Stephen Kinsella has kindly agreed to write a short article for us about his new book Quick Win Economics. This is a great book for those who want to explore economics in the context of daily life.
QUICK WIN ECONOMICS, Oaktree Press, 2011
by Stephen Kinsella, Lecturer in Economics, University of Limerick.
Q: What is this book about?
Quickwin Economics looks at the 100 most common questions asked in economics and gives short, commonsense answers, normally with a chart, graph, or example to back these answers up. The emphasis is on rapid understanding of the key elements of an idea, with links to further readings, other important concepts, or real world examples given just after every entry.
Q: Who is it for?
The book is written to be halfway between a Wikipedia entry and a textbook. It portrays economics as an unfinished conversation rather than a canon of knowledge. Economics as it exists today is as full of contradictions as it is full of promise and insight. Readers will get a sense of this from the book.
Q: Can you give us a feel for the book?
Sure. Here’s something I wrote for the book about Monetary Policy. It’s an extra entry, but you’ll get the idea of the book right away.
Can the government manage the economy through monetary policy?
Monetary policy is a set of tools that governments use to control the levels of spending in an economy. By setting interest rates and reserve rates on levels of funds that banks must have to meet withdrawals, by buying and selling government-backed securities, by deciding how much money to allow into circulation, and by providing credit to private banks, central banks use the instruments of monetary policy to try and keep the economy ‘on track’.
So, if the economy is in a slump, central banks can reduce the interest rates at which they lend money to private banks, allowing private banks to lend more cheaply, so increasing the amount of credit in the productive parts of the economy, because banks lend more to more people, and the economy gets stimulated.
If the economy is going ‘off track’, and inflation is rising as a result, then the central bank can increase interest rates to private banks, making loans more expensive, and ensuring the economy stays ‘on track’, that is, close to its potential output.
If the central bank wants to reduce the money supply, it can start selling long-dated bonds to the public (usually via private banks and lending institutions), which buyers pay for by using their deposits of cash. Banks thus have less money on their books to lend with, and so the volume of lending drops, followed (in theory) by a drop in productive activity in the real economy.
Monetary policy is not a science, but rather an art – and does not always work as intended. In an era of globalised money, the inflows and outflows of currency make operating a domestic monetary policy extremely difficult, even for a large country like the United States. There are many other difficulties besides, including lags between the setting of monetary policy in a central bank, and its effect on the real world, and the existence of financial ‘innovation’, where private banks and lending institutions produce ‘new’ and unregulated financial products, which make the imposition of credit controls very difficult, if not impossible.