Economy & society
Exam study sheet 2021
Lesson 1: Introduction
- Measures of Inequality:
Gini-Index:
Class: for disposable income inequality (Lorenz curve helps explain Gini index – the Index itself ranges
from 0, which is complete equality, to 1 which is complete inequality, it is calculated by look at the
Lorenz curve, and dividing A by A+B). – Problem with Gini Index is that it is quite abstract, and can’t be
easily determined (what changes mean) by non-economists.
Net: is a measure of statistical dispersion intended to represent the income inequality or wealth
inequality within a nation or any other group of people. The Gini coefficient measures the inequality
among values of a frequency distribution (for example, levels of income). A Gini coefficient of zero
expresses perfect equality, where all values are the same (for example, where everyone has the same
income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (e.g., for a
large number of people where only one person has all the income or consumption and all others have
none, the Gini coefficient will be nearly one).
Share of different income groups (e.g., top 1%) in national income.
Class:
Net: Piketty bases his argument on a formula that relates the rate of return on capital (r) to economic
growth (g), where r includes profits, dividends, interest, rents and other income from capital and g is
measured as growth of society's income or output. He argues that when the rate of growth is low, then
wealth tends to accumulate more quickly from r than from labor and tends to accumulate more among
the top 10% and 1%, increasing inequality. Thus the fundamental force for divergence and greater
wealth inequality can be summed up in the inequality r > g. He analyzes inheritance from the
perspective of the same formula. The central thesis of the book is that inequality is not an accident, but
rather a feature of capitalism, and can only be reversed through state interventionism. The book thus
argues that, unless capitalism is reformed, the very democratic order will be threatened.
Wealth Inequality (share of different wealth groups – top 1%):
Class: Is the distribution of net wealth, such as assets (real estate and financial assets) minus the
liabilities, such as debt. Wealth inequality is traditionally higher than income inequality, as wealth is the
accumulation of saved income during one’s lifetime and the capacity to save money depends on the
level of income. It is important to point out that wealth can also be inherited.
Net: Wealth is defined as the current value of one's assets less liabilities (excluding the principal in
trust accounts).
Consequences of Inequality:
1. Social: Negative correlation between inequality and social well-being (Spirit
Level), and also a negative correlation between inequality and social mobility
(Great Gatsby curve).
2. Political: Political system erodes due to a disproportionate influence of the
super-wealthy on public policy, and the rising attractiveness of populism
End of Keynesian Era: A strong link between rising wages, rising aggregate demand and economic
growth during this era lead to the break down of Keynesian economic policies in the 1970s, more specifically
around the time of the Stagflation crisis (73-75), but also into the 80’s. Seeing as low and middle income
households spend a larger portion of their wages than high income households, any loss in these two groups
has the potential to lower the economy’s aggregate demand (people will buy less stuff). As a response to the
downfall of the Keynesian era, the economies of different countries acted differently. The LME’s turned to
debt led growth, whereas the CME’s turned to export-led growth.
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, Terminologies – Lesson 1:
a. Aggregate Demand: is an economic measurement of the total amount of
demand for all finished goods and services produced in an economy.
Aggregate demand is expressed as the total amount of money exchanged for
those goods and services at a specific price level and point in time. It consists
of all consumer goods, capital goods (factories and equipment), exports,
imports, and government spending.
b. Keynesianism: Keynesian economics is a macroeconomic economic theory
of total spending in the economy and its effects on output, employment, and
inflation. Looks into how aggregate demand strongly influences economic
output and inflation. In the Keynesian view, aggregate demand does not
necessarily equal the productive capacity of the economy.
c. Liberal Market Economies (LME’s): In liberal market economies, the
problem of coordination between firms and between firms and their financiers,
employees, suppliers, and customers is solved through market mechanisms. LMEs are
free market economies. They are also characterized by a relatively decentralized
system of industrial relations, with collective bargaining taking place at enterprise or
workplace level. Because of the dominance of the market, LMEs typically exhibit
relatively short-term and adversarial relations between economic actors. In the field of
human resource management, there is a tendency for firms to have a poor record in
training and development and to have limited systems of employee participation and
involvement. Where trade unions are present they are kept at arm's length and the
relationship is adversarial, focused mainly on distributive wage bargaining. Although
LMEs may be characterized by short-term and adversarial relations, they also possess a
high capacity for innovation and economies of this kind secure comparative advantage
by developing new products and new industries, particularly science-based industries
such as biotechnology and computers. Prime examples are the Anglo-Saxon countries,
but most predominantly the USA.
d. Coordinated Market Economies (CME’s): Rely on formal institutions to
regulate the market and coordinate the interaction of firms and firm relations with
suppliers, customers, employees, and financiers. CMEs tend to be characterized by
relatively long-term relations between economic actors that are also relatively
cooperative (see patient capitalism). In the field of HRM, CMEs tend to have high levels
of job security, a good record on training and development, institutionalized forms of
worker participation, based on works councils, and relatively cooperative relations
between trade unions and employers' associations. These long-term, cooperative
relations provide CMEs with their source of comparative advantage in the world
economy: they tend to be good at process innovation and the production of high
quality, high value-added goods in mature manufacturing industries.
e. Mixed Market Economies (MME’s): Is a system that combines aspects
of both capitalism and socialism. A mixed economic system protects private
property and allows a level of economic freedom in the use of capital, but
also allows for governments to interfere in economic activities in order to
achieve social aims. Mixed economies typically maintain private ownership
and control of most of the means of production, but often under government
regulation. They also socialize select industries that are deemed essential or
that produce public goods.
f. Gross domestic product (GDP): is a monetary measure of the market value
of all the final goods and services produced in a specific time period. GDP (nominal) per
capita does not, however, reflect differences in the cost of living and the inflation rates
of the countries; therefore, using a basis of GDP per capita at purchasing power parity
(PPP) is arguably more useful when comparing living standards between nations, while
nominal GDP is more useful comparing national economies on the international
market. Total GDP can also be broken down into the contribution of each industry or
sector of the economy. The ratio of GDP to the total population of the region is the per
capita GDP and the same is called Mean Standard of Living. GDP is often used as a
metric for international comparisons as well as a broad measure of economic progress.
