Economic Ideas: Macroeconomics - Business cycles or Growth
I've decided that I ought to carry on about economic ideas. Its kind of make me feels great talking about this stuff. Haha.
Ok, last time I was talking about inflationa and interest rates and their effects on the economy. So now I shall dicuss about 2 key ideas in Macroeconomics. i.e Business cycles vs Growth.
I'm not talking about whether which idea is more pertinent and important. In my opinion, they are both important ideas that we all should be aware of (my 'we' refers to anyone who studies Economics). I'm more concerned with the practical aspect, that is whether we should concentrate more on smoothing out business cycles or in boosting economic growth. (I'm more concerned with potential growth here then actual growth). Also, I shall attempt to correct some views which A level students are always constantly confused with (and in fact, they actually have the wrong idea!).
Ok, let me state my stand first. I'm more pro growth (or I treasure potential growth more than actual growth). Why? Well, undoubtely growth has a simply enormous impact on every human's life. Let me just give some figures. If the economy grows at a constant rate of 1% for 20 years, national income will increase by 22%, 2% and it will rise by 49%, 3% and it is 80%, 4 % and is 120%, 5% and it is 165%, 10% and it is 572%!!!! This shows that any percentage rise in the growth rate will directly affect real national income of a country, and it affects significantly that it can raise the standard of living of the people as well as their incomes level by a real huge amount.
Of course, some of you will argue that actual growth is more important. You claim that if supply just rise, and demand doesn't the economy will not grow at all. I agree. But this is a pretty easy problem that can be corrected easily. In this new world, trade occurs and I find it hard to accept the ideas that most of the products that you made can't be sold (unless your really producing something crappy). But I'm also very supportive of the idea that a country should be more competitive and think of how to market and sell its products. So, I don't neglect demand totally as I think its easier to boost demand. Instead, I feel that potential growth must always exist, because the dangers of having no growth in supply is hysteris as well as a HUGE wastage of resources. Furthermore, by continuing to have actual growth, you might just cause inflation and affect the basic economic structure.
People who are more pro the idea of smoothing out business cycles will talk about the dangers of recession and the Great Depression. Its true. But what are the chances that government management of the economy will produce results. In this case, I am more supportive of van Hayek's view that the free-market mechanism corrects itself better than the government does. So I'm more supportive of the idea that the government should focus on dealing with the issue of growth more than to keep worrying about recessions and over-heating.
Ok, I am not necessarily right as the above is just my ideas. But I'm going to correct this idea first. Just because I don't trust the government to intervene well and I also think that the government should not intervene and smoothen out business cycles doesn't mean that I am not a Keynesian, and that I am a Classical. You need to seriously define what are Keynesians? Are they peopl who claim that government intervention is always necessary and good? Are Classicals people who really believe that government intervention is redundent and it will distort the economy?
Well, seriously speaking, Keynes is a classical. He never changes the classical framework unlike Marx. Yes, I do think that Classicals are people who believe in self-correction (well its true that the economy will correct itself eventually!), but Keynes differ from the fact that he feels that in times of necessity (such as the great depression), government intervention is necessary in order for the free-market mechanism to work well again. He believes that the loss to the economy, due to a prolonged downturn is just too great (actually, its something like the loss to growth!). So, it is wrong to say that just because I am a Keynesian I believe in the superiority of government intervention. That's quite a huge distortion.
The other dumb idea which I have came across so far is that Keynesians believed in Fiscal policy and thinks that monetary policy is ineffective, and that Monetarists believe monetary policy and distrust fiscal policy. What crappy idea is that? Let me just say this, just because both parties have different view points on the way monetary acts doesn't mean that they distrust the policy!
Well, I will say that Friedman believes in more of less active government intervention (and the idea of adopting monetary rules) and not active government intervention with monetary policy. Keynsians actually view that active government intervention is necessary at times (i.e. using discretionary policies).
To top things off, Keynsians (Keynes himself as well. The amazing thing about him is that he just develop a great theory of money with LP theory) actually advocate the idea of using both monetary policy and fiscal policy together! Now who says that Keynsians distrust monetary policies?
