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1

SECTION

ONE

EARLY ECONOMIC THOUGHT

1.

Ancient Economic Thought

1.
1

Introduction

Main articles:
Ancient economic thought
,
Chanakya
,
Qin Shihuang
,
Wang Anshi
,
Muqaddimah
, and
Arthashastra

The earliest discussions of economics date back to ancient times (e.g.
Chanakya
's
Arthashastra

or
Xenophon
's
Oeconomicus
). Back then, and until the indu
strial revolution,
economics was not a separate discipline but part of philosophy. In
Ancient Athens
, a
slave based society but also one developing an embryonic model of democr
acy,
[4]

Plato
's
book
The
Republic

contained references to specialisation of labour and production. But it
was his pupil Aristotle that made some of the most familiar arguments, still in economic
discourse today.

1.
2

Thought History of Economic

The
history of economic thought

deal
s with different thinkers and theories in the subject
that became
political economy

and
economics

fr
om the
ancient world

to the present day.
It encompasses many disparate
s
chools of economic thought
. Greek writers such as the
philosopher
Aristotle

examined ideas about the "art" of wealth acquisition and questioned
whether property is best left in private o
r public hands. In medieval times,
scholars

such
as
Thomas Aquinas

argued that it was a
moral

obligation of businesses to sell goods at a
just price
.

British
philosopher

Adam Smith

is often cited as the father of modern economics for his
treatise

The Wealth of Nations

(1776). His ideas built upon a considerable body of work
from predecessors in the eighteenth century particularly the
Physiocrats
. His book
appeared on the eve of the
Industrial Revolution

with associated major changes in the
economy
.
[3]

Smith's successors included such
classical economists

as the
Rev. Thomas
Malthus
,
Jean
-
Bapti
ste Say
,
David Ricardo
, and
John Stuart Mill
. They examined ways
the landed, capitalist and la
bouring classes produced and distributed national output and
modeled

the effects of
population

and
international trade
. In London,
K
arl Marx



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castigated the capitalist system, which he described as exploitative and alienating. From
about 1870,
neoclassical economics

attempted to erect a posit
ive, mathematical and
scientifically grounded field above normative politics.

After the wars of the early twentieth century,
John Maynard Keynes

led a reaction agains
t
what has been described as governmental abstention from economic affairs, advocating
interventionist fiscal policy to stimulate economic demand and growth. With a world
divided between the
capitalist

first world, the
communist

second world, and the poor of
the
third world
, the
post
-
war consensus

broke down. Others like
Milton Friedman

and
Friedrich von Hayek

warned of
The Road to Serfdom

an
d
socialism
, focusing their
theories on what could be achieved through better
monetary policy

and deregulation. As

Keynesian

policies seemed to falter in the 1970s there emerged the so called
New
Classical

school, with prominent theorists such as
Robert Lucas

and
Edward Prescott
.
Governmen
tal economic policies from the 1980s were challenged, and
development
economists

like
Am
artya Sen

and
information economists

like
Joseph Stiglitz

introduced
new ideas t
o economic thought in the twenty first century.

1.3
Aristotle

Main articles:
Aristotle
,
Politics (Aristotle)
, and
Nicomachean Ethics

Plato

and his pupil,
Aristotle
, have had an enduring effect on
Western
philosophy
.Aristotle's
Politics

(c.a. 350 BC) was mainly concerned to analyse different
forms of a state (
monarchy
,
aristocracy
,
constitutional government
,
tyranny
,
oligarchy
,
democracy
) as a critique of Plato's advocacy of a ruling class of "philosopher
-
kings". In
particular for economists, Plato had drawn a blueprint of society on t
he basis of common
ownership of resources. Aristotle viewed this model as an oligarchical
anathema
.







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In
Politics

Book I, Aristotle discusses the general nature of households and market
exchanges. For him there is a certain "art of acquisition" or "wealth
-
getting". Money itself
has the sole purpose of being a medium of exchange, which means on its own "it is
worthles
s... not useful as a means to any of the necessities of life".
[5]

Nevertheless, points
out Aristotle, because the "instrument" of money is the same many people are ob
sessed
with the simple accumulation of money. "Wealth
-
getting" for one's household is
"necessary and honourable", while exchange on the retail trade for simple accumulation is
"justly censured, for it is dishonourable".
[6]

Aristotle disapproved highly of
usury

and also
cast scorn on making money through
monopoly
.
[7]

















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4

SECTION

TWO

CLASSICAL POLITICAL ECONOMY

2.
Classical E
conomics

Main article
:
Classical economics

See also:
Thomas Edward Cliffe Leslie
,
Walter Bagehot
,

and
Thorold Rogers

The
classical economists

were referred to as a group for the first time by
Karl Marx
.
[26]

One unifying part of their theories was the
labour theory of value
, contrasting to value
deriving from a
general equilibrium

of supply and demand. These economists had

seen
the first economic and social transformation brought by the Industrial Revolution: rural
depopulation, precariousness, poverty, apparition of a working class. They wondered
about the population growth, because the
demographic transition

had begun in Great
Britain at that time. They also asked many fundamental questions, about the source of
value, the causes of economic growth and the role of money in the ec
onomy. They
supported a free
-
market economy, arguing it was a natural system based upon freedom
and property. However, these economists were divided and did not make up a unified
current of thought.

2.1
Jeremy Bentham

Main article:
Jeremy Bentham


The aim of
legal

policy must be to decrease misery and suffering so far as possible while
pr
oducing the greatest happiness for the greatest number.
[28]

Bentham even designed a
comprehensive methodology for the calculation of aggregate happiness in society t
hat a
Jeremy Bentham

believed in "the greatest good for the greatest number".

