Thursday, 10 November 2011

HCJ - Lecture 4 - Economics - Money is ALL powerful

This weeks HCJ lecture was based on economics and some important figures who held theories about the economy and money. Money is probably the most powerful thing in the world, and it is for this reason that we as humans still exist. I see money as a bartering tool, something to give in exchange for services, products or luxuries. It has been said that we as humans have 'wants' or 'desires'. These desires, in the opinion of many including economist Thomas Malthus outstrip the ability to produce which is a major problem. This is where we can link economics back to previous lectures and my previous posts. In logical terms the word 'need' has no reference point. Humans do not necessarily NEED homes, or clothes, or any kind of luxury, even though we are led to believe that we do in this day in age. Philosophers such as previously discussed Frege will reject 'need' as you can have an emotional feeling towards this word. This being said, the word 'want' on the other hand, has a reference point, I may not need the a pair of shoes, as realistically I could walk around bare-foot, but I do want shoes, as sooner or later my feet will begin to hurt!

Ricardo and the theory of value:
The example given in the lecture was that of a biro against a piano. Now a piano may be worth £5000, whereas a biro is only worth £1. Who decides why the piano is worth 5000x more than the biro? Why should it? In Ricardo's theory he believed that if two things were valued differently it was because the more expensive item, would have taken X amount more labour than the cheaper item. So in the case of the piano and the biro, the piano would have had 5000x more labour gone in to making it than the biro. Once the biro factory is opened, all it takes is a push of a button, whereas the piano has lots of different materials, and takes a lot longer to make.

Thomas Malthus and the 'iron law of population':
At the time of Malthus' theory, it was the age of the Poor Law Reformation in England, and the need for relief was high, with major parts of the UK suffering from famine and poverty. Malthus predicted that the ever-growing population would soon drain the land of all it's resources. He said that if the population grew steady it would need a family to consist of two children. One to take the place of the mother and one the father. At the time however people were having on average four children. This was in my opinion die to the non-existence of contraception and things such as abortion, but also that relief was given in the form of number of children times the price of bread; meaning the more children, the more the relief. Although the draining of resources did not occur, Malthus did have good evidence behind his theories, and could not for-see the invention of contraception and/or abortion.

Ricardo + Malthus = Marx and the 'iron law of wages:
There is a what I believe to be a vicious circle when it comes to wages and employment in certain industries. Being on a journalism course, and wanting to become a sports journalist, I see it fitting to use this example. So a sports journalist pays very well, so suddenly everyone wants to become one. Now the employer has their pick of who they want to employ and who will do it for the right price. This will then give the employer the ability to negotiate and lower the wages. Lots of people then lose interest, meaning a drop in interest. The employer then has no option but to increase the wages once more to meet their need for a worker.

An example of simple economy according to Marx - If you take one apple and give it a value of £3, that is a real value that people are prepared to pay. The company manufacturing the apple need to make a profit for expansion; so new factories, more production and so on. The company spends £2 on the production of the apple, and everything involved, including wages. Someone who works in the factory making the apples, can't afford the £3 for the apple, they can only afford £2. So this get's back to the big bosses at the factory who then decide to reduce the cost of the apple to £2, but in order to make a profit, they now need to cut costs of production to £1. To do this, the have to enforce pay-cuts, so the worker can only afford £1, meaning he still can not afford the apple, even though it is at the price he could previously afford.

Printing money - a confidence trick:
When the government pay a public sector worker, such as a University lecturer or a fireman, they get the wages, not from tax money, but from printing money. They produce these I.O.U type lettes which are given to the bank in exchange for money, which they then distribute around. This is again another kind of economic circle:

Adding to government debt, they take out I.O.U > Lecturer is paid their salary > Lecturer spends their salary on a train ticket, sandwich, coffee > Cafe that produce food/drink have income, as well as train drivers kept in work. So by adding to government spending, it is actually benefiting the economy, in that people are spending money, and employment levels are maintained. The government debt therefore will rise along with the economy. So this does beg the question, why the need for taxation? The taxation goes somewhat towards paying off the interest towards these bonds, or I.O.U's the government is taking out to improve the economy.

Keynes formula
Household spending (C) + Private Investment (I) + Government Spending (G) = Total demand in economy (Y) - or the money needed to give everyone a salary

If one of the factors goes down, then the other two will need to pick up the slack. So if household spending is reduced, government spending will have to increase, so in the area affected (lets say Croydon) will have a shopping centre built or expanded. So there will be more shops, so more jobs to run the shops, more production at the factories, meaning household spending should rise due to these once unemployed people can now afford to spend.

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