Department of Management Information System

Course Name: Microeconomics

Course code: MIS 107
Topic:

Submitted By
Anisa Labiba
Section-B
BBA Roll: 029-15-006
Department of MIS
University Of Dhaka
Submitted To:
Md. Ariful Islam
Assistant Professor
Department Of MIS
Faculty of Business Studies
University of Dhaka
Submission Date: 18th March, 2021
 You are an everyday economist
We are often taught that economics is dry, complicated and sometimes heartless field. But
actually economics is accessible to each and every one of us. If we are opened up to the field we
might discover even more powerful within ourselves. The biggest misconception of economics is
it’s strictly about money, even according to definition it is about production, consumption and
transfer of wealth which is kind of wrong. The better definition of economics is it’s the study of
allocation of scarce resources in a given constraint. Basically economics is the study of what we
do with things we have in limited supply and when we are given around how to use them. Money
is one resource that most of us don’t have an unlimited amount of, but what about this planet and
the scarcest resource of all, time? Economics studies all of this things and more. We may thing
that to learn economics we need a beard or a library full of leather-bound books, but it’s not true.
The fundamental concept of economics is supply and demand, the idea is when the supply is low
and demand is high prices rise and vice versa. Suppose, a very rare sneaker is released which has
very little supply but everybody wants them, for this the price will be around 300 to a thousand
dollars. On the other hand, we take regular old tennis shoes from the mall which has a ton of
supply, little demand and price is like 50 to 60 dollars. Anyone can be an everyday economist as
we make complex economic decisions every day. Sometimes they can be subtle like we take up a
product and think of checking in Amazon whether we can get that product cheaper. Sometimes
large disruptive forces make those economic choices more obvious to us. Another ventral idea of
economics that seems complicated but is actually straightforward. Lately the economists are
concerned that our economies are slowing. Back in 1970s and 80s the North American economy
could easily grow in 3, 4 or 5 percent which were considered as good numbers and associated
with prosperity, but recently it is growing at 2% or below which seems like we lost the ability to
grow we used to. An economy’s ability to grow its potential growth rate and economist measure
it as the labor force participation rate plus the change in productivity. If we take our favorite
burger joint as an example its growth rate will be simply how many burgers can it make. That’s
going to be function of two things, first how many people work behind the counter (labor force),
second how fast each one can make a hamburger (productivity). Once we know about the
potential rate next step will be to live up to it, both as individuals but also in our economies at
large. To make sure that our economies are not just living up to their potential but growing their
potential over time, we need to have pretty big conversations about affordable and accessible
child care, public transportation, competitiveness and even reskilling and retooling our economy
towards a more sustainable and inclusive future. We are also told that economy is a positive
discipline, not a normative one or put differently economics just studies the way the world is not
how it should be. Just as all architects don’t believe that all buildings are beautiful or all artists
don’t love every piece of art, not all economists agree that the economy is as it should be or even
agree in the best ways to fix it. Economy has entire subfields devoted to improving the way the
world works such as: Environmental economics which seeks to preserve our planet, Stratification
economics which studies income and racial inequalities, feminist economics which looks into
issues like the male female wage gap. We may not understand any term but that doesn’t mean we
should shut it off. Rather we should bravely ask questions and put them into term which is more
understandable. We can ask those persons who make topics more accessible. As we are facing a
critical situations and can face more moments, but if we can learn economics in 10 minutes, we
can do hard as we have all tools and at last we need the confidence.
 What is economic value, and who creates it?
Value creation and wealth creation. These are really powerful words. Maybe we think of finance,
innovation, creativity. But who are the value creators? If we use that word, we must be implying
that some people aren't creating value. To answer this question, we actually have to have a
proper theory of value. We've stopped contesting and actually asking really tough questions
about what is the difference between value creation and value extraction, productive and
unproductive activities. We know that 2009 was just about a year and a half after one of the
biggest financial crisis of our time, second only to the 1929 Great Depression, and the CEO of
Goldman Sachs said Goldman Sachs workers are the most productive in the world. Productivity
and productiveness, for an Economist, actually has a lot to do with value. When we're producing
stuff, we're producing it dynamically and efficiently. We're also producing things that the world
needs, wants and buys. Now, how this could have been said just one year after the crisis, which
actually had this bank as well as many other banks – the reason for picking on Goldman Sachs
here -- at the center of the crisis, because they had actually produced some pretty problematic
financial products, mainly but not only related to mortgages, which saw many thousands of
people actually lose their homes. In 2010, in just one month, September, 120,000 people lost
their homes through the foreclosures of that crisis. Between 2007 and 2010, 8.8 million people
lost their jobs. The bank also had to then be bailed out by the US taxpayer for the sum of 10
billion dollars. We didn't hear the taxpayers bragging that they were value creators, but
