Saturday, February 07, 2009

What You Wanted To Know About Economics But Were Afraid To Ask

Economics is really a very simple subject matter. Its the underlying assumptions that kills everyone. Economics should be the easiest subject for students as there are really no correct answer (how do you like that in an exam), but you must be able to grasp some principles in order to b.s. your way through life. The reason why there is really no correct answer is that there are many schools of economic thought, each having great merit. Its like studying the merits and demerits of horoscope, only that horoscope would probably be more rewarding. The defining factor is that your political ideology somewhat determines your eventual support for whichever school of economic thought.

You hear the talking heads on business channels spewing venom at each other over the stimulus plan, what they are really arguing about is that each of them are from different schools of economic thought. Now here is the funny thing, even if you have NEVER studied economics before, we all belong to a certain school of economic thought - well maybe not all will be solidly within a certain school of thought, but you could mark yourself on the chart matrix above.

Centrists - This is the current most popular crop of economists. In fact, most of the economists on Obama's team are centrists. Places importance on high savings, reduction of deficits and freer markets. A centrist wants to promote what is best for society, tolerate what is good enough, and prevent what is harmful.

Libertarians -
Libertarianism is a term used by many which seek to promote individual liberty and seek to minimize or even abolish the state. Economic libertarian - a libertarian who advocates maximizing individual rights and minimizing the role of the state.

Conservative -
Conservatives want to promote what is best for society, and prevent everything else. Conservatism is a political and social term whose meaning has changed in different countries and time periods, but which usually indicates support for the status quo. The most famous of conservative economists has to be Milton Friedman, the grandmaster of free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility. In Friedman's view, government had the obligation: to keep its hands off the economy, to let the free market do its work. That runs counter to the John Maynard Keynes grand plan who maintained that governments had a duty to help capitalistic economies through periods of recession and to prevent boom times from exploding into high inflation. The only economic lever that Friedman would allow government to use was the one that controlled the supply of money. conservative - consistent with their values of limited government and equality of opportunity over equality of outcome, prime features are tax cuts and limited social spending. Under the assumption that with their money free of taxes and restrictions, individual and corporate spending will spur the economy - a rising tide (individual spending) lifts all boats (lower-income classes benefit through increased employment and wages, driven by high-income spending). This is an attractive policy approach as it appeals to individuals of all demographics, who can easily weigh the benefits of increased take home pay.

Liberal - Better known as Neoliberalism, is a late-twentieth-century philosophic doctrine, actually a continuance and redefinition of classical liberalism, influenced by the neoclassical theories of economics. The central principle of neoliberal policy is untrammeled free markets and free trade. The prime global advocate is the International Chamber of Commerce in Paris, whose self-defined trade and commerce mandate is to break down barriers to international trade and investment so that all countries can benefit from improved living standards through increased trade and investment flows. Exactly the kind of thing practised by IMF, World Bank & WTO (and criticised heavily by Chang Ha-Joon in his book Bad Samaritans). Other things strongly favoured by by liberals include anti-unions, promoting free market economics and welfare reform. neoliberalism seeks to transfer part of the control of the economy from state to the private sector, to bring a more efficient government and to improve economic indicators for a nation. Frowns heavily on subsidies, prefers to guide investing into pro-growth/pro-poor services such as education, health care and infrastructure investment. On tax, it favours a very broadbased tax (covers as many as possible) and low marginal rates. They are also in favour of competitive exchange rates, i.e. slightly weaker rates to boost competitiveness. Thinks that state enterprises should be privatised aggressively. Prime example of neoliberalism: Hongkong - "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." The other country that have embraced neoliberalism with gusto is Sweden. Unfortunately, Iceland was also a prime embracer of this kind of economics, and thanks to the unfettered economic liberalisation, Iceland may no longer exist now. Mantra of liberalism - Higher economic freedom has a strong correlation with higher living standards; Higher economic freedom leads to increased investment, technology transfer, innovation and a responsiveness to consumer demand. liberal - consistent with their values of active government to balance equality of opportunity and equality of outcome, tax revenues (progressively weighted towards the wealthy) are crucial to providing support for low-income people in order to maintain a minimal standard of living for all individuals. If it's not a "rising tide," perhaps another play on the nautical theme would be, all oars in the water makes the boat go faster. This is generally a tough sell as no one likes taxes, and it can be difficult to find a successful balance between providing the wealthy enough freedom to prosper and extracting enough taxes to properly address spending needs. Therefore, these days, it seems the conservative approach has more public support, particularly in the US.

