Tuesday, September 29, 2015

64. Economies need entrepreneurs. Entrepreneurs need freedom.

Click on the name and read:Jim Harris on Entrepreneurship

Sunday, September 27, 2015

63. What is in the Economics curriculum?

Students often ask if something is in the curriculum or if they should be able to do this or that calculation.

The answer is simple - the curriculum is described in the Student Guide. If it is in the Student Guide it is in the syllabus and the student should have some knowledge of the concepts. And herein lies the rub - how much should the student know? If he or she knows everything that is in the student guide he/she may just pass the examination.

If the learner can incorporate some of the general material of the prescribed handbook, they would have increased their success rate dramatically. They would comfortable earn their 60 - 70%. If however they are able to include some of the finer points and nuances they will be moving into the honours category.

Question papers Should contain 40%-50% of content that all students should be fully conversant with, 40% - 50% of content that students may have some knowledge of; and then 0 - 20% which will indicate the learners that have distiguised themselves in mastering the content fully.

The learning objectives in the Student Guide should give the learner a clear idea of what competencies he/she should be able to demonstrate. However we are in an academic environment and not in the industrial environment where performance is measured by saying that "You should be able to type 45 words per minute with and accuracy level of less than 5% error margin, under normal working conditions." It is a little more open ended since the area of knowledge that is being sampled is vast and the examination or test is really a sampling process to determine to what extent the learner has read widely and to what extent the learning and mastery has taken place rather than whether the learner is able to perform certain operations.

Some subjects like accounting resemble more of the former (operational learning) while say philosophy or literature may fall more into the latter category (conceptual understanding).

Economics falls between the two. Depending on the approach of the learning institution, it should provide guidance to learners to eliminate high levels of uncertainty and ambiguity.

Friday, September 25, 2015

62. The multiplier and marginal propensity to consume


Discuss how the "mutiplier effect" works as proposed by Keynes. A detailed discussion of this is found in Mohr & Assoc. 5th Edition page 331.

It is important that you know and be able to explain the definition: The ratio between the eventual change in income and the initial investment is called the multiplier, the size of the multiplication effect depends on the portion of additional income that is created by the spending in each round; and that in turn depends on the marginal propensity to consume.

Thursday, September 24, 2015

61. Try this multiple choice.

Some of the questions are not part of your curriculum - useful to try in any event!http://highered.mheducation.com/sites/0072823402/student_view0/chapter1/multiple_choice_quiz.html

Wednesday, September 23, 2015

60. Nationalisation

In this blog I will be talking about Nationalisation, and provide you with some links on the subject.

I will be starting off by indicating my moral objection to the principle, then I will be looking at what the proponents say (together with some initial objections) then I will go on by looking at the key arguments against nationalisation before looking at some historical perspectives before arriving at a conclusion to the argument.

So, let me start by making the point that I think from a moral point of view - it is wrong for a Government to use force to attain social objectives. Apartheid was a good example of this concept - it just isn't right to use force - even if it may be to the benefit of some - even the majority. It was wrong for Nazi Germany to expect that a group of people wear a yellow star, even if the majority agreed with it.

The ANCYL in their "Basic Document" gave seven reasons for Nationalisation:

 Firstly they say that the Freedom Charter" requires it.

Secondly they say it will increase the Fiscal Capacity of the state (I am sorry - theft increses the fiscal capacity of the thief - it is no argument).

They feel that it will lead to better working conditions for the employees. Fourthly they see it as a tool for industrialisation and job creation.

In the fifth place it supports the idea of National sovereignty (SAA - the national flag carrier also does this at a massive cost to the taxpayer - I believe that the money should rather be used for other social services than subsidising the relatively wealthy to travel by air to their favourite holiday destinations).

Then they talk about transformation of the "accumulation path" .

And in the seventh and last spot they refer to the transformation of unequal spatial development patterns.

The arguments against Nationalisation are as follows: 1. Governments are not in the business of operating commercial enterprises. The correct incentives are not in place for Governments to execute the kinds of controls that drive private organisations to create wealth. Even if they hire the best persons to do the job, the very fact that the government is the main or sole shareholder removes the strict discipline of "produce or perish" that exist for privately owned organisations.

