Adam Smith and his invisible hand of capitalism

WHAT IS ECONOMICS

Let's face it: If there's one fundamental principle guiding life on earth, it's scarcity. There simply aren't enough beachfront houses, luxury cars, and seats at the theater for everyone who wants one! And on a more serious note, there's not enough food, clothing, and medical care for everyone who needs it.

The entire discipline of economics—and all economic activity—arises from a scarcity of goods and services in comparison to human wants and needs. If there is not enough of something for everyone who wants or needs it, society faces a serious problem: it has to make decision about some basic economic questions.

Throughout history there have always been people who obtained what they wanted or needed by force*. The barbarians who sacked Rome practiced this form of “economic activity,” and in modern times it is practiced by armed robbers. But a society* requires an orderly system* of producing and distributing the necessities and luxuries of life. Such a system is essential to a stable society. Economics is the study of systems of production and distribution— which are called economies—and of their fundamentals, dynamics, and results.

*by force силой

*society общество

*orderly system упорядоченная система

 

AN INEXACT SCIENCE

Economics is the study, description, and analysis of the ways in which a society produces and distributes. In economics, the term goods and services refers to everything that is produced in the economy—all products and services, including government “services,” such as national defense and the prison system.

Economics is one of the social (as opposed to natural or physical) sciences, as are psychology and anthropology. Social sciences examine and explain human interaction. Because of this, the findings and knowledge produced by a social science generally cannot be as exact or predictable as those of a physical science, such as physics or chemistry.

For instance, if you put water in a saucepan on a stove, you know with certainty that it will boil when it reaches 212° Fahrenheit. But if you are the governor of a state and you raise the state sales tax, you cannot be certain about the effect it will have. And you won’t be able to answer any of the following basic questions: How much money will the tax raise? In order to avoid the tax, will people take more of their business across the state line?

Will they shop more often on the Internet, where there is no sales tax (yet)? Will companies in the state experience lower sales and generate lower corporate income taxes as a result? Economics deals with these kinds of questions, but it seldom comes up with totally precise explanations or correct predictions. Why? Because human behavior in the economic realm is as complex and mysterious as it is in any other sphere of life.

Vocabulary

government правительство

prison тюрьма

national defense национальная безопасность

interaction взаимодействие

certainty определенность

sales tax налог на продажи

income tax налог на доходы

behaviour поведение

to avoid избегать

to raise поднимать

to experience испытывать

to deal with иметь дело с

Economics (2)

The good news, however, is that economics can tell us the likely results of a sales tax. In addition, as a scientific discipline, economics provides extremely useful analytical tools and frameworks for understanding human behavior in the areas of getting and spending money, which (let's face it) occupies the majority of most people's waking hours.

Economics deals with fundamental, often life-or-death issues. That is why economics is important. Its challenge lies in its mysteries: We don't know when the next expansion or recession will come. We don't know if a federal tax cut will help the economy grow. We don't know which new technologies should be encouraged and which ones won't pan out. And, tragically, we don't know how to overcome poverty, hunger, crime, and other evils rooted in economic reality. But economics is the branch of the social sciences most concerned with these matters, and it is the one that's well equipped to help us deal with them.

Economics provides a framework for understanding government policies, business developments, and consumer behavior here and abroad. It provides a rich context for making decisions in your business, professional, and financial life. The economy is to business as the ocean is to fish. It is the environment in which business operates. The more you know about this environment, the better you will function as a manager, analyst, and decisionmaker.

Vocabulary

likely вероятно

to provide обеспечивать

tools инструменты

framework структура

to occupy занимать

majority большинство

issue пункт, проблема

challenge сложная задача

expansion расширение

recession спад

to encourage поощрять

to overcome преодолевать

poverty бедность

equipped оборудованный

 

Economics (3)

The field of economics may be divided in several different ways, most popularly microeconomics (at the level of individual choices) versus macroeconomics (aggregate results). Today there is a view that good macroeconomics has solid microeconomic foundations. In other words, its theories should have evidential support in microeconomics. A few authors (for example, Kurt Dopfer and Stuart Holland) also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study.

Theories developed as a part of economic theory have also been applied in other fields such as criminal behavior, scientific research, death, politics, health, education, family, dating, etc. This is allowed because economics is fundamentally about human decision-making. One of the main purposes is to understand how economies work, and what are the relations between the main economic players and institutions.

Economics can also be divided into numerous sub disciplines that do not always fit neatly into the macro-micro categorization. These sub disciplines include: international economics, development economics, industrial organization, public finance, economic psychology, economic sociology, institutional economics and economic geography.