obviously, having bailed out one of the biggest value-creating productive companies, perhaps
they should have. There was a lot of debate within the economics profession. We've kind of lost
our way, and that has actually allowed this term, "wealth creation" and "value," to become quite
weak and lazy and also easily captured. What was interesting 300 years ago is the society was
still an agricultural type of society. So it's not surprising that the economists of the time, who
were called the Physiocrats, actually put the center of their attention to farm labor. According to
them, the value came from farming. And they produced was probably the world's first
spreadsheet, called the "Tableau Economique," and this was done by François Quesnay, one of
the leaders of this movement. The interesting thing was because they didn't just say, "Farming is
the source of value." They then really worried about what was happening to that value when it
was produced. What the Tableau Economique does, it is broke down the classes in society into
three. The farmers, creating value, were called the "productive class." Then others who were just
moving some of this value around but it was useful, it was necessary, these were the merchants;
they were called the "proprietors." And then there was another class that was simply charging the
farmers a fee for an existing asset, the land, and they called them the "sterile class." If too much
of the resources are going to the landlords, we're actually putting the reproduction potential of
the system at risk. And so all these little arrows there were their way of simulating -- again,
spreadsheets and simulators, they were really using big data, they were simulating what would
actually happen under different scenarios if the wealth actually wasn't reinvested back into
production to make that land more productive and was actually being siphoned out in different
ways, or even if the proprietors were getting too much. And what later happened in the 1800s,
and this was no longer the Agricultural Revolution but the Industrial Revolution, is that the
classical economists, and these were Adam Smith, David Ricardo and Karl Marx, the
revolutionary, also asked the question "What is value?" But it's not surprising that because they
were actually living through an industrial era with the rise of machines and factories, they said it
was industrial labor. So they had a labor theory of value. But again, their focus was reproduction,
this really worries of what was happening to the value that was created if it was getting siphoned
out. And in "The Wealth of Nations," Adam Smith had this really great example of the pin
factory where he said “If you only have one person making every bit of the pin, at most you can
make one pin a day. But if you actually invest in factory production and the division of labor,
new thinking.” Today, we would use the word "organizational innovation", then we could
increase the productivity and the growth and the wealth of nations. So he showed that 10
specialized workers who had been invested in, in their human capital, could produce 4,800 pins a
day, as opposed to just one by an unspecialized worker. And he and his fellow classical
economists also broke down activities into productive and unproductive ones. Lawyers,
professors, shopkeepers, musicians. But this wasn't an exercise of saying, "Don't do these
things." It was just, "What's going to happen if we actually end up allowing some parts of the
economy to get too large without really thinking about how to increase the productivity of the
source of the value that they thought was key, which was industrial labor.” Again, we should not
ask ourselves is this right or is this wrong, it was just much contested. By making these lists, it
actually forced them also to ask interesting questions. And their focus, as the focus of the
Physiocrats was on these objective conditions of production. They also looked at the class
struggle. Their understanding of wages had to do with the objective, if someone wants, power
relationships, the bargaining power of capital and labor. But again, factories, machines, division
of labor, agricultural land and what was happening to it. So the big revolution that then
happened, the big revolution that happened with the current system of economic thinking that we
have, which is called "neoclassical economics," was that the logic completely changed. It
changed in two ways. It changed from this focus on objective conditions to subjective ones.
Objective. Subjective, in the sense that all the attention went to how individuals of different sorts
make their decisions. Workers are maximizing their choices of leisure versus work. Consumers
are maximizing their so-called utility, which is a proxy for happiness, and firms are maximizing
their profits. And the idea behind this was that then we can aggregate this up, and we see that
turns into supply-and-demand curves which produce a price, an equilibrium price. It's an
equilibrium price, because we also added to it a lot of Newtonian physics equations where
centers of gravity are very much part of the organizing principle. But the second point here is
that that equilibrium price, or prices, reveal value. So the revolution here is a change from
objective to subjective, but also the logic is no longer one of what is value, how is it being
determined, what is the reproductive potential of the economy, which then leads to a theory of
price but rather the reverse: a theory of price and exchange which reveals value which turns out
to be a huge change. It affects how we measure growth. It affects how we steer economies to
produce more of some activities, less of others, how we also remunerate some activities more
than others. It affects how we think about output. If we only include in GDP, those activities that
have prices, all sorts of really weird things happen. Feminist economists and environmental
economists have actually written about this quite a bit. If we pollute, GDP goes up. Because we
have to actually pay someone to clean it. Now, what's also really interesting is what happened to
finance in the financial sector in GDP is something surprisingly many economists don't know.