Statist - This is the hardest to define. Generally, statists economists support centralised controls on the grounds that free markets tend to fail. That market failures are endemic. Freedom of choice does not work. (I guess Mahathirism would be a kind of statist economics). They teach that with s
tate intervention we will have more products that we want. That we will have lower unemployment, greater income in our old age, better medical care, and better and less expensive education. They are persuaded that there will be more clean air and water, greater safety at home, when we travel, and in the workplace, and more security from foreign enemies. To the statist economist, perfect markets (atomistic or perfectly competitive) exist as desirable impossibilities under freedom. Only under government intervention and authority can these ideals be approached. People simply cannot make themselves happy without the government intervening in their exchanges. Rhetorically, the concept of perfect markets in the hands of statist economists is a device to persuade the novice that government is good. So basically, being a statist is as close as you will get to being a communist or extreme socialist.

So you can see how convoluted economists can be. Everybody can be at various differing points of the matrix. Even ten libertarians can see room for disagreements at the stimulus plan.

If your first reaction to this is, “Who is to say what is best?” you are a probably a liberal.

If your first reaction to this is, “Why settle for mediocrity?” you are probably a conservative.

Don't let the above confuse you, basically a social liberal thinks the state has no business interfering in citizens’ private lives; a social conservative thinks society will be stronger if it does.

An economic liberal will seek to minimise the role of the state in the delivery of public services; an economic centrist will favour more pragmatic case-by-case solutions; and an economic left-of-centre voter is likely to believe the state (whether by local or central means) is key to the delivery of public services.

At the end of the day we all view things differently: whether you favour reducing taxes to stimulate the economy; whether you think safety nets should be enhanced during trying times; whether fiscal spending will yield the right results; what are the multiplier effects for each measure; where is the fiscal responsibility and accountability in these measures; how the monetary policy and currency management policy ties in with the long term effects of the stimulus; etc... So no disagreement will be a fanciful idea... unless you are in Russia or China where things are mainly dictated rather than debated, where things are pre-approved rather than needed to have an approving consensus.


easystar said...

I am sure there is another school of economic at least, which is all for my pocket at all cost..

By the way, Ho Ching has finally been kicked out..and looks like Singapore meritocracy system do work (no chance if it is Najib wife)

evonneloke said...

I'm no economics student but from what i understand, i usually look at it from the left(liberal)/right(conservative) division.

This is what i found with a quick google search

As what i understand, the liberals (classical liberals i guess) would want more government intervention, where the government acts as the hand to balance out the economy.

evonneloke said...

i think my earlier post was incorrect, as both left and right wing are want would like to have laissez-faire markets. I think another definition that is more correct would be:

"right-wing economics is defined as economic policies that maximize the utility of the stronger property owners and maintain their purchasing power, whereas left-wing economics are economic policies that maximize utility for all individuals as a whole."

Which is pretty much what defines the Republican vs Democrats in America right now in terms of economic policies.

What i was describing in my last paragraph in the earlier post was probably keynesian economics.

solomon said...

In times like this which is chaotic by description, there are so many approving concensus.

The characteristic of a good leader is to bulldoze his way and restore the economy. Left is let the time prove him wrong. Just like our Dr M in 1997/98. Westerners can criticise him by then but have to admit later some of his measures are right.

The longer one wait, the situation may change. Economics is abt sentiment which is so fluid, nobody can precisely measure it. Most of the time, the economic measures we have are lagging in nature. So, don't think twice on the stimulus plan, "Just do it" like Nike business motto says.

see said...

Huh? thot social liberal are those had holding types singing kumbaya or we are the world and their economic ideology would be the state to play a heavy role like paying out more welfare benefits, more spending on social programs which translates into higher taxes. Conservatives prefer less state intervention ie less tax, maintain fiscal discipline & less spending programs & their ideology is as Bush coined it "Personal Responsibility"