chakravyuha

From Basic of Economics by David E O’Connor.

Macroeconomics

Microeconomics is the branch of economics that focuses on the inter-
actions among the individual decision-making units within an economy

…

The most important partici-
pants in the microeconomy are households, business firms, and the government.
The private sector, or nongovernmental sector of the economy, consists of
households and firms. Households, for example, consume the lion’s share of all
goods and services produced in the U.S. economy. Hence, one important micro-
economic topic analyzes consumer demand, why people choose to buy certain
goods or services and not others. The behaviors and decisions of other house-
hold units including savers, investors, workers, and entrepreneurs are also criti-
cal elements in this study. Businesses, the other decision makers in the private
sector, supply goods and services in an economy. Economists who study the mi-
croeconomy are concerned with how firms make pricing, output, hiring, and
other production decisions. These business decisions are guided by the desire to
maximize profits in a market economy—another major topic in the field of mi-
croeconomics.

…

Macroeconomics

Macroeconomics is the branch of economics that deals with the eco-
nomic performance of the entire economy.

…

Macroeconomics focuses on economic growth and eco-
nomic stability in a nation. Economic growth is often measured by tracking a
nation’s real gross domestic product over time. The real gross domestic prod-
uct (GDP) is the dollar value of all newly produced goods and services in an
economy in a given year, adjusted for inflation. Economic stability refers to
maintaining stable price levels for consumer and producer goods, and a fully em-
ployed labor force. In short, macroeconomics is concerned with aggregates such
as national output, national income, national savings rates, and the national un-
employment rate, rather than with the behaviors of individuals or firms.

Fiscal and Monetary Policy [emphasis mine]

Government is also a major player in the realm of macroeconomics. This
is because the federal government devises policies that affect the economy as a
whole. The two most important government policies that influence a nation’s
economic performance are fiscal policy and monetary policy. Fiscal policy in-
volves changes in taxes and government spending, while monetary policy in-
volves changes in the money supply and cost of credit. For example, if the
government wants to jump-start a sluggish economy, it could lower taxes and in-
crease government spending. The government could also increase the money
supply and make credit easier to come by. Combined, these policies would in-
crease aggregate (total) demand in the economy and thus stimulate production,
create jobs, and encourage new investment. In the U.S. economy, Congress and
the president are mainly responsible for forming an effective fiscal policy for the
nation, while an independent Federal Reserve System (the Fed) devises the na-
tion’s monetary policy (see chapter 10 for more on monetary and fiscal policy).

Stefan Collignon in the journal Social Europe.

Since World War II, three paradigms have dominated political and economic thinking in the world. In the East, Marxism rejected markets and democracy; in the West, Keynesianism laid the foundations for social democracy and political liberalism, while Friedman’s counter-revolution developed a neoliberal ideology from the theories of monetarism.

I just came across this article from the Washington Post. In the context of India, I find that the sentiments expressed here are rather relevant. The failure of India to either reduce the levels of poverty or generate sustainable growth in the country is a failure of ingenuity, innovativeness. India has a intelligence capital and culture capital but we have not utilized it in any way to keep it vital to the current age or to leverage it to move the populace forward for it to be of any meaningful use to the society as a whole. Indeed, there’s a very under-developed realization of “society” as such. Therefore all concerns and then solutions are very individual. There’s a startling intellectual bankruptcy in the society where everyone is so risk-averse that everyone treads the same worn path of disource, habit and vocation. China is offered as a counter example in this article but then it’s probably the exception to the rule and also who’s to say that their model of limited capitalism by decree is sustainable. Emphasis is mine.

The Global Poverty Trap

By Robert J. Samuelson
Wednesday, October 31, 2007; A19

It’s nature vs. nurture. One of the big debates of our time involves the causes of economic growth. Why is North America richer than South America? Why is Africa poor and Europe wealthy? Is it possible to eliminate global poverty? The World Bank estimates that 2.5 billion people still live on $2 a day or less. On one side are economists who argue that societies can nurture economic growth by adopting sound policies. Not so, say other scholars such as Lawrence Harrison of Tufts University. Culture (a.k.a. “nature”) predisposes some societies to rapid growth and others to poverty or meager growth.

Comes now Gregory Clark, an economist who interestingly takes the side of culture. In an important new book, ” A Farewell to Alms: A Brief Economic History of the World,” Clark suggests that much of the world’s remaining poverty is semi-permanent. Modern technology and management are widely available, but many societies can’t take advantage because their values and social organization are antagonistic. Prescribing economically sensible policies (open markets, secure property rights, sound money) can’t overcome this bedrock resistance.

“There is no simple economic medicine that will guarantee growth, and even complicated economic surgery offers no clear prospect of relief for societies afflicted with poverty,” he writes. Various forms of foreign assistance “may disappear into the pockets of Western consultants and the corrupt rulers of these societies.” Because some societies encourage growth and some don’t, the gap between the richest nations and the poorest is actually greater today (50 to 1) than in 1800 (4 to 1), Clark estimates.

All this disputes the notion that relentless globalization will inevitably defeat global poverty. To Clark, who teaches at the University of California at Davis, history’s most important event was the Industrial Revolution — more important than the emergence of monotheism, which produced Judaism, Christianity and Islam; or the invention of the printing press around 1450, which spread knowledge; or the American Revolution, which promoted democracy.

Before 1800, says Clark, most societies were stagnant. With some exceptions, people lived no better than their ancestors in the Stone Age. Economic growth was virtually nonexistent. Then England broke the pattern, as textile, iron and food production increased dramatically. Since 1800, English income per person has risen by a factor of 10. Much of Europe and the United States followed.

Almost everything that differentiates the modern era from the preceding millennia dates from this point: the virtual end of hunger in advanced societies; the expectation that living standards will constantly rise; the creation of the welfare state to redistribute income; the destructiveness of contemporary warfare; industry’s environmental spoilage. But why did the Industrial Revolution start in England?

It’s Clark’s answer that convinces him of the supremacy of culture in explaining economic growth. Traditional theories have emphasized the importance of the Scientific Revolution and England’s favorable climate: political stability, low taxes, open markets. Clark retorts that both China and Japan around 1800 were about as technically advanced as Europe, had stable societies, open markets and low taxes. But their industrial revolutions came later.

What distinguished England, he says, was the widespread emergence of middle-class values of “patience, hard work, ingenuity, innovativeness, education” that favored economic growth. After examining birth and death records, he concludes that in England — unlike many other societies — the most successful men had more surviving children than the less fortunate. Slowly, the attributes of success that children learned from parents became part of the common culture. Biology drove economics. He rejects the well-known theory of German sociologist Max Weber (1864-1920) that Protestantism fostered these values.

Clark’s theory is controversial and, at best, needs to be qualified. Scholars do not universally accept his explanation of the Industrial Revolution. More important, China’s recent, astonishing expansion (a fact that he barely mentions) demonstrates that economic policies and institutions matter. Bad policies and institutions can suppress growth in a willing population; better policies can release it. All poverty is not preordained. Still, Clark’s broader point seems incontestable: Culture counts.

Capitalism in its many variants has been shown, he notes, to be a prodigious generator of wealth. But it will not spring forth magically from a few big industrial projects or cookie-cutter policies imposed by outside experts. It’s culture that nourishes productive policies and behavior.

By and large, nations have either lifted themselves or have stayed down. Societies dominated by tribal, religious, ideological or political values that disparage the qualities needed for broad-based growth will not get growth. Economic success requires a tolerance for change and inequality, some minimum level of trust — an essential for much commerce — and risk-taking. There are many plausible combinations of government and market power; but without the proper cultural catalysts, all face long odds.

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