The Invisible Hand of Cowen and Tabarrok - Essay Example

Due Cowen and Tabarrok: The Invisible Hand Cowen and Tabarrok said that,“See the invisible hand, understand your world.” This tagline applies to the modern approach in economics. This tagline meant that economics is a scientific type of misery which is deep, inspiring, fundamental similar to that of the universe which is rapidly expanding or those forces that tend to bind the matter. This statement tries to explain the manner in which order can result from the freedom of choice. This involves the Solow Model, ideas in economics, real exact business cycles and the Keynesian approach in economics.This approach assumes that when businesses fluctuate, then this is a clear interpretation of the fluctuation in the output’s growth rate instead of a change in the level of output. This statement implies that economics is a misery in that there is a very peculiar of interconnection of markets and they respond in a very surprising manner to the changes in preferences and resources. For example, if a reduction of a product occurs, the price of the commodity goes up and the consumers get an incentive to consume less of the commodity while the suppliers get an incentive to discover more. It is very surprising that increase in the price of one commodity can be the reason of another commodity’s price going up. Therefore, this approach in economics tends to let people understand the invisible side in economics in order to understand the economics world. 2. Keynes vs. Hayek argument on government intervention Keynes a very popular economist stated that he would like to steer the economy while Hayek articulates that he would like to set the economy free. Keynes, had a very strong believe and supported that during the periods of depression or during recession in an economy, the government should spend during the depression period as a way to increase the aggregate demand and to lower the levels of unemployment. He believed that during the period of recession, the government should buy security bonds in order to reduce aggregate demand since this reduces the flow of money amongst the citizens. By doing this, Keynes felt that government spending is a good way of controlling the markets. Hayek, a fellow economist, criticized what Keynes argued that government spending should regulate the demand in the market by arguing that he preferred to set the market in the economy to operate freely. Hayek argued that the market should operate freely without any intervention and correct itself without intervention too. His argument was that intervention by either the government spending or the policies of the central bank in effort to correct the market and bring back the growth can lead to a transformation of a very mild recession. This transformation of the mild recession gives rise to a cluster in the economy. 3. Five concepts of Macro economics It is important for my classmates to remember several concepts of macroeconomics. These concepts are; National income, Gross Domestic Product, Economic growth, inflation and full employment. These concepts are very important because they determine the economic status of a country. Gross domestic product is the total worth of the output both goods and services produced by the production factor within the boundaries of a country. This production factor can by the citizens of the country or by the foreigners in that country. Economic growth is the increase in all the economic related activities. This is measured as the rate at which the Gross Domestic Product changes. Gross National Product is the total worth of the output of a country produced and the total income that the country receives from the domestic residents. This includes any other capital that the domestic residents invest in other foreign countries. National income is the full value of the final good and services that the nationals of a particular country produce within a certain period of time. Inflation is an increase in the general price levels of both goods and services in an economy. Full employment is that situation when an economy produces at the most maximum capacity by utilizing all the factor of production. Out of the above five concepts that I would like my fellow classmates to understand, inflation, full employment and national income are important to understand and problems associated with them. Inflation which is the increase in the prices of goods and services is very vital. This reduces the standards of living of individuals because consumers spend more on consumption and save less or invest less. Therefore, it is important to understand that inflation reduces the rate of economic growth. Inflation is a source of poverty in an economy and it increases the levels of unemployment in an economy. Inflation leads to an increase in interest rates thus hindering investment. National income which is another concept of macroeconomics determines the rate of taxation in an economy. Therefore, if the income is not enough to meet the expected expenditure of a country, then this means that the citizens face a higher tax rate which becomes a burden and results to inflation. Therefore, national income of a country determines economic growth and also the levels of unemployment and inflation. Full employment is what determines the level of economic growth in a particular country. Therefore, there being a certain level of unemployment in an economy, this implies that the economy is not operating at its full. Unemployment leads to crime reduces the standards of living of the individuals and the society at large. Therefore, unemployment is a platform for crime and increases the levels of poverty in an economy. It reduces the level of the national income and this leads to high tax rates and inflation as well. 4. Unfair Foreign competition Unfair type of foreign competition in the tire manufacturing companies in America has greatly posed lots of challenges due to the low priced tires from China. If I happened to sit next to a CEO of an automobile tire manufacturing company, who is very angry with tire imports and worried that many Americans will lose their jobs, I would advise him as follows. For this problem to stop affecting the American economy negatively, it is important for the governmentto come up with a strong policy that created crucial conditions in the industry by imposing high taxes to the importers. This will make it more expensive to import tires and profitable to the government too. The government should also use subsidies where necessarily needed in the industry in order to make the prices relatively fair than the prices of the imported tires. By doing this, the cost of production by the manufacturing companies will go down and this will result to reduced prices of the tires and the quality will still remain intact. The policy should also protect the American economy from any form of foreign predatory type of practices. This should ensure that there is a very strict law to any country that tends to act as a predator of the economy. Changing the structure of taxation in the industry is vital in ensuring that there is fair foreign competition. 