Until 1970, most of the financial sector was not even included in GDP. It was kind of indirectly,
still being seen through the eyes of the Physiocrats as just kind of moving stuff around, not
actually producing anything new. So only those activities that had an explicit price were
included. If we went to get a mortgage, we were charged a fee. That went into GDP and the
national income and product accounting. But net interest payments didn't, the difference between
what banks were earning in interest if they gave us a loan and what they were paying out for a
deposit. That wasn't being included. And so the people doing the accounting started to look at
some data, which started to show that the size of finance and these net interest payments were
actually growing substantially. And they called this the "banking problem." These were some
people working inside, actually, the United Nations in a group called the Systems of National
Accounts (SNA), they called it the "banking problem.” So instead of stopping and actually
making that Tableau Economique or asking some of these fundamental questions that also the
classical were asking about what is actually happening, the division of labor between different
types of activities in the economy, they simply gave these net interest payments a name. So the
commercial banks, they called this "financial intermediation" which went into the NIPA
accounts. And the investment banks were called the "risk-taking activities," and that went in
.And so this was quite extraordinary, because what actually happened, and what we know today,
and there's different people writing about this, this data here is from the Bank of England, is that
lots of what finance was actually doing from the 1970s and '80s on was basically financing itself:
finance financing finance which is finance, insurance and real estate. In fact, in the UK,
something like between 10 and 20 percent of finance finds its way into the real economy, into
industry, say, into the energy sector, into pharmaceuticals, into the IT sector, but most of it goes
back into that acronym, FIRE: finance, insurance and real estate. Now, this is interesting
because, in fact, it's not to say that finance is good or bad, but the degree to which, by just having
to give it a name, because it actually had an income that was being generated, as opposed to
pausing and asking, "What is it actually doing?" which that was a missed opportunity. Similarly,
in the real economy, in industry itself, what was happening? And this real focus on prices and
also share prices has created a huge problem of reinvestment, again, this real attention that both
the Physiocrats and the classical had to the degree to which the value that was being generated in
the economy was in fact being reinvested back in. And so what we have today is an ultra
financialized industrial sector where increasingly a share of the profits and the net income are not
actually going back into production, into human capital training, into research and development
but just being siphoned out in terms of buying back your own shares, which boosts stock options,
which is, in fact, the way that many executives are getting paid. And some share buybacks is
absolutely fine, but this system is completely out of whack. In the last 10 years, 466 of the S and
P 500 companies have spent over four trillion on just buying back their shares. If we look at
aggregate business investment, which is a percentage of GDP, we also see this falling level of
business investment which is a huge problem for skills and job creation. Mechanization has for
centuries, actually, taken jobs, but as long as profits were being reinvested back into production,
then it didn't matter: new jobs appeared. But this lack of reinvestment is very dangerous.
Similarly, in the pharmaceutical industry, for example, how prices are set, it's quite interesting
how it doesn't look at these objective conditions of the collective way in which value is created
in the economy. So in the sector where we have lots of different sectors -- public, private, of
course, but also third-sector organizations, creating value, the way we actually measure value in
this sector is through the price system itself. Prices reveal value. Recently, the price of an
antibiotic went up by 400 percent overnight, and the CEO was asked, "How can you do this?
People actually need that antibiotic. That's unfair." He said, "Well, we have a moral imperative
to allow prices to go what the market will bear," completely dismissing the fact that in the US,
the National Institutes of Health spent over 30 billion a year on the medical research that actually
leads to these drugs. So, again, a lack of attention to those objective conditions and just allowing
the price system itself to reveal the value. All this really matters for how we measure output, to
how we steer the economy, to whether we feel that we're productive, to which sectors we end up
helping, supporting and also making people feel proud to be part of. In fact, going back to that
quote, it's not surprising that Blankfein could say that. In the way that we actually measure
production, productivity and value in the economy. We need to rethink how we're measuring
output, and in fact there's some amazing experiments worldwide. In New Zealand they now have
a gross national happiness indicator. In Bhutan, they're thinking about happiness and well-being
indicators. But the problem is that we can't just be adding things in. We do have to pause, given
that we see so little has actually changed since the financial crisis, to make sure that we are not
also confusing value extraction with value creation, so looking at what's included, not just adding
more, to make sure that we're not confusing rents with profits. Rents for the classical was about
unearned income. Today, rents, when they're talked about in economics, is just an imperfection
towards a competitive price that could be competed away if taken away some asymmetries.
Second, we can steer activities into what the classical called the "production boundary." This
should not be us-versus-them, big, bad finance versus good, other sectors. We could reform
finance. There was a real lost opportunity in some ways after the crisis. We could have had the
financial transaction tax, which would have rewarded long-termism over short-termism, but we
didn't decide to do that globally. We can change our minds. We can also set up new types of
institutions. There's different types of public financial institutions worldwide that are actually
providing that patient, long-term, committed finance that helps small firms grow, that help
infrastructure and innovation happen. But this shouldn't just be about output. This shouldn't just
be about the rate of output. We should also as a society pause and ask: What value are we even
creating? In celebrating the 50th anniversary of the Moon landing. This required the public
sector, the private sector, to invest and innovate in all sorts of ways, not just around aeronautics.
It included investment in areas like nutrition and materials. There were lots of actual mistakes
that were done along the way. In fact, what government did was it used its full power of
procurement, for example, to fuel those bottom-up solutions, of which some failed. But are
failures part of value creation? Or are they just mistakes? Or how do we actually also nurture the
experimentation, the trial and error and error and error? Bell Labs, which was the R and D
laboratory of AT and T, actually came from an era where government was quite courageous. It
actually asked AT and T that in order to maintain its monopoly status, it had to reinvest its
profits back into the real economy, innovation and innovation beyond telecoms. That was the
early history of Bell Labs. So how we can get these new conditions around reinvestment to
collectively invest in new types of value directed at some of the biggest challenges of our time,
like climate change? This is a key question. But we should also ask ourselves, had there been a
net present value calculation or a cost-benefit analysis done about whether or not to even try to
go to the Moon and back again in a generation, we probably wouldn't have started. In the end we
can say that value is not just price.
Why Are There So Few Women In Economics?