Ok, the real Keynesian and Monetarist divide actually comes with the idea of policy making (expectation!), as well as activism vs rules. I shall discuss on this great debate some other time in future!
Ok, last time I was talking about inflationa and interest rates and their effects on the economy. So now I shall dicuss about 2 key ideas in Macroeconomics. i.e Business cycles vs Growth.
I'm not talking about whether which idea is more pertinent and important. In my opinion, they are both important ideas that we all should be aware of (my 'we' refers to anyone who studies Economics). I'm more concerned with the practical aspect, that is whether we should concentrate more on smoothing out business cycles or in boosting economic growth. (I'm more concerned with potential growth here then actual growth). Also, I shall attempt to correct some views which A level students are always constantly confused with (and in fact, they actually have the wrong idea!).
Ok, let me state my stand first. I'm more pro growth (or I treasure potential growth more than actual growth). Why? Well, undoubtely growth has a simply enormous impact on every human's life. Let me just give some figures. If the economy grows at a constant rate of 1% for 20 years, national income will increase by 22%, 2% and it will rise by 49%, 3% and it is 80%, 4 % and is 120%, 5% and it is 165%, 10% and it is 572%!!!! This shows that any percentage rise in the growth rate will directly affect real national income of a country, and it affects significantly that it can raise the standard of living of the people as well as their incomes level by a real huge amount.
Of course, some of you will argue that actual growth is more important. You claim that if supply just rise, and demand doesn't the economy will not grow at all. I agree. But this is a pretty easy problem that can be corrected easily. In this new world, trade occurs and I find it hard to accept the ideas that most of the products that you made can't be sold (unless your really producing something crappy). But I'm also very supportive of the idea that a country should be more competitive and think of how to market and sell its products. So, I don't neglect demand totally as I think its easier to boost demand. Instead, I feel that potential growth must always exist, because the dangers of having no growth in supply is hysteris as well as a HUGE wastage of resources. Furthermore, by continuing to have actual growth, you might just cause inflation and affect the basic economic structure.
People who are more pro the idea of smoothing out business cycles will talk about the dangers of recession and the Great Depression. Its true. But what are the chances that government management of the economy will produce results. In this case, I am more supportive of van Hayek's view that the free-market mechanism corrects itself better than the government does. So I'm more supportive of the idea that the government should focus on dealing with the issue of growth more than to keep worrying about recessions and over-heating.
Ok, I am not necessarily right as the above is just my ideas. But I'm going to correct this idea first. Just because I don't trust the government to intervene well and I also think that the government should not intervene and smoothen out business cycles doesn't mean that I am not a Keynesian, and that I am a Classical. You need to seriously define what are Keynesians? Are they peopl who claim that government intervention is always necessary and good? Are Classicals people who really believe that government intervention is redundent and it will distort the economy?
Well, seriously speaking, Keynes is a classical. He never changes the classical framework unlike Marx. Yes, I do think that Classicals are people who believe in self-correction (well its true that the economy will correct itself eventually!), but Keynes differ from the fact that he feels that in times of necessity (such as the great depression), government intervention is necessary in order for the free-market mechanism to work well again. He believes that the loss to the economy, due to a prolonged downturn is just too great (actually, its something like the loss to growth!). So, it is wrong to say that just because I am a Keynesian I believe in the superiority of government intervention. That's quite a huge distortion.
The other dumb idea which I have came across so far is that Keynesians believed in Fiscal policy and thinks that monetary policy is ineffective, and that Monetarists believe monetary policy and distrust fiscal policy. What crappy idea is that? Let me just say this, just because both parties have different view points on the way monetary acts doesn't mean that they distrust the policy!
Well, I will say that Friedman believes in more of less active government intervention (and the idea of adopting monetary rules) and not active government intervention with monetary policy. Keynsians actually view that active government intervention is necessary at times (i.e. using discretionary policies).
To top things off, Keynsians (Keynes himself as well. The amazing thing about him is that he just develop a great theory of money with LP theory) actually advocate the idea of using both monetary policy and fiscal policy together! Now who says that Keynsians distrust monetary policies?
Ok, the real Keynesian and Monetarist divide actually comes with the idea of policy making (expectation!), as well as activism vs rules. I shall discuss on this great debate some other time in future!
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