 

MARKET ECONOMIES

A society may attempt to deal with the basic economic problems by allowing free play to what are known as market forces. The state plays little or no part in economic activity. Most of the people in the non-communist world earn and spend in societies which are still fundamentally market economies. The market system of economic organization is also commonly described as a free enterprise or laissez-faire, or capitalist system. We shall use all these terms to stand for a market economy. Strictly speaking the pure market of laissez-faire system has never existed. Whenever there has been some form of political organization, the political authority has exercised some economic functions (e.g. controlling prices or levying taxation). It is useful, however, to consider the way in which a true market system would operate because it provides us with a simplified model, and by making modifications to the model we can approach the more realistic situations step by step.

The framework of a market or capitalist system contains six essential features: private property, freedom of choice and enterprise, self-interest, competition, the price system, the role for government.

 

Private property

The institution of private property is a major feature of capitalism. It means that individuals have the right to own, control and dispose of land, buildings, machinery, and other natural and man-made resources. Man-made aids to production such as machines, factories, docks, oil refineries and road networks are known as capital. Private property not only confirms the right to own and dispose of real assets, it provides the owners of property with the right to income from that property in the form of rent, interest and profits.

 

Self-interest

Since capitalism is based on the principle that individuals should be free to do as they wish, it is not surprising to find that the motive for economic activity is self-interest. Each unit in the economy attempts to do what is best for itty is self-interest. Each unit in the economy attempts to do what is best for itself.

Firms will act in ways which, they believe, will lead to maximum profits (or minimum losses). Owners of land and capital will employ these assets so as to obtain the highest possible rewards. Workers will tend to move to those occupations and locations which offer the highest wages. Consumers will spend their incomes on those things which yield the maximum satisfaction.

 

Markets and Prices

Perhaps the most basic feature of the market economy is the use of the price mechanism for allocating resources to various uses. The price system is an elaborate system of communications in which innumerable free choices are aggregated and balanced against each other. The decisions of producers determine the supply of a commodity; the decisions of buyers determine the price.

Changes in demand and supply cause changes in market prices and it is these movements in market prices, which bring about the changes in the ways in which society uses its economic resources.

 

WHAT IS ECONOMICS

Let's face it: If there's one fundamental principle guiding life on earth, it's scarcity. There simply aren't enough beachfront houses, luxury cars, and seats at the theater for everyone who wants one! And on a more serious note, there's not enough food, clothing, and medical care for everyone who needs it.

The entire discipline of economics—and all economic activity—arises from a scarcity of goods and services in comparison to human wants and needs. If there is not enough of something for everyone who wants or needs it, society faces a serious problem: it has to make decision about some basic economic questions.

Throughout history there have always been people who obtained what they wanted or needed by force*. The barbarians who sacked Rome practiced this form of “economic activity,” and in modern times it is practiced by armed robbers. But a society* requires an orderly system* of producing and distributing the necessities and luxuries of life. Such a system is essential to a stable society. Economics is the study of systems of production and distribution— which are called economies—and of their fundamentals, dynamics, and results.

*by force силой

*society общество

*orderly system упорядоченная система

 

AN INEXACT SCIENCE

Economics is the study, description, and analysis of the ways in which a society produces and distributes. In economics, the term goods and services refers to everything that is produced in the economy—all products and services, including government “services,” such as national defense and the prison system.

Economics is one of the social (as opposed to natural or physical) sciences, as are psychology and anthropology. Social sciences examine and explain human interaction. Because of this, the findings and knowledge produced by a social science generally cannot be as exact or predictable as those of a physical science, such as physics or chemistry.

For instance, if you put water in a saucepan on a stove, you know with certainty that it will boil when it reaches 212° Fahrenheit. But if you are the governor of a state and you raise the state sales tax, you cannot be certain about the effect it will have. And you won’t be able to answer any of the following basic questions: How much money will the tax raise? In order to avoid the tax, will people take more of their business across the state line?

Will they shop more often on the Internet, where there is no sales tax (yet)? Will companies in the state experience lower sales and generate lower corporate income taxes as a result? Economics deals with these kinds of questions, but it seldom comes up with totally precise explanations or correct predictions. Why? Because human behavior in the economic realm is as complex and mysterious as it is in any other sphere of life.

Vocabulary

government правительство

prison тюрьма

national defense национальная безопасность

interaction взаимодействие

certainty определенность

sales tax налог на продажи

income tax налог на доходы

behaviour поведение

to avoid избегать

to raise поднимать

to experience испытывать

to deal with иметь дело с

Economics (2)

The good news, however, is that economics can tell us the likely results of a sales tax. In addition, as a scientific discipline, economics provides extremely useful analytical tools and frameworks for understanding human behavior in the areas of getting and spending money, which (let's face it) occupies the majority of most people's waking hours.