2. Governments should also not want to get involved in the running of enterprises - why assume the the risk of losses when by merely taxing a profitable enterprise without assuming the risk could provide an income without any effort?

3. Governments often assume the role of service provider to be able to deliver the service to the vulnerable sectors of society - this is a less effective way of achieving the objective. They should rather directly assist those groupings through subsidies and vouchers rather than to try and run the delivery organisation too. Often the assistance goes to the organisation and never gets to the intended recipients of the service. (I will include more arguments and points of view in the future)

LINKS: http://www.economicsonline.co.uk/Business_economics/Nationalisation.html

Tuesday, September 22, 2015

59. What is meant by marginal propensity to consume?

What is meant by marginal propensity to consume?

Marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). What does this mean?

At low levels of Income the spending in an economy will be more than the total income (or production) firms will be experiencing shortages (more demand than what they are producing) There will be a pressure on them to increase production. At Very high levels of income firms will be experiencing a glut (or over production) and will contract their activities). There will be an equilibrium point where the MPC (Marginal Propensity to Consume line intersects the 45 - degree line). You can read more about this in you textbook (Mohr and Associates on p325 -in the new edition - the Chapter on the Simple Keynesian model)

Here is an example of how to calculate the MPC given a change in Income (Y) and a change in Consumption (C) using the formula below (Change in consumption C divided by the change in income Y).
Here \Delta C= 50\Delta Y= 60 Therefore, \mathit{MPC}=\Delta C/\Delta Y= 50/60= 0.83 or 83%. For example, suppose you receive a bonus with your paycheck, and it's $500 on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit, your marginal propensity to consume will be 0.8 ($400/$500). (Wikipedia example)

58 Stagflation

In economics, stagflation, a combination word made up of the words "stagnation" and "inflation", is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high in spite of Government monetary and fiscal actions to stimulate the Aggregate Demand (aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels).

Sunday, September 20, 2015

57. The Welfare State

(From the Free Market Foundation Correspondence)


The apparent problems of the European welfare state may be a politically hot issue, however, they are definitely not new. Since its introduction in the 1880s, supporters of the welfare state have pushed its seductive agenda for decades on end and continue to do so. Serious scholars on the other side also have warned us for decades on end of its dangerous fiscal and social problems. They all should have known that the dynamic growth of public obligations leads to the production of collective goods that in turn will not only overload any government’s fiscal responsibilities, but also culturally spin out of control. And Adolph Wagner’s "Law of Increasing State Spending" (1863) continues to be politically disregarded. The convenient and irrepressible assumption that every social problem can be resolved by ‘social engineering’ and throwing government money at them has no theoretical base and ignores both the dynamics of markets and of culture. As a result, and despite elegant Pareto efficiency models and politically attractive slogans, the unintended consequences of the Welfare State’s ever-increasing flood of assumed entitlements are apt to seriously disrupt the social and moral fabric of European democracies.


 Prof Kurt Leube is a Professor of Economics (emeritus) and Research Fellow (emeritus) at the Hoover Institution, Stanford University, USA, and an expert at the Austrian School of Economics, Law and Economics. In addition, Prof Leube holds recurrent guest professorships in LUISS (Rome, Italy) and several major universities of Guatemala, Chile and Argentina. Educated in Germany and Austria, Leube also serves as Academic Director of the European Centre of Austrian Economics Foundation (ECAEF), a research and public policy institute based in Vaduz (Principality of Liechtenstein). He is currently the Editor-in-Chief of the bilingual book series “ECAEF – Studien zur Wirtschafts- und Gesellschaftsordnung”, published in Vaduz. Leube is the editor of numerous books and frequently contributes to leading publications with translations into several languages. “Kurt R. Leube is internationally recognised as a leading authority in the tradition of the Austrian School of Economics, and is one of the closest collaborators and disciples of Friedrich A. von Hayek (Nobel Prize 1974)”.

