ECONOMICS: an Introduction ECONOMCS (COOPERATION AND DEVELOPMENT) PROF. PASCA DI MAGLIANO.

ECONOMICS: an Introduction

ECONOMCS (COOPERATION AND DEVELOPMENT) PROF. PASCA DI MAGLIANO

What is Economics all about?

Even someone who is not familiar with the discipline probably has an idea of the main topics that Economics is concerned with

A first list of these topics, could be the following:

• markets, competition, market structure• consumption , production• labour market •inflation• public spending, taxes, public debt, • stock market• multinationals, globalization, foreign investment

ECONOMICS PROF. PASCA DI MAGLIANO

But a mere list of topics is not enough

The list (even if enriched) is not enough to define the economic science.

These topics are not the sole interest of economics but they also concern: •Other disciplines (sociology, law, etc.)• Social actors (enterprises, banks, trade unions, etc.)• Institutions (either local, national or international)

It is necessary to specify the point of view and the method that the economist chooses to use while studying these topics.

ECONOMCS PROF. PASCA DI MAGLIANO

What is Economcs?

Economics is a social science which studies the choices of the economic agents and the interaction that establishes itself among the single choices. In other words, it studies the modality through which individuals, organizations and enterprises employ scarce resources to produce various types of goods and services, as well the ways in which they are distributed among the subjects (families, enterprises) to satisfy their present or future needs. Economics assume that the choices of the agents are:• based on a criteria of rationality • aimed to maximize objectives of individual interest (profits, utility, etc.)

EONOMCS PROF. PASCA DI MAGLIANO

General Principles: Scarcity

Scarcity of resources happens everytime that, given the needs of a society at a given time, the means available to satisfy them are not sufficient. A consequence of scarsity is that society, institutions, organizations and individuals are almost always forced to choose within a limited set of possibilities between objectives and scarce means applicable to alternative uses. Scarce means any resource acquire a value (price)


General Principles: Reliable information

It is assumed that all the data relative to the prices pf any good and to the available technologies are known and available a-priori both to the entreprices to produce goods, and to the consumers to by them.


General Principles: Rationality

A fundamental principle on which most of the economic analyses is based on rationality of choices.

Rationality assumes that economic agents behavior use standard criteria as it is assumed that everybody is perfectly capable of assessing the costs and benefits following to each available set of alternative scenario.


Microeconomics and Macroeconomics

Economics is articulated in two major sub-disciplines: microeconomics and macroeconomics

MICROECONOMICS emphasizes the individual dimension of the various economic problems (choice of the single consumer, choice of the single firm, the functioning of a given market, the determination of a price, etc.)

MACROECONOMIA studies the functioning of the economic system as a whole (national product, consumption, saving, investment, employment and unemployment, inflation etc.)

EONOMICS PROF. PASCA DI MAGLIANO

Microeconomics

The main topics it deals with are:

1. Consumer Choice Theory How a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases

2. Theory of ProductionHow a firm chooses the inputs to be used and in which quantity, as well it decides about production mix

3. Market StructureCharacteristics and degree of market power held by sellers and buyers

POLITICAL ECONOMY (P-Z) PROF. PASCA DI MAGLIANO

Macroeconomics

The main topics it deals with are:

1. National IncomeHow to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc.

2. EmploymentCauses, typologies (structural, conjonctural), consequences

3. Political economyFiscal policies (taxes, transfers, public investments) , as it is run by the StateMonetary policies (interest rate, currency exchange rate, as it is run by the Central Bank


Main Schools of Thought

Classical School(1600/1700, until the second-half of the 1800s) Main authors : abate ferdinando Galiani, Adam Smith, Thomas Malthus, David Ricardo, Stuart Mill, Karl MarxEconomics is a social science that studies questions such as capital accumulation, income distribution

Marginalist or Neo-classical School (since 1870 circa)Main authors : Jevons, Walras, Marshall, von Hajek, Friedman, Say, PhilipsEconomics studies how to obtain the best result in the presence of a given amount of resources available

POLITICAL ECONOMY (P-Z) PROF. PASCA DI MAGLIANO

Main Schools of Thought (2)

Keynesian School(since 1930 circa)Main Thinkers: Keynes, Galbraith, Stiglitz, Dornbusch, PhelpsGrowth is no longer driven by offer, but rather sustained by demand, even public

Development different from growth(since 1950 circa)Main thinkers of development: Lewis, Kuznets, Bauer, Myint, Streeten, Sen, YunusThe problems of the economies in the developing world are concerned not only with economic aspects but also institutional and social ones; unlike growth that is concerned with economics and is concentrated in the developed countries


The State and the Market

Periodically, in conjunction with major economic events that raise the attention of the public opinion, the scientific and

political community interrogate themselves on the role of the free market

The discussion aims at understanding the extent and the modalities of State intervention in the market mechanism

At the extremes of this debate, there are on the one hand the supporter of State intervention and on the other the liberal

oriented economists


Comparing the two positions

Supporter of State intervention as:• outcome by market allocations may not be socially acceptable• the market, if left unregulated and free to follow its own rules, does not function well

Market supporter• most efficient mechanism • autghomatic capacity to increase well-being • moral qualities (i.e.: meritocracy)


Origins of Liberalism: Adam Smith

The father of liberalism is considered Adam Smith who published in 1776 “The Wealth of Nations”, the birth of

modern economics

The Smith’s theories designed the modern economic thought by discovering the superiority of the free market to any other

structure

Among the many ideas put forward by Smith, one was particularly successful: that of the famous metaphor of the

“invisible hand”


The « Invisible Hand »

