and tells of dynamic economies. He notes that economists have advocated stifling policies and implemented them which has led to inequalities and financial crises the world over. He further points out the inequalities in the manufacturing sector and its change and how efficient it is. There has been much pride in the service economy in Anglo-Saxon nations that Chang argues misplaced as it is as a result of low world trade in services. This contends that the country’s perceived success in the service industry say the UK is not as efficient as economists claim. Chang does not refute capitalism totally but contributes that another model is necessary to balance out the global economy equation by a said state putting tariffs on imported items and subsidies on exports. Moreover, the state should regulate economies through markets and ban them where it is necessary, if we want independent, successful economies. Obsession Complex structures like tertiary education should be done away with unless they have long-term beneficial effects on economies like industrial policies. Chang uses statistics to back his words which is the mark of a true economist, and talks of models like Keynesian and their behavior in relation to global economies, which covers the quantitative and qualitative aspect of economies. Keynesian school of thought has the approach that an economy is comprised of policies, government spending and consumer behavior in expenditure. It relies on government expenditure to jumpstart the country’s economy when there are economic recessions, to improve it or take over for a short time where consumer expenditure and business are non- existent. Keynesian economy also advocates for lower taxes to increase demand and finish the depression. It is, therefore, seen as a demand side theory. Keynesian economists advocate a mixed economy which is dominated by the private sector, but which allows government interventions in hard times, for instance, the financial global crisis of 2008. Developed countries used this model for all their functions especially in World War II, but it has been overtaken by changes in the economy according to Chang. There is a short and long term effect of Keynesian economics. Since it focuses on solving short term problems, Chang argues that it is not ideal for nations that aim for long term economic growth. The government gives instant answers to issues and thus relies heavily on government expenditure, and misses the fact that individual businesses also need resources. In recessions, the government is the only institution that has instant solutions like fiscal policies and money. Chang has also talked of the classical economic theory. This theory approach is that of no rules, where there is a free market for all to carrying out business without government interference. Individuals act as per their diverse interests and thus resources are allocated as per individual businesses or persons. Prices here are dictated by value, that is, production costs and transport costs for goods for instance. The government is left out since classical economists are of the belief that business investment and consumer expenditure are more crucial for economic growth. Also, such economists are of the idea that too much involvement of the government reduces the amount of resources required by businesses and individuals. It is said that government expenditure will hamper economic growth by improving the public sector and reducing the private sector. 1776 is the year that classical economy ideology started and was active to mid-19th century. Economists said that markets should regulate themselves towards equilibrium without interference from outside. Prices were flexible and demand was created by supply. It was assumed that production would generate incomes big enough to buy outputs needed. Also, there should be equal investment and savings to stabilize interest rates. Finally, there was emphasis of free competition. There were long term effects of classical economies, since that is what they focus on. Government laws, taxation and inflation effects formed this economy. This theory also took into account current policies and how other economic theories distort free markets. Chang was comparing mercantilist theory with classical economic theory and concluded that a country’s economic growth would best be suited to freedom to trade and compete in a free market without government interference. This would only happen if individuals profit by production of goods on demand, and others buy goods and services they want a scenario that would translate to wealth for individuals and businesses and in turn be an organized order of a system. The general theory was put forward by an economist called Keynes. It was based on the approach that spending was strongly dependent on income, which is aggregate. He noted that should income be increased, it will not automatically increase consumption equally. Thus, it was obvious what aspect depended on the other. He further proposed that when income was increased, as a rule, a bigger portion of income was saved. Empirical work was then done by data from different periods. One was after world war one when he used consumption, prices and income of citizens and the other from surveys from past century. He found indeed that consumption was related to income earned, and people saved when income increased and did not spend more. Other theories that Chang alludes to is labor theory of value and theory of distribution. In labor of value, the price of goods produced and sold is equal to labor costs of production. Sometimes however, price depends on demand and supply. This theory is worth noting since it is related to classical economic theory. The theory of distribution divided resources among social classes; these were rents paid by tenants to landlords, wages paid to laborers and profits that owners got from capital. It's only fair to make an assumption that one social class taking a bigger share would affect the other class unfairly due to limited economic growth. Chang compared these theories to real world conditions and gave authority to new concepts. Other theories that economists have come up with to solve global economy crises were a mix of two. For instance, Karl max adopted the labor theory and combined it with surplus theory. Another is by Ricardo called comparative advantage advocating that countries should specialize in commodities it has a niche in, and import all else. This was better received because of the fact that it would improve and increase total world output than trying to be independent in provision of all goods and services. 19th century saw adaptation of this theory. Chang refers to these as ineffective in meeting global economic needs. A Critical Comment upon the Conclusion as drawn in the Epilogue In conclusion, we can safely assume that aggregate consumption, savings and income which are referred to as the consumption function has been incorporated into our thinking and that of the author. A point to note is that low inflation and earnings influenced a worker to invest and employ people that automatically created employment and brought economic growth. Chang does not explore self-healing of the economy by not interfering or creating analogies and theories to be followed. He instead challenges this by citing the great depression that brought greater demand and inequalities in the world economy and tested that theory. A lower degree of wages and inflation would trigger employers into making capital investments and hire or employ more individuals, fostering economic and employment growth. Chang denies that Internet and modern mobile use has affected global economic growth and that information technology has anything to do with growth economically. Even uses like mobile banking and increased use of the internet to shop and market, do not move him to accept they are indeed contributing to significant growth. Education too especially formal too is looked down upon as a factor that contributes to growth. Most of all, Keynesian theory hampers growth according to Chang, But he does not focus on any theory either. He insists all capital is national and advocates the solution for global economic crises as capitalism that has more human values and more equal in results, but he doesn’t talk of avoiding stagnation or how people would react to it and the whole world which is now tuned to internet and all aspects of modernization including education and empowerment of consumers. Just that he doesn’t support free market capitalism in this book, it begs that we return to industrial policy, a larger government and welfare. We might not go back as we are entrenched in the modern ways. Whether it would work for global economic growth or not is a question we have to grapple with. Read More