5. Politicians vs. economists’ perception of International Trade Politicians refer to trade as a war with other countries because international trade calls for measures in job protection and industries too through restricting trade. For industries elated with defense, politicians feel that it is vital to protect such industries because they mean a lot to the security of a country. Retaliation is another issue that politicians feel that the government should intervene in trade and this calls for tough policies in the open types of foreign markets. Concerning imports, politicians feel that there is need to protect consumers and this leads to restricting imports. By doing so, this affects the relationship between the two countries. This is a very tough field because what one country regards safe and of high standards may not apply to the other country. According to the economists, trade is a cooperation whereby the government should not impose any restriction on both imports and exports. This is through use of open markets whereby trading of goods occurs without imposing any trade taxes or barriers. This results to increased gain to the entire global society. Economists feel that tariffs usage and quotas reduces the average living stands of individuals. However, politicians have it right because not everyone in the trade will offer right qualities and this may lead to exploitation of the consumers in terms of quality and safety of the commodities. Therefore, free trade is not the best type of trade and it is better for a government to protect its citizens which involves extra costs. 6. Institutions Matter An institution is a collection of constraints that re humanly devised and also a place for interaction of human beings. They include constraints such as formal and informal and the characteristic of their enforcement. These constraints define a very important incentive of the structures of the societies and in specific the economies. These institutions can further be classified into either political or economic types of institutions. The statement institutions matter is a rue statement because for an economy to develop, institutions are vital. Political institutions are very important in economic development. However, for these institutions to positively affect the economy, they must be a great value. Institutions can either cause a positive or a negative significant effect on the economic growth. Nevertheless, political institutions cannot operate on their own to bring a positive effect on the economy; they must work together with economic institutions. For an economy to grow positively, political institutions must portray a high level of democracy, proper regulation of economic activities and give appropriate property rights. This is applicable if the institutions test respective effects of every institution on the sustainability of economic growth. However, it is important to test the effect of different institutions in a positive and significant way in order to affect the economy positively. 7. Incentives matter In economics, an incentive is that thing that motivates someone to do something. The statement incentive matters applies that those factors that motivate individuals to perform and do something are very vital in the growth of an economy. For example, when prices of a certain commodity goes up, the consumers get an incentive to consume less of the commodity while the sellers are motivated to sell more of that commodity. This statement implies that changes in behavior occur as a result of costs perceived and the benefits associated with the change in action. Incentives are very helpful in prediction of behavior of individuals. Therefore, as an economist, it is vital to focus on the effects of the incentives that arise as a result of a certain economic policy. Putting everything in constant, the amount of incentive determines the effort that individual put while performing a certain action. Monetary incentives are easy to observe in an economy and easy to change those incentives that are non-monetary. In an economy, when income of a certain work or business increases, most people will prefer to engage in that activity. Therefore, monetary rewards or tangible rewards are very powerful in compelling individuals to feel satisfaction of what they do or attract other persons to do the same task that has high incentives. In conclusion, incentives matter a lot in the development and growth of an economy. 8. Monetary vs. Fiscal Policy Federal Reserve implements the monetary policy. Federal Reserve is the Central Bank of the United States. This bank influences money availability in terms of its circulation, value of money and credit. This bank achieves its roles through policies, statement, directives and actions that influence the perceptions of the future. It involves open market type of operations which involve the buying and selling of the treasury securities of the U.S. This bank sets interest rates for the commerce; banks in the target of ensuring stable prices, high level of employment and a moderate type of long term interest rates in the economy. The bank protects the U.S currency’s power of purchasing and compels economic conditions which aid in sustenance of both financial growth and reduce unemployment levels. This fosters long term transactions with other countries. However, the control of this bank is private and the government or the government officials do not control its operations. It relies on its own earnings instead of using the appropriations given by the congress. This opposes its function which is to come up with monetary policies which should help both the president and the congress to achieve the fiscal policies’ goals. This hinders political type of influence to the bank and this helps the bank in protecting the consumers from any exploitation. Infringements on other states may cause rivalry and high competition. 