If we imagine an economist we probably think of a slightly nerdy white man. It is obvious as
economics is historically known as a man’s discipline. At Harvard University’s Economic
faculty’s central staircase, there are seen 30-40 of their emeritus professors, but not a single
woman. According to Shelly Lundberg, under the committee for the status of women in
economic profession, they’ve documented that there are only 9% are women among tenured
professors in top 10 American economic departments. Dona Ginther and Shulamit Kahn have
compared economics to other subjects and found out that economics has a worse gender
imbalance problem than the Social Sciences, Maths, Computer Sciences, and Physical Sciences.
As there are few women in senior ranks of academic economics, the main question is why?
Luckily economist love to think about work decisions and they’ve kind of got a simple
framework for thinking about how people make a decision to become an academic economist. So
there are three things that could be driving it, maybe its preferences, maybe women don’t like
economics, maybe they’re put off by Maths or maybe its ability or productivity in academic
economics. But basically what matter is how many article we churn out and how good a journal
they are in. Maybe women faces prejudice and constraints the men don’t face. There are also two
warnings about this, first one is human tendency that we have towards motivated reasoning. If
we imagine us as a woman and we haven’t succeeded where a male colleague has, it’s much
more comforting than our own failing have occurred of are because of the system than our own
personal shortcomings. The second warning is about the reality of academic economics
departments today. Once Nobel laureate George Stigler told the class that if the faculty hired a
woman he would leave because of the deterioration in quality that would signal about the
department. If there is a problem of discrimination and prejudice, it will be subtle and really hard
to uncover and fix. As economics are considered as detectives, we can find some clue to know
what is actually going on. First clue is, women drop out early. Other clue is it is very difficult to
explain the gender gap by pointing out the Maths. Economist Heather Sarsons made a research
by comparing equally productive men and women and saw they face different chances of
success. She gathered CVs of economists from the top 30 American PhD granting institutions,
she found out that men got tenure at the rate of 75%, women at the rate of 52%. She also
compared how many papers they had been producing and it turns out that women need to publish
more papers to get the same chances of promotion. When men published papers with other men
they got boost in their chances whereas women who published papers with other men weren’t
given the same credit. As productivity is hard to measure, we cannot measure that women are not
putting effort like other men. For the absence of information promoters go with their guts and
they feel that women are contributing less. When Erin Hengel from University of Liverpool
researched about productivity by analyzing 9000 articles abstracts, she found out that the articles
written by women are clearer and more readable than the ones written by men. She also found
out that women need 6 months more through publication process than men. The last message is it
is really difficult to disentangle these reasons for gender imbalances. We make look at one
framework which is very neat and clean but it doesn’t opens up about all the clues hiding.
Productivity is very hard to measure but what if the measure we use has same bias in them. So
essentially we need to find more clues and hope for more women joining in economics.
 Income and Wealth Inequality
The world is full of inequality. There's racial inequality, gender inequality, health, education,
political inequality, and of course, economic inequality. Some people are rich, and some people
are poor, and it can seem pretty impossible to fix. So there are two main types of economic
inequality: wealth inequality and income inequality. Wealth is accumulated assets, minus
liabilities so it's the value of stuff like savings, pensions, real estate, and stocks. When we talk
about wealth inequality, we're basically talking about how assets are distributed. Income is the
new earnings that are constantly being added to that pile of wealth. So when we talk about
income inequality, we're talking about how that new stuff is getting distributed. Point is, they're
not the same. After looking at both types of inequality at the global level, we see that global
wealth today is estimated at about 260 trillion dollars, and is not distributed equally. One study
shows that North America and Europe, while they have less than 20% of the world's population,
have 67% of the world's wealth. China, which has more people than North America and Europe
combined, has only about 8% of the wealth. India and Africa together make up almost 30% of
the population, but only share about 2% of the world's wealth. We're learning economics, so we
can focus on income inequality. These ten people represent everyone on the planet, and they're
lined up according to income. The poorest group represents the poorest 20%, this is the second
poorest 20%, the middle 20%, and so on. If we distributed a hundred dollars based on current
income trends, this group would get about 83 of those dollars, the next richest would get 10
dollars, the middle gets four, the second poorest group would get two dollars, and the poorest
20% of humans would get one dollar. Branko Milanovic, an economist that specializes in
inequality, explained all this by describing an "economic big bang" - "At first, countries' incomes
were all bunched together, but with the Industrial Revolution the differences exploded, it pushed
some countries forward onto the path to higher incomes while others stayed where they had been
for millennia." According to Milanovic, in 1820, the richest countries in the world - Great Britain
and the Netherlands - were only three times richer than the poorest, like India and China. Today,
the gap between the richest and poorest nations is like 100:1. The gaps are getting bigger and
bigger. The Industrial Revolution created a lot of inequality between countries but today
globalization and international trade are accelerating it. Most economists agree that globalization
has helped the world's poorest people, but it's also helped the rich a lot more. Harvard economist
Richard Freeman noted, "The triumph of globalization and market capitalism has improved
living standards for billions while concentrating billions among the few." So, it's kind of a mixed
bag. The very poor are doing a little better, but the very rich are now a lot richer than everybody
else. There are other reasons inequality is growing. Economists point to something called "skill-