Jeremy
Bentham (1748
-
1832) was perhaps the most radical thinker of his time,
and developed the concept of
utilitarianism
. Bentham was an
atheist
, a
prison
reformer
,
animal rights

activist, believer in
universal suffrage
,
free speech
,
free
trade

and
health insurance

at a time when few dared to argue for any. He was
schooled rigorously from an early age, finishing university and being called to the
bar at 18.
His first book,
Fragment of Government

(1776) published anonymously
was a trenchant critique of
William Blackstone
's
Commentaries of the laws of
England
. This gained wide success until it was found that the young Bentham, and
not a revered Professor had

penned it. In
The Principles of Morals and Legislation

(1791) Bentham set out his theory of utility.




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particular law produced a
felicific calculus
.
[29]

Society, argued Benth
am, is nothing more
than the total of individuals,
[30]

so that if one aims to produce net social good then one
need only to ensure that more pleasure is experienced
across the board than pain,
regardless of numbers. For example, a law is proposed to make every bus in the city
wheel chair

accessible, but slower moving as a result than its
predecessors

because of the
new design
. Millions of bus users will therefore experience a small amount of displeas
ure
(or "pain") in increased traffic and journey times, but a minority of people using wheel
chairs will experience a huge amount of pleasure at being able to catch public transport,
which outweighs the aggregate displeasure of other users. Interpersonal c
omparisons of
utility were allowed by Bentham, the idea that one person's vast pleasure can count more
than many others' pain. Much criticism later showed how this could be twisted, finstance,
would the
felicific calculus

allow a vastly happy dictator to outweigh the dredging misery
of his exploited populus? Despite Bentham's methodology there were severe obstacles in
measuring people's happiness.















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2.2

Jean
-
Baptiste Say

Main article:
Jean
-
Baptiste Say














Say's law
, that supply always equals demand,
was unchallenged
until the 20th century.

Jean
-
Baptiste Say

(1767
-
1832) was a Frenchman, born in
Lyon

who helped to popularise Adam Smith's work in France.
[31]

His
book,
A Treatise on Political Economy

(1803) contained a brief
passage, which later became orthodoxy i
n political economics until
the
Great Depression

and known as
Say's Law

of markets. Say
argued that
there could never be a general deficiency of demand
or a general glut of commodities in the whole economy. People
produce things, said Say, to fulfill their own wants, rather than
those of others. Production is therefore not a question of supply,
but an in
dication of producers demanding goods. Say agreed that
a part of the income is saved by the households, but in the long
term, savings are invested. Investment and consumption are the
two elements of demand, so that production
is

demand, so it is
impossible

for production to outrun demand, or for there to be a
"general glut" of supply. Say also argued that money was neutral,
because its sole role is to facilitate exchanges: therefore, people
demand money only to buy commodities. Say said that "money is
a vei
l". To sum up these two ideas, Say said "products are
exchanged for products". At most, there will be different economic
sectors whose demands are not fulfilled. But over time supplies
will shift, businesses will retool for different production and the
mar
ket will correct itself. An example of a "general glut" could be
unemployment, in other words, too great a supply of workers, and
too few jobs. Say's Law advocates would suggest that this
necessarily means there is an excess demand for other products
that
will correct itself. This remained a foundation of economic
theory until the 1930s. Say's Law was first put forward by
James
Mill

(1773
-
1836) in English, and was advocated by
David Ricardo
,
Henry Thornton
[32]

and
John Stuart Mill
. However two political
economists, Thomas Malthus and
Sismondi
, w
ere
unconvinced
.




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2.
3

Thomas Malthus

Malthus

cautioned law makers on the effects of poverty reduction policies.

Main article:
Thomas Malthus



2.
4

David Ricardo

Main article:
David Ricardo


To postpone the steady state, Ricardo advocates
promoting

international trade to import
wheat at a low price to fight landowners. The
Corn Laws

of the UK had been passed in
1815, setting

a fluctuating system of tariffs to stabilise the price of
wheat

in the domestic
market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes
of farmers, would mere
ly produce a rise in the prices of rents that went into the pockets of
Thomas Malthus

(1766
-
1834) was a
Tory

minister in the United Kingdom
Parliament who, contrasting to Bentham, believed in strict government
abstention from social ills.
[33]

Malthus devoted the last chapter of his book
Principles of Political Economy

(1820) to rebutting Say's law, and argue
d that the
economy could stagnate with a lack of "effectual demand".
[34]

In other words,
wages if less than the total costs of production cannot purchase the total o
utput
of industry and that this would cause prices to fall. Price falls decrease incentives
to invest, and the spiral could continue indefinitely. Malthus is more notorious
however for his earlier work,
An Essay on the Principle of Population
. This
argued that intervention was impossible because of two factors. "Food is
necessary to the existence of man," wrote Malthus. "The pass
ion between the
sexes is necessary and will remain nearly in its present state," he added,
meaning that the "power of the population is infinitely greater than the power in
the Earth to produce subsistence for man."
[35]

Nevertheless growth in population
is checked by "misery and vice". Any increase in wages for the masses would
cause only a temporary growth in population, which given the constraints in the
supply of t
he Earth's produce would lead to misery, vice and a corresponding
readjustment to the original population.
[36]

However more labour could mean
more economic growth, e
ither one of which was able to be produced by an
accumulation of capital.




Ricardo

is renowned for his law of
comparative advantage
.

