In many ways economics is the study of incentives. An incentive is any factor (financial or non-financial) that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives.
In English, Incentives make you want to do something you otherwise wouldn’t want to do. Today let’s talk about an incentive which is in the media at the moment, the oft criticised, proposed marriage tax break. Read the rest of this entry »
But what is debt, and what does economics have to say about it? Debt is borrowing something; an asset, and then paying it back over time. This immediately leads to some issues; how do you know the person you’re lending to can pay you back? Why would you lend your money to someone? And how do you make money out of lending your money to other people?
One way this is dealt with is via the interest rate. This is a percentage that is paid on top of the amount borrowed, for example a 10% rate on a 100-pound loan results in £110 to be paid back (10/100*100=10). This economic revelation results in all 3 criteria being fulfilled, money being made, money being lent to those who can pay it back (via a method known as self-selection) and therefore an incentive to lend.
Economics teaches us a wide variety of ways to calculate the interest rate. This seemingly asinine thing is fascinating the more you study it. You see the interest rate affects all sorts of things. If the rate of interest falls, then the charges on a loan to buy larger items like cars, furniture, electrical equipment and so on is also likely to fall. Therefore total sales of these goods are likely to increase. Holidays are likely to become more likely and more houses will be sold. You will likely see more tourists as the exchange rate falls (and pounds become cheaper) One of the key things you will learn from economics is that changes to things like the interest rate have knock-on effects (also called externalities). This principle applies to a whole variety of things from signage to coffee prices. Your question this week is what implications could there be to Iceland not paying off their debt?
What does economics teach? Why study economics? What’s the big deal? In a lecture by Robert P. Murphy of the ‘Mises Institute’ he explains ‘The Core of What Economics Teaches’ in yet another fascinating video.
Economics is a fascinating subject, but it is always controversial.
Here the always controversial ‘Mises Institute’ present their take on the recycling debate and whilst we don’t have to agree with their solutions the arguments are important to understand!
Graffito of Keynes, photographed by r2hox, via Wikimedia Commons
John Maynard Keynes was born in 1883 the same year that Karl Marx died, and whilst both wrote critiques of the capitalist system here the similarities end. Marx was an angry loner, his ventures and business failed and the majority of his life was spent in exile. Working anonymously and alone in the British library, Marx spent many years sculpting his theories about the inevitable overthrow of the free market system. Perhaps the saddest thing is that Marx never lived to see his theories proved wrong.
Keynes was very different, a dashing figure and a brilliant economist, who could also mix with the elite of British society. Keynes attacked the inequalities and inefficiencies of the capitalist system it didn’t stop him from making a small fortune speculating on the foreign exchange markets.
Keynes was also a visionary, while the Allies were clamoring reparations to be imposed on Germany he saw that they would be would be impossible to repay claiming that it would reduce Read the rest of this entry »
Karl Marx was an unwitting world changer. Unlike his predecessor Adam Smith, Marx saw and believed in the inequality that capitalism could bring. This inequality would lead to a revolution of the oppressed workers leading to the formation of a Communist state. However, like the rest of his economist kin, Marx loved to write, his principal works, Das Kapital could make claim to be one of the longest (and most boring) books ever written. However his ideas when teamed up with accomplished writers were haunting.
A leaflet called the ‘Communist Manifesto’, which was distributed to the masses in London contains several passages which to this day remain a part of the canon of political economy.
“A spectre is haunting Europe — the spectre of communism”
“ The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.”
Despite the attractions of Marxism, it never really took hold in the US and Western Europe. Economists were just too enamored with the free market orthodoxy of classical economics. Just to remind you, these economists differed little from the original ideas postulated by Adam Smith.
However in the 1930s free market economics was to face an impossible challenge – The Great Depression. With it came mass unemployment, bankruptcies and falling output. Western democracy itself was threatened. The result of this was a new way of thinking about economic problems and the end of blind optimism that economists held that in the Long Run everything would be OK.
Thus it was in the middle of the great depression that J.M.Keynes rose to prominence retorting to orthodox economists that “In the Long Run we are all dead” Keynes saw no point in waiting a couple of decades for the depression to come to an end. Keynes argued for immediate intervention and by that he meant that in particular the government should spend, spend, spend.
via the interest rate. This is a percentage that is paid on top of the amount borrowed, for example a 10% rate on a 100-pound loan results in £110 to be paid back (10/100*100=10). This economic revelation results in all 3 criteria being fulfilled, money being made, money being lent to those who can pay it back (via a method known as self-selection) and therefore an incentive to lend..jpg)
Karl Marx was an unwitting world changer. Unlike his predecessor Adam Smith, Marx saw and believed in the inequality that capitalism could bring. This inequality would lead to a revolution of the oppressed workers leading to the formation of a Communist state. However, like the rest of his economist kin, Marx loved to write, his principal works, Das Kapital could make claim to be one of the longest (and most boring) books ever written. However his ideas when teamed up with accomplished writers were haunting.