Donald Marron - 30-Second Economics

The 50 most thought-provoking economic theories, each explained in half a minute

Editor

Donald Marron

Contributors

Adam Fishwick

Christakis Georgiou

Katie Huston

Aurelie Marechal

Published in the UK in 2011 by

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2010 by Ivy Press Limited

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Digital ISBN: 9781848314498

Economics wants to be the physics of the social sciences. Physicists examine how fundamental natural forces shape everything from the movements of subatomic particles to the orbits of heavenly bodies. Economists, in turn, study how fundamental social forces explain everything from the price of bread to the wealth disparity between the United States and Zimbabwe.

The theme of this book is that economists have been succeeding, but economics will never be physics. Over the past two centuries, economists have developed a host of theories many described in the pages that follow that explain how markets work and sometimes fail, how consumers, workers, firms and politicians make decisions, and why economies grow or stagnate.

Those theories have their limitations, however, because humans are less predictable than particles and planets. Economies are complex (more like ecosystems) and so our understanding of them sometimes falls short; our near-universal failure to foresee the worst financial and economic crisis in eight decades is a sorry but perfect case in point.

The science of economics is thus still a work in progress; and it may end up resembling biology more than it does physics. But economics isnt just a science. Many economists, myself included, believe that our insights into how the world works have implications for how the world should work in general. As a result, the scientific theories of economics blur into political theories of the good society.

Both sets of theories the scientific and the political can have great impact. As John Maynard Keynes once put it: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

Many of the top fifty theories in economics can indeed be traced to economists who are defunct, at least in the biological sense (including Keynes himself). But the theories themselves remain vibrant. As Keynes warns, however, important theories are not always right. So mixed among the most important theories you will find a few that are almost certainly wrong, despite their influence. See if you can find them.

Each 30-second theory is presented alongside a 3-second crash for those in a particular hurry, in addition there is a 3-minute boom for those who want to delve a little deeper. The first group of economic theories, Schools of Thought, examines the large-scale forces markets, inertia, history that determine how the macroeconomy actually works. Economic Systems then presents theories of how economies should be structured with greater and lesser faith in markets and how struggling economies can improve. In Economic Cycles, we look at the factors that drive economic ups and downs and the possible role of government in smoothing them. Growth examines how the proper blend of capital, labour, resources, ideas and social institutions can foster prosperity. Global Trade looks internationally, explaining how products and capital flow around the world. Choice peers into our heads in order to see how individuals make decisions in the marketplace, in the home, and in the public sphere. Tax & Spend Policies examines the sometimes surprising effects of government tax and spending policies. Markets, finally, documents the remarkable power of market forces, from the miracle of the invisible hand to the tragedy of the commons. Along the way, each section presents a quick profile of some of the most important economists, from Adam Smith to John Maynard Keynes to Milton Friedman.

How should you enjoy this book? Well, the individual essays are great for sampling but, as with potato crisps, you probably wont be able to stop with just one theory. Enjoy.

aggregate demand The total demand for goods and services within an economy at a certain time. This can be influenced by government either through monetary policy (that is controlling the amount of money in the economy) and/or fiscal policy (that is increasing/decreasing the amount of government expenditure).

exchange value The theoretical value for which a product or service can be tradedas opposed to the actual value for which it is traded, which is its price. Exchange value can be described as the quantitative value of a commodity, as opposed to use value, which is its qualitative value.

fiscal policy The way in which government uses public spending and taxation to influence a countrys economic performance. Thus, a government may choose to tax more and invest in social security and public works, such as roads and hospitals, to create employment, and to increase salaries. Or it may choose to reduce public spending in order to reduce taxation, so that people have more money to spend in the first place. Its swings and roundabouts!

Keynesianism A school of thought created by the British economist John Maynard Keynes in the 1930s. Unlike most economists of the day, who believed that the market mechanism produces the most efficient outcome, Keynes believed that the market needed to be tempered by government intervention. He advocated the use of countercyclical fiscal policies, whereby the government pumps money into the economy when times are hard, but reduces spending when times are good.

laissez-faire An economic approach that advocates minimum government intervention (from the French, meaning let it be). Proponents of this approach believe that the market will achieve the most efficient outcome and that government regulations distort the reality of the market, leading to inefficiency.

monetary policy The way in which government uses the supply of moneyor, more specifically, interest ratesto influence a countrys economic performance. Generally, low interest rates tend to increase the amount of money in circulation, which can help stimulate an economy during a recession; high interest rates tend to reduce the supply of money and can be used to reduce inflation.