David Ricardo

(1772
-
1823) was born in London. By the age of 26, he had
become a wealthy stock market trader and bought himself a cons
tituency seat in
Ireland to gain a platform in the
British parliament's

House of Commons
.
[37]

Ricardo's best known work is his
Principles o
f Political Economy and Taxation
,
which contains his critique of barriers to international trade and a description of
the manner the income is distributed in the population. Ricardo made a
distinction between the workers, who received a wage fixed to a lev
el at which
they can survive, the landowners, who earn a rent, and capitalists, who own
capital and receive a profit, a residual part of the income.
[38]

If populatio
n grows,
it becomes necessary to cultivate additional land, whose fertility is lower than
that of already cultivated fields, because of the law of decreasing productivity.
Therefore, the cost of the production of the wheat increases, as well as the price
o
f the wheat: The rents increase also, the wages, indexed to inflation (because
they must allow workers to survive) too. Profits decrease, until the capitalists can
no longer invest. The economy, Ricardo concluded, is bound to tend towards a
steady state
.




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landowners.
[39]

Furthermore, extra labour would be employed leading to an increase in the
cost

of wages across the board, and therefore reducing exports and profits coming from
overseas business. Economics for Ricardo was all about the relationship between the
three "factors of production":
land
,
labour

and
capital
. Ricardo demonstrated
mathematically
that the
gains from trade

could outweigh the perceived advantages of
protectionist policy. The idea of
comparative advantage

suggests that even if one country
is inferior at producing all of its goods than another, it may still benefit from opening its
borders since the inflow of goods produced more cheaply than at home, produces a
gain
for domestic consumers.
[40]

According then to Ricardo, this concept would lead to a shift
in prices, so that eventually England would be producing goods in whic
h its comparative
advantages were the highest.

2.
5

John Stuart Mill


R
emy Bentham, wrote the most authoritative economics text of his time.

Mill, weaned on the philosophy of Je


Main articles:

Principles of Political Economy

and
John Stuart Mill






John Stuart Mill

(1806
-
1873) was the dominant figure of political economic
thought of his time, as well as being a
Member of Parliament

for the seat of
Westminster
, and a leading political philosopher.
Mill was a child prodigy,
reading Ancient Greek from the age of 3, and being vigorously schooled by
his father
James Mill
.
[41]

Jeremy Bentham

was a close mentor and family
friend, and Mill was heavily influenced by
David Ricardo
. Mill's textbook, first
published in 1848 and titled
Principles of Political Economy

was essentially a
summary of the economic wisdom of the mid nineteenth century.
[42]

It was
used as the standard texts by most univer
sities well into the beginning of the
twentieth century. On the question of
economic growth

Mill tried to find a
middle ground between Adam Smith's view of ever expanding opp
ortunities
for trade and technological innovation and Thomas Malthus' view of the
inherent limits of population. In his fourth book Mill set out a number of
possible future outcomes, rather than predicting one in particular. The first
followed the Malthusi
an line that population grew quicker than supplies,
leading to falling wages and rising profits.
[43]

The second, per Smith, said if
capital accumulated faster than p
opulation grew then
real wages

would rise.
Third, echoing
David Ricardo
, should capital accumulate and popul
ation
increase at the same rate, yet technology stay stable, there would be no
change in real wages because supply and demand for labour would be the
same. However growing populations would require more land use, increasing
food production costs and theref
ore decreasing profits. The fourth alternative
was that technology advanced faster than population and capital stock
increased.
[44]

The result would be a prospering
economy. Mill felt the third
scenario most likely, and he assumed technology advanced would have to
end at some point.
[45]

But on the prospect of continuing economic

growth, Mill
was more ambivalent.




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"I confess I am not charmed with the ideal of life held out by those who think that the
normal state of human beings is that of struggling to get on; t
hat the trampling, crushing,
elbowing, and treading on each other's heels, which form the existing type of social life,
are the most desirable lot of human kind, or anything but the disagreeable symptoms of
one of the phases of industrial progress. Mill is

also credited with being the first person to
speak of supply and demand as a relationship rather than mere quantities of goods on
markets,
[47]

the concept of
opportunity cost

and the rejection of the
wage fund doctrine
.




















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SECTION

THREE

MARXIST ECONOMICS

3.
Marxian Economics

Main article:
Marxian E
conomics


3.1
Context

Main articles:
Robert Owen
,
Pierre Proudhon
, and
Friedrich Engels







Karl Marx provided a fundamental critique of classical economics, based on the
labour theory of value
. Just as the term "mercantilism" had been coined and
popul
arised by its critics, like
Adam Smith
, so was the term "capitalism" or
Kapitalismus

used by its dissidents, primarily
Karl Marx
. Karl Marx (1818
-
1883)
was, and in many ways still remains the pre
-
eminent socialist economist. His
combination of political theory represented in the
Communist Manifesto

and the
dialectic theory of history inspired by
Friedrich Hegel

provided a revolutionary
critique of
capitalism

as he saw it in the nineteenth century. The
socialist

movement that he joined had emerged in response to the conditions of people
in the new industrial era and the classical economics which accompanied it. He
wrote his magnum opus
Das
Kapital

at the
British Museum
's library.



With Marx,
Friedrich Engels

coauthored the Communist Manifesto, and the second
volume of
Das Kapital
.

Robert Owen

(1771
-
1858) was one i
ndustrialist who determined to improve the
conditions of his workers. He bought textile mills in
New Lanark
,
Scotlan
d

where he
forbade children under ten to work, set the workday from 6 a.m. to 7 p.m. and
provided evening schools for children when they finished. Such meagre measures
were still substantial improvements and his business remained solvent through
higher pro
ductivity, though his pay rates were lower than the national average.
[49]

He
published his vision in
The New View of Society

(1816) during the passage of the
Factory Acts
, but his attempt from 1824 to begin a new utopian community in
New
Harmony, Indian
a

ended in failure. One of Marx's own influences was the French
philosopher
Pierre Proudhon
. While deeply critical of capitalism, he also objected to
those contemporary socia
lists who idolized association. In his book
The Philosophy
of Poverty

Proudhon made a political economic attack on the classical
subsistence
theory of wages
.(1846)
[50]

In his book
What is Property?