56. Shifts in the supply and demand curves

Shifts in supply and demand curves are caused by all the things other than price. So a shift to the right of a supply curve (or a shift up - same thing) is as a result of more suppliers that have entered the market (if you have understood that the marginal cost curve represents the supply curve this post is redundant) a shift to the right of a demand curve (or a shift up - same thing) is as a result of more customers that have entered the market - this is as a result of a demographic increase or that the disposable income of a particular group of customers have increased.

So a shift to the left of a supply curve is as a result of ... just the opposite of what was said in the previous paragraph.

If this does not make too much sense to you, you may want to start here.

Friday, September 18, 2015

55. Environmental Economics

Environmental Economics Agricultural and Resource Economics Development Economics http://wec.ufl.edu/faculty/pienaar/

54. The Production Possibilities Frontier

The production possibilities frontier is a simple economic model that illustrates the limits of production faced by an individual, a firm or a country because of the limitations placed on these entities by the reality that the means available to achieve our goals (our resources) are limited.

In the Video Varsity section there is a link to the following video that will help you understand opportunity costs and how countries (and individuals) can benefit from trade and consume at levels outside of the production possibilities frontier. It says:

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE This is a VERY nice video - a must see if you wish to understand the concept.

(or you could pick it up here.


Here is a link to the Wikipedia article: https://sites.google.com/site/economicssa123/the-production-possibilities-frontier---wikipedia-article

Thursday, September 17, 2015

53. Comparative Advantage

Not the best video on earth, but worth looking at if you need to understand the concepts. https://www.youtube.com/watch?v=xx9xNJlPOJo


Tuesday, September 15, 2015

52. Panic of 1873

Panic of 1873

From Wikipedia, the free encyclopedia

A bank run on the Fourth National Bank No. 20 Nassau Street, New York City, from Frank Leslie's Illustrated Newspaper, 4 October 1873

The Panic of 1873 was a financial crisis that triggered a depression in Europe and North America that lasted from 1873 until 1879, and even longer in some countries. In Britain, for example, it started two decades of stagnation known as the "Long Depression" that weakened the country's economic leadership. The Panic was known as the "Great Depression" until the events in the early 1930s took precedence.

The Panic of 1873 and the subsequent depression had several underlying causes, of which economic historians debate the relative importance. Post-war inflation, rampant speculative investments (overwhelmingly in railroads), a large trade deficit, ripples from economic dislocation in Europe resulting from the Franco-Prussian War (1870-1871), property losses in the Chicago (1871) and Boston (1872) fires, and other factors put a massive strain on bank reserves, which plummeted in New York City during September and October 1873 from $50 million to $17 million.

The first symptoms of the crisis were financial failures in the Austro-Hungarian capital, Vienna, which spread to most of Europe and North America by 1873. Contents

1 Factors in the United States

1.1 Coinage Act of 1873

1.1.1 Jay Cooke & Company fails

2 Effects on the U.S.

2.1 Railroad strike

3 Europe

3.1 Germany and Austria-Hungary

3.2 Britain

3.2.1 Compared with Germany

3.3 Ottoman Empire

3.4 Latin Monetary Union

4 Global protectionism

5 See also

6 Notes

7 References

7.1 Yearbooks

Factors in the United States

The American Civil War was followed by a boom in railroad construction. 33,000 miles (53,000 km) of new track were laid across the country between 1868 and 1873.[3] Much of the craze in railroad investment was driven by government land grants and subsidies to the railroads.[4] At that time, the railroad industry was the nation's largest employer outside of agriculture, and it involved large amounts of money and risk. A large infusion of cash from speculators caused abnormal growth in the industry as well as overbuilding of docks, factories and ancillary facilities. At the same time, too much capital was involved in projects offering no immediate or early returns.[5] Coinage Act of 1873

The decision of the German Empire to cease minting silver thaler coins in 1871 caused a drop in demand and downward pressure on the value of silver; this had a knock-on effect in the USA, where much of the supply was then mined. As a result, the Coinage Act of 1873 was introduced and this changed the United States silver policy. Before the Act, the United States had backed its currency with both gold and silver, and it minted both types of coins. The Act moved the United States to a 'de facto' gold standard, which meant it would no longer buy silver at a statutory price or convert silver from the public into silver coins (though it would still mint silver dollars for export in the form of trade dollars).