biased technological change." The jobs created in modernized economies are more technology-
based, generally requiring new skills. Workers that have the education and skills to do those jobs
thrive, while others are left behind. So, in a way, technology's become a complement for skilled
workers but a replacement for many unskilled workers. The end result is an ever widening gap
between not just the poor and the rich, but also the poor and the working class. As economies
develop and as manufacturing jobs move overseas, low skill low pay and high skill high pay
work are the only jobs left. People with few skills fall behind in terms of income. In the last
thirty years in the US, the number of college-educated people living in poverty has doubled from
3% to 6%, which is bad. And then consider that during the same period of time, the number of
people living in poverty with a high school degree has risen from 6% to a whopping 22%. Over
the last fifty years, the salary of college graduates has continued to grow while, after adjusting
for inflation, high school graduates' incomes have actually dropped. There are other reasons the
income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and
the fact that somehow it's okay for CEOs to make salaries many, many times greater than those
of their employees. Also, race and gender and other forms of inequality can exacerbate income
equality. Max Lorenz, who created a graph to show income inequality. Here households has been
considered rather than just looking at individuals because many households have two income
earners. So every household earns the same income. And while perfect income equality might
look nice on the surface, it's not really the goal. When different jobs have different incomes,
people have incentive to become a doctor or an entrepreneur or a YouTube star – the jobs society
really values. Lorenz curve helps visualize the depth of inequality. For 2010, the US Census
Bureau found that the poorest 20% of Americans made 3.3% of the income. And the richest 20%
made over 50% of the income. So that's pretty unequal but it was always not like this. In 1970,
the bottom group earned 4.1% of the income and the top earned 43.3%. By 1990, things were
even less equal so the 2010 numbers are just a continuation of the trend. And it isn't just the
poorest group that's losing ground. Over those 40 years, each of the bottom groups or 80%
households earned smaller and smaller shares of the total income. From the Lorenz curve we can
calculate the most commonly used measure of income equality – the GINI Index. It's basically
the size of the gap between the equal distribution of income and the actual distribution. Now, 0
represents complete equality and 100 represents complete inequality. Now, we might be
surprised to learn the US doesn't have the highest income inequality, but it does have the highest
among Western industrialized nations. The UK has the highest in the EU. The debate over
income equality isn't about whether it exists. It obviously does. The fight is over whether it's a
problem and what should be done about it. Those who don't think it's a big deal tell you that the
data suggests that the rich are getting richer and the poor are getting poorer, but that might not be
the case. Instead, it could be that all the groups are making more money but the rich's share is
just growing faster. So it's true that people in the lowest income bracket have earned a little more
money in the last 40 years but in the last 20 years, that average income has been falling.
Meanwhile, the rich have continually gotten richer. Bill Gates said, "Yes, some level of
inequality is built in to capitalism. It's inherent to the system. The question is, what level of
inequality is acceptable? And when does inequality start doing more harm than good?" There's a
growing group of economists who believe income inequality in the US today is doing more
harm. They argue that greater income inequality is associated with a lot of problems. They point
to studies that show countries with more inequality have more violence, drug abuse and
incarcerations. Income inequality also dilutes political equality, since the rich have a
disproportionate say in what policies move forward, and the rich have an incentive to promote
policies that benefit the rich. To address inequality, there's not a lot of agreement on this. Some
argue that education is the key to reducing the gap. Basically, workers with more and better
education tend to have the skills that earn higher income. Some economists push for an increased
minimum wage. There's even an argument that access to affordable, high quality childcare would
go a long way. And some think governments should do more to provide a social safety net, focus
on getting more people to work and adjust the tax code to redistribute income. Some economists
call for the government to increase income taxes and capital gains taxes on the rich. Income
taxes in the US are already somewhat progressive, which means that there are tax brackets that
require the rich to pay a higher percent of income. Right now, it peaks at around 40% but some
economists call for increases up to 50 or 60%. One idea is to fix loopholes that the rich use to
avoid paying taxes. Other economists argue that taxing the rich won't be as effective as reducing
regulation and bureaucratic red tape. It's unclear which path we're going to take but extreme
income inequality at the national and global level needs to be addressed. Motivation to improve
income inequality may come from a genuine desire to help people and level the playing field, or
the fear of Hunger Games-style social upheaval. But either way, the issue can't be ignored.
Even Adam Smith, the most classical of classical economists, said, "No society can surely be
flourishing and happy of which the far greater part of the members are poor and miserable."
 The dirty secret of Capitalism
Now a days rich capitalists like me have never been richer. The reason behind this is
economics. Because, here's the dirty secret. There was a time in which the economics
profession worked in the public interest, but in the neoliberal era, today, they work only
for big corporations and billionaires, and that is creating a little bit of a problem. We
could choose to enact economic policies that raise taxes on the rich, regulate powerful
corporations or raise wages for workers. But neoliberal economists would warn that all of
these policies would be a terrible mistake, because raising taxes always kills economic
growth, and any form of government regulation is inefficient, and raising wages always
kills jobs. Well over the last 30 years, in the USA alone, the top one percent has grown
21 trillion dollars richer while the bottom 50 percent have grown 900 billion dollars
poorer, a pattern of widening inequality that has largely repeated itself across the world.