(1840) he argue that
property is
theft
, a different view than the classical
Mill
, who had written that "partial
taxation is a mild form of robbery".
[51]

However, towards the end of his life, Proudhon
modified some of his earlier views. In the posthumously published
Theory of
Property
, he argued that "property is t
he only power that can act as a counterweight
to the State."
[52]

Friedrich Engels
, a published radical author, released a book titled
The Condition of the Working Class in England

in 1844
[53]

describing people's
positions as "the most unconcealed pinnacle of social misery in our day." After Marx
died, it was Engels that completed the second v
olume of
Das Kapital

from Marx's
notes.




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3.2
After Marx


3.3 Neoclassical T
hought

Main articles:
Neoclassical E
conomics
,
Marginalism
, and
Mathematical E
conomics

See also:
Leon Walras
,
Alexander del Mar
,
John Bates Clark
,
Irving Fisher
,
William
Ashley (economic historian)
,
Enrico Barone
,

and
Maffeo Pantaleoni
.

In the 1860s, a revolution took place in economics. Th
e new ideas were that of the
Marginalist

school. Writing simultaneously and independently, a Frenchman (
Leon

Walras
), an Austrian (
Carl Menger
) and an Englishman (
Stanley Jevons
) were developing
the theory, whi
ch had some antecedents. Instead of the price of a good or service
reflecting the labor that has produced it, it reflects the marginal usefulness (utility) of the
last purchase. This meant that in equilibrium, people's preferences determined prices,
includ
ing, indirectly the price of labor.

This current of thought was not united, and there were three main schools working
independently. The
Lausanne school
, whose two main repre
sentants were Walras and
Vilfredo Pareto
, developed the theories of
general
equilibrium

and
optimality
. The main
written work of this school was Walras'
Elements of Pure Economics
. The
Cambridge
school

appeared with Jevons'
Theory of Political Economy

in 1871. This English school
has developed the theories of the partial equilibrium and has insisted on markets' failures.
The main representatives were
Alfred Marshall
,
Stanley Jevons

and
Arthur Pigou
. The
Vienna school

was made up of Austrian economists Menger,
Eugen von Böhm
-
Bawerk

and
Friedrich von Wieser
. They developed the theory of capital and has tried to explain
Beatrice Webb

helped establish the
London School of Economics
.

Main articles:
Karl Kautsky
,
Rosa Luxembourg
,
Beatrice Webb
,
John
A. Hobson
,
R. H. Tawney
, and
Paul Sweezy

The first volume of
Das Kapi
tal

was the only one Marx alone published.
The second and third volumes were done with the help of
Friedrich
Engels

and Karl Kautsky, who had become a friend of Engels, saw
through the publication of volume four.

Marx had begun a tradition of economists who concentrated equally on
political affairs. Also in Germany,
Rosa Luxembourg

was a member of
the
SPD
, who later turned towards the
Communist Party

because of
their stance against the
First World War
.
Beatrice Webb

in England
was a socialist, who helped found both the
London School of
Economics

(LSE) and the
Fabian Society
.




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the presence of economic crises. It ap
peared in 1871 with Menger's
Principles of
Economics
.

3.
3

Marginal U
tility

Main articles:
Marginal utility theory
,
Carl Menger
,
Stanley Jevons
, and
Leon Walras


3.
4

Mathematical A
nalysis

Main articles:
Vilfredo Pareto
,
Alfred Marshall
,
Francis Edgeworth
, and
Johann Heinrich
von Thünen





Alfred Marshall is also credited with an attempt to put economics on a more mathematical
footing. He was the first Professor of Economics at the
University of

Cambridge

and his
work,
Principles of Economics
[56]

coincided with the transition of the subject from
"
political economy
" to his favoured term, "
economics
". He viewed maths as a way to
simplify economic reasoning, though had reservations, revealed in a letter to his student
Arthur Cecil Pigou
.

Early attempts to explain away the periodical crises of which Marx had
spoken were not initially as successful. After finding a statistical correlation
of
sunspots

and business fluctuations
and following the common belief at
the time that sunspots had a direct effect on weather and hence agricultural
output, Stanley Jevons wrote,

"when we know that there is a cause, the variation of the solar activity,
which is just of the nature to affect th
e produce of agriculture, and which
does vary in the same period, it becomes almost certain that the two series
of phenomena


credit cycles and solar variations

are connected as effect
and cause.
[55]


Alfred Marshall

wrote the main alternative textbook to John Stuart Mill of the day,
Principles of Economics

(1882)

Vilfredo Pareto (1848
-
1923) was an Italian economist, best known for developing
the concept of the circumstance under which nobody need be made worse off,
and nobody better off through
wealth redistribution
. When this situation exists,
the economy is said to be "
Pareto efficient
". Pareto devised math
ematical
representations for this optimal resource allocation, which when represented on
a graph would yield a curve. Different points along the curve represent different
allocations, but each would be optimally efficient. Rather than using the
persuasive
language of classical economists like Mill, the Pareto efficient curve
could be represented with a precise mathematical formula
.




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(1) Use mathe
matics as shorthand language, rather than as an engine of inquiry.


(2) Keep to them till you have done.

(3) Translate into English.

(4) Then illustrate by examples that are important in real life.

(5) Burn the mathematics.

(6) If you can’t succeed in
4, burn 3.

This I do often.

