IVS Bloc 1 Q2 Course Notes

Course Introduction and Explanation

• The course includes theoretical elements defined in the course notes, but examples illustrating the course are presented during the course and based on current events (e.g., Coronavirus, war in Ukraine, energy crisis, etc.).

Course Plan

1. Macro-economics:
   • Economic indicators of the economic circuit and reflection on the economic circuit (economic agents are interdependent).
2. Economic Policy:
   • Left-wing (Keynesian theory) and right-wing (monetarist theory) economic policies.
3. Micro-economics:
   • Productivity of a company and work organizations.
4. Basic Concepts of the Belgian Political Organization:
   • Separation of powers and the different levels of power and their competence.
5. A Society in Transition:
   • Documentary film "DEMAIN" + educational file.
   • Sustainable Development: Documentary film "Bigger than us" + debate.

Definition of Political and Economic Ideologies

• Communism: Political and economic ideology that consists of giving the same to everyone.
• Socialism: Political and economic ideology that consists of giving a minimum to everyone.
• Liberalism: Political and economic ideology that advocates non-intervention of the State in the redistribution of wealth. Furthermore, liberalism is linked to a notion of merit and work.
• Capitalism: Political and economic ideology in which capital, a source of income, and the means of production and exchange do not belong to those who implement them through their own work.

Macro-economics: Economic Indicators of the Economic Circuit

• Indicators: credit, savings, interest rates, taxes, social security contributions, inflation, purchasing power, activity rate, employment rate, unemployment rate.
• Reflection on the economic circuit: economic agents are interdependent.

a) Credit

• Definition: Reserve of money, often granted by a banker and generally linked to a current account. It can be used at any time.
• Lender's obligation: To verify the financial health (solvency) of the borrower with the Central Credit Register each year on the working day following the anniversary date of the credit agreement.

b) Savings

• Definition: The portion of income that—during a given period—is not spent.
• Fate of savings: This sum of money is not destroyed immediately by a consumption expenditure and can be kept in liquid form or be reinvested in the economic circuit in the form of a placement or an investment.

c) Interest Rate

• Definition: The price that the bank charges for lending money.
• Two-way street: The bank also pays interest on savings when it "borrows" money.

d) Social Security Contribution (ONSS)

• Who pays: Every employed or self-employed worker pays social security contributions each month.
• Amount: The employed worker contributes the equivalent of 13.07% of their salary each month.
• Purpose: This contribution is used to finance the budget of the ONSS (National Office of Social Security).
• What ONSS covers: The ONSS is our social security system and ensures the reimbursement of healthcare, pensions, unemployment benefits, family allowances, annual leave for workers, the occupational accident fund, and the occupational disease fund.

e) Income Tax

• Obligation: Each year, the worker must pay tax to the State on their income.
• Collection mechanism: This is partly withheld by the employer from the remuneration (withholding tax).
• Tax variation: This tax on wages varies depending on income and takes into account the family situation of the worker (e.g., number of dependents, household with 1 or 2 incomes, etc.).

f) Inflation

• Definition: General increase in prices.
• Measurement: Inflation is measured by the health index, which is represented by the famous "housewife's basket."
• Comparison: Comparing the same household basket in 2022 and 2023 to see if the total price has evolved positively or negatively.
• Impact of inflation: In case of inflation, economic agents spend less, and the economy is slowed down.
• Salary indexation in Belgium: The federal government practices annual indexation of wages, adjusting wages according to inflation to maintain purchasing power.
• Link between inflation and interest rates: In case of inflation, the interest rate can be used as a regulatory tool.
  • Lowering interest rates on savings encourages economic agents not to leave their money in the bank but to spend it. This helps to revive and support the economy.
  • Low interest rates on credit stimulate many investments, which create jobs.
  • High interest rates on credit encourage savings, which slows down investments and job creation.

g) Purchasing power

• Definition: Quantity of goods that a monetary unit or a given sum allows to acquire.
• Loss of purchasing power: Occurs when prices increase faster than incomes.
• Salary indexation: In Belgium, salaries are linked to the index.

h) Activity Rate

• Definition: The population of working age (24-65 years) on the entire Belgian global population.

i) Employment Rate

• Definition: Total population of working age and employed on the entire active population, i.e., people of working age (24-65 years).

j) Unemployment Rate

• Definition: The total number of unemployed active persons wishing to work (job seekers) and compensated by the Onem on the entire active population.

k) Productivity

• Definition: Productivity is not the production, which is a certain quantity produced. Productivity is a ratio between the cost of production and the time required for production.
• Factor: The main factor is the temporal factor i.e. produce in a certain amount of time.
• Indicator type: Productivity is a micro-economic indicator, i.e. it can be calculated at the level of a company, even if it can also be calculated on average at the level of an economic whole (macro-economic).
• Company activity: The activity of a company is to produce goods (consumer goods, production) and services.