The Act had the immediate effect of depressing silver prices. This hurt Western mining interests, who labeled the Act "The Crime of '73." Its effect was offset somewhat by the introduction of a silver trade dollar for use in Asia, and by the discovery of new silver deposits at Virginia City, Nevada, resulting in new investment in mining activity.[7] But the coinage law also reduced the domestic money supply, which raised interest rates, thereby hurting farmers and anyone else who normally carried heavy debt loads. The resulting outcry raised serious questions about how long the new policy would last.[8] This perception of instability in United States monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was in its later stages at the time.

In September 1873, the US economy entered a crisis. This followed a period of post-Civil War economic over-expansion that arose from the Northern railroad boom. It came at the end of a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872, and demonetization of silver in 1873.

Jay Cooke & Company fails

In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, had invested heavily in the railroads. At a time when investment banks were anxious for more capital for their enterprises, President Ulysses S. Grant's monetary policy of contracting the money supply (again, also thereby raising interest rates) made matters worse for those in debt. While businesses were expanding, the money they needed to finance that growth was becoming scarcer. Cooke and other entrepreneurs had planned to build the second transcontinental railroad, called the Northern Pacific Railway. Cooke's firm provided the financing, and ground was broken near Duluth, Minnesota, for the line on 15 February 1870. But just as Cooke was about to swing a $300 million government loan in September 1873, reports circulated that his firm's credit had become nearly worthless. On 18 September, the firm declared bankruptcy.

Effects on the U.S.

New York police violently attacking unemployed workers in Tompkins Square Park, 1874. The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, and more slowly in Chicago, Virginia City, Nevada, and San Francisco.[10][11] The New York Stock Exchange closed for ten days starting 20 September.[12] By November 1873 some 55 of the nation's railroads had failed, and another 60 went bankrupt by the first anniversary of the crisis.[13] Construction of new rail lines, formerly one of the backbones of the economy, plummeted from 7500 miles of track in 1872 to just 1600 miles in 1875.[13] 18,000 businesses failed between 1873 and 1875. Unemployment peaked in 1878 at 8.25%.[14] Building construction was halted, wages were cut, real estate values fell and corporate profits vanished.

Railroad strike

In 1877, steep wage cuts led American railroad workers to launch the Great Railroad Strike. The strike stopped trains across a wide swath of the country, especially in Pennsylvania and the great railway hub of Chicago. President Rutherford B. Hayes sent in federal troops to try to stop the strikes, and more than 100 people died in the ensuing melees. In July 1877, the market for lumber crashed, sending several leading Michigan lumbering concerns into bankruptcy.[16] Within a year, the effects of this second business slump reached all the way to California.

The depression lifted in the spring of 1879, but tension between workers and the leaders of banking and manufacturing interests lingered on. Poor economic conditions caused voters to turn against the Republican Party. In the 1874 congressional elections, the Democrats assumed control of the House. Public opinion made it difficult for the Grant Administration to develop a coherent policy regarding the Southern states. The North began to steer away from Reconstruction. With the depression, ambitious railroad building programs crashed across the South, leaving most states deep in debt and burdened with heavy taxes. Retrenchment was a common response of southern states to state debts during the depression. One by one, each Southern state fell to the Democrats, and the Republicans lost power. The end of the crisis coincided with the beginning of the great wave of immigration into the United States which lasted until the early 1920s. Europe