Coming after the marginal revolution, Marshall concentrated on
reconciling the classical labour theory of value, which had concentrated on the supply
side of the market, with the new marginalist theory that concentrated on the
consumer
demand side. Marshall's graphical representation is the famous
supply and demand

graph,
the "Marshallian cross". He insisted it is the intersection of
both

suppl
y
and

demand that
produce
equilibrium

of price in a competitive market. Over the long run, argued Marshall,
the costs of production and the price of goods and services tend towards the lowest point
consistent with continued production.
Arthur Cecil Pigou

in
Wealth and Welfare

(1920
)

insisted on the existence of
market failures
. Markets are inefficient in case of
economic
exte
rnalities
, and the State must interfere. However, Pigou retained free
-
market beliefs,
and in 1933, in the face of the economic crisis, he explained in
The Theory of
Unemployment

that the excessive intervention of the state in the labor market was the real
cause of massive
un
employment
, because the governments had established a minimal
wage, which prevented the wages from adjusting automatically. This was to be the focus
of attack from Keynes.

3.5

Contemporary Economic T
hought

From the 1970s onwards Friedman's monetarist criti
que of Keynesian macroeconomics
formed the starting point for a number of trends in macroeconomic theory opposed to the
idea that government intervention can or should stabilise the economy.
[80]

Robert Lucas

criticized Keynesian thought for its inconsistency with microeconomic theory.
Lucas's
critique

set the stage for a neoclassical school of
macroeconomics;

New Classical
economics

based the foundation of cla
ssical economics. Lucas also popularized the idea


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of
rational expectations
,
[81]

which was used as the basis for several new classical theories
including the
Policy Ineffectiveness Proposition
.
[82]

The standard model for new classical economics is the
real

business cycle theory
, which
sought to explain observed fluctuations in output and employment in terms of real
variables such as changes in technology and tastes. Assuming competitive markets, real
business cycle theory implied that cyclical fluctuations
are optimal responses to
variability in technology and tastes, and that macroeconomic stabilisation policies must
reduce welfare.
[83]

Keynesian economic made a comeb
ack among mainstream economists with the advent of
New Keynesian

macroeconomics. The central theme of new Keynesianism was the
provision of a microeconomic foundation for Keynesi
an macroeconomics, obtained by
identifying minimal deviations from the standard microeconomic assumptions which
yield Keynesian macroeconomic conclusions, such as the possibility of significant
welfare benefits from macroeconomic stabilization.
[84]

Akerlof’s ‘menu costs’ arguments,
showing that, under imperfect competition, small deviations from rationality generate
significant (in welfare terms) price stickiness, are

good example of this kind of work.
[85]














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SECTION

FOUR

ECONOMICS IS THE STUDY OF HOW PEOPLE CHOOSE
TO USE RESOURCES

4.1 Concepts of Economics

Resources
include the time and talent people have available, the land, buildings,
equipment, and other tools on hand, and the knowledge of how to combine them to create
useful products and services.

Important choices involve how much time to devote to work, to schoo
l, and to leisure,
how many dollars to spend and how many to save, how to combine resources to produce
goods and services, and how to vote and shape the level of taxes and the role of
government.

Often, people appear to use their resources to improve thei
r well
-
being. Well
-
being
includes the satisfaction people gain from the products and services they choose to
consume, from their time spent in leisure and with family and community as well as in
jobs, and the security and services provided by effective gov
ernments. Sometimes,
however, people appear to use their resources in ways that don't improve their well
-
being.

I
n short, economics includes the study of labor, land, and investments, of money, income,
and production, and of taxes and government expenditu
res. Economists seek to measure
well
-
being, to learn how well
-
being may increase overtime, and to evaluate the well
-
being of the rich and the poor. The most famous book in economics is the
Inquiry into the
Nature and Causes of
the

Wealth of Nations

written

by
Adam Smith
, and published in
1776 in Scotland.

Although the behavior of individuals is important, economics also addresses the
collective behavior of businesses and industries, govern
ments and countries, and the
globe as a whole. Microeconomics starts by thinking about how individuals make
decisions. Macroeconomics considers aggregate outcomes. The two points of view are
essential in understanding most economic phenomena. The list of
fields

in economics
illustrates the scope of economic thought.



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4.2

About the
American Economic Associatio
n

The Association

has about 18,000
members

from all over the world, most of whom are
working economists in academia, business,
government
,

international and not
-
for
-
profit
agencies. It was fou
nded in 1885 to promote the study of economics from all points of
view. "The Association as such will take no partisan attitude, nor will it commit its
members to any position on practical economic questions." The Association publishes
seven journals
. About 4,000 libraries subscribe to the journals and individual members
receive journals with membership. The Association also produces
ECONlit
, a database to
identify and locate books and articles in economics. The
annual meeting

of the
Association, usually in early January, attracts about eight thousand economists who
present their work and discuss current economic issues. The Association recognizes with
aw
ards

the achievement of a small number of economists who have made outstanding
achievements in the advance of economic thought. The Association promotes the
market
for economists

by helping em
ployers find applicants and vice versa. The Association is
headquartered in Nashville, Tennessee.













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SECTION

FIVE

WHAT
ARE

THE FIELDS IN ECONOMICS?

Economists organize their discipline in fields from agricultural economics to urban
economics. Many economists specialize in a field by publishing original essays on topics
and teaching courses in a specific field.

The fields are in two sets:
t
hose that d
evelop core skills and those that emphasize
application of the skills in specific settings. The core itself involves two modes of
analysis. The
Skills

page gives simple examples. First, math
ematical description of
economic phenomena allows derivation of relationships. This mode of thought is called
economic theory
. Mathematics allows arguing by
deductive reasoning

from stated
premises to a conclusion. It offers the internal consistency of mathematical proofs but
requires no evidence of applicability.

