Economics part 2

John Maynard Keynes

John Maynard Keynes

• comes with economic theory known as Demand Side

• first to come with business cycle—economy goes through natural boom and bust

steps a government needs to take to prevent a recession according to demand side economics

1. public work projects—creating demand for certain things which creates domino effect

2. creation of social programs

3. cut taxes—when people don’t have to pay as much tax, they have more money to spend

steps a government needs to take in order to prevent inflation under demand side economics

1. stop work projects

2. cut social programs

3. raise taxes

the two benefits of raising taxes under demand side economics

1. gets rid of the cause of inflation (oversupply of money)

2. either able to pay off the debt or if its already paid off, create a rainy day fund

biggest flaw of Keynesian economics

the government is unwilling to raise taxes even when they’re in a time of prosperity and at risk of inflation

problems that emerged in the US economy in the 1920’s

increase gap between factory owners and workers—wages not keeping up with inflation

two factors that set the price of stock

1. how much money the company is making

2. law of supply and demand

problems with the stock market in the US in the 1920’s

1. companies reporting false profits—no government regulations on the stock market

2. insider trading—the number one rule of the stock market is you have to make sure all your information is accessible. this is holding back information

buying stocks on margin

people taking out large loans from the bank to invest in the stock market because they could not afford it

first event that caused the Great Depression

stock market crash in October 1929, prices of all stocks dropped substantially

issue with the stock market crashing

everyone selling stocks at the same time, high supply and low demand

the main cause of the stock market crash was _______, everyone starts to panic, and withdrawal all their money from the stock market

fear

who did the stock market crash hurt the most

those who bought stocks on margin

• could not repay loans

• banks took their houses

what happened when the banks took people’s home

high supply of homes, low demand (no one could afford to buy them) and the banks could not get their money back

bank runs

people lining up outside banks wanting to withdrawal all of their money

• becomes a self fulfilling prophecy

factors that made the Great Depression worse

1. low wages: even if someone had a job, their wage was too low to buy non necessary products

2. lack of any kind of social safety net: no welfare, pension, or unemployment insurance

3. businesses getting no money from the stock market

4. protectionism

5. dust bowl: incredibly dry during the 30’s

protectionism

countries start to shut down and implement protectionism policies to protect the jobs in their country

• increase tariffs on foreign products

how did protectionism make the great depression worse

all countries were doing this, internation trade was frozen

hoover-villes

groups of these dwellings for the homeless meant to mock US president at the time Herbert Hoover

FDR’s Plan

the New Deal

first part of the New Deal (providing jobs)

1. civilian conservation

2. works progress administration: people hired to beautify cities

3. public works administration: massive construction jobs

4. Tennessee valley authority: specifically focused on energy/electricity

Second part of the New Deal (protecting workers)

1. creation of Securities Exchange Commision

2. creation of FDIC

3. Social Security Act

4. Wagner Act

5. Fair Labor Standards Act

6. the National Recovery Act

job of Securities Exchange Commision

create laws for the stock market and enforce them

job of FDIC

federal government insures that if the bank gets shut down, people’s money would be protected

Social Security Act

for the first time, a social security net would be put in place. government programs to help people through difficult economic times

Wagner Act

made it legal for workers to join a union

Fair Labor Standard Act

protection of the rights of workers. establishment of minimum wage maximum hours, and outlaws child labor

National Recovery Act

set wages and established price control. Businesses no longer free to raise the price of basic goods to whatever they wanted

New deal is an example of __________________

welfare capitalism

two groups that opposed the New Deal

1. business owners

2. US supreme court

why did business owners oppose the New Deal

feared FDR’s involvement in the economy would make things worse (unions allowed, plus all these new taxes to pay for government programs)

why did the US Supreme Court oppose the New Deal

they specifically rules FDR’S attempt of price control as unconstitutional

the Neal Deal transformed the US economy moving from classical liberalism to ________________________________________. These government programs are still in place today.

modern liberalism (welfare capitalism)

aspects of neo conservatism/ supply side economics

1. tax cuts for the rich

2. cuts to social programs

3. privatization

4. deregulation

Supply side economics believed in having a ___________, their job was to fight off inflation

central bank

how do central banks help with inflation

they establish interest rate that they lend to banks, and this can tighten the supply of money

monetarism

controlling the supply of money as the chief method of stabilising the economy.

Britain in the 1970’s

• going through stagflation

• massic government debt

• high unemployment

US economy in the 2000s

• continued to follow supply side economics

• economic disparity like in the 1920’s—lack of government involvement in the economy, specifically in the stock market

causes of the economic meltdown in 2008

• sub prime mortgages

• derivatives

sub prime mortgages

people encouraged to take mortgages that could not qualify for, In fine print, it would say that interest was going in drastically increase. People could not make their mortgage payments and would lose their house

core of the cause of the 2008 economic meltdown

the lack of regulation of the banks

Occupy Wallstreet Movement

left-wing populist movement against economic inequality, corporate greed, and the influence of money in politics

Robert Owens

• came up with welfare state/mixed economy/socialism

• factory owner during the industrial revolution, however he saw the negatives and believed workers could be treated well and that society could provide basic needs

utopian socialism

you can work within the system to improve the conditions in gradual change, and still make money

key ideas to socialism

1. cooperation instead of competition

2. nationalisation of only key industries

3. closing the gap between the rich and the poor

4. universality—social programs apply to everyone equally

socialistic aspects in canada

• everything medically necessary is free (with exception to prescription medicine, eye care, and dental care)