And yet, as middle class families struggle to get by on wages that have not budged in
about 40 years, neoliberal economists continue to warn that the only reasonable response
to the painful dislocations of austerity and globalization is even more austerity and
globalization. So, we need a new economics. Economics has been described as the dismal
science, and for good reason, because as much as it is taught today, it isn't a science at all,
in spite of all of the dazzling mathematics. In fact, a growing number of academics and
practitioners have concluded that neoliberal economic theory is dangerously wrong and
that today's growing crisis of rising inequality and growing political instability are the
direct result of decades of bad economic theory. What we now know is that the
economics that made me so rich isn't just wrong, it's backwards, because it turns out it
isn't capital that creates economic growth, it's people; and it isn't self-interest that
promotes the public good, it's reciprocity; and it isn't competition that produces our
prosperity, it's cooperation. What we can now see is that an economics that is neither just
nor inclusive can never sustain the high levels of social cooperation necessary to enable a
modern society to thrive. We went wrong when it turns out that it's become painfully
obvious that the fundamental assumptions that undergird neoliberal economic theory are
just objectively false. There are some of those mistaken assumptions and their
descriptions of where the science suggests prosperity actually comes from. Neoliberal
economic assumption number one is that the market is an efficient equilibrium system,
which basically means that if one thing in the economy, like wages, goes up, another
thing in the economy, like jobs, must go down. The second assumption is that the price of
something is always equal to its value, which basically means that if someone earns
50,000 dollars a year and another one earns 50 million dollars a year, that's because
second person produce a thousand times as much value as first person. This is a very
comforting assumption if somebody is a CEO paying yourself 50 million dollars a year
but paying your workers poverty wages. In reality people are not paid what they are
worth. They are paid what they have the power to negotiate, and wages' falling share of
GDP is not because workers have become less productive but because employers have
become more powerful. And by pretending that the giant imbalance in power between
capital and labor doesn't exist, neoliberal economic theory became essentially a
protection racket for the rich. The third assumption and the most pernicious one is a
behavioral model that describes human beings are called "homo economicus," which
basically means that we are all perfectly selfish, perfectly rational and relentlessly self-
maximizing. According to behavioral model which is at the cold, cruel heart of neoliberal
economics, and it is as morally corrosive as it is scientifically wrong because, if we
accept at face value that humans are fundamentally selfish, and then we look around the
world at all of the unambiguous prosperity in it, then it follows logically, then it must be
true by definition, that billions of individual acts of selfishness magically transubstantiate
into prosperity and the common good. If we humans are merely selfish maximizers, then
selfishness is the cause of our prosperity. Under this economic logic, greed is good,
widening inequality is efficient, and the only purpose of the corporation can be to enrich
shareholders, because to do otherwise would be to slow economic growth and harm the
economy overall. And it is this gospel of selfishness which forms the ideological
cornerstone of neoliberal economics, a way of thinking which has produced economic
policies which have enabled the rich in the top one percent to grab virtually all of the
benefits of growth over the last 40 years. But, if instead we accept the latest empirical
research, real science, which correctly describes human beings as highly cooperative,
reciprocal and intuitively moral creatures, then it follows logically that it must be
cooperation and not selfishness that is the cause of our prosperity, and it isn't our self-
interest but rather our inherent reciprocity that is humanity's economic superpower.
So at the heart of this new economics is a story about ourselves that grants us permission
to be our best selves, and, unlike the old economics, this is a story that is virtuous and
also has the virtue of being true. This new economics is not something someone has
imagined or invented. Its theories and models are being developed and refined in
universities around the world building on some of the best new research in economics,
complexity theory, evolutionary theory, psychology, anthropology and other disciplines.
And although this new economics does not yet have its own textbook or even a
commonly agreed upon name, in broad strokes its explanation of where prosperity comes
from goes something like this. Market capitalism is an evolutionary system in which
prosperity emerges through a positive feedback loop between increasing amounts of
innovation and increasing amounts of consumer demand. Innovation is the process by
which we solve human problems, consumer demand is the mechanism through which the
market selects for useful innovations, and as we solve more problems, we become more
prosperous. But as we become more prosperous, our problems and solutions become
more complex, and this increasing technical complexity requires ever higher levels of
social and economic cooperation in order to produce the more highly specialized products
that define a modern economy. Now, the old economics is correct about that competition
plays a crucial role in how markets work, but what it fails to see is that it is largely a
competition between highly cooperative groups -- competition between firms,
competition between networks of firms, competition between nations -- and anyone who
has ever run a successful business knows that building a cooperative team by including
the talents of everyone is almost always a better strategy than just a bunch of selfish
jerks. To leave neoliberalism behind and build a more sustainable, more prosperous and
more equitable society, the new economics suggests just five rules of thumb. First is that
successful economies are not jungles, they're gardens, which is to say that markets, like
gardens, must be tended, that the market is the greatest social technology ever invented
for solving human problems, but unconstrained by social norms or democratic regulation,
markets inevitably create more problems than they solve. Climate change, the great
financial crisis of 2008 are two easy examples. The second rule is that inclusion creates
economic growth. So the neoliberal idea that inclusion is this fancy luxury to be afforded
if and when we have growth is both wrong and backwards. The economy is people.