Reflection on the Economic Circuit

• Economic Agents: Economic agents are interdependent.
• Question: Show that in the economic system, when things go wrong, they tend to get worse and worse. Start from "a company goes bankrupt".

1) Household economic agent

• Starting situation: A company goes bankrupt. Then the number of job seekers increases and therefore households have less income and the purchasing power of households decreases.
• Chain reaction: Merchants, therefore, sell less, and companies produce less, and they are forced to reduce their staff. The number of job seekers increases, etc. With each turn of the circuit, the phenomenon amplifies.

2) Bank economic agent

• Starting situation: A company goes bankrupt. Then the number of job seekers increases and therefore households have less income overall, they save less, and are sometimes even forced to resort to more credit.
• Chain reaction: This has the effect that banks have less liquidity (less savings and more credit so they have less money and therefore interest rates increase).

3) Rest of the World economic agent

• Starting situation: Interest rates are rising but companies continue to borrow to invest.
• Chain reaction: In this case, the cost of their borrowing is higher (because the interest rate has increased since banks have less liquidity) and this has the effect that they become less competitive compared to foreign companies and therefore they export less, and companies may find themselves in difficulty.

4) Company economic agent

• Starting situation: Interest rates are rising, and therefore companies no longer borrow because it is too expensive, and their manufacturing tools are not replaced and become outdated by companies that have modernized and have higher productivity.
• Chain reaction: This causes difficulties for these companies (layoffs, possible closure i.e., bankruptcy). The number of job seekers increases, etc. With each turn of the circuit, the phenomenon amplifies.

5) State economic agent

• Starting situation: A company goes bankrupt, and therefore this causes the State's income to decrease and the State's expenses to increase in terms of unemployment benefits.
• Chain reaction: Indeed, the bankrupt company no longer pays taxes and no longer contributes to the ONSS. (As a reminder: The ONSS is our social security system and ensures the reimbursement of healthcare, pensions, unemployment benefits, family allowances, annual leave for workers, the occupational accident fund, and the occupational disease fund).
• Further chain reaction: In addition, workers who have become job seekers no longer pay social security contributions and also pay less tax to the State. The State's expenses increase and the State's revenues decrease (less taxes and less contributions for the ONSS). Indeed, if the number of job seekers increases, the expenses of the ONSS also increase.
• Examples: In 1972, there were 72,000 job seekers to compensate. In 1987, there were 500,000 job seekers to compensate. Today, the European averages revolve around 10% unemployment for some decades.
• State intervention: In times of crisis, to avoid other bankruptcies, the State intervenes to help companies in difficulty (in times of covid, for example).
• State deficit: The State deficit is worsening ($1000 \text{ billions in } 1977$, $5700 \text{ billions in } 1988$, $11000 \text{ billions in } 2000$ and then $275 \text{ billion euros in } 2009$ ($11000 \text{ billion Belgian francs}$) because the euro came into force on 01/01/2002).
• Solutions to fight against deficit:
  • Either reduce spending and therefore less money for civil servants, less allowances for job seekers, disabled people, fewer purchases and therefore a slowdown in economic life.
  • Or increase its revenues and increase taxes for households and for companies. Companies, therefore, see their production costs increase and they become less competitive, they, therefore, export less, this leads to less production and this leads to layoffs.

Economic Policy

Left-Wing (Keynesian) vs. Right-Wing (Monetarist)

Left-Wing Economic Policy (Keynesian)

• Theorist: John Maynard Keynes (1883-1946).
• General Theory: Revive the economy through demand.
• Objective: Oriented towards the ideal of full employment (e.g., creating jobs).
• Central Idea:
  • Based on consumption.
  • Employment is linked to growth.
  • To create jobs, production must be increased.
  • To increase production, demand must be increased by increasing purchasing power (wage indexation).
  • Demand increases, so production increases, which promotes employment and wages.
• Concrete Measures:
  • Practice a social policy (increase low wages and family allowances, etc.).
  • Improve public services (education, army, SNCB, etc.).
  • Hire job seekers to perform public tasks or meet new collective needs.
  • Practice major works (roads, ports, canals, bridges).
• Consequences and Disadvantages:
  • Generates inflation (increasing the volume of the money supply encourages agents to consume and invest, which can generate inflation due to excess demand without an equivalent increase in production, and therefore prices increase).
  • This leads to State debt. The State's budget deficit increases.
  • An increase in purchasing power does not necessarily lead to an equivalent increase in domestic demand.
• Counter Measures:
  • Taxes on Exports
  • Price Freeze