The panic and depression hit all industrial nations. Germany and Austria-Hungary

Black Friday, 9 May 1873, Vienna Stock Exchange. A similar process of over-expansion had taken place in Germany and Austria, where the period from German unification in 1870/71 to the crash in 1873 came to be called the Gründerjahre ("founders' years"). A liberalized incorporation law in Germany gave impetus to the foundation of new enterprises, such as the Deutsche Bank, and the incorporation of already established ones. Euphoria over the military victory against France in 1871 and the influx of capital from the payment by France of war reparations fueled stock market speculation in railways, factories, docks, steamships – the same industrial branches that expanded unsustainably in the United States.[18] It was in the immediate aftermath of Otto von Bismarck's victory against France that he began the process of silver demonetization. The process began on 23 November 1871 and culminated in the introduction of the gold mark on 9 July 1873 as the currency for the new united Reich, replacing the silver coins of all constituent lands. Germany was now on the gold standard.[19] Demonetization of silver was thus a common element in the crises on both sides of the Atlantic Ocean. On 9 May 1873, the Vienna Stock Exchange crashed, unable to sustain the bubble of false expansion, insolvencies, and dishonest manipulations. A series of Viennese bank failures ensued, causing a contraction of the money available for business lending. One of the more famous private individuals who went bankrupt in 1873 was Stephan Keglevich of Vienna. He was a relative of Gábor Keglevich, who had been the main royal treasurer of Hungary (1842–1848), and who in 1845 had founded, with some others, a financing association to fund the expansion of Hungarian industry and to protect the loan repayments, similar to the Kreditschutzverband of 1870 (Austria's association for the protection of creditors and for the protection of the interests of its members in cases of bankruptcy). That made it possible for a number of new Austrian banks to be established in 1873 after the Vienna Stock Exchange crash.[20] In contrast to Berlin, where the railway empire of Bethel Henry Strousberg crashed after a ruinous settlement with the Romanian government, bursting the speculation bubble in Germany. The contraction of the German economy was exacerbated by the conclusion of war reparations payments to Germany by France in September 1873. Coming two years after the foundation of the German Empire, the panic became known as the Gründerkrach or "founders' crash".[21][22][23] Keglevich and Strousberg had come in the year 1865 in direct competition in a project in today's Slovakia, whereupon, in 1870, the Government of Hungary and finally in 1872 the Emperor-King Franz Joseph I of Austria resolved the question of these competing projects.

Although the collapse of the foreign loan financing had been foreshadowed, the anticipatory events of that year were in themselves comparatively unimportant. Buda the old capital of Hungary and Óbuda were officially united with Pest,[26] thus creating the new metropolis of Budapest in 1873. The difference in stability between Vienna and Berlin had the effect that the French indemnity to Germany overflowed thence to Austria and Russia, but these indemnity payments aggravated the crisis in Austria, which had been benefited by the accumulation of capital not only in Germany, but also in England, the Netherlands, Belgium, France and Russia.

Recovery from the crash occurred much more quickly in Europe than in the United States.[28][29] Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations at the time.[29] There was an anti-Semitic component to the economic recovery in Germany and Austria as small investors blamed the Jews for their losses in the crash.[30][31] Soon more luxury hotels and villas were built in Opatija and a new railway line was extended in 1873 from the Vienna-Trieste line to Rijeka, from where it was possible to go by tram to Opatija. The strong increase of port traffic generate a permanent request for expansion.[32] The Suez Canal was opened in 1869. 1875–1890 became "the golden years" of Giovanni de Ciotta in Fiume (Rijeka).


The construction of the Suez Canal, which opened in 1869, was one of the causes of the Panic of 1873, because goods from the Far East had been carried in sailing vessels around the Cape of Good Hope and were stored in British warehouses. As sailing vessels were not adaptable for use through the Suez Canal because the prevailing winds of the Mediterranean Sea blow from west to east, British entrepôt trade suffered.