Including more people in more ways is what causes economic growth in market
economies. The third principle is the purpose of the corporation is not merely to enrich
shareholders. The greatest grift in contemporary economic life is the neoliberal idea that
the only purpose of the corporation and the only responsibility of executives is to enrich
themselves and shareholders. The new economics must and can insist that the purpose of
the corporation is to improve the welfare of all stakeholders: customers, workers,
community and shareholders alike. Rule four is “greed is not good”. Being rapacious
doesn't make you a capitalist, it makes you a sociopath. And in an economy as dependent
upon cooperation at scale as ours, sociopathy is as bad for business as it is for society.
And fifth and finally, unlike the laws of physics, the laws of economics are a choice.
Neoliberal economic theory has sold itself to us as unchangeable natural law, when in
fact its social norms and constructed narratives based on pseudoscience. If we truly want
a more equitable, more prosperous and more sustainable economy, if we want high-
functioning democracies and civil society, we must have a new economics. The good
news is, if we want a new economics, all we have to do is choose to have it.
 How economic inequality harm societies
The intuition that inequality is divisive and socially corrosive has been around since
before the French Revolution. It is a matter of sorrow that we are a miserable lot. I want
According to a paradox which shows expectancy against gross national income how rich
countries are on average. The countries like Norway and the USA, are twice as rich as
Israel, Greece and Portugal. And it makes no difference to their life expectancy at all.
There's no suggestion of a relationship there. But if we look within our societies, there are
extraordinary social gradients in health running right across society. This is life
expectancy. A lot of difference are seen between the poor and the rest of us. Even the
people just below the top have less good health than the people at the top. So income
means something very important within our societies, and nothing between them. The
explanation of that paradox is that, within our societies, we're looking at relative income
or social position, social status - where we are in relation to each other and the size of the
gaps between us. According to the data from the U.N. - it's the same as the World Bank
has - on the scale of income differences in these rich developed market democracies. The
measure we've used, because it's easy to understand is how much richer the top 20
percent than the bottom 20 percent in each country. And we can see in the more equal
countries on Japan, Finland, Norway, Sweden -- the top 20 percent are about three and a
half, four times as rich as the bottom 20 percent. But on the more unequal end - U.K.,
Portugal, USA and Singapore -- the differences are twice as big. On that measure, we are
twice as unequal as some of the other successful market democracies. According to data
on problems with social gradients, the kind of problems that are more common at the
bottom of the social ladder. Internationally comparable data on life expectancy, on kids'
maths and literacy scores, on infant mortality rates, homicide rates, proportion of the
population in prison, teenage birthrates, levels of trust, obesity, mental illness -- which in
standard diagnostic classification includes drug and alcohol addiction -- and social
mobility. They all included in one index. They're all weighted equally. Where a country
is a sort of average score on these things, it is in relation to the measure of inequality.
The more unequal countries are doing worse on all these kinds of social problems. It's an
extraordinarily close correlation. But if we look at that same index of health and social
problems in relation to GNP per capita, gross national income, there's nothing there, no
correlation anymore. We were a little bit worried that people might think we'd been
choosing problems to suit our argument and just manufactured this evidence, so we also
did a paper in the British Medical Journal on the UNICEF index of child well-being. It
has 40 different components put together by other people. It contains whether kids can
talk to their parents, whether they have books at home, what immunization rates are like,
whether there's bullying at school. Everything goes into it. Here it is in relation to that
same measure of inequality. Kids do worse in the more unequal societies. Highly
significant relationship. But once again, if we look at that measure of child wellbeing, in
relation to national income per person, there's no relationship, no suggestion of a
relationship. What all the data are shown so far says is the same thing. The average well-
being of our societies is not dependent any longer on national income and economic
growth. That's very important in poorer countries, but not in the rich developed world.
But the differences between us and where we are in relation to each other now matter
very much. Trust, used in separate bits of our index is simply the proportion of the
population who agree most people can be trusted. It comes from the World Values
Survey. At the more unequal end, it's about 15 percent of the population who feel they
can trust others. But in the more equal societies, it rises to 60 or 65 percent. And if we
look at measures of involvement in community life or social capital, very similar
relationships closely related to inequality. After doing all this work twice and doing it
first on these rich, developed countries, and then as a separate test bed, repeating it all on
the 50 American states -- asking just the same question: do the more unequal states do
worse on all these kinds of measures? So here is trust from a general social survey of the
federal government related to inequality. Very similar scatter over a similar range of
levels of trust. Same thing is going on. Basically we found that almost anything that's
related to trust internationally is related to trust amongst the 50 states in that separate test
bed. This is not about a fluke but is mental illness. WHO put together figures using the
same diagnostic interviews on random samples of the population to allow us to compare
rates of mental illness in each society. About eight percent up to three times that -- whole
societies with three times the level of mental illness of others of the population with any
mental illness in the preceding year. And again, closely related to inequality. This is
violence. From 15 homicides per million up to 150. This is the proportion of the
population in prison. There's a about a tenfold difference there, log scale. But it goes
from about 40 to 400 people in prison. That relationship is not mainly driven by more
crime. In some places, that's part of it. But most of it is about more punitive sentencing,
harsher sentencing. And the more unequal societies are more likely also to retain the
death penalty. Moreover children dropping out of high school which has big differences.
