Political Economy Exam Iii

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Thorstein Veblen

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-- 1857-1929

--dissident American economist

-- sought to develop a more subtle view of the relationship between the individual and society (father of institutional economics)

--sought to explain the tendency to economic recession

--forecast a great depression

--Norwegian descent

--wrote The Theory of the Leisure Class

--disliked due to dissident views

--invited to be President of the American Economics Association but turned it down

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3 Dependencies of the Market

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1) Legal institutions

2) Financial institutions

3) SOcial institutions

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Capital-labour-state framework

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three conceptual categories serving as a loose guideline for political-economic inquiry. institutional clusters having internal diversity, particularly in respect of their economic power. how they interact is a power play based on economic power.

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Institutional economics

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--aka "economic sociology"

--evolutionary rather than mechanistic

--focuses on history rather than institutionalism

--focuses on diverse pattern of capitalist development (in different countries/societies)

--devoted to the societal and political context in which markets exist including: Organizational capacities, interaction between social values, technology and economic institutions.

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Institutional perspective on capital

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not an amorphous factor of production; rather, comes in a range of institutional forms from MNCs to small businesses whose behavior is shaped by local conditions, to absentee owners.

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Institutional perspective on labor

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varies depending on whether workers are organized into trade unions and whether they are fragmented by locality, gender, and race. Unified, fragmented, gender, ethnic

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Institutional perspective on the state

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a wide range of institutions ranging from public enterprises (concerned w/ direct provision of goods + services) to agencies responsible for the provision of infrastructure, central banking, regulation of markets, and arbitration of wages and disputes. Variations in governance and regulatory structures

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inflation

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rising prices. Inflation is normal measured by a consumer price index (CPI), which indicates how the price of a typical basket of goods varies over time.

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monetarism

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the view that government policy should be restricted to a steady increase in the money supply at a rate just sufficient to match the growth in the volume of goods and services produced.

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monetary policy

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the adjustment of the supply of money or the price of money (the rate of interest) in order to affect the level of national income, output, and employment

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rate of interest

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price of money

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money

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anything that is generally acceptable as a means of settling debt. It normally consists of currency on issue (notes and coins) and deposits or credit with financial institutions that is obtainable on demand (i.e. through abn ATM)

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fiscal policy

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the adjustment made by government to revenues and expenditures in order to affect the level of national income, output, and employment. Executive branch is the primary institution. President submits budget to Congress – sets priorities.

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The Leisure Class

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Veblen's idea of a trendsetting affluent social stratum which tended to engage in conspicuous consumption and leisure. activities involved the unscrupulous exercise of economic power. Viewed extravagant wealth as inefficient-- generated social waste

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Veblen's thoughts on people's preferences

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they are socially determined and cannot be taken as a given. Humanbehavior is based on discernible patterns called “instincts.”

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conspicuous consumption

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buying for the purpose of display

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Veblen's central feature of capitalist society

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waste

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Social emulation

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attempts for poorer classes to copy living standards of the leisure class (i.e. though cheap knockoffs)

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Predatory instinct/behavior

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activities that enhance profit without adding to productive capacity; socially counterproductive

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Workmanship

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use of land, labor, and capital to make useful goods and services; socially beneficial

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Industry

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productive activity focused on the use of the means of production, and on technological possibilities for the development of new products or better ways

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Veblen's idea of two traits in perpetual conflict

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•Cluster I: Related to Workmanship (Industry) •Cluster II: Related to Exploitation (Predatory Instinct) (Business)

The conflict between these two and the social institutions created to deal with this conflict, was the central point of Veblen’s social theory.

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Institution

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an organized pattern of group behavior;well-established and accepted as a basic part of the culture

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Business

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concerned with monetary values and financial flows, with the so-called bottom line. in the interest of business owners.

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absentee owners

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shareholders having no direct involvement in the management of enterprises

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Veblen said the most successful form of expenditure is.....

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war

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John Commons

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1862-1945

wrote The Legal Foundations of Capitalism, which examined the relationship between the economic and legal systems. Emphasized the need to study the economy as a 'going concern' evolving in response to real pressures rather than abstract principles. influenced the New Deal

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Principleof circular and cumulative causation

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inequalities, once established, tend to self-perpetuate and grow

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Institutionalism's critique of NCE

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--Simple product of Utilitarianism

--Fails to explore all the things that matter

---Attacked consumer sovereignty

--static

--simplistic view of human nature and social institutions

--Equates hedonism with human nature

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John Kenneth Galbraith

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--1908-2006

--studied economic power

--Born into a Canadian farming family

--studied agriculture at University of Toronto and got PhD at econ at UC Berkeley

--Became professor of econ at Harvard

--Wrote The Anatomy of Power

--1972 became President of the American Economics Association

--outspoken against conservation "conventional wisdom"

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Galbraith's Three Types of Power

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1) Condign Power – coercion and punishment (submission is a result of threat/consequences)

2) Compensatory Power – Pecuniary reward (monetary compensation)-- working by offering rewards. Pursuit of praise.

3) Conditioned Power – Influencing people’s beliefs (persuasion, education,or social commitment to what seems natural, proper, or right). willing or enthusiastic compliance marked by SOCIAL CONFORMITY.

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Galbraiths 3 sources of power

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1) Personality and charisma (related to codign power)

2) Property and wealth (related to compensatory power)

3) Organization – power attached to a particular office or status (related to conditioned power)

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Technostructure

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Galbraith's term for those who can shape the operations of modern capitalist economic institutions bc they control info and organization. specialized knowledge and talent, scientists, financial controllers, human resource managers, market researchers.

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Wesley Mitchell

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renowned for his investigations of trends in capitalist development, especially the cyclical character of economic growth. originated economic statistics, later econometrics.

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Joseph Schumpeter

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--fled Europe as facism spread and became a USA professor at MIT

--wrote Capitalism, Socialism and Democracy

--did not think capitalism could survive

-- saw the most attractive feature of capitalism as the dynamism generated by entrepreneurship and innovation, which would be eroded by the development of corporations and the emergence of a 'managerial class.'

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Measures of the money supply

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M0 and M1: coins and notes in circulation and other money equivalents that are easily convertible into cash.

M1: Currency and Demand Deposits

M2: M1 plus short-term time deposits in banks and 24-hour money market funds. Currency, Demand Deposits, savings accounts, money market accouts, and CDs

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Demanddeposits

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when banks make loans

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What does the Fed do to increaseor decrease demand deposits?

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--Reserve Requirements

--Temporarily lending money to banks tocover reserve requirements

--Buying and selling government bonds (openmarket operations)

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Liquidity

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the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price

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Bonds

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promises to pay a loan plus anannual interest amount

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Velocity

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the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period of time. usually measured as a ratio of GNP to a country's total supply of money.

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asset

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a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

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Interest rates expectedto fall when demand for financial assets...

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increases

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Different views on velocity

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--Monetarists: believe velocity changes but is predictable. Allows the Federal Reserve to manage the economy just through the money supply.

--Keynesianists: view velocity as unpredictable, unreliable, and not stable.

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Keynesian view on Monetary Policy

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--•Increasing money supply may have little impact because people might hoard the money and not spend it. In the Monetarist world, most people spend on real assets. But Keynesianists argue that people spend on financial assets.

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Transactions demand

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Precautionary demand

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Speculative demand

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John Maynard Keynes

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--combined economic theory with how the world actually worked

--wanted to inject sense into practical economic policy during the Great Depression and WWII

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Keynesianism

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emphasized the positive role governments can play in stabilizing an otherwise unstable capitalism system. PRIMARY TARGET: eradication of involuntary unemployment through policies to reduce it.

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why analyze unemployment?

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--it is economically irrational. underutilizes economic resources and fails to satisfy social needs. leads to marginalization and stigmatization.

--OPPORTUNITY COST

--reducing unemployment: win-win. the unemployed benefit w/ jobs while society benefits w/ extra goods and services and extra tax revenues.

--economic system is vulnerable to external shocks

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Keynesian macroeconomy

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functions according to principles that cannot be derived by simply adding up all its microeconomic components

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Aggregate demand is driven by 4 things

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1) consumer spending

2) business investment

3) government expenditure

4) export sales

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Aggregate demand is slowed by 3 things

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1) savings

2) taxes

3) spending on imports

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Households

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supply the factors of production and are rewarded with corresponding income flows: wages (paid to workers), rent (paid to landowners), and profits (i.e. dividends paid to shareholders)

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Firms

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supply the goods and services that households purchase with their incomes

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Keynesian alternative to cutting wages

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the gvmt adjusting level and pattern of its own expenditure

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Transactions demand

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money handy for day-to-day needs

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Precautionary demand

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money kept as a safeguard for rainy days or unexpected opportunities

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Speculative demand

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money held by financial speculators rather than interest-bearing assets so they can quickly buy financial assets later if the prospect of making capital gains is greater

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Whether speculators hold cash or interest-bearing assets depends on...

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their expectations about interest rate changesS

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Speculation

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buying and selling assets with a view to making a profit later when prices have changed (a capital gain) without making any productive contribution to the economy

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For Keynesianists, ________is the most direct way to influence GNP

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fiscal policy

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Multiplier effect

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a little spending goes a long way. a measure of the effect on national income of a change in one of the components of aggregate demand.

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3 institutions that shape the US economy

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1) president

2) congress

3) federal reserve

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Why do we want deficits in a time of recession?

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reduces impact of and enables quick recoveryI

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Incomes policy

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gives the government direct authority over setting the incomes of a particular society group (i.e. minimum wage law)

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trade policies

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tarrif agreements between countries/sectors

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Tobin tax

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discourage internal speculation. tax on currency and transactions

aka financial transfer tax

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aggregate demand

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the total expenditure on goods and services within a community. KEYNES: sum of expenditure on consumption, investment, government spending, and exports minus expenditure on imports