Right-Wing Economic Policy (Monetarist)

• Theorist: Milton Friedman (1912-2006).
• General Theory: Revive the economy through supply.
• Objective: Fight against inflation (e.g., reduce the money supply and increase interest rates).
• Central Idea:
  • Increase the productivity of companies and make them competitive.
  • Decrease production costs (e.g., decrease wages and corporate taxes).
• Concrete Measures:
  • a) Reduction of the cost of the labor factor
    • Suppression of the link between wages and the index (wage indexation jump).
    • Reduction of employer social security contributions.
    • Introduction of precarious status and loss of benefits (interim, part-time work).
  • b) Reduction of the cost of the capital factor
    • Decrease in interest rates.
    • Investment bonuses.
    • Aid to young people who create their company.
    • Tax exemption for Belgian savers who become shareholders of Belgian companies.
  • c) Reduction of the cost of energy
    • Preferential tariff for companies.
    • Bonus for companies that invest in energy saving.
• Consequences and Disadvantages:
  • Austerity (limiting spending) leads to a recession (less purchasing power leads to less consumption, which leads to less production).
  • Companies that have received benefits (bonuses, tax exemptions, etc.) do not necessarily reinvest in our country (problem of relocation).

Company Productivity and Work Organizations

• Definition: Productivity is not production, which is a certain quantity produced. Productivity is a micro-economic indicator, i.e., it can be calculated at the level of a company and macro-economic because it can also be calculated on average at the level of an economic whole.
• Activity of the Company: The activity of a company is to produce goods (consumer goods, production) and services.
• Factors of Production: To produce, the company will use variable technical capital and fixed technical capital.
  • Variable Technical Capital:
    • Work (labor).
    • Raw materials.
    • Production goods.
    • Energy.
  • Fixed Technical Capital:
    • Machines, tools.
    • Buildings.

How to Maximize productivity and minimize costs?

Acting on the Labor Factor:

