2Nd Period Summaries

2nd Period Summaries

David Ricardo
o Lived during the Industrial Revolution.
o Published Essay on Profits.
- “Law of Diminishing Returns”: we will get less extra output when we add additional input, holding other inputs fixed; the marginal product of each unit of input will decrease as the amount of that input increases.
o Theory of Rent/Distribution Theory—
- States that an increase in wages does not lead to higher prices, but instead lower profits.
o Created the International Trade Theory/Comparative Costs when arguing for free trade.
- Comparative Advantage: when one country that trades produces at lower costs from another country is better off than actually making the product.
o Effects on Modern Society—
- Why farming price does not support the actual farmers, but the owners of the farmland.
- Employers are aware of the fact that every new employee they hire will provide less of a service then the last employee hired; will open job positions to increase productivity.

Thomas Robert Malthus

·  His most famous work, Essay on Population (1798), was about the relationship between population growth and the food supply.

·  He argued that while population grows exponentially, the food supply grows linearly, so overpopulation will result in starvation and misery.

·  He believed that if people did not voluntarily have fewer children (“preventive checks”), then the population would inevitable decrease through famine (“positive checks”).

·  Malthus also examined other issues, such as rent and protectionism, but his work in these topics was not as acclaimed as his work on population.

·  Today, most economists agree that Malthus’s claims about population growth were true for most of history.

·  Critics argue that in recent history, technological advances in the field of agriculture have made it easier to meet the demands of population growth.

Immigration of the 20th Century

  U.S. prospered because of increase in production & industry

  Immigrants were employed to work these new industries

  Great increase of immigrants in U.S. because of U.S. prosperity

  WWI slowed immigration=people were afraid of discrimination, but still relatively high

  Immigration Act and Great Depression greatly slowed down immigration levels, since many lost confidence in America. Conditions were similar to those in their home land.

  In the end immigration levels grew to previous normal height, after the New Deal and increase in economy and status.

  Immigration of the 20th Century paved the way for a better more diverse America and one that prospered and provided for its people whether native or not.

  20th Century immigration impacts us today because of our world status as a major power, because of increase in industry started in the 20th Century with the help of immigrants.

Immigration in the 21st Century

·  “Ellis Island opened its doors to welcome those seeking political and religious freedom as well as the adventurer, the wanderer, the persecuted, the fortune seekers, and others" (Rapid Immigration).

·  As laws for legal immigration become more and more authoritarian and dictatorial, many have no choice but to cross on to American soil illegally.

·  11,550,000 illegal immigrants were occupying the United States (as of 2006)

·  Immigrants hold eight million jobs in the US.

·  Many are seeking better lives in this “land of opportunity”, especially for Mexican immigrants who want to escape Mexico’s economic problems

·  There are those who are in favor of immigrants being here.

o  Immigrants take jobs we don’t want.

o  We should help them escape poverty.

o  It is profitable for business to pay them low wages while increasing production.

·  There are those opposed to immigrants.

o  Legal immigrants are using government spending and we are paying for illegal immigrants to stay here and use our resources.

o  They are competing with us for jobs in our state of unemployment.

o  We must be cautious of terrorists.

·  The US government works to solve the issue by helping the root cause: poor Mexican economy

The Industrial Revolution

·  · The Industrial Revolution changed the Western world from a rural and agricultural society to an urban and industrial society.

·  · Was an era where mass production took over handmade items and tools.

·  · Increase of production resulted from the introduction of steam-driven machinery and development of factory organization.

·  · The textile industry took place between 1750 and 1800, marking it the beginning of the age of modern factory.

·  · Steam powered locomotives allowed for quicker transportation of materials that could be used to produce finished goods.

·  · The growth of the Industrial Revolution solely depended on the industry’s ability to transport raw materials and finished products over long distance to its consumer.

·  · The invention of interchangeable parts made it possible so that machinery and other items can swap and replace parts.