Economics deals with fundamental, often life-or-death issues. That is why economics is important. Its challenge lies in its mysteries: We don't know when the next expansion or recession will come. We don't know if a federal tax cut will help the economy grow. We don't know which new technologies should be encouraged and which ones won't pan out. And, tragically, we don't know how to overcome poverty, hunger, crime, and other evils rooted in economic reality. But economics is the branch of the social sciences most concerned with these matters, and it is the one that's well equipped to help us deal with them.

Economics provides a framework for understanding government policies, business developments, and consumer behavior here and abroad. It provides a rich context for making decisions in your business, professional, and financial life. The economy is to business as the ocean is to fish. It is the environment in which business operates. The more you know about this environment, the better you will function as a manager, analyst, and decisionmaker.

Vocabulary

likely вероятно

to provide обеспечивать

tools инструменты

framework структура

to occupy занимать

majority большинство

issue пункт, проблема

challenge сложная задача

expansion расширение

recession спад

to encourage поощрять

to overcome преодолевать

poverty бедность

equipped оборудованный

 

Economics (3)

The field of economics may be divided in several different ways, most popularly microeconomics (at the level of individual choices) versus macroeconomics (aggregate results). Today there is a view that good macroeconomics has solid microeconomic foundations. In other words, its theories should have evidential support in microeconomics. A few authors (for example, Kurt Dopfer and Stuart Holland) also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study.

Theories developed as a part of economic theory have also been applied in other fields such as criminal behavior, scientific research, death, politics, health, education, family, dating, etc. This is allowed because economics is fundamentally about human decision-making. One of the main purposes is to understand how economies work, and what are the relations between the main economic players and institutions.

Economics can also be divided into numerous sub disciplines that do not always fit neatly into the macro-micro categorization. These sub disciplines include: international economics, development economics, industrial organization, public finance, economic psychology, economic sociology, institutional economics and economic geography.

 

ADAM SMITH AND HIS INVISIBLE HAND OF CAPITALISM

Adam Smith, a Scot and a philosopher who lived from 1723 to 1790, is considered the founder of modern economics. In Smith's time, philosophy was an all-encompassing study of human society in addition to an inquiry into the nature and meaning of existence. Deep examination of the world of business affairs led Smith to the conclusion that collectively the individuals in society, each acting in his or her own self-interest, manage to produce and purchase the goods and services that they as a society require. He called the mechanism by which this self-regulation occurs “the invisible hand,” in his groundbreaking book, The Wealth of Nations, published in 1776.

While Smith couldn't prove the existence of this “hand” (it was, after all, invisible) he presented many examples of its working in society. Essentially, the butcher, the baker, and the candlestick maker individually go about their business. Each produces the amount of meat, bread, and candlesticks he judges to be correct. Each buys the amount of meat, bread, and candlesticks that his household needs. And all of this happens without their consulting one another or without all the king's men telling them how much to produce. In other words, it's the free market economy in action.

In making this disco very, Smith founded what is known as classical economics. The key doctrine of classical economics is that a laissez-faire attitude by government toward the marketplace will allow the “invisible hand” to guide everyone in their economic activities, create the greatest good for the greatest number of people, and generate economic growth. Smith also delved into the dynamics of the labor market, wealth accumulation, and productivity growth. His work gave generations of economists plenty to think about and expand upon.

 

KARL MARX: IT'S EXPLOITATION!

Karl Marx, a German economist and political scientist who lived from 1818 to 1883, looked at capitalism from a more pessimistic and revolutionary viewpoint. Where Adam Smith saw harmony and growth, Marx saw instability, struggle, and decline. Marx believed that once the capitalist (the guy with the money and the organizational skills to build a factory) has set up the means of production, all value is created by the labor involved in production.

In Marx's view, presented in his 1867 tome Das Kapital (Capital), a capitalist's profits come from exploiting labor—that is, from underpaying workers for the value that they are actually creating. For this reason, Marx couldn't abide the notion of a profit-oriented organization.

This situation of management exploiting labor is the main reason of the class struggle. Marx saw the class struggle at the heart of capitalism, and he predicted that that struggle would ultimately destroy capitalism. To Marx, class struggle intensifies over time. Ultimately, in Marx's view, society moves to a two-class system of a few wealthy capitalists and a mass of underpaid, underprivileged workers.

Marx predicted the fall of capitalism and movement of society toward communism, in which “the people” (that is, the workers) own the means of production and thus have no need to exploit labor for profit. Clearly, Marx's thinking had a tremendous impact on many societies, particularly on the USSR (Union of Soviet Socialist Republics) in the twentieth century.

While Marx's theories have been discredited, they are fascinating and worth knowing. They also say something about weaknesses in capitalism.