• Adam Smith: Division of labor into small, simple, and repeated gestures.
• Taylor (Taylorism): Scientific Organization of Work (OST).
  • Pyramidal hierarchy (those at the bottom of the hierarchy are exempt from thinking).
  • The organization is military, and workers are considered passive instruments.
  • Workers suffer alienation like a malfunctioning robot.
  • Goal: To increase productivity at work and strengthen the divisions of labor.
  • Taylor studied at Harvard but dropped out to work in the factory.
  • He wants to rationalize work and studies how to work to improve performance. Introduced his science to the workshop (modernizes).
  • Advocates for on-the-ground study (practice) compared to studying in books (theory).
  • Practicing is how he develops his theory, which leads to the elimination of systematic loafing.
  • Workers can afford to loaf because, unlike bosses, they know how long the task takes to be completed and how it should be done.
  • Taylor entrusts the design of methods to outside experts and They analyze the work to deduce the "One Best Way". This gives rise to two functions (separation of know-how):
    • Those at the top study how to work, and those at the bottom execute the work (vertical division of labor).
  • Taylor also insists on collaboration and dialogue between workers and management.
  • Management will choose a worker who has the best performance and encourage them to reach a higher goal.
    • If they reach it, they will get a 60% wage increase compared to other workers.
    • This allows management to motivate other workers to become the "best worker" and reach the goal and have that extra percentage.
• Ford (Fordism).
  • Fordism is a continuation of Taylorism but marks a break with it.
  • It is a new materialization of the organization of work.
  • The Fordian device consists of:
    • Fragmentation of Tasks:
      • Intensified and systematized.
      • Inscribed in the layout of the posts and the installations themselves.
    • Standardization:
      • Parts.
      • Machines.
      • Products.
    • Hunt for downtime:
      • Between workstations.
      • Time to transfer parts for a quasi-continuous sequence (presence of an automatic conveyor that dictates the pace and represents a new form of hierarchy).
    • The chain is the mechanism by which all tasks are successively linked.
    • The pace is dictated by the automatic conveyor (piece transfer device):
      • The worker is subject to the automatic rhythm.
      • The circulation of parts and materials ensures a gain in time.
    • The goal is to find a balance of the chain.
    • Important Rules:
      • The succession of operations from the entry of the raw material to the completion of the finished product.
      • All this must tend towards continuity.
    • Bring work to the worker and not the other way around, "we don't pay a worker to walk".
    • Maximum fragmentation: the one who puts on a bolt doesn't put on the nut, the one who puts on a nut is not the one who tightens it.
    • This organization of production is only suitable for mass production that requires standardized and interchangeable parts.
    • Ford gave his clients the option to have any color car they wanted, so long as it was black.
    • Economy of Scale:
      • Allowed for a reduction in prices and supported wage increases.
      • The combination of these 2 factors supports the economic recovery of the moment.
    • Collective agreements of work: They made it possible to establish a compromise between wages and mass consumption.
    • Automation of production also facilitated the link between mass consumption and mass production.
    • This formula is quite rigid because it depends on constant demand, otherwise, production becomes obsolete.
    • Weaknesses of Fordism:
      • Diversification of products.
      • The scarcity of demand is the worst enemy of Fordism because it will generate an accumulation of stocks.
    • Henry Ford had the chance to benefit from an abundant and cheap manual labor which made considerable cuts of costs in personnel and keep from falling short of manpower.
• Elton Mayo: The Hawthorne Effect
  • Experiments conducted between 1924 and 1932 at Hawthorne in the Western Electric Company factory; the Hawthorne effect will become a founding event.
  • The starting point is the paradoxical phenomenon: the lighting of a workshop is increased, and it is noted that productivity increases in the group studied but also in the control group where the lighting does not vary.
  • Researchers found that the control group adjusted their behavior to that of the experimental group.
  • Productivity increased in the control group when the lighting was decreased, and productivity does not depend only on the physical aspects of the work.
  • Mayo and other researchers then followed the first industrial sociology experiment: The Ready Assembly Test Room.
    • Relay assembly is repetitive work, and all the workers perform the same operations and the same tasks.
    • Five volunteers are selected because of their affinities, and this group is subjected to the permanent presence of an observer, and the experiment varies different parameters (the salary system, the number and duration of the break, and the daily or weekly duration of work).
    • The productivity of the workers increases all the time even when the working conditions deteriorate, it does not evolve despite certain improvements. With the crisis and the departure of certain workers, the climate deteriorates, and the performance decreases.
    • Interpreting increases in productivity the salary on the scale of a small group is the best incentive to performance rather than the collective bonus on the scale of the workshop.
    • Experimental conditions modify the situation of the workers, their attitudes, and their interpersonal relations.
    • Generalizing the opposition between formal and informal organization, Mayo and his collaborators make it a reading grid of the company as "lower social code".
    • The company fulfills two functions: a technical-technical function (production according to requirements of cost, profit and technical efficiency) and socio-organizational function (cooperation based on interactions in groups and between groups).

Acting on the Capital Factor

• By Investing (hoping that it pays more).
  • Definition: Increase in fixed economic capital such as, for example, expanding buildings and/or acquiring new machines that are reusable several times. This investment must be depreciated over years.

1) Rationalization Investment:

• Historical Example:
  • The introduction of computer tools in the 70s).
  • The digitalization of companies is also a great example of rationalization investment.
  • The idea is to produce the same thing, but this often causes job losses instead of creating them.
  • European companies were obliged to introduce IT into the production process. This was essential for survival.
• Rationalize, is to restructure, modernize.
• The worker serves the machine.
• Informatization, automation, robotization, restructuring, and relocation are all examples of rationalization.
• These investments aim to reduce production costs (same quantity of production at the lowest cost).

2) Expansion Investment

• Simply seeks to produce more and this has the consequence of creating employment.
• Production capacity increases and involves the creation of new subsidiaries (multinationals) and the creation of new products.

Basic Concepts of the Organization of Belgian Politics

• Separation of powers and the different levels of power and their competence.