Extraordinarily damaging, or about using the talents of the population. This is social
mobility. It's actually a measure of mobility based on income. Basically, it's asking if rich
fathers have rich sons and poor fathers have poor sons, or is there no relationship between
the two. And at the more unequal end, fathers' income is much more important -- in the
U.K., USA. And in Scandinavian countries, fathers' income is much less important.
There's more social mobility. If Americans want to live the American dream, they should
go to Denmark. I've shown you just a few things in italics here. I could have shown a
number of other problems. They're all problems that tend to be more common at the
bottom of the social gradient. But there are endless problems with social gradients that
are worse in more unequal countries -- not just a little bit worse, but anything from twice
as common to 10 times as common. If we think of the expense, the human cost of that. In
graph after graph, we find the countries that do worse, whatever the outcome, seem to be
the more unequal ones, and the ones that do well seem to be the Nordic countries and
Japan. So what we're looking at is general social dysfunction related to inequality. It's not
just one or two things that go wrong, there are most things. The other really important
point, Sweden and Japan, they're very different countries in all sorts of ways. The
position of women, how closely they keep to the nuclear family, are on opposite ends of
the poles in terms of the rich developed world. But another really important difference is
how they get their greater equality. Sweden has huge differences in earnings, and it
narrows the gap through taxation, general welfare state and generous benefits and so on.
Japan is rather different though. It starts off with much smaller differences in earnings
before tax. It has lower taxes and has a smaller welfare state. And in one analysis of the
American states, we find rather the same contrast. There are some states that do well
through redistribution, some states that do well because they have smaller income
differences before tax. So in conclusion it doesn't much matter how we get our greater
equality, as long as we get there somehow. It is not about perfect equality, it is about
what exists in rich developed market democracies. Another really surprising part is that
it's not just the poor who are affected by inequality. There seems to be some truth in John
Donne's "No man is an island." And in a number of studies, it's possible to compare how
people do in more and less equal countries at each level in the social hierarchy. This is
just one example. It's infant mortality. Some Swedes very kindly classified a lot of their
infant deaths according to the British register of general socioeconomic classification.
And so it's anachronistically a classification by fathers' occupations, so single parents go
on their own. But then where it says "low social class," that's unskilled manual
occupations. It goes through towards the skilled manual occupations in the middle, then
the junior non manual, going up high to the professional occupations -- doctors, lawyers,
directors of larger companies. We see there that Sweden does better than Britain all the
way across the social hierarchy. The biggest differences are at the bottom of society. But
even at the top, there seems to be a small benefit to being in a more equal society. We
show that on about five different sets of data covering educational outcomes and health in
the United States and internationally. And that seems to be the general picture -- that
greater equality makes most difference at the bottom, but has some benefits even at the
top. According to the psychosocial effects of inequality, more to do with feelings of
superiority and inferiority, of being valued and devalued, respected and disrespected. And
those feelings of the status competition that comes out of that drives the consumerism in
our society. It also leads to status insecurity. We worry more about how we're judged and
seen by others, whether we're regarded as attractive, clever, all that kind of thing. The
social evaluative judgements increase, the fear of those social-evaluative judgments.
Interestingly, some parallel work going on in social psychology: some people reviewed
208 different studies in which volunteers had been invited into a psychological laboratory
and had their stress hormones, their responses to doing stressful tasks, measured. And in
the review, what they were interested in seeing is what kind of stresses most reliably raise
levels of cortisol, the central stress hormone. And the conclusion was it was tasks that
included social-evaluative threat -- threats to self-esteem or social status in which others
can negatively judge our performance. Those kind of stresses have a very particular effect
on the physiology of stress. Now we have been criticized. There are people who dislike
this stuff and people who find it very surprising. When people criticize us for picking and
choosing data, we never pick and choose data. We have an absolute rule that if our data
source has data for one of the countries we're looking at, it goes into the analysis. Our
data source decides whether it's reliable data, we don't. Otherwise that would introduce
bias. There are 200 studies of health in relation to income and equality in the academic
peer-reviewed journals. This isn't confined to these countries here, hiding a very simple
demonstration. The same countries, the same measure of inequality, one problem after
another. We don’t control for other factors as GNP per capita doesn't make any
difference. And others using more sophisticated methods in the literature have controlled
for poverty and education and so on. And correlation in itself doesn't prove causality.
And people know the causal links quite well in some of these outcomes. The big change
in our understanding of drivers of chronic health in the rich developed world is how
important chronic stress from social sources is affecting the immune system, the
cardiovascular system. Or for instance, the reason why violence becomes more common
in more unequal societies is because people are sensitive to being looked down on.
To deal with this, we've got to deal with the post-tax things and the pre-tax things. We've
got to constrain income, the bonus culture incomes at the top. We must make our bosses
accountable to their employees in any way we can. The take-home message though is
that we can improve the real quality of human life by reducing the differences in incomes
between us. Suddenly we have a handle on the psychosocial well-being of whole
societies which is exciting.