Alan Greenspan Summary

·  Lived through both the great depression and the booming fifties.

·  He was chairman of the federal reserve from 1987-2006 which gave him much control over the U.S. economy. Because of this he was called the second most important man in the United States.

·  He believed in classical economics and letting the economy regulate itself.

·  He controlled inflation through interest rates that controlled the lending rates of banks and through that how many consumers spent.

·  He has predicted most of the recessions in the last 20 years. He has also led the U.S. to historically low unemployment rates in the mid 90’s.

·  When he remarked that stocks had an “irrational exuberance” or overvaluation the stock market lost 3% of its value because people trusted his words so much.

·  His low interest rates were one cause for the irrational spending that led to the housing bubble to burst into our current recession. He has admitted that the housing bubble could be blamed on his actions around 2001 that had lending rates so low.

·  However, he is still seen as an expert on the U.S. economy.

Karl Marx

·  Became a communist while in Paris where he befriended Friedrich Engels.

·  Thought capitalism was ineffective and that it would eventually collapse.

·  Capitalists exploit the labor of others.

·  Believed that feudalism evolved into capitalism, but would be replaced by socialism.

·  The value of a commodity is determined by the average labor time used to create it.

·  Labor power is the ability of people to do work; it can lead to a surplus value and exploitation of the worker.

·  Labor time is the time basis for wages; it is controlled by the employer which causes inefficiency.

·  A major impact of Marx was modern day communism and the USSR.

Adam Smith

· The Father of Modern Economics

o Born during Scottish Enlightenment (18th century)

o Wrote The Wealth of the Nations published in 1776; outlined his major economic theories

o Mercantilism was the dominant economic structure during 18th century

· Specialization

o Smith termed it “division of labor”

o Rather than have one laborer produce a good, it is more efficient to divide the tasks among several workers. That way, more goods may be produced and the worker can gain more returns, like earning more money. (one Jeff vs. five Jeffs)

· Compensating Differential

o Employers pay their employees higher wages for the undesirable work, compensating them for their unpleasant, dangerous, disgusting jobs. (ex: garbage men, coal miners, executioners, butchers.)

Adam Smith provided the groundwork for many economic theories that are still in use today.

THE SILK ROAD

·  The Silk “Road” has spanned over many dynasties two important periods of heavy trade include the Tang Dynasty (618-907Ad) and the Mongol empire period.

·  Items that were traded include porcelain, spices, and silk all of which influenced the arrival of the European powers to find a way to Asia without fighting the Turks.

·  The age of exploration was born out of the trading of the Silk Road.

·  As a result of the age of exploration America was founded; thus we can trace our path to America to the Silk Road.

The Great Recession Summary

·  Booming markets and high confidence led to risky spending habits

·  Housing market was the chief culprit

·  Government added to the cause with their idea of “housing for all”

·  The bubble eventually popped and caused the current recession

·  The risk was so spread out over different companies that the fear was when one large one went under it would take down many others so the government had to step in

·  Lessened demand for college education means less human capital in the future

·  People entering the current market are more likely to make less during their careers

·  Lack of technological improvement due to poor funding

·  Scarce small and new companies due to consumer fears

·  Consumer confidence is low

·  We have no entered a recovery

The crash of 1987 (Black Monday)

Setup:

As the US dollar weakened in the early part of 1987, foreign countries began to purchase massive amounts of products causing AD to skyrocket.

This inflated the stock market as people were feeling secure investing large quantities of money.

Merger mania and leveraged buyouts of the 1980’s put the stock market on a very weak foundation.

The many leveraged buyouts during the period gave way to extreme growth but these leveraged buyouts and mergers could not last forever, meaning the growth had to end sometime.

Causes:

“Automatic trading systems” causes a massive selling spree once the market hit a low point

Stock prices were overvalued and futures were undervalued or vice versa which threw the market into a violent slide.