History

• Belgium becomes independent in 1830.
• Causes of Independence:
  • Was led before independence by William I.
  • The Belgian territory belonged to the Netherlands.
  • William I governs with great authority, and the people have few freedoms (censorship, Dutch administration, imposed language, etc.).
  • Added to this, the rise of nationalism all over Europe leads the Belgians to revolt.
• October 4, 1830: The provisional government that was formed proclaims the independence of the Belgian provinces even as the troops of the Netherlands evacuate the territory.
• November 18, 1830, the National Congress proclaims the independence of the Belgian people, which is recognized by the London conference on December 26, 1830.
• King: At the creation of the Belgian states, it is Leopold of Saxe Cobourg Gotha who becomes king.
• Adoption of monarchic system: The country adopts the constitutional monarchy and establishes a unitary state of parliamentary type (with a parliament) with a decentralization towards the provinces and the municipalities.
• Parliament: The Parliament is composed of two Assemblies the Senate and the Chamber of Representatives.
• Constitution: A set of rules that say how the country should be governed. It defines and limits the powers of the king. Besides, the king must swear an oath to remain faithful to the Constitution.
• Proclamations of the Constitution:
  • Equality of Belgians before the law.
  • Individual liberty.
  • Freedom of worship, opinion, education, press, assembly, use of languages.
  • Separation of Powers (legislative power = parliament, executive power = government and judicial power).

Reforms:

• The country has evolved towards a federal structure (between 1970 and 1993).
• Five state reforms were needed to get there (in 1970, 1980, 1988-89, 1993 and 2001).
• Reasons for federalization:
  • Existence within the Belgian State of two major communities each aspiring to greater autonomy for cultural reasons in Flanders, economic reasons in Wallonia and, on the other hand, growing linguistic demands, would transform Belgium from a unitary State into a federal State as we know it today.

Society in Transition and Sustainable Development

• Documentary film "DEMAIN" + educational file / Sustainable Development (Documentary film "Bigger than us") + debate

The Movie "Demain"

• The film's structure: the around 5 chapters covering parts of our everyday life, proposing solutions on each aspect.

The Findings

Anthony Barnosky and Elizabeth Hadly

• Both work in environmental sciences.
• In 2012 participated with other scientists in a workshop to study climate change.
• Study published on Nature under the name “Approaching a state shift in Earth's biosphere >>.
• Findings: If we don't change we will assist to the collapse of ecosystems at the horizon 2040-2100
• Humanity has become a geologic power,

Agriculture

Vandana Shiva

• Indian activist for food sovereignty and the defense of biodiversity of all forms.
• Fights against biotechnologies on the destin of Indian peasants.
• Her foundation Navdanja (<< nine seeds », in Hindi) has assisted 120 communities with the set up of their seed bank and trained more than 500.000 peasants to the biological agriculture, their rights to seeds and the alimentary security.
• Feminist.

Charles and Perrine Herve-Gruyer

• Bec Hellouin farm.
• Farm based on permaculture (use the nature as a reference).
• No machinery, gas or phytosanitary products.
• Produce a lot of food and quality while creating humus, protecting biodiversity, stocking carbon in the soils and trees.

Olivier de Schutter

• Jurist and professor of International Rights.
• Has been the rapporteur of the United Nations about the alimentary rights.

Energy

Thierry Salomon

• Energetic engineer and cofounder of the Negawatt Institute.
• Promotes the energy saving.
• Believes the sun and wind should be used more than gas, petroleum and uranium.

Robert Reed

• Spokesman of the Recology cooperative, the zero-wastes in San Francisco
• Aim to recycle at 100% in 2020.
• Implemented with good habits from the citizens and taxes for bad habits (100-1000 dollars).

Jan Gehl

• Architect and Urbanist.
• Revitalisation of publics spaces, sidewalks in old cities and promotes the use of bike and public transport.

Economy

Rub Hopkins

• Professor in Permaculture.
• Founder of a movement on transition cities with the goal to reduce the dependence on petroleum for the citizens.

Emmanuel Druon

• CEO of Pocheco (company specialized in enveloppes).
• Applies principles of “ecolonomy” guided by three habits development, respecting the environment , respecting the wage-earners while promoting profits

Bernard Lietaer

• Economist who defends complementary currency especially regional currencies.
• Convinced by the correlation between the currency used and the social and geographic landscape.

Democracy

David Van Reybrouck

• His proposal is to introduce sorting as it was done in the old Greek Civilization.

Elango Rangaswamy

• Ex mayor of Kuttambakkam (India).
• Created housing for the poors, fixed sanitation services, routes and lightning, and now 100% of the children are schooled

Education

Kari Luuhivuuri

• Director of Kirkkojarvi Comprehensive School.
• Believes his philosophy of School is simple, learning children how to learn and preparing them to life.
• 43% of the students come from immigration, school has no standard tests and teachers are free to teach what they see fit, because Kari believes it helps the children better.