Economic Principles and Problems

A Pluralist Introduction

Geoffrey Schneider

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781317266488
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Economic Principles and Problems: A Pluralistic Introduction offers a comprehensive introduction to the major perspectives in modern economics, including mainstream and heterodox approaches. Through providing multiple views of markets and how they work, it leaves readers better able to understand and analyze the complex behaviors of consumers, firms, and government officials, as well as the likely impact of a variety of economic events and policies.

Most principles of economics textbooks cover only mainstream economics, ignoring rich heterodox ideas. They also lack material on the great economists, including the important ideas of Adam Smith, Karl Marx, Thorstein Veblen, John Maynard Keynes, and Friedrich Hayek. Mainstream books tend to neglect the kind of historical analysis that is crucial to understanding trends that help us predict the future. Moreover, they focus primarily on abstract models more than existing economic realities. This engaging book addresses these inadequacies. Including explicit coverage of mainstream economics and the major heterodox schools of economic thought—institutionalists, feminists, radical political economists, post-Keynesians, Austrians, and social economists—it allows the reader to choose which ideas they find most compelling in explaining modern economic realities.

Written in an engaging style and focused on real-world examples, this textbook brings economics to life. Multiple examples of how each economic model works, coupled with critical analysis of the assumptions behind them, enable students to develop a sophisticated understanding of the material. Digital supplements are also available for students and instructors. Economic Principles and Problems offers the most contemporary and complete package for any pluralist economics class.

Part I

Economics

A pluralist definition

DOI: 10.4324/9781315636924-1

Part I explores several different definitions of what economics is and the different ways in which economists practice the social science of economics (economic methodology).

The first chapter, What Is Economics?, begins by describing why economic policy matters to the country and to every person. It describes the debate over whether or not politicians should balance their budgets every year given the regular occurrence of recessions in the economy (downturns in which unemployment increases and business activity decreases). The chapter then offers four different definitions of economics: One offered by mainstream economists (who tend to advocate a capitalist market system with limited government intervention), one preferred by economists practicing progressive political economics (PPE, which includes institutionalist, social, post-Keynesian, and feminist economists who believe that capitalism can and should be reformed), another from economists who engage in radical political economics (RPE—Marxists and others who believe that capitalism is fatally flawed and should be replaced), and a broad definition of pluralist economics that synthesizes the other definitions.

Chapter 1 then takes up methodology, or how economists attempt to “do” economics. This will give you an idea of what it means to be an economist from the various perspectives—the kind of things you study, what you look for, and how you construct knowledge about the economy. The chapter then goes through a series of short examples so you can see different types of economic analysis in action when economists study consumer behavior, labor markets, and the business cycle. The chapter concludes by briefly laying out the ten different schools of economics that will be discussed in the book.

Chapter 2 takes up a simple mainstream economics concept, opportunity costs, and a simple economic model, the production possibilities curve (PPC). The PPC model is applied to several economic issues, including a treatment of defense spending and its impact on economic growth. The chapter concludes with a section on the potential limitations of economic models in capturing economic reality, building on the work of PPE and RPE economists.

1 What is economics?

The answer depends on who you ask

DOI: 10.4324/9781315636924-2

In his famous book, The General Theory of Employment, Interest and Money, John Maynard Keynes said, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” This quote highlights the extent to which economic policy is a major determinant of what our lives are like. Economic ideas led the followers of Adam Smith to demand an end to mercantilism and ushered in the beginnings of capitalism in the late 1700s. Karl Marx provoked the masses to strike and revolt against the oppressions of unregulated capitalism in the 1800s. Thorstein Veblen and Keynes provided a vision of regulated, mixed market capitalism that proved compelling in the Great Depression of the 1930s, and Friedrich Hayek’s critique of bloated bureaucracy helped persuade Ronald Reagan and Margaret Thatcher to reduce the size of government in the 1980s. Economic ideas play a significant role in shaping the type of economic system you live in, which has a major impact on the opportunities you have and the challenges you face.

This is why everyone needs to have a solid understanding of economics. To help you grasp the material, each chapter in this book will begin with a list of learning goals. These goals will help you to focus on the key themes.

1.0 Chapter 1 learning goals

After reading this chapter you should be able to:

• Explain in your own words the importance of economics for you and for society as a whole.
• Briefly contrast unregulated market capitalism with mixed market capitalism.
• Describe the difference between mainstream economics, progressive political economics (PPE) and radical political economics (RPE), using their different definitions of economics and their different methods.
• Explain and begin to apply the methods of mainstream, PPE, and RPE economists to economic issues.
• Understand how the ten different schools of economics match up with conservative, moderate, liberal, and radical political approaches to the economy.

Note that there are a lot of new ideas in this chapter. However, the topics in this chapter will become clearer as the book progresses, so do not feel like you need to get all the details down now. Instead, work to grasp the basic ideas and gain a general understanding of the material.

1.1 Why economics matters: Economic policy

Economics is a crucial subject that every educated voter and politician should understand. To show this, we begin with a brief example of how economic debates and a government’s economic policy can matter to us all. As we go through this book, it is especially important for you to try to understand all of the different views of the various schools of economic thought that we will be studying. Understanding their differences teaches us more about this subject than any other way we might study it. As you read through this first example, and as a general rule while going through this book, take the time to try to figure out the meaning of each part of each section, including the key terms that are used, what they mean, and how they work.

