ECONOMICS: an Introduction

1. ECONOMCS (COOPERATION AND DEVELOPMENT) PROF. PASCA DI MAGLIANO ECONOMICS: an Introduction

2. ECONOMICS PROF. PASCA DI MAGLIANO What is Economics all about? Even someone who is not familiar with the discipline probably has an idea of the main topics that Economics is concerned with A first list of these topics, could be the following: markets, competition, market structure consumption , production labour market inflation public spending, taxes, public debt, stock market multinationals, globalization, foreign investment

3. ECONOMCS PROF. PASCA DI MAGLIANO But a mere list of topics is not enough The list (evenifenriched) isnotenoughto define the economic science. Thesetopics are not the sole interest of economicsbuttheyalsoconcern: Otherdisciplines (sociology, law, etc.) Social actors (enterprises, banks, tradeunions, etc.) Institutions (eitherlocal, national or international) Itisnecessary to specifythe point of viewand the methodthat the economistchooses to use whilestudyingthesetopics.

4. EONOMCS PROF. PASCA DI MAGLIANO What is Economcs? Economics is a social science which studies the choices of the economic agents and the interaction that establishes itself among the single choices. In other words, it studies the modality through which individuals, organizations and enterprises employ scarce resources to produce various types of goods and services, as well the ways in which they are distributed among the subjects (families, enterprises) to satisfy their present or future needs. Economics assume that the choices of the agents are: based on a criteria of rationality aimed to maximize objectives of individual interest (profits, utility, etc.)

5. ECONOMICS PROF. PASCA DI MAGLIANO General Principles: Scarcity Scarcity of resources happens everytime that, given the needs of a society at a given time, the means available to satisfy them are not sufficient. A consequence of scarsity is that society, institutions, organizations and individuals are almost always forced to choose within a limited set of possibilities between objectives and scarce means applicable to alternative uses. Scarce means any resource acquire a value (price)

6. ECONOMICS PROF. PASCA DI MAGLIANO General Principles: Reliable information It is assumed that all the data relative to the prices pf any good and to the available technologies are known and available a-priori both to the entreprices to produce goods, and to the consumers to by them.

7. ECONOMICS PROF. PASCA DI MAGLIANO General Principles: Rationality A fundamental principle on which most of the economic analyses is based on rationality of choices. Rationality assumes that economic agents behavior use standard criteria as it is assumed that everybody is perfectly capable of assessing the costs and benefits following to each available set of alternative scenario.

8. EONOMICS PROF. PASCA DI MAGLIANO Microeconomics and Macroeconomics Economics is articulated in two major sub-disciplines: microeconomicsand macroeconomics MICROECONOMICS emphasizes the individual dimension of the various economic problems (choice of the single consumer, choice of the single firm, the functioning of a given market, the determination of a price, etc.) MACROECONOMIA studies the functioning of the economic system as a whole (national product, consumption, saving, investment, employment and unemployment, inflation etc.)

9. POLITICAL ECONOMY (P-Z) PROF. PASCA DI MAGLIANO Microeconomics The main topics it deals with are: 1. Consumer Choice Theory How a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases 2. Theory of Production How a firm chooses the inputs to be used and in which quantity, as well it decides about production mix 3. Market Structure Characteristics and degree of market power held by sellers and buyers

10. ECONOMICS PROF. PASCA DI MAGLIANO Macroeconomics The main topics it deals with are: 1. National Income How to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc. 2. Employment Causes, typologies (structural, conjonctural), consequences 3. Political economy Fiscal policies (taxes, transfers, public investments) , as it is run by the State Monetary policies (interest rate, currency exchange rate, as it is run by the Central Bank

11. POLITICAL ECONOMY (P-Z) PROF. PASCA DI MAGLIANO Main Schools of Thought Classical School (1600/1700, until the second-half of the 1800s) Main authors : abate ferdinando Galiani, Adam Smith, Thomas Malthus, David Ricardo, Stuart Mill, Karl Marx Economics is a social science that studies questions such as capital accumulation, income distribution Marginalist or Neo-classical School (since 1870 circa) Main authors : Jevons, Walras, Marshall, von Hajek, Friedman, Say, Philips Economics studies how to obtain the best result in the presence of a given amount of resources available