9. Minimum Wage as Price Flow Minimum wage is the lowest rate of remuneration that all the employers should pay their employees. It is the lowest rate at which an employee should sell his or her labor. This may be in either hour rate, month rate or a daily rate. This rate is a price floor because it higher the stands of living of the employees and reduces the levels of poverty. Minimum wage lowers inequality in the society and makes businesses to be more efficient since it compel employees to work. However, as a result of the standards of living going up, this increases the prices of the commodities and increases the levels of poverty. Though the amount one is paid is high, consumption amount goes up due to inflation because demand of the commodities goes up thus increasing price levels of commodities. Minimum wage increases the levels of unemployment because very few employers are willing to pay the amount and this ends up reducing the performance of businesses. This results from the fact that the cost of hiring is very high thus increasing the costs of running a business effectively. Therefore, many businesses opt not to hire more employees and this leads to the high levels of unemployment. Therefore, it is true that minimum wage is a platform for inflation because they increase demand and purchasing power of the employees leading to high prices of commodities in the market. It is important to note that whenever demand exceeds supply, then the prices of the commodities increase rapidly. 10. National Debt High and Unemployment Rate There is a relationship between the high levels of unemployment and the national debt in an economy. Whenever the rate of unemployment goes up, this implies that the total revenue of the government reduces. To cater for this reduced income, the government has to borrow in order to cater for its budget deficit. The government issues securities to the public in order to raise funds to cover up for the deficit. When the government’s debt increases, the creditors may end up expecting higher rates of interest payments in order to get a high return for the securities. These high interest rates expected by the creditors can lead to a dampened growth of the economy. This situation may force the government to lower the value of its currency in order to repay the debt. Investors and other foreign governments may end up willing to invest in the treasury bonds and this means that the interest rates will go high. An increase in the government debt in the long run can lead to elimination of the high levels of unemployment. This is thorough reduction of taxes and an increase in the government production. When the government involves itself in massive production or different profitable projects, this leads to creation of job opportunities and this lowers the high levels of unemployment in an economy.In conclusion, high levels of unemployment can lead to a high government debt but a high government debt can be a solution to lower the high levels of unemployment through government projects. 11. TheGreatest Invention of the 20th Century: Hans Rosling Hans Rosling in his Ted Talk claims that a washing machine is one of the greatest inventions of the 20th century. Hans felt that women spent a lot of time in washing. This is one of the house chores that women put more of their time in. Washing machine created time for women to enter into the labor market. This improved their standards of living and having them employed created a room for them to have fewer children. High population leads to high rates of unemployment and when women get fewer children, then the government is able to sustain its population. Since the women had a chance to work, they invested more in their children especially the females thus reducing the rate of birth because educated women are good in family planning and play a very big role of improving the economy. The women developed a higher level position of bargaining in the household and in the wide society at large. The women acquired great changes in leadership and in lifestyle too and this caused a transformation in the manner in which all people live. Therefore, Hans implies that having the washing machine for the women has changed the lifestyle of the women and increase per capita income and the GDP and this has led to an increased growth rate in the global economy. 12. Aggregate Demand Reduction Aggregate demand can decrease as a result of fiscal and monetary policies. Fiscal policy manipulates both the government expenditure and taxes. When the government borrows from the public and increases tax rates, this influences the manner in which consumers spend their manner. As a result, this decreases the aggregate demand. Increase in tax rates increases the prices of commodities and when prices go up, consumers consume less of the commodities. A contractionary monetary policy leads to a decrease in the aggregate demand because this reduces high circulation of money in the economy. Monetary policy induced through reduction of money circulation by selling of the government securities reduces the purchasing power of the consumers and this leads to a reduced demand of different commodities. Distribution of income is another factor that reduces the aggregate demand in an economy. When real wage of employees go down, this reduces the levels of consumption thus reducing the expenditure of consumption. This results from the fact that when the employees real wage reduces, the purchasing power of the employees reduces thus forcing them to consume less. This implies that the employees will have less money because of their reduced income and this will force them to consume less. Consuming less is a reduced aggregate demand in the economy. Therefore, income distribution determines the level at which consumers will consume either at a high level or a reduced level. Work Cited Barron, John M, Bradley T. Ewing, and Gerald J. Lynch.Understanding Macroeconomic Theory. New York: Routledge, 2006. Print . Read More