Unit 1 - Aims of Public Policy (1.2 Original Purpose of Economic Policy…
Unit 1 - Aims of Public Policy
1.3 Economic policy in the twentieth century
1.2 Original Purpose of Economic Policy
Individual Activity: Role of the State
There are many complications in calculating GDP, including:
Inflation adjustment (via the 'GDP deflator')
The lack of a market price to use for government services,
Classification of consumption vs investment
Lack of national resource/expertise to collect the data
Political ramifications of historical adjustment to GDP figures
The 'Production Boundary', what counts as output?
In the output approach, the value of every good and service is added up, but goods sold by one business to another have to be removed to avoid double counting, they are termed 'intermediate goods'.
Expenditures approach: GDP = C + I + G + (X - M)
C = Consumption by individuals/households
I = Investment by companies
G = Government expenditures
(X - M) = Exports less imports
GNP covers income from all national entities, some of them abroad, while GDP only measures domestic output.
GDP can be measured as all output, all expenditure or all income (in theory equivalent).
Macroeconomic models emerge e.g. the fiscal multiplier (ratio of change in government spending to change in GDP) . If multiplier > 1, governments should increase spending or cut taxes, if < 1 then austerity policies should be adopted.
World War 2 also fuels demand for accurate measurement of the economy, with Keynes producing his pamphlet
How to Pay for the War
Economists like Colin Clark and Simon Kuznets start producing accurate quarterly reports, but find that the definition of what should be counted as output is controversial and not always compatible with the government's aims especially when it comes to warfare. Kuznets favours a welfare definition and wants to exclude war spending, but loses the argument.
The Great Depression of the 1930's creates a demand for accurate measurements of the economy to monitor progress in resolving the problem.
The neoclassical economist Alfred Marshall does away with this distinction, but measures of national income remain unstandardised.
Adam Smith distinguishes between productive and unproductive activity and this influence the exclusion of service activities from measures of national output.
The early days of national accounting were inspired by taxation capacity for warfare.
Individual Activity: Classical Role of the State
Eight hour workday, banning of child labour, minimum wage laws, protection of workers unions. Antitrust statutes, environment conservation projects and the nationalised health care.
Motivated by poor working conditions (Upton Sinclair's
), progressives introduce labour regulations.
The faulty conception of the labor theory of value, which is solely focused on the supply side and ignores the benefits provided by financial intermediaries and entrepreneurs.
Capitalism sows the seeds of its own destruction by exploiting the workers and encouraging revolution to socialism - collective ownership of the means of production.
The history of all hitherto existing society is the history of class struggles.
American framers design a republic through the Federalist Papers with a focus on separation of powers and avoiding the tyranny of the majority. Also powers are retained de facto to the states and the people. Forming a government that works over a large geographic area is a challenge.
Adam Smith comes up with the 'rules of the game' set by the government to promote social well-being through individual self-interest. Protection from invasion, internal violence and creation of institutions that can only be afforded if everyone contributes.
Rousseau thinks of the state of nature as ideal, the discovery of the general will and any type of government to promote it.
Hume agrees with the balance of powers in a republic. Favours an evolutionary explanation of the role of government to protect an emergent concept of justice (over social contract theory).
Montesquieu's definition of a republic with clear separation between the executive, judiciary and legislative
Locke's sovereign is also bound by the social contract to balance the rights of individuals with the rights of the whole, and may be legitimately overthrown for failing to meet that contract. Liberty vs oppression.
Hobbes 'state of nature' and the mutual agreement to self-preservation as the basis of the state. Favours monarchy. Anarchy vs order.
The rights of subjugated people as well as the Spanish.
Natural rights of individuals against slavery and to private property, against all authority including the Church.
The aim of virtue has limits in the real world and non-virtuous means may justify the ends.
Machiavelli's realism instead of idealism.
The Middle Ages
Magna Carta codifies the protection of rights for citizens with a long-lasting influence.
Aquinas places the Church above the King as the source of virtue with the authority to judge.
St. Augustine's Heavenly City as the domain of the Chuch, and the Earthly City as the domain of the emperor or monarch.
Ecclesiastic authority as a check on the power of the monarch.
Monarchy vs Tyranny
Aristocracy vs Oligarchy
Democracy vs Demagogy
The Direct Democracy of Athens
Plato attacks democracy as the 'rule of the mob' and advocates the monarchical Philosopher-King.
Aristotle's golden mean between monarchy and democracy - the aristocracy.
Democracy with a degree of representation.
The emphasis on 'balance of power' still popular today.
Cicero advocates the 'republic', a mix of monarchy, aristocracy and democracy.