12. ECONOMCS PROF. PASCA DI MAGLIANO Main Schools of Thought (2) Keynesian School (since 1930 circa) Main Thinkers: Keynes, Galbraith, Stiglitz, Dornbusch, Phelps Growth is no longer driven by offer, but rather sustained by demand, even public Development different from growth (since 1950 circa) Main thinkers of development: Lewis, Kuznets, Bauer, Myint, Streeten, Sen, Yunus The problems of the economies in the developing world are concerned not only with economic aspects but also institutional and social ones; unlike growth that is concerned with economics and is concentrated in the developed countries

13. ECONOMICS PROF. PASCA DI MAGLIANO The State and the Market Periodically, in conjunction with major economic events that raise the attention of the public opinion, the scientific and political community interrogate themselves on the role of the free market The discussion aims at understanding the extent and the modalities of State intervention in the market mechanism At the extremes of this debate, there are on the one hand the supporter of State intervention and on the other the liberal oriented economists

14. ECONOMICS PROF. PASCA DI MAGLIANO Comparing the two positions Supporter of State intervention as: outcome by market allocations may not be socially acceptable the market, if left unregulated and free to follow its own rules, does not function well Market supporter most efficient mechanism autghomatic capacity to increase well-being moral qualities (i.e.: meritocracy)

15. ECONOMCS PROF. PASCA DI MAGLIANO Origins of Liberalism: Adam Smith The father of liberalism is considered Adam Smith who published in 1776 “The Wealth of Nations”, the birth of modern economics The Smith’s theories designed the modern economic thought by discovering the superiority of the free market to any other structure Among the many ideas put forward by Smith, one was particularly successful: that of the famous metaphor of the “invisible hand”

16. ECONOMICS PROF. PASCA DI MAGLIANO The « Invisible Hand » The metaphor of the invisible hand is the basis of the liberal view of the market economy The market (as if it were guided by an invisible hand), if left free to operate according to its own rational logic, produces an unexpected result that is also desirable at the same time: it maximizes the wealth of the entire society Such a result is reached without anyone explicitely pursuing a collective goal. Rather, the collective goal is reached thanks to the selfishness of individuals

17. ECONOMICS PROF. PASCA DI MAGLIANO Consequences of the free market The consequence of such an assumption is all too obvious: the market works well only if it is left free (hence the famous expression “laissez faire”) Therefore, the market, not only did not need any help, but if anything, just needs to be freed of obstacles and regulations that might prevent its action It is interesting to note that in this last consideration, one can find an argument that is often made in favour of the market, even nowadays: the market must be left free, it must not be caged

18. economics PROF. PASCA DI MAGLIANO The role of the State in the economy The founder of the theory of the role of the State in the market is John Maynard Keynes, who published in 1936 “General Theory of Employment, Interest and Money” The innovative idea is that the role of the State is fundamental. Indeed, the market can, according to Keynes, produce results that are not optimal, and the State’s role is to help the market The duty of the State is on the one hand to mitigate and control the economic cycles and on the other hand to bring the market to a better situation (especially in terms of unemployment) than the one that the market itself would have been able to realize if operating alone

19. ECONOMICS PROF. PASCA DI MAGLIANO Current Schools of Thought Liberalism monetarists neo-classical school State intervention keynesian school neo-keynesian school

20. ECONOMICS PROF. PASCA DI MAGLIANO Intermediate Positions (1) In reality, the contrast between market and State is played within the realm comprised between the two extreme positions, most radical in their nature. Hereafter are a few examples: Antonio Martino pure liberal and intellectually close to the School of Chicago and to his most notable inspiration Milton Friedman, he trusts the free market as a source of economic and social progress Jagdish Bagwati considers economic integration as positive, provided that the distortions be corrected without introducing duties Anthony Giddens considers that the growing liberalization creates problems that globalization may, instead, contribute to solve Lawrence Summers considers that, within the market, the State must insure the reduction of inequalities through fiscal harmonization

