Economics 2 – Disciplinary Approach, the Big Theories no comments
Researcher: Jo Munson
Title: Can there ever be a “Cohesive Global Web”?
Disciplines: Economics, Ethnography (Cultural Anthropology)
John Maynard Keynes, revolutionary Economist and inventor of “Keynesian Economics”
Major Economic theories
Recall our second definition of Economics, that highlighted the concept of and importance of choice – where our desires may be infinite, but the availability of resources is finite:
[Economics is] the study of how people choose to use (scarce) resources.
This concept leads to one of the fundamental theories of Economics, also known as the “Economic Problem”. The Economic Problem arises precisely because there are finite resources in any economy. Choices therefore have to be made.
The problem with choosing any one course of action is that the benefits you could have received by taking an alternative action are forgone. This is known as the “opportunity cost” of an action. If you knew what the outcome of each possible action would be, it would be easy to minimise the “opportunity cost”, but this is rare in practice.
The challenge of any economy is to minimise the opportunity cost and make the best use of the scarce resources available to it. American Nobel Prize winning Economist Paul Samuelson suggested that an economy should seek the optimum answers to the following questions:
- What to produce?
- How to produce?
- For whom to produce?
How economies approach these questions and how firms and individuals behave has been debated by Economists since the inception of the Discipline. Some of the key theories / theorists are outlined below:
- Adam Smith’s Invisible Hand – In the 1770s, Adam Smith proposed the idea that economies function best when markets are left to make their own choices about how to allocate resources. This has come to be known as the ‘Free Market’. Smith argued that markets will naturally correct any imbalances (as if guided by an Invisible Hand) and supply will necessarily cater to demand. The Free Market Economy is in direct contrast with the concept of a ‘Command Economy’, where governments choose how resources are allocated with the marketplace.
- Marxian Economics – Karl Marx was less optimistic about market’s ability to self-govern, believing that workers in a Free Market were not compensated for the labour and value of the goods they produced, but only for their labour. The surplus value would then be creamed off by the employer whilst the labourer is left with just enough to survive. Marx indicated that if a worker was forever trapped in this cycle it “would make him at once the lifelong slave of his employer”.
- Keynesian Economics – John Maynard Keynes formulated his theories against the backdrop of the ‘Great Depression’ in the 1930s. He advocated the need for governments to intervene to lessen the duration and negative effects of economic cycles inevitable in a Free Market. Keynes believed governments should control their spending so that during periods of economic growth, taxes are increased, welfare spending is decreased and the cost of borrowing money (interest rates) increase so that when an economy enters recession, it has the ability to lower taxes and interest rates and increase welfare spending in order to stimulate a faster economic recovery. Keynesian ideas formed the basis of Macroeconomics.
There are numerous other schools of thought in Economics, but these three form a good basis from which to work. Next I will look at how these theories are applied in Economic research.
Next time (and beyond)…
I’ve had a quick reshuffle of the order, but broadly, I will be covering the following in the proceeding weeks:
Can there ever be a “cohesive global web”?Ethnography 1 – Introduction & DefinitionEthnography 2 – Disciplinary ApproachEconomics 1 – Introduction & DefinitionEconomics 2 – Disciplinary Approach, the Big Theories- Ethnography 3 – Methodologies & Analysis
- Economics 3 – Models & Methodologies
- Ethnographic Approach to the “Cohesive Global Web”
- Economic Approach to the “Cohesive Global Web”
- Ethno-Economic Approach to the “Cohesive Global Web”
Sources
Gillespie, A. 2007. Foundations of economics. Oxford: Oxford University Press.
Wikipedia. 2013. Economics. [online] Available at: http://en.wikipedia.org/wiki/Economics [Accessed: 31 Oct 2013].
Image retrieved from: http://www.pbs.org/wnet/need-to-know/tag/john-maynard-keynes/