• education—k to 12 is paid for by the government

taxes in Canada

• GST, plus PST/HST in other provinces

• property tax (local tax)

• income tax (provincial and federal tax)

progressive tax system

the more money you make, the more you taxes you pay

regressive tax

tax that is more burdensome to the poor (ex: increasing bus fare pe pying for parking at hospitals)

flat tax

everyone paying the same percent

tax loopholes for businesses

claiming business expenses

purpose of Canada’s social programs

redistribution of the wealth

indicative planning

government comes up with economic plan where the believe the economy is headed

• provide predictions

• companies can either follow or ignore this plan

sweden social programs

• health care: anything medically necessary INCLUDING perscription medicine, dental, and eyecare

• education: k to 12 is paid for AND post secondary + pre school is covered

Karl Marx

• started communism/ command economy

• wrote “The Communist Manifesto”

elements of “The Communist Manifesto”

1. all of history can be explained by the class struggle (rich vs poor)

2. all of society can be divided into two groups: proletariats (workers) and bourgeois (owners)

3. core to capitalism is the exploitation of the workers

4. there will be a violent revolution of the proletariats, and they will take over means of production

5. production no longer based on profit motive, but instead the common good

6. the main goal: economic equality

Russia in the beginning stages of the industrial revolution

• majority uneducated peasant farmers

• subsistence farmers

• led by monarchy, Tzar (Nicholas II)

Vladimir Lenin

• follower of Karl Marx

• slogan “bread, peace, land”

core to Lenin’s ideas

revolution had to be planned and organized, it could not just happen

the first thing that Lenin did when he got into power

sign the treaty of Brest Litovsk

treaty of Brest Litovsk

marked Russia's final withdrawal from World War I and resulted in Russia losing major territorial holdings

1917-1922 Russin Civil War

• Red’s (led by Lenin) vs White’s (in favor of the Tzar returning) vs the Non Russians (wanted independence)

War communism

the implementation of Marx’s udeas, everything was nationalized

main purpose of war communism

support the Red Army

1921

Lenin and the Red’s gained full control of russia and transformed Russia into the USSR

War communism was a ________

disaster

The New Economic Plan

• “one step forward to take two steps forward”

• some aspects of capitalism allowed to exist but once the economy rebounded ther’’s be return to the ideas of Marx

Trotsky’s plan for communism

spread it throughout the world

Stalin’s plan for communism

strengthen it within the USSR first before taking it to other places

first concern of Stalin when he got voted in as the USSR leader

strengthen the army

Why did Stalin ant to industrialize so fast?

feared that capitalist countries would invade the USSR, and they were extremely behind industrially, so if they did the USSR would lose

main goal of Stlain;s economic plans

quickly industrialize

Stalin’s first economic plan

forced collectivization

forced collectivization

the USSR grows a lot of crops, and then sells them to the west and use the money to buy modern machines

problem with forced collectivization

everyone is a subsistence farmer, they do not have exra food. Stalin steals food from his own people to the point of mass starvation

problem with centralized economy

the individual becomes secondary to the state

first group to oppose forced collectivization

kulaks (Russia’s best farmers). they were very successful and had gotten rich under the Tzar. Would burn their crops, and destroy their own livestock rather than give it to Stalin. Lalbed enemy of the state

anyone caught hiding food was called a _______and sent to the gulags

kulak

1932, 1933 Holodomor

direct result of Stalin’s forced collectivization policy, Millions of Ukrainians starved to death becuase of the food stolen from them for the benefit of the communist party

Stalin’s second economic plan

5 year plans

5 year plans

• set goals that specific industries had to meet by the end of the 5 years

• main focus: heavy industries

main goal of the 5 year plans

modernization of the military

Gosplan

government agency that was responsible for ALL economic decisions the USSR

• accountants artificially setting prices

• massive bureaucracy

flaw of Gosplan

if one accountant makes a minor error, the government could lose millions of dollars

after Stalin died, factories stopped metting their quotas, workers had to be _______________________ to meet these quotas

extra incentive (bonuses, vacation time)

in a rush to meet quotas it was ______________________________

quantity over quality

problem with 100% employment

people do not take pride in their work, and you cannot automate/modernize. USSR factories were far behind American ones

three types of farms in the USSR

1. collective farms

2. state farms

3. private plots

collective farms

people work the land that’s owned by the government together. The crops are privately owned but there’s only one buyer (the government). The selling price is very low in order to make food affordable for factory workers

state farms

treated like factories. everything is owned by the government. farmers paid as an hourly worker. These workers do not care about quality because they are getting paid either way

private plot

a; farmers in the USSR were allowed to srt aside small plots of land to grow whatever they wanted and sell it on the side of the road.

• most productive use of land—only 3% but produced 30% of the food

who replaced stalin after he died

bunch of old bolveshaks

stalin’s economic policies were continued after his passing but…

without the brutality

1984 USSR leader

Gorbachev

why was Gorbachev different

• he was young

• wanted to help the people of the USSR

two reforms of Gobachev

1. perestroika: allowed some elements of capitalism to exit

2. glasnost: political freedoms

1991

USSR collapsed, debatable whether it was because of Gorbachev or if it was inevitable. USSR reverted back to Russia

Today Russia…

has both elements of communism and classical liberalism and is not the USSR/communist

stagflation

time of high prices, low emolument, and overall slow economic growth