In Britain the long depression resulted in bankruptcies, escalating unemployment, a halt in public works, and a major trade slump that lasted until 1897.[34] Compared with Germany

During the depression of 1873–96, most European countries experienced a drastic fall in prices. Still, many corporations were able to reduce production costs and achieve better productivity rates, and, as a result, industrial production increased by 40% in Britain and by over 100% in Germany.[citation needed] A comparison of capital formation rates in the two countries helps to account for the different industrial growth rates. During the depression the British ratio of net national capital formation to net national product fell from 11.5% to 6.0% while Germany's rose from 10.6% to 15.9%.[citation needed] In essence, during the course of the depression, Britain took the course of static supply adjustment while Germany stimulated effective demand and expanded industrial supply capacity by increasing and adjusting capital formation. For example, Germany dramatically increased investment with regard to social overhead capital, such as in the management of electric power transmission lines, roads, and railroads, while this input stagnated or decreased in Britain and the investment helped to stimulate industrial demand in Germany. The resulting difference in capital formation accounts for the divergent levels of industrial production in the two countries and the different growth rates during and after the depression.[35] Ottoman Empire

In the periphery, the Ottoman Empire's economy also suffered. Rates of growth of foreign trade dropped, external terms of trade deteriorated, declining wheat prices affected peasant producers, and the establishment of European control over Ottoman finances led to large debt payments abroad. The growth rates of agricultural and aggregate production were also lower during the "Great Depression" as compared to the later period.[36] Latin Monetary Union

The general demonetisation and cheapening of silver caused the Latin Monetary Union in 1873 to suspend the conversion of silver to coins. Global protectionism

After the 1873 depression, agricultural and industrial groups lobbied for protective tariffs. The 1879 tariffs protected these interests, stimulated economic revival through state intervention and refurbished political support for the conservative politicians Bismarck and John A. Macdonald (the Canadian prime minister). Chancellor Bismarck gradually veered away from classical liberal economic policies in the 1870s, embracing many conservative and progressive policies, including high tariffs, nationalization of railroads, and compulsory social insurance.[37][38][39] This political and economic nationalism also reduced the fortunes of the German and Canadian classical liberal parties. France, like Britain, also entered into a prolonged stagnation that extended to 1897. The French also attempted to deal with their economic problems through the implementation of tariffs. New French laws in 1880 and in 1892 imposed stiff tariffs on many agricultural and industrial imports, an attempt at protectionism.[40] The U.S., still in the period after the Civil War, continued to be very protectionist.[41][42]

51. Business Cycles

Business Cycles

C.M. Heydenrych

The concept of business cycles conjure up the idea that they are regular and even predictable - they are not.

Noah Smith (2014) in an article titled "Maybe There's No Such Thing as a Business Cycle" says "you need to realize that nobody really knows if a business cycle actually exists." He continues by saying "The word “cycle” conjures up images of waves and seasons, but the business cycle isn’t a regular cycle like that (if it were, it would be easy to predict the next recession). Economists actually think that recessions and booms are random temporary disturbances of a smooth trend of long-term growth." This last point reminds us of the pre-Keynesian view of the Classical economists.

One definition of the business cycle is: It is the movement of gross domestic product (GDP) around the long-term trend. This long term trend has been upward growth trend for most of human history though not really measured since the 1930's WIKIPEDIA: Economists of the Austrian School argue that business cycles are caused by excessive issuance of credit by banks in fractional reserve banking systems. The excessive issuance of bank credit may be exacerbated if central bank monetary policy sets interest rates too low. The resulting expansion of the money supply causes a "boom" in which resources are misallocated or "malinvested" because of artificially low interest rates. Eventually, the boom cannot be sustained and is followed by a "bust" in which the malinvestments are liquidated (sold for less than their original cost) and the money supply contracts.[38][39] One of the criticisms of the Austrian business cycle theory is based on the observation that the United States suffered recurrent economic crises in the 19th century, notably the Panic of 1873, which occurred prior to the establishment of a U.S. central bank in 1913. Adherents of the Austrian School, such as the historian Thomas Woods, argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with Austrian Business Cycle Theory. More to come... (last updated 15 September 2015)


Smith, Noah (2014: Maybe There's No Such Thing as a Business Cycle. http://www.bloombergview.com/articles/2014-12-18/maybe-theres-no-such-thing-as-a-business-cycle [Accessed 15 September 2015].

Saturday, September 12, 2015

50. The Plagiarism letter.


49. Exam Prep Economics 1B