The second core method looks for evidence bas
ed on observing economic phenomena. It
draws inference from persistent patterns. A consistent pattern that is distinct from the
complexity and randomness in nature is likely to have meaning.


This mode of thought is
called
inductive reasoning
. It is the mode of analysis of economic historians, statisticians,
and experimenters. The study of formal methods for drawing inferences from statistical
evidenc
e in economics is called
econometrics
.

Many advances in economic understanding come from the interaction between deduction
and induction. When mathematical analysis yields new insights,
the historians,
statisticians, and experimenters look for ways to judge whether available evidence is
consistent with the theory. When observation shows phenomena that are inconsistent with
available theories, economic theorists look for new theories. The
core fields are in item C
on the list of fields shown below.

Most economists concentrate their work and teaching in an applied field, that is, in the
other categories shown below. They study the history of the phenomena and adapt the
core theoretical idea
s of economics to offer explanations. They develop a variety of
methods to observe and measure events and apply econometric methods to test
hypotheses. For example, international economists study the history of trade, balance of


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payments, and exchange rate
s. They will understand both the economic theories and the
econometric findings that explain international economic phenomena.

The fields of economics, however, have fuzzy boundaries because economic events are
interconnected. Every transaction has a buye
r and a seller; each economic event has
extended consequences. A change in a wage rate will affect the cost of the goods the
workers produce as well as change the income and consumption patterns of the workers’
households. An economist working in one field

will be aware of connections to the rest of
the economy.

The fields of economics, then, are more signposts than fences. They include the core
areas of mathematical and statistical methods as well as the many areas in which the core
methods are applied. M
ost undergraduate
p
rograms

include study in the core fields and in
a selection of applied fields. The standard classification of economic fields given below
appears in the
Journal of Econo
mic
Literature
.
These field labels provide enduring
markers on the terrain of economic thought.













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SECTION

SIX

JOURNAL OF ECONOMIC LITERATURE

6.
Classification of F
ields

6.1
General Economics and Teaching

The principles course in the economics curriculum develops core ideas. The course also
provides the big picture of how individual economic events fit
together to shape
aggregate outcomes. Mastering basic ideas and getting a sense of how the parts fit into the
whole is an essential entry point to the study of other fields and more advanced ideas in
economics. The A category also includes discussion of th
e teaching of economics.

6
.
2

Schools of Economic Thought and Methodology


Economists who study the history of economic thought investigate how the core ideas in
economics
have developed.



6.3
Mathematical and Quantitative Methods

Econometricians

develop methods to measure economic phenomena.

They apply the
scientific method by formulating hypotheses, ga
thering evidence, and judging whether the
evidence is consistent with the hypotheses.
Mathematical economists

develop tools for
finding optimal solutions to economic problems a
nd advance ideas in
game theory
. Game
theory is the method for analyzing how one player chooses strategies in light of
knowledge of the possible strategies a rival might choose. Game theo
ry is used to analyze
many economic phenomena including the interaction between firms. In recent decades,
experimental economists

have tested economic theories in laboratories
and in the field.

6.4

Microeconomics


Studying how markets function and the role of prices is of central concern in
understanding economics. Investigation of the behavior of individual households, firms,
and prices and quantities of specific products like automobiles is called microeconomics.
Behavioral economists

study the cognitive and emotional dimensions of economic
decisions.



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6.5

Macroeconomi
cs

and

Monetary Economics


The actions of individuals sum to the total activity in a whole economy. In the aggregate,
the total amount of products consumed by households and firms must equal th
e total
amount produced. The total amount firms pay to workers and investors must equal the
amount households receive in income.


Study of the aggregate relationships in an
economy is called macroeconomics.


Economic growth
, the role of money and interest
rates, and changes in the overall level of prices and the aggregate level of unemployment
are central concerns of macroeconomics.



6
.
6

International Economics



International economists study
trade

among nations and the flow of
finance

across
international borders. Globalization and the deficit in the U.S.
balance of payments

with
other countries are current concerns.

6
.
7

Financial Economics



Financial economists study the process of saving and investing with a specific concern
for how individuals and firms deal with risk.

6
.
8

Public Economics


Public finance economists consider the role of government in the economy.


Some focus
on evaluating government programs and others focus on the design of
tax

systems.


Public finance economists are also interested in how the political process makes
decisions.
Issues of national security and defense appear here as well the study of state
and local governments.

6
.
9

Health
,
Education
,
and
Welfare



Some economist
s focus on the markets and government policies that directly shape
access to health care.


Others focus on schools and educational policies. Still others
consider the economic circumstances of the poor and evaluate alternative government
programs to improv
e the well
-
being of the poor.




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6.10
Labor

and
Demographic

Economics

Labor economists study employers’ decisions to hire workers and employees’ decisions
to work.


They study how wages are set, the nature of incentives workers face, and the
role of minimum wage laws, unions, pensions plans, and training programs. They are a
lso
interested in the formation of families, determinants of birth rates, migration, population
change, and aging.

6
.
11

Law and Economics

Some economists use the tools of economics

to study the incentives for human behavior
that are defined by the legal system. Property rights, for example, are essential for
markets to work well but they can be defined in a variety of ways that have different
effects on the well
-
being of people.

6
.
12

Industrial Organization


Industrial Organization

is the study of individual markets, the na
ture of competition, and
the role of prices. Some economists study issues in anti
-
trust policy. Others study the role
of advertising, pricing policies, and how costs vary with the scale of operations. Some IO
economists investigate particular industries su
ch as appliances, software, and electricity.
In the last decade a number of economists have studied economic issues in sports,
recreation, and tourism.