Can be looked at from both a supply side (production/income) approach, for instance in
labour income (wages) and capital income (profits). On the demand side, it looks into
expenditure, such as consumption.
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,Lesson 2: Inequality: Neoclassical vs Heterodox views
- Three most important (First and last seen as most prominent in decision making today)
Neoclassical School of Political Economy:
Class: Believes that an economy that embraces the principles of the free market, and is not harmed by
excessive state intervention, will be a growing economy. Also believes inequality is not a bad thing, as
there has to be a trade off between equality and efficiency.
Efficiency of Markets: They develop “spontaneously” to satisfy human needs.
Efficiency of Decentralized Markets: Keeps the balance between supply and
demand.
Neoclassical explanation to rise in inequality: SBTC and trade off between
equality and efficiency. For them inequality is unavoidable, as firstly, wages
should reflect the “marginal product of labour”, and also reflect the
mechanism of supply and demand. Additionally, inequality is desirable, as it
creates incentives for individuals and firms to invest, which increases the
overall efficiency in the economy, as growth in average labour productivity is
the most fundamental determinant for the growth in living standards.
Wages reflect: Marginal product of labour.
Labour productivity growth automatically leads to wage growth.
Governments should focus on maximizing economic growth rather than on
income distribution, as “a rising tide will shift all boats”, or rather, growth in
GDP and labour productivity will result in increasing wages and living
standards for everyone, even low skilled workers (allegedly).
CRITIQUES: Neglects the institutional underpinnings of the economy, the
effects of SBTC and economic globalizations on domestic inequality are
mediated by diverse national institutional settings, e.g., labour market
regulations, and economic liberalization is a political choice with distributional
implications (during golden age of capitalism, the economy was much less
globalized).
Net: An approach to economics in which the production, consumption and valuation (pricing) of goods
and services are driven by the supply and demand model. According to this line of thought, the value of
a good or service is determined through a hypothetical maximization of utility by income-constrained
individuals and of profits by firms facing production costs and employing available information and
factors of production, in accordance with rational choice theory.
Marxist School of Political Economy:
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, Class: Looks at the inequality in society, seeing there to be an intrinsic conflict between the capitalist
and working class, due to an exploitation of labour by the former on the latter. They believe that
overproduction and underconsumption can only be solved by replacing capitalism with socialism.
Intrinsic (naturally occurring) conflict and asymmetric power between
bourgeois and proletariat.
The proletariat revolution will occur due to the recurring crises of
overproduction and underconsumption.
Look below for Marxist terminology ****ADDDDDD from SOC last sem**
Wages: are lower than the marginal product of labour.
Wage growth: will typically be lower than labour productivity growth.
Net: Concerns itself variously with the analysis of crisis in capitalism, the role and distribution of the
surplus product and surplus value in various types of economic systems, the nature and origin of
economic value, the impact of class and class struggle on economic and political processes, and the
process of economic evolution. It is important to point out that it differentiates itself with the Marxist
political ideology.
Keynesian School of Political Economy (again and more in next lesson):
Class: Believe state intervention should be based upon a) Activist ( not stuck to rigid
policies) fiscal and monetary policy, and b) social security ( welfare state)
Net: Argues that aggregate demand is volatile and unstable and that, consequently, a market
economy often experiences inefficient macroeconomic outcomes – a recession, when demand is low,
and inflation, when demand is high. Further, they argue that these economic fluctuations can be
mitigated by economic policy responses coordinated between government and central bank. In
particular, fiscal policy actions (taken by the government) and monetary policy actions (taken by the
central bank), can help stabilize economic output, inflation, and unemployment over the business cycle.
Keynesian economists generally advocate a market economy – predominantly private sector, but with
an active role for government intervention during recessions and depressions.
Terminology Class 2
a. Monetary Policy: The demand side of economic policy,
refers to the actions undertaken by a nation's central bank to
control money supply and achieve macroeconomic goals that
promote sustainable economic growth. Can be broadly
classified as either expansionary or contractionary. Tools
include open market operations, direct lending to banks,
bank reserve requirements, unconventional emergency
lending programs, and managing market expectations—
subject to the central bank's credibility.
b. Fiscal Policy: Refers to the use of government spending
and tax policies to influence economic conditions, especially
macroeconomic conditions, including aggregate demand for
goods and services, employment, inflation, and economic
growth. Is largely based on ideas from John Maynard Keynes,
who argued governments could stabilize the business cycle
and regulate economic output. During a recession, the
government may employ expansionary fiscal policy by
lowering tax rates to increase aggregate demand and fuel
economic growth. In the face of mounting inflation and
other expansionary symptoms, a government may pursue
contractionary fiscal policy.
c. “Invisible Hand”: Is a metaphor describing the
unintended greater social benefits and public good brought
about by individuals acting in their own self-interests.
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