Juggling with Economics

As demonstrated by the recent economic crises that have hit nations across the globe, the wellbeing of individual countries is greatly (and arguably wholly) reliant upon governments' monetary and fiscal policies. Monetary policy involves the supply of money, largely concerning interest rates (i.e. the price of money itself, constituting the difference in the nominal value of government bonds), which rise or fall to tackle potentially harmful inflation, as borrowers must compensate lenders for future economic risks. Fiscal policy, on the other hand, concerns taxation and government spending.

This week's lecture included an exploration into the ultimate reasons behind taxation. The popular belief is that it simply acts as a financial resource used to pay off government debt, however, a more insightful view, according to followers of economist John Maynard Keynes, is that taxation is a means of regulating aggregate demand within the economy. Thus, it directs consumer behaviour and strengthens weakened areas of the markets.

Economists talk of an invisible unit of measurement through which one may determine an individual's 'value' to his or her country's economy. This is called utility. The 'runaway train' scenario was also discussed in the lecture: a train carrying hundreds of people, out of control, is heading for an unfinished bridge. You stand by a lever that can change the train's direction, carrying it to safety. However, on the alternate tracks stands a man who can neither hear or see the oncoming train. What do you do? By my reckoning, on the face of things, saving hundreds and sacrificing one would seem the best option and on an economist level, this would make me a utilitarian. I have chosen to save more 'utility units', which in the future could be of great value to the economy, rather than the relatively low value of a man who is apparently deaf and blind; of course, this is all hypothetical!

By a dictionary definition, money is merely a means of exchange that may be used to better one's utility. It is, in itself though, almost completely worthless and may be described as 'transparent'. Alfred Marshall, however, (and I agree on this point), believed in what he named as the Money Effect, which described the very real, psychological effect that money (or at the very least, the concept of money) has on real people. It dismissed the transparency of money and I think that goverments of today realised this to be true; that money has a great, albeit irrational, control over the masses and so grants a form of power.

Today, juggling with the economics of a nation is vital to any government. Economists and philosophers of the 19th Century in particular have analysed the importance of maintaining a healthy economy. Thomas Robert Malthus introduced the 'iron law of population', which stated that agricultural wealth may only double itself at any one time, whereas the population of a given country grows far more steeply; it grows geometrically. Thus, famine and poverty are very real threats that face nations all the time. As well as interest rates and taxation, governments utilise what is known as the credit creation ratio, which banks use to expand the money supply by manifesting a percentage of the value of an individual payment, (in the UK this stands at 1:10). So for every £1 received, the bank in question has £10 to lend to other customers.

Clearly, dealing with the economy is a very delicate balancing act, in which a wrong decision may have catastrophic consequences, (demonstrated by Germany's hyper-inflation in the 1920s, after its government decided merely to print more money in response to the vast debts accumulated during the First Worold War). It would seem that our own current climate will prove to be an uphill challenge for the coalition.