6
.
13

Business Administrat
ion
,
Business Economics
,
Marketing

and

Accounting

Business economists study decisions made by firms. How do firms maximize profit?
What prices should they set and how much should they produce? What is the role of
incentives within the firm, of entrepreneurship, and leadership?

6
.
14

Economic History


Economic historians explore changes in economic well
-
being and how economic
institutions have developed. The emergence of markets, the forces shaping the industrial
revolution, the sourc
es of improvements in agricultural productivity, the influence of
railroads and other new technologies provide perspective on current economic issues.



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6
.
15

Economic Development
,

Technical Change
,
and

Growth

Economists who are interested in the development of economies often focus o
n third
world countries. Why have some countries developed while others have not? How might
the industrialized countries improve the prospects for development around the world?
Who gains and who loses with industrialization?

6
.
16

Economic Systems


Analysts compare the capital market system to the various forms of socialism and the
transition from centrally planned to more market
-
based economic systems. Economists
sometimes address is
sues in specific countries like China, Cuba, and Poland.

6.17

Agricultural

and Natural

Resource

Economics
,
Environmental

and
Ecological

Economics

Economists study farming, fishery, and forests

with a focus on prices, markets, and
changing technologies. Natural resource economists study markets for
energy

(oil, coal,
and electricity) and mineral resources. Economists h
ave played an important role in the
evolution of policies to promote clean air, water, and land.

6
.
18

Urban
,
Rural
,
and

Regional

Economics

Economists analyze the location decisions of households and firms and the associated
issues in housing,
transportation
, and local government.

6.19

Miscellaneous Categories


Data, dissertations, and book reviews are classified here.







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6
.
20

Other Special Topics

Other special topics include the
economics of the arts
, religion, and
culture
.

Each major field defined in the JEL has se
veral
subfields
.
Search for the field and
subfield terms in
Wikipedia

and
Google

for more

information about each.

Economists add to our collective knowledge by publishing new work in each of the fields
above as explained in the
finding facts & ideas
page. Some of the lates
t work addresses
issues

of significant current interest.




















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SECTION

SEVEN

CURRENT ISSUES IN ECONOMICS

Economists study changes occurring in specific countries or individual sectors of an
economy; some ask fundamental questions about the nature of economic decisions; some
address proposals to change government policies.

Leading economists develop issues in

two
lectures

sponsored by the American Economic
Association at its annual meeting. The address of the President of the Association and an
invited lecture called the Ely Lectur
e, named for a founder of the Association
, discuss
issues of the speakers' choice. More economists define their own issues in
symposia

where they present their work. The symposia sometimes address more focused topics than
the newspaper headlines and also develop deeper understanding of economic phenomena.
Economists from all over the world present their latest research at the
Annual Meetings

of
the American Economic Association and economic agencies publish annual reports that
discuss significant issues for the nation and the world.













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SECTION

EIGHT

LOGICAL ANALYSIS

The Open Market Committee of the Federal Reserve looks at evidence about the rate of
inflation, that is, the rate of increase in the general price level, and the expected rate of
inflation, and decides to act to reduce inflation. Wi
ll it buy bonds from investors in the
open market, using money from its accounts, or will it sell bonds from its reserves in
exchange for investors’ money?



A bond is a contract.


The seller of the bond receives the face amount of the bond at the
time of
the sale and agrees to pay the holder of the bond a certain amount each quarter
until the bond matures (expires) at which time the bondholder receives the return of the
face amount of the bond.

Once a bond is issued, its current price varies in the marketp
lace
for bonds as investors’ respond to changing interest rates. When interest rates on similar
assets rise
,

the holders of a given bond will want their bond to pay the same interest rate
as other similar assets.


A fall in the current price of the bond me
ans that the fixed bond
payment provides a higher rate of interest relative to the current price. The bond’s interest
payment is fixed; the bond’s market price varies as market interest rates vary.

Here is the analysis. When the Federal Reserve sells bonds
, the market price of bonds will
go down and thereby increase the current rate of interest of the bonds. (The fixed interest
payment relative the lower market price of the bond means the current rate of interest
earned by the bond is higher.)


With higher

interest rates, investors will economize on the
use of funds, businesses will begin fewer capital projects, the pace of economy activity
will slacken, and inflation will, in time, come down
.









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SECTION

NINE

COMPUTERS IN ECONOMICS, POLITICS, AND SOCIAL

STRUCTURES

9.1
Computer Economics


9.1.1
Stock Market

Today's financial markets experience larger swings partly because of program trading,
where large stockholders use computers to decide when to buy or sell stock in large
quantities. When the
specified conditions are met and the programs trigger, the large
transactions can cause other programs to trigger, leading to a spiral of selling and buying
that produces the large swings in the market.

On the other hand, computer trading has also allowed
more people to participate in the
stock market through low
-
cost Internet stock trading sites.

9.1.2
E
-
commerce

There has been a meteoric rise in online business, a phenomenon that
is termed
e
-
commerce
. Many consumers now pay their bills entirely
online.
Online shopping at sites like Amazon.com has become routine
for many consumers. It did not take many years for online
auctions

at
sites such as eBay to become enormously popular.

9.1.3
Electronic commerce

Electronic commerce
, commonly known as (electronic
marketing)
e
-
commerce

or
eCommerce
, consists of the buying and selling of
products

or
services

over electronic
systems such as the Internet and other
computer networks
. The amount of trade conducted
electronically has grown extraordinarily wi
th widespread Internet usage. The use of
commerce is conducted in this way, spurring and drawing on innovations in
electronic
funds transfer
,
supply chain management
,
Internet marketing
,
online transaction
processing
,
electronic data interchange

(EDI),
inventory management

systems, and
automated data collection systems. Modern electronic commerce typically uses the
World
Wide Web

at least at some point in the transaction's lifecycle, although it can encompass
a wider range of technologies such as
e
-
mail

as well.



