Contemporary Week 10

Business Economics
 The relationship between the development of macro economic theories and changes
in :
Technology
Working practices
Micro economics
Social structures
Political theory and practices

Periods of disruption that sees the decline of key aspects of the above. The rise of
new versions of them
Last Week
The period of such disruption may relate to some or a few cases of these

Linked to cyclical nature of change and evolution

Kondraliev’s model of the impact of technology, ‘The Long Wave’

Kuhn’s Paradigm Shift

 Free Marketers
Those forces within an economy (and those adjacent to it) will create
both change within it, (and adjacent elements) which whilst it may

Emergence of disrupt the equilibrium of the time, will either self correct, or create
new forces that will themselves bring the economy back to equilibrium.
This will be done by the ‘market’ itself and not directly by external
two basic interventions, such as the State/Government. A key element of this is the
control of the money supply, or fiscal policy. This controls actually money
in the economy and the price that one may have to pay for it (interest
schools of rates) and the demand for labour (wage rates). The rules of supply and
demand will determine this.

macro- Market Interventionists (Keynesian)

That markets may not/cannot naturally always correct imbalances within
an economy. That this may create long term damage to some or all of
economic these elements – PESTEL
In such circumstances the state/government should directly intervene. It

thought or
has a number of levers that it can use to do this direct control of the
money supply (interest rates if it controls the state bank) and creating
funds that can be sold to get cheap money into the market, so people

schools and companies spend. This money then flows through the economy
utilising Keynes's Multiplier model
Economists – Who is a free marketer? , who might be called a Keynesian?

• Adam Smith
• Ricardo Theorists
• Marx
Evolving over time, as economies
evolve from :
• Marshall
Agrarian to Industrial to Post Industrial
Data and data
• Keynes modellers/theorist

• Hayek
• Friedman
 • Late 19th century to 1950s
• Austrian
• Finance Minister, Harvard Professor
• Capitalism, Socialism and Democracy

‘That capitalism can only be understood as an evolutionary process of continuous innovation and
creative destruction’

Joseph
According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they
would freeze all but a few variables. Then they could argue that one caused the other in a simple
monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly

Schumpeter
from a highly abstract theoretical model.

Advocate of Kondratiev wave theory

Competitive equilibrium or Walrasian equilibrium is the traditional concept of economic

equilibrium, appropriate for the analysis of commodity markets with flexible prices and many
traders, and serving as the benchmark of efficiency in economic analysis. It relies crucially on the
assumption of a competitive environment where each trader decides upon a quantity that is so
small compared to the total quantity traded in the market that their individual transactions have no
influence on the prices. Competitive markets are an ideal standard by which other market
structures are evaluated.
That at the point of
stagnation, old paradigms
would be broken by
emergence of entrepreneurs
who would seize emerging
ideas/technologies to create
the next paradigm
 •FDR’s New Deal in WWII gives power to the development of what
President Eisenhower called the Military-Industrial Complex
•https://www.sam-network.org/video/eisenhower-s-farewell-address-
a-warning-on-the-military-industrial-complex

•Rooted in Western Europe via Social Democracy and the Common

The Decline
Market /European Union

•Fails in UK because of its attempt to maintain world power status, at

of Keynes the same time as funding a welfare state, paying of WWII debt with
legacy of outdated nationalised heavy industries and no social
contract between workers and management as seen in other western
European democracies

•High inflation
•Low productivity
•Sparse R&D innovation
•Stop -start economics – boom/bust
 UK Economic
Boom and Bust
 Boom and Bust
Boom
A boom occurs when real national output is rising at a rate faster than the trend rate of
growth. Some of the characteristics of a boom include:
A fast growth of consumption helped by rising real incomes, strong confidence and a surge in house
prices and share prices
A pick up in demand for capital goods as businesses invest in extra capacity to meet strong demand
and to make higher profits
More jobs created and falling unemployment and higher real wages
High demand for imports which may cause the economy to run a larger trade deficit because it
cannot supply all of the goods and services that consumers are buying
Government tax revenues will be rising as people earn and spend more and companies are making
larger profits – this gives the government money to increase spending in areas such as education,
the environment, health and transport
An increase in inflationary pressures if the economy overheats and has a positive output gap
‘Bust’--- From Slow Down To Recession
Slowdown
A slowdown occurs when the rate of growth decelerates – but national output is still rising
If the economy grows without falling into recession, this is called a soft-landing
Recession
A recession means a fall in the level of real national output i.e. a period when growth is
negative, leading to a contraction in employment, incomes and profits.
A simple definition:
A fall in real GDP for two consecutive quarters i.e. six months
A more detailed definition:
A recession is a significant decline in economic activity spread across the economy,
lasting more than a few months, normally visible in real GDP, real income, employment,
industrial production, and retail sales.
 Symptoms Of A Recession
There are many symptoms of a recession – here is a selection of key indicators:
A fall in purchases of components and raw materials (i.e. intermediate products)
Rising unemployment and fewer job vacancies available for people looking for work
A rise in the number of business failures and businesses announcing lower profits and investment
A decline in consumer and business confidence
A contraction in consumer spending & a rise in the percentage of income saved
A drop in the value of exports and imports of goods and services
Large price discounts offered by businesses in a bid to sell their excess stocks
Heavy de-stocking as businesses look to cut back when demand is weak – causes lower output
Government tax revenues are falling and welfare benefit spending is rising
The budget (fiscal) deficit is rising quickly
 
UK v Others
 • Ideas of Free Market Economists
• Thatcherism/ Reganonmics
• Small state government

• Lower taxation both personal and corporate to encourage

economic growth
Post 1978– • How?
Emergence of
Free Marketer • Individualistic society

Economics • Economic Entrepreneurship – Home owning, share owning

• Sell off social housing

• Sell off old nationalised industries

• What has helped in these developments?

