Deck the halls with Macro Follies!

With the holidays around the corner… ūüôā

Each year, our attention turns to the holidays… and to holiday consumer spending! We’re told repeatedly that, because consumer spending is 60 – 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.

This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions where caused by “underconsumption” because there was a “general glut” of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you’ve got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought…

John Maynard Keynes resurrected this approach and built on it with his influential “General Theory”, which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a “leak” out of the flow of spending. Indeed, this economic philosophy underpins many people’s widespread obsession with retail sales each holiday season.¬†Keynesian Macro Santa’s sack is filled with spending.

But there is another view on recessions, recoveries and growth.

Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren’t simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value — at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the “Law of Markets” and later “Say’s Law”. For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can’t be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system that cause monetary “disequilibrium”, often as the result of government interventions in the economy since they can be system-wide.

Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best — i.e. the most valuable and sustainable — ways to serve customers. That process is lead by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures.¬†Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living. If there are problems in the financial system such that our savings aren’t effectively being invested but sitting idle in bank vaults, or people are hoarding cash under their mattress in distress, a classical approach seeks to get the root of that problem and resolve the monetary problems with monetary solutions such as increasing the money supply to meet demand and other approaches. Using up more real resources through additional consumption in such a case is a applying the wrong medicine to the disease.

Consuming is our end goal, but producing value must be the means to that end.¬†That is to say, Macro Santa’s sack is filled with saving…


Old Spice Advertising Success!

Advertising is one of the great ways of shifting out demand i.e increasing quantity demanded for a good. This in turn could increase sales revenue, assuming the P.E.D is elastic (which you could justify with the large amounts of substitutes for body care products). Old spice is here to show you how to pursue a successful campaign!

Here’s an article discussing the success rate of the campaign, which increased sales figure by 107%!

marketing lessons

Germany and the Minimum Wage

Until November 2013, a minimum wage in Germany did not exist yet unemployment was low, the economy strong; and German workers were renowned for strong job protection- perhaps this could mean a minimum wage is not entirely necessary. However the non-existence of a minimum wage led to some employees being paid terribly low wages; and this surely is a sign of inequality and hence market failure. Also, if a minimum wage did exist to prevent this, should wages be negotiated between workers and their industries or should one wage be set to cover all workers? If trade union bargaining power is deemed limited, maybe a national wage would be most effective.


minimum wage

15 year high for job vacancies!

A telling signal that an economy is on the road to recovery is reflected in the amount of job vacancies with in the labour market.  These two articles highlight the fact that although confidence is still bruised it is strengthening.  They also point out that interest rates may rise as the BOE has warned previously.  As the economy moves towards the inelastic part of the AS curve workers are in more of a position to demand higher wage rates.  This is inflationary and as unemployment approaches 7% we may see that increase being implemented.  Remind yourselves of the chart in the sidebar on the right of the page.

engineers and medical staff       unemployment falling

Eurozone growth slowing down!

Although the Purchasing Managers’ Index ¬†-PMI (An indicator of the economic health of the manufacturing sector)¬†fell to 51.7 from 51.9, it beat expectations considering it was expected to fall below 50. At a quick glance Spain seemed to be rebounding from its recession as the service sector showed growth.

However, the actual picture is different. The PMI of France fell to an all-time low of 48 while Italy’s worsened to 48.8. There is also some split in the Eurozone with some countries improving and some worsening. Retail sales fell by a tiny amount. Overall the Eurozone shrank by 0.4%

The Impossible Trinity – 60 Second Adventures in Economics

Further to our discussions in class – The Impossible Trinity. Not everything can be controlled…

The Impossible Trinity or ‘trilemma’ suggests that it is impossible for a country to maintain a fixed exchange rate, free capital movement and an independent monetary policy at one and the same time.


¬£375 billion on infrastructure projects!

Great economics can be extracted from this announcement.  Is this a long overdue improvement of the capital infrastructure or another smoke and mirrors exercise?  Fantastic practise for your powers of analysis and evaluative skills. Think about the short run and long run implications for the economy. Where is the funding coming from?  Can you anticipate the exam questions that may come up regarding such an announcement?

government expenditure