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A large percentage of
electronic commerce is conducted entirely electronically for
virtual

items such as access to premium content on a website, but most electronic commerce
involves the transportation of physical items in some way. Online retailers are sometimes
known as
e
-
tai
lers

and online retail is sometimes known as
e
-
tail
. Almost all big retailers
have electronic commerce presence on the
World Wide Web
.

Electronic commerce that is conducted bet
ween businesses is referred to as
business
-
to
-
business

or B2B. B2B can be open to all interested parties (e.g.
commodity exchange
) or
limited to specific, pre
-
qualified participants (
private electronic market
). Electronic
commerce

that is conducted between businesses and consumers, on the other hand, is
referred to as
business
-
to
-
consumer

or
B2C
. This is the type of electronic commerce
conducted by companies such as
Amazon.com
.

Electronic commerce is generally considered to be the sales aspect of
e
-
business
. It also
consists of the exchange of data to facilitate the financing and payment aspects of the
business transactions.

9.2
History
: Early D
evelopment

The meaning of electronic commerce has c
hanged over the last 30 years. Originally,
electronic commerce meant the facilitation of commercial transactions electronically,
using technology such as
Electronic Data Interchange

(EDI) and
Electronic Funds
Transfer

(EFT). These were both introduced in the late 1970s, allowing businesses to
send comme
rcial documents like
purchase orders

or
invoices

electronically. The growth
and acceptance of
credit cards
,
automated teller machines

(ATM) and
telephone banking

in the 1980s were also forms of electronic commerce. Another form of e
-
commerce was
the airline reservation system typified by
Sabre

in the USA and
Travicom

in the UK.

Online shopping
, an important component of electronic
commerce

was invented by
Michael Aldrich

in the UK in 1979. The world's first recorded B2B was Thomson
Holidays in 1981.

The first reco
rded B2C was Gateshead SIS/Tesco in 1984 The world's
first recorded online shopper was Mrs Jane Snowball of Gateshead, England During the
1980s, online shopping was also used extensively in the UK by auto manufacturers such
as Ford, Peugeot
-
Talbot, Genera
l Motors and Nissan. All these organizations and others
used the Aldrich systems. The systems used the switched public telephone network in
dial
-
up and leased line modes. There was no broadband capability.



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From the 1990s onwards, electronic commerce would
additionally include
enterprise
resource planning

systems (ERP),
data mini
ng

and
data warehousing
.

An early example of many
-
to
-
many electronic commerce in physical goods was the
Boston Computer Exchange
, a marketplace for used computers launched in 1982. An
early online information marketplace, including online consulting, was the
American
Information Exchange
, another pre Internet

online system introduced in 1991.

In 1990 Tim Berners
-
Lee invented the World Wide Web and transformed an academic
telecommunication network into a worldwide everyman everyday communication system
called internet/www. Commercial enterprise on the
Internet

was strictly prohibited until
1991.
Although the Internet became popular worldwide around 1994 when the first
internet online shopping started, it took about five years to introduce security protocols
and
DSL

allowing continual connection to the Internet. By the end of 2000, many
European and American business companies offered their services through the
World
Wide Web
. Since then people began to associate a word "ecommerce" with the ability of
purchasing various goods through the Internet using secure protocols and electronic
payment services.

9.3
Business A
pplications

Some common applicat
ions related to electronic commerce are the following:



Email



Enterprise content mana
gement



Instant messaging



Newsgroups



Online shopping

and order tracking



Online banking



Online office
suites



Domestic and international
payment systems



Shopping cart software



Teleconferencing



Electronic tickets




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9.4
Government R
egulations

In the United States, some el
ectronic commerce activities are regulated by the
Federal
Trade Commission

(FTC). These activities include the use of commercial e
-
mails, online
advertising

and consumer
privacy
. The
CAN
-
SPAM Act of 2003

establishes national
standards for direct marketin
g over e
-
mail. The
Federal Trade Commission Act

regulates
all forms of advertising, including online advertising, and states that advertising must b
e
truthful and non
-
deceptive. Using its authority under Section 5 of the FTC Act, which
prohibits unfair or deceptive practices, the FTC has brought a number of cases to enforce
the promises in corporate privacy statements, including promises about the sec
urity of
consumers’ personal information. As result, any corporate privacy policy related to e
-
commerce activity may be subject to enforcement by the FTC.

The Ryan Haight Online Pharmacy Consumer Protection Act of 2008, which came into
law in 2008, amends
the
Controlled Substances Act

to address
online pharmacies
.
[11]

9.5
Forms

Contemporary electronic commerce involves everything from ordering "digital" content
for immediate online consumption, to ordering conventional goods and services, to
"meta" services to facilitate other types of electronic commerce.

On the consumer level, electronic commerce is mostly conducted on the World Wide
Web. An individual can go online to purchase anything from books or groceries, to
expensive items like real e
state. Another example would be online banking, i.e. online bill
payments, buying stocks, transferring funds from one account to another, and initiating
wire payment to another country. All of these activities can be done with a few strokes of
the keyboard
.

On the institutional level, big corporations and financial institutions use the internet to
exchange financial data to facilitate domestic and international business. Data integrity
and security are very hot and pressing issues for electronic commerce to
day.





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SECTION

TEN

COMPUTER ECONOMICS

10.1
IT Job and Budget Cuts Expected


Computer Economics has been doing an in
-
depth survey of a couple hundred North
American IT shops for 20 years now, and even with that skinny amount of data compared
to the millions

of companies