Impact of technology on financial sector
Each day 7bn shares worth $320bn are
traded on US stock markets. Most of this
is done via AI and ML
Over 50% of assets are under ‘passive
management’
These industries are already actively
engaging in the development and use of
ML

What other parts of the service sector

are being impacted by this growth of
technology ?
 • Optimising invest (as quickly as possible)

• Uncoupling of stock market from parts of the real economy

• Future Trading --- enabled by technology both in buy /sell and tracking
• https://www.essdocs.com/

• Off shoring
• Move manufacturing to countries with low wage costs/ better tech and
that are now well connected --- specialised ports /containers

Results • Foreign Owners

• Floated state companies owned by others
• BMW Mini
• British Steel

• UK and US – Service Economy – non unionised – creates pool of labour ,

added to by freer movement of people across boarders– keeps domestic
wage/pricing low
 In 2018, the financial services sector contributed £132
billion to the UK economy, 6.9% of total economic output.
The sector was largest in London, where 49% of the sector’s
output was generated.
The UK financial services sector was the seventh largest in
What makes the OECD in 2018 by its proportion of national economic
output.
up the service There were 1.1 million financial services jobs in the UK,

sector in UK ?
3.1% of all jobs. Exports of UK financial services were worth
£60 billion in 2017 and imports were worth £15 billion, so
there was a surplus in financial services trade of £44 billion.
43% of financial services exports went to the EU and 34% of
financial services imports came from the EU.
The sector contributed £29 billion in tax in the UK in
2017/18.
Other Parts of
Service Sector
 • Free flow of capital, goods, people

Basis of Free • The market will create its own dynamic

Market • It will self correct, based upon it observing

Economics potential rise in risks

• It thinks logically, rationally

 Different types of
globalisation
Shifts in world economic
blocks, as types of
economies evolve
But what happens when the market does not self correct?
Break
 2007 Financial Crisis and what stopped a 2 nd Great Depression
• Sub Prime – selling debt to people who cannot afford to pay it off – both domestic and business

• In US Lehmann’s allowed to fail

• But in rest of the world—’Banks too Big to Failure’

• UK leads on correcting this

• Direct Government Action
• Bail out Banks

• Quantitative Easing Government Debt Rises

• Cut Interest Rates
 Quantitative easing (QE), also known as large-scale asset purchases, is a monetary
policy whereby a central bank buys predetermined amounts of government bonds or
other financial assets in order to inject liquidity directly into the economy. An
unconventional form of monetary policy, it is usually used when inflation is very low
or negative, and standard expansionary monetary policy has become ineffective. A
central bank implements quantitative easing by buying specified amounts of financial
assets from commercial banks and other financial institutions, thus raising the prices
of those financial assets and lowering their yield, while simultaneously increasing the
money supply. This differs from the more usual policy of buying or selling short-term

What Is
government bonds to keep interbank interest rates at a specified target value.

Quantitative
Expansionary monetary policy to stimulate the economy typically involves the central
bank buying short-term government bonds to lower short-term market interest rates.
However, when short-term interest rates reach or approach zero, this method can no

Easing ?
longer work. In such circumstances, monetary authorities may then use quantitative
easing to further stimulate the economy, by buying specified quantities of financial
assets without reference to interest rates, and by buying riskier or longer maturity
assets (other than short-term government bonds), thereby lowering interest rates
further out on the yield curve.

Quantitative easing can help bring the economy out of recession and help ensure that
inflation does not fall below the central bank's inflation target. Risks include the
policy being more effective than intended in acting against deflation (leading to
higher inflation in the longer term), or not being effective enough if banks remain
reluctant to lend and potential borrowers are unwilling to borrow.
 What happened ?

Post 2007 Why ?

What type of economy does the

UK have ?
 What type of economic
theory does this represent ?
Old
Economics Or
Rise of Neo Keynesians
Emerging
New Ones ? • Paul Samuelson
• Gary Becker
• Joseph Stiglitz
 • Old Keynesian ideas require

• Cheap money – low interest rates – fund

multiplier

• An ability to cut interest rates to stimulate

Issues borrowing

• But interest rates are already low and some

want to raise them – USA

• Quantitative easing – creates more debt

 Both Keynesian and Free Market Economic
Theory is based upon logic, and rationale
thinking by organisations, those that run them
and individuals in their day to day lives
A More
If it had been the case then:
Fundamental Keynesian economics would have worked in
Problem UK in 1950s-1978
The market would have self corrected before
the 2007 Crisis

Human beings are not always logical and rational

 Emergence of
Behavioural Economics
•Daniel Kahneman
•Amos Tversky
•Veron Smith

•Psychologist
https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/lecture/

•People are not (on the whole) rational

•Work on preferences

•Adopted on a micro level – specifics – found in areas like Nudge Theory applications
•How might we see it working ?
 Macro Behavioural Economics
•Banerjee and Duflo 2019

•Good Economics For Hard Times

•According to Free Marketer Theory lower taxation at the individual and corporate level should create more funds which
people will spend in the market – this will filter down to all – ‘a rising tide floats all boats’

•This also relates to Keynesian theory – this time it is done by the State

•This will also create entrepreneurs – who logically well go on to create bigger organisations, thus expanding the economy
even more

•However B&D’s work found that lower taxation, particularly on the better off did not see flows of money into the economy
in a manner that those lower down the social scale benefited from it , either directly (spent on them by better off buying
their labour at a going market rate) or indirectly (government spending to move people out of poverty)
Next Week
• How do we relate this to Task 2 in the assignment ?

• In the mean time look at and evaluate the links on these slides and a
book would be:

• https://www.youtube.com/watch?v=nafM5aUClbA