21. ECONOMCS PROF. PASCA DI MAGLIANO Intermediate Positions (2) Amartya Sen e Peter Singer view risks but also positive opportunities in the market dynamics, underlining the necessity for regulation that bring businesses and individuals towards a virtuous path JosephStiglitz argues in favour of the importance of the role, not only of the national State but also of the international institutions in regulating the markets Edward Luttwak e Giulio Tremonti underline the risks that the global market, if it is not properly regulated, might impose upo the workers of the developed world (low salaries, unemployment) and upon the environment John Gray does not believe that the anglo-saxon model of economic liberalism can be applied to systems that are different from the western one historically speaking and advocates for national solutions Paul Krugman(2008 Nobel Prize) underlines the need for global governance to make markets work, and that it be entrusted to the IMF

22. ECONIOMICS PROF. PASCA DI MAGLIANO The market in the face of crisis- origins of the financial crisis 2007/08 Since the 1980s, liberal pressures and the dissemination of new and revolutionary communication technologies have produced an enormous expansion of the financiary activities at the international level. This has been, on the one hand, one of the cornerstones of globalization but on the other it has also brought about the huge expansion of a market less stable and predictable than the real markets. From the 1970s to the 1990s, the volume of trade grew exponentially: suffice it to say that since the early 80s to the mid 90s, the trade volume produced by mutual funds, pension funds and institutional investors has increased tenfold. The conjunction between the expansion of financial wealth, the introduction of new derivative contracts and the growth of the debts of advanced countries has led to finance taking over the real economy. These phenomena are at the origin of the widespread crisis exploding in 2011, slowing down the global economic growth, causing recession and unemployment.

23. ECONOMICS PROF. PASCA DI MAGLIANO Financial Markets Theymovevolumes of wealthbuilt on the trade of derivatives and otherproductsthat are detached from economicactivities, wherebyeveryturbulencegeneratespsychologicalrepercussionsnotonly on the stock marketsbutalso on the loans to businesses They are maneuvered by investmentbanks and big investors, but are a cause of growingconcern for the small savers They are particularlyvolatile, and aboveall, moody: perceptionsof the market compared to hypotheticalscenariosmaygive rise to chainreactions Theyinfluencerealactivitiesthroughbanks and otherfinancialintermediaries

24. ECONOMICS PROF. PASCA DI MAGLIANO Reasons of the actual crisis Many have denounced the end of a financial system exempt of rules of supervision and surveillance On the other hand, the same liberal view, while it encourages private activity, also places it in a balanced interaction between market and institutions The present crisis originates in a guilty lack of governance, representative of the liberal culture that was indulged in during the times in which the strong economic growth facilitated financial activities (Fed, Grennspan) But investment banks, and not only, have taken advantage of this, thrusting on much higher leverage ratios than those of the commercial banks, eventually bringing about the creation of high-risk financial products

25. ECONOMCS PROF. PASCA DI MAGLIANO The actual crisis: potential solutions Public participation in the capitals of banks in crisis, provided it goes to fuel the loan supplies (EU’s approach) Government guarantee both on deposits and interbank loans Lighten the regulatory capital requirements of Basel 2 Appeal to FDI by promoting cooperation agreements with Sovereign Funds Greater flexibility in the budgetary constraints imposed by the Maastricht Treaty, revising a view that is only concerned with budgetary discipline and inflation Boost the demand, by reducing the tax burden on families, in order to send a strong signal to the recovery of purchasing power Review the rules regulating the financial and stock markets in order to fight the speculative designs that preceed the speculation in real terms over the economic and patrimonial consistency of businesses Lower the minimum requirement for OPA in businesses to avoid hostile participations Intervention of the European Stability Mechanism (ESM)