Let’s begin by taking a look at a government policy called austerity, where governments reduce or eliminate social programs like food stamps, unemployment insurance, and education in order to balance the government budget (they try to balance the incoming tax revenues with the spending amounts going out). Political leaders around the world regularly make the argument that the government should balance its budget each year, spending no more than it takes in via tax revenue. Such a policy is frequently justified by folksy expressions such as, “if households balance their checkbooks, then the government should balance its budget.” And this policy is sometimes supported by a few “crank” economists who are, in general, opposed to any type of government intervention. (These economists can be labeled “cranks” because their views have been dismissed by the vast majority of the economics profession.) The problem is that an obsession with balancing the government budget each and every year could cause an economic disaster. Here is a brief explanation for why it is a bad idea to try and balance the government budget when a recession hits.

In the modern United States, the economy tends to hit a major crisis, called a recession, every eight to twelve years. As you can see in Figure 1.1, the United States experienced recessions beginning in 1980, 1990, 2000, 2008, and 2020, when the U.S. real gross domestic product, which is the total output of goods and services, declined. A recession is usually sparked by a major panic of some sort, such as the financial crisis of 2007–2008 when stock markets plunged, banks failed, and the global economy shrank considerably. After a financial market collapse, businesses and consumers become pessimistic. Businesses lay off workers and consumers stop spending. This reduces overall spending in the economy, which reduces the incomes of both workers and business owners.

FIGURE 1.1 U.S. real gross domestic product (GDP) growth in the modern era (1971–2020).

Reduced incomes in the economy mean that governments take in less tax revenue from income and sales taxes and that the government will start running a large budget deficit because tax revenues will have fallen below the level of government spending. How should the government respond to the fact that a recession caused a decline in incomes, which caused a decline in tax revenues and an increase in the government deficit? If the government decides to balance the government budget right away, then it must either raise taxes or cut spending, an economic policy called austerity. But—and here is where the crucial knowledge of economics comes in—austerity will not succeed in balancing the budget in a recession!

Here is why: If a nation’s economy is in a recession, and if its government responds by raising taxes and cutting government spending, then the result will be that consumers and businesses have even less money to spend than before. Raising taxes directly reduces the money consumers and businesses have to spend. Reducing government spending directly reduces incomes: Teachers and other government personnel are laid off, construction firms see less revenue from building fewer roads and bridges, and so on. So cutting government spending and raising taxes directly reduce income and spending. Also, the decline in incomes and spending means additional reductions in tax revenues from income and sales taxes, making the government deficit worse! Thus, as any student of economics should know, trying to balance a government budget in a recession via austerity makes the recession worse, which makes the government deficit worse, not better.

Furthermore, even though it seems counterintuitive, governments can actually improve the deficit situation over the long term by spending more in a recession and running larger deficits! If the government cuts taxes and increases spending when a recession hits, which means running a larger budget deficit, it directly increases the incomes of consumers and the revenues of businesses. This leads consumers to spend more money and businesses to hire more people, raising incomes further and increasing tax revenues in the process. By stimulating economic growth, government spending and tax cuts can help to pay for themselves. (Before you go on, try reading back through the last two paragraphs until you understand the material. They contain a number of terms that we will deal with throughout the book.)

There are some major lessons to be learned from this example. First, what seems to be logical to most people (balancing one’s budget every year) can fly in the face of what economists have learned. For example, the best way to combat a recession is for the government to increase spending, cut taxes, and inject money into the banking system to promote lending. Even though this will increase government deficits in the short term, it will likely stimulate economic growth, which will actually reduce deficits over the long term once economic growth is restored. However, efforts to balance the government budget in a recession via austerity will not work. When a recession hits, incomes and spending fall, and that reduces tax revenues, leading to substantial government deficits. If the government responds by raising taxes and cutting spending (austerity), this makes a fragile economy even worse, slowing economic growth and reducing incomes and tax revenues further, resulting in even more deficits.

Second, our example demonstrates that economics is an uncertain field, and there is much disagreement between economists from the different economic schools of thought. This means that it is usually possible for politicians to find support for their ideas, no matter how bad those ideas are. Politicians frequently seize on bad ideas from crank economists because those ideas support their political perspective, even though most of the economics profession would consider those ideas to be ridiculous. This was certainly true of austerity policies, which have been promoted recently by a few crank economists but opposed by most economists.

Your job, as you read through this book, is to understand and evaluate the best ideas that economists have about how the economy works and what economic policies should be used in certain situations. However, we need to avoid making the mistake that some politicians do when they listen only to the economists who say what they want to hear. Instead, critically evaluate the ideas of all the economists you study, assess the available evidence, and develop your own perspective regarding which economic ideas best explain the world you see around you. The world is desperately in need of economically literate people who will call politicians on their craziest economic ideas. You will find that a solid understanding of the economy will help you in your personal life as well.

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Table of contents

• Cover
• Half-Title
• Title
• Copyright
• Dedication
• Detailed table of contents
• Preface
• Acknowledgments
• PART I Economics: A pluralist definition
• PART II The evolution of economic ideas and systems
• PART III Markets, supply and demand
• PART IV Market structures and corporations
• PART V Government intervention in microeconomic markets
• PART VI Labor markets and inequality
• PART VII Macroeconomic issues and problems
• PART VIII Macroeconomic models
• PART IX Stabilization policy
• PART X Growth and global interconnectedness
• Glossary of key terms and concepts
• Index