The Great Depression

·  Black Tuesday: Collapse of the Market

·  Causes for this crash

o  Unregulated economy led to overinvestment

o  Massive withdraw from the stock market

o  Speculation—no one knew what they were investing in

·  President Herbert Hoover, classical Economist, did little.

·  New President Franklin Roosevelt, a Keynesian, established the New Deal.

·  During the Depression, production went downhill, businesses folded, unemployment skyrocketed.

·  Some social problems/events during the Depression were evictions, prohibition, soup kitchens, the Dust Bowl and internal migration across the U.S.

·  What came out of the Great Depression?

o  Social Security

o  Increased business regulations

o  Infrastructure projects

o  The Federal Deposit Insurance Corporation (FDIC)

Globalization Summary

·  It is the interaction and the ties made between different countries around the world.

·  The term has been around for centuries but Globalization boomed in the 1980s and continues to develop to this day.

·  Globalization not only affects the economy but also the culture and the politics of a country.

·  It affects politics when it comes to laws and regulations, dealing with injustices, and non- government organizations.

·  It affects the culture when it comes to understanding and accepting, identity of a nation, and sharing with others.

·  There are pros to Globalization: free trade, innovations and inventions, smaller differences between currencies, beneficial for less developed nations.

·  There are cons to Globalization: leads to people losing their jobs, cheap labor, intolerable working conditions, lack of resources and capital for poorer countries.

Alexander Hamilton

·  Lived during a time when U.S. had just gained independence and the country was trying to jumpstart its economy

·  Country had few businesses and trade existed with Britain exclusively

·  Established the first national bank, which gave people the opportunity to buy bonds directly from the government. It also gave the government more power over people’s money and a greater source of revenue.

·  Pushed to start the first U.S. mint since he saw the need for the country to run on a single currency

·  Also started the first federal taxes on goods, which was another source of revenue for the national government

·  Overall, the majority of his ideas pushed for a strong central government.

Dot-com Boom and Bust

The Boom- 1995-2001

·  Internet-based companies made unrealistic promises to investors

·  Over investing led to over spending

The Bust

·  Investors pulled out when they didn’t make money

·  Stock became worthless

·  Nasdaq dropped and has never seen such levels again

·  Many companies went bankrupt

Results

·  Surviving companies have become stronger, better known brand names

·  Bust changed the way people do business on the internet

·  Proved that the internet influences more than just online companies

·  Prompted people to focus more on what they were investing in and become “smart” with their money

·  Through devastating consequences, the Boom and Bust shaped the internet we have come to incorporate in our everyday lives

Henry Ford and Mass Production

·  The introduction of the Model T revolutionized the modern automobile. It was reliable, affordable, and easy to use and maintain.

·  Ford valued the “Wage Motive”, a theory that if you pay workers a higher wage they will be more efficient workers, producing more output and in turn, making a profit for the company.

·  The Assembly Line allowed products to be produced fast and in mass amounts. Because of the short time it took, costs were also lower, simply allowing more products to be manufactured.

·  Vertical Integration was a strategy used by Ford Motor Company to centralize all their suppliers into one complex. This way, they could regulate the supplies need for production ( rubber, metal, glass, iron) into one location for easy access to the manufacturing plant.

·  Mass production is the production of large amounts of standardized products which has to do with both assembly lines and vertical integration.

John Maynard Keynes

·  Born in Cambridge, and went to King’s College where he got his degree in 1905

·  In the 1920s Keynes was a believer in the quantity theory of money, today called Monetarism.

·  Makes a name for himself when the unemployment rates rises, and he comes up with a way to stop it from rising.

·  Keynes’s General Theory revolutionized the way economists think about economics. It was path breaking in several ways, in particular because it introduced the notion of aggregate demand as the sum of consumption, investment and government spending.

·  He was so influential that there is a branch of economics named after him called Keynesian Economics; which believe aggregate demand is affected by economic decisions, price changes slowly and gradually, and that the intervening of the government is ok.