Economic Policy

(Week 2)

Size of the state;

Policy-economics (Big state, small state)

Domestic economics (each country big state, small state)

This week (theories):

 Policy (Neal liberal) Don’t use liberal, since it causes contradiction
 Interventionist (most status intervention – is communism)
 State works for police, military, education, hospital etc. Debate for big state small state
it is never 0 or 100. Its never 0 or 100 we are always somewhere in between.
 Barriers (entry barriers) International bus cares about domestic economics, since
subsidiaries have to work in different environments.
 Some people tend to be Neal liberal (small state) in everything they do. However
business students, want small stake rather than big stake.
 Have people who are mixed, each has a subjective bias, in domestic economics could be
a communist.
 Don’t be ideological, don’t work accordingly to one theory only (different schools of
thought)
 Regime of international cooperation (regime (UN, IMF, world bank) after second world
war Keynes. (Trump; is deregulating everything in the domestic economy, because it
makes things harder, so hes getting rid of regulations)
 State intervention (protectionism)
 Have some people that are more consistent (freedman and Hayek)

Lesson 1:
 Classical economics (Adam smith; the wealth of nations; written in 1776, war of
independence) This guy is known as a classical economist; had a whole system in his
head, on a domestic level; ‘invisible hand’ according to smith; has to do with markets
performing well (meaning; optimal allocation; resources are allocated that way. And
things are priced at their fair value) Price is supposed to indicate the value that’s in it,
and should be done since price is a message, to producers-consumers of the value of a
good. If the price is high, it is a message to a consumer and to the producer, each one in
the current conditions present. Over long term, models will reach an equilibrium.
Meaning right quantities, for right amount being sold. So, they change the behavior.
Because of price mechanism, over the long term with the right price, they do well. (This
was all Adam Smiths Idea). Another idea is marginal utility, agreeing with smith.
 ‘Utility’ meaning value, a different way. The concept of value for money comes in.
(Pareto, search him up) In economic policy, you look at what is good for the whole
 society. Having some utility, for some people. With different policies, might hurt other
people. So might help some, might not help others. ‘As long as it helps more people
than it hurts’. (This was all about classical economics). So they need to create utility, also
lots of comments/criticism on ‘state intervention’. A fundamental principle of classical
economics, if they don’t survive against competition, means they are not creating value.
Shouldn’t let a company survive if just allows good amount of employment, should use
the capital for something else. Problem with classical economics; tend to forget the
politics, its hard to do economics without politics. Another thing as a modern principle,
with lots of criticism about ignoring people who are not competitive. In modern, if you
let the economy be efficient(allocate) , then wealth will ‘trickle down’. Meaning let the
rich make a lot of money, and then they can employ them. (lots of debate)
 (After classical economics) Critique; market failure. Market interactions where price
affects behavior, that issues the market will always allocate resources efficiently, making
everyone intelligent. Market failures usually happen when price is wrong, as price is a
message, and giving the wrong message, so were buying more of something we should
have. Price could be wrong with lots of competition, or with a monopoly/oligopoly.
 Now moving to behavioral economics, not just science but human beings. Making
rational decisions, being rational/irrational (since we are humans) could cause market
failure. “Bubbles” market failure, market failed to find the value, paying much more
than what its worth for example. (Markets can work very well, however they are good
or bad, could sometimes produce efficient behavior, some wont).
 Friction; things change from year to year (sectors changing with new technologies) Time
it takes from transition of old sector to new (not easy) frictional costs come in, since it is
not easy with bumps on the road. So market will tell usually, let them go out of business
(Too much costs) So you try getting rid of them, when they have too many production
costs, etc.
 Sometimes the state intervenes
 Infant industries (sub brand of econ, being a baby industry) Say industry isn’t of high
value, and another country does have the high value. So if you want some of that, if you
wait and wait you wont catch up, but to go from 0 to something, you need to feed the
baby, with the infant company being vulnerable. ‘State A’ is the opposite of Smith.
 One more thing about classical economics, if some do good some do bad, you have
equality. But suffer loads of tension, and jealousy is at rise. As well as political tension.
 Market economics, if you criticize classical economics, you are in state intervention. (big
state, small state which one matters) Over history, with different periods of time
whatever, when one adapts or dominate a paradigm, for example all adapting to small
state, everyone does that and leads to a crisis, Then in the present time, they realize
that they shouldn’t adapt small state and rather big state. Questioning the opposing
paradigms or state, they then look to the alternative. (here, from small state to big
state) When the state is spending money, it is not classical economics.

After classical economics,

  Keynes (government should do opposite of business cycle, government should get
involved, government should raise taxes, have surplus, and raise its purchasing power)
Have money to create activity. In comparison to smith, small state smith (supply
economics) Keynes tackles the demand side of it.
Galbraith (says smith, market economics, could have lots of money, but state will be bankrupt.
So them should be some sort of balance)
 Post-war Boom years (big state, small state) Everyone was kind of adapting to Keynes, if
economy is doing well, they say the paradigm is doing well. When there is demand
(reconstruction, mass production, with lots of industry) lots of demand driven by
consumers. (Cars, fridges) Was a very strong economy, and people followed Keynes. But
it will come and go, as different paradigms always change. (based on past)
 In 1970’s (stagnation, saturation, inflation) Less demand, everyone already bought their
cars and fridges. Have inflation same time you have lower demand, and having some
negative growth. When economy goes to hell, the paradigm you worked by starts to
seem weak.
 Market economics rely on competition. In Keynes, if it goes too far you have the state
protecting weak actors. If you try keeping prices high, you aren’t supporting the
producers. For consumers, means it tends to benefit consumers. (not sure of this)
 Keynes only talked about governments, and whether the economy is strong or not.
 ‘Monetarism’ keep inflation low, have a strong currency, which shows small state,
shouldn’t look at unemployment rates (Milton Freeman) wanted to make sure people
didn’t borrow money too cheaply.
 ‘Labor market flexibility’
 Crony capitalism: when government gives business to different company more like
friend (ex. Arab)
 Big state, small state; in domestic economics small state remains popular. Their has
been a big state, but it was international economics. ‘Free trade’ now we have all this
protectionism (taxing on imports; big state).
 Solvent demand (want something, have the payment)
 Supply sides, lower interest (say; supply creates demand)

Hayek:
 Liberty (policy which evolves markets, markets are what give you liberty)
 Money should not be cheap (free market economic policies)
 Market; form of collective agreement (Hayek)

Class discussion:
 England and America (individualist) America (Rigid individualism)