The metaphor of the invisible hand is the basis of the liberal view of the market economy

The market (as if it were guided by an invisible hand), if left free to operate according to its own rational logic, produces an unexpected result that is also desirable at the same time:

it maximizes the wealth of the entire society

Such a result is reached without anyone explicitely pursuing a collective goal. Rather, the collective goal is reached

thanks to the selfishness of individuals


Consequences of the free market

The consequence of such an assumption is all too obvious: the market works well only if it is left free (hence the famous expression “laissez faire”)

Therefore, the market, not only did not need any help, but if anything, just needs to be freed of obstacles and

regulations that might prevent its action

It is interesting to note that in this last consideration, one can find an argument that is often made in favour of the market,

even nowadays: the market must be left free, it must not be caged


The role of the State in the economy

The founder of the theory of the role of the State in the market is John Maynard Keynes, who published in 1936 “General Theory of Employment, Interest and Money”

The innovative idea is that the role of the State is fundamental. Indeed, the market can, according to Keynes, produce results that are not optimal, and the State’s role

is to help the market

The duty of the State is on the one hand to mitigate and control the economic cycles and on the other hand to

bring the market to a better situation (especially in terms of unemployment) than the one that the market itself would

have been able to realize if operating alone

economics PROF. PASCA DI MAGLIANO

Current Schools of Thought

• Liberalism– monetarists– neo-classical school

• State intervention– keynesian school– neo-keynesian school


Intermediate Positions (1)

In reality, the contrast between market and State is played within the realm comprised between the two extreme positions, most radical in their nature. Hereafter are a few examples:

• Antonio Martino pure liberal and intellectually close to the School of Chicago and to his most notable inspiration Milton Friedman, he trusts the free market as a source of economic and social progress

•Jagdish Bagwati considers economic integration as positive, provided that the distortions be corrected without introducing duties

• Anthony Giddens considers that the growing liberalization creates problems that globalization may, instead, contribute to solve

• Lawrence Summers considers that, within the market, the State must insure the reduction of inequalities through fiscal harmonization


Intermediate Positions (2)

• Amartya Sen e Peter Singer view risks but also positive opportunities in the market dynamics, underlining the necessity for regulation that bring businesses and individuals towards a virtuous path • Joseph Stiglitz argues in favour of the importance of the role, not only of the national State but also of the international institutions in regulating the markets • Edward Luttwak e Giulio Tremonti underline the risks that the global market, if it is not properly regulated, might impose upo the workers of the developed world (low salaries, unemployment) and upon the environment• John Gray does not believe that the anglo-saxon model of economic liberalism can be applied to systems that are different from the western one historically speaking and advocates for national solutions • Paul Krugman (2008 Nobel Prize) underlines the need for global governance to make markets work, and that it be entrusted to the IMF


The market in the face of crisis- origins of the financial crisis 2007/08

Since the 1980s, liberal pressures and the dissemination of new and revolutionary communication technologies have produced an enormous expansion of the financiary activities at the international level.

This has been, on the one hand, one of the cornerstones of globalization but on the other it has also brought about the huge expansion of a market less stable and predictable than the real markets. From the 1970s to the 1990s, the volume of trade grew exponentially: suffice it to say that since the early 80s to the mid 90s, the trade volume produced by mutual funds, pension funds and institutional investors has increased tenfold.

The conjunction between the expansion of financial wealth, the introduction of new derivative contracts and the growth of the debts of advanced countries has led to finance taking over the real economy. These phenomena are at the origin of the widespread crisis exploding in 2011, slowing down the global economic growth, causing recession and unemployment.

ECONIOMICS PROF. PASCA DI MAGLIANO

Financial Markets

• They move volumes of wealth built on the trade of derivatives and other products that are detached from economic activities, whereby every turbulence generates psychological repercussions not only on the stock markets but also on the loans to businesses

• They are maneuvered by investment banks and big investors, but are a cause of growing concern for the small savers

• They are particularly volatile, and above all, moody:

perceptions of the market compared to hypothetical scenarios may give rise to chain reactions

• They influence real activities through banks and other financial intermediaries


Reasons of the actual crisis

Many have denounced the end of a financial system exempt of rules of supervision and surveillanceOn the other hand, the same liberal view, while it encourages private activity, also places it in a balanced interaction between market and institutions The present crisis originates in a guilty lack of governance, representative of the liberal culture that was indulged in during the times in which the strong economic growth facilitated financial activities (Fed, Grennspan)But investment banks, and not only, have taken advantage of this, thrusting on much higher leverage ratios than those of the commercial banks, eventually bringing about the creation of high-risk financial products


The actual crisis: potential solutions

• Public participation in the capitals of banks in crisis, provided it goes to fuel the loan supplies (EU’s approach)

• Government guarantee both on deposits and interbank loans• Lighten the regulatory capital requirements of Basel 2• Appeal to FDI by promoting cooperation agreements with Sovereign

Funds • Greater flexibility in the budgetary constraints imposed by the

Maastricht Treaty, revising a view that is only concerned with budgetary discipline and inflation

• Boost the demand, by reducing the tax burden on families, in order to send a strong signal to the recovery of purchasing power

• Review the rules regulating the financial and stock markets in order to fight the speculative designs that preceed the speculation in real terms over the economic and patrimonial consistency of businesses

• Lower the minimum requirement for OPA in businesses to avoid hostile participations

• Intervention of the European Stability Mechanism (ESM)


ECONOMICS: an Introduction ECONOMCS (COOPERATION AND DEVELOPMENT) PROF. PASCA DI MAGLIANO.

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