Economic Growth and the Battle of Ideas - Essay Example

Economic Growth and the Battle of Ideas: A Macroeconomic Perspective Economic growth seems to be one of the mosttalked about economic concept nowadays. America and the rest of the world have been suffering from economic meltdown for a long time now. That is why the question of when economic growth will again flourish, especially in first-world countries, remains to be unanswered. However, I do believe that development in the economy is not just boxed within the bounds of technology, human resources, natural resources, and capital. If these indicators are present in the economy, it doesn't always mean economic growth. This is what I'm trying to point out: Economic growth cannot be measured by merely resources, technology, employment and other economic factors because there are other non-economic factors that can determine whether a country's economy is growing or not. Economic Growth I chose the chapter about economic growth (chapter 16) because I believe that it would be most useful to use that topic at this time since the global economy has been experiencing a downturn in the past months. In chapter 16, the different indicators of growth are discussed as well as different ways to illustrate growth. I find these aspects interesting since there are, indeed, a lot of ways to show economic growth. For example, the use of a Production Possibility curve to measure growth is a common tool. This chapter says that in order for growth to occur, the curve should execute an outward shift. But I think it cannot be applied to all countries. Maybe it is applicable to developed countries because it is easy for them to shift to a higher Production Possibilities Frontier (PPF). In developing countries, however, economic growth means moving from inside the PPF to reach the point along the PPF (Crafts 139). Also, growth will not always occur just as long as the PPF curve shifts outward. According to the Solow Growth model, growth will start to slow down as the economy approaches its steady state level (Crafts 140). Just like in microeconomics where there is the law of diminishing marginal utility. Although Solow did not mention about a diminishing economic growth, the steady state level of an economy is like the satiation point wherein growth will slow down. Also, this topic brought the study of macroeconomics to a new level since it does not only talk about the usual AS-AD curves in macroeconomics but it also tackles the "society" part of economics. Yes, it discusses about the Aggregate demand and supply and the Production Possibility curve but it enables us to understand the global economy in a broader perspective. "The Battle of Ideas": A Macroeconomic Perspective In the first episode of Commanding Heights, The Battle of Ideas, the contrasts between Keynesian economics and Austrian economics are very noticeable. From Lenin's revolution against the global economy to Von Mises' free market. During the World War I, Lenin was against the free market and even said that globalization exploits men. Communism took over Russia. The state had implemented heavy public intervention. When John Stalin came, the idea of central planning was introduced. The government had so much power over wages and prices. This was the main idea of Keynesian economy. Public intervention is needed in order for an economy to develop or attain growth. On the other hand, there's this Austrian economics that constitutes the laissez faire approach to the economy - that free market is essential to attain a good economy. But what is really appropriate in order for an economy to grow Is it the Keynesian or Austrian In the world today that globalization is so prevalent, is it really beneficial for a country to apply the Keynesian thought of heavy public intervention Well, lessons from the past may have the answers to that. In the Battle of Ideas, when Lenin decided to impose heavy public intervention, the Soviet Union did not really prosper at all. Although communism was rampant in their time, having the government get their hands on the economy too much didn't do the country any good. In the first part of Episode 1 of Commanding Heights, it is said that some favor globalization, some don't. The US Vice President even said that September 11 bombing was one of the implications of globalization. Then President Bill Clinton, on the other hand, said that "globalization makes us interdependent". I believe that globalization is really essential for many countries. This is why the concept of international trade is very important in understanding the issue of globalization. Here's the thing: not all countries have as much resources as other countries have to be self-sustainable. Countries which participate in the globalization process can use their comparative advantage to get as much benefit as they can. Every country has their own comparative advantage and this will benefit not only the country itself but other countries as well. For example, country A has a surplus of bananas but lacks rice in their economy. Country B, on the other hand, is overflowing of rice and doesn't have a resource for bananas in their country. This is where the role of globalization is beneficial. The comparative advantage of the two countries gave them both benefits. If for example, country A decided not to participate in the globalization process and their government preferred that their economy be controlled, I don't think country A can be self-sustainable. This is just one of the advantages of globalization. It allows the exchange of resources from one country to another. However, the downside of this situation is that what happens in one country may have an effect on the other country. Just like the weakening of currency or price increases. Other disadvantage of globalization is that the domestic markets in the economy might get hurt. If a country becomes overly dependent on imports and exports, their domestic market will certainly suffer. This is where the role of government comes in. The government can somehow regulate the inflow of goods from other countries. Although many people have this notion that free market is good and protectionism is bad, I think a little government intervention is needed in the economy to provide what the "invisible hands" cannot provide. Take note, I'm not suggesting central planning or communism either (just like in Commanding Heights). I'm just saying that the government can somehow regulate the inflow of goods to protect some of the small enterprise in their economy. I don't agree with heavy public intervention because it also has its advantages. In Episode I, there was an instance where in Germany experienced hyperinflation because the government produced a lot of money to pay their debts because of the war. This is one disadvantage of the government. Because they have the power produce money, prices skyrocketed in the country. In terms of economic growth, I'd say that government intervention is necessary to achieve growth. According to chapter 16, the aggregate demand must increase to sustain full employment at each new level of production possible. The government has the power to provide jobs and increase employment. Also, GDP is one of the indicators of growth. Our macroeconomic formula for GDP is C + I+ G + NX where C is consumption, I is investment, G is government spending, and NX is net exports. The government also has the power to manipulate GDP which can contribute a lot on the country's economic growth. The quality and quantity of natural resources in a country is also an indicator of growth. The government can also control the use of these resources to achieve efficient allocation. Public intervention can protect natural resources in terms of legal barriers, taxes, and incentives. But you see, as I've said before, the economic growth of a country should not just be based on economic indicators. I think this is the most important role of the government when it comes to economic growth. Come to think of it, even if the county has all the quality resources, full employment, foreign and domestic investments, and high-end technology, the people will still be poor in that country without good governance. If you have corrupt officials, for example, those indicators would not really make a difference. The people in that country will remain poor eventhough the government is saying that they've increased the GDP. That is why we need good governance in a nation - because such indicators do not really measure the actual economic growth in a country. Economic Growth on Today's Issues and Current Events In an article written by Fox in TIME magazine, John McCain said that the US economy is fundamentally strong. Although many eyebrows were raised with this statement (since almost all people are aware of the recession in America), Sarah Palin defended that it is the workforce that McCain is talking about. And the article basically talked about productivity growth as the main ingredient in economic growth in which I disagree with. The workforce of a country is very essential to the economy. However, economic growth, I think, does not solely depend on human capital and productivity alone. In fact, productivity growth is not always good for all the stakeholders in the economy. According to Nordhaus, as cited by Balls, higher productivity growth may lead to unemployment for individual companies and industries. For example, the rise of personal computer resulted to a decline in employment in the typewriter manufacturing industry (Balls). However, higher productivity may also result to a decrease in price since more outputs are produced in lesser time. This will in turn increase the demand for those products. Another article entitled "Inflated Claims" published by The Economist provided reasons why China should not be blamed for the inflation in many countries. America and European countries blame China for the inflation because of their increasing demand for food, oil, and raw materials as well as increasing wage in the country. I think putting the blame in China is just a scapegoat for the government because inflation is not just caused by increase in demand. It is also caused by improper monetary policies. Also, China even makes the price of some goods cheaper because they offer products which are less expensive compared to the goods made in America or Europe. With the cheap prices of Chinese goods, many companies are forced to lower their prices to keep pace with the competition. So, in a way, China even causes a small-scale deflation. Maybe the Fed needs to take a second look with their monetary policy. The Challenges and Some Solutions In the chapter, productivity is one of the essentials of the supply side of growth. Although it is affected by the availability of capital goods, quality of labor, and efficiency of inputs, productivity is still highly affected by technology. Given technology, more outputs will be produced with the same amount of labor. It may sound to be a good thing and not really a challenge but I think productivity, being an indicator economic growth, is a bit overrated. What technology does is basically increase the output with lesser time. However, many sectors in the economy are still not penetrated with technology. Worse, these sectors are those which are essential to men. Many countries have been overly dependent on technology for production but I think they're not tapping their real market. The healthcare industry for example, hasn't yet fully penetrated by information and technology while explorations in the outer space (which doesn't really add up to production) use high-end technology. One possible solution for this is trying look at the depth of the different sectors in the economy. Instead focusing on technology to increase production, maybe international trade and globalization might be an option. With globalization, the government can raise revenues through tariffs and taxes. This can prevent budget deficits and might also lead to efficient allocation instead of overproduction. Another challenge that I see in Chapter 16 is the GDP being the measure of growth. This chapter shows the growth of US through the measure of real GDP. As I said before, the well-being of a nation cannot just be measured in figures like the GDP. Even if the country is very rich with resources, labor, and investment, we still cannot say that the country is developing if those resources are misused by their government. I believe that the utility or the societal benefit should also be considered in measuring the economic growth of a country. One solution to this is the newly introduced concept of happiness economics. With this concept, economists can now measure the Gross National Happiness (GNH) of a country (Mustafa). This can also be considered in measuring the development of a country. Key Concepts/ Insights Learned The main concepts that I learned in Macroeconomics is basically the role of government in policy making. The government is not just there to control the people but also think of policies that would result to the optimal output. They have to implement proper monetary policies to prevent inflation or the hyperinflation that happened in Germany during World War I. They also have to find ways how to properly raise revenues to prevent budget deficits. The most important insight that I learned is that economics is not just black or white. I mean, it is not just free market is good and protectionism is bad. Nor it is inflation is bad and deflation is good. Bottom line is, economics is as complex as any other exact science and both the government and the people should always think about that. Works Cited Fox, Justin. "The Economy Really Is Fundamentally Strong", TIME, 16 October 2008. 15 November 2008. < http://www.time.com/time/business/article/0,8599,1850909,00.html> Balls, Andrew. "Productivity Growth and Employment", National Bureau of Economic Research, 16 November 2008. < http://www.nber.org/digest/nov05/w11354.html> "Inflated Claims", The Economist, 14 August 2008. 18 November 2008. < http://www.economist.com/finance/economicsfocus/displaystory.cfmstory_id=11920640> "Commanding Heights Episode One: The Battle of Ideas", PBS.org, 17 November 2008 < http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/tr_show01.html#1 >. Mustafa, Nadia. "What About Gross National Happiness", TIME, 10 January 2005. 18 November 2008. < http://www.time.com/time/health/article/0,8599,1016266,00.html> Crafts, Nicholas. "East Asian Growth Before and After the Crisis", International Monetary fund. June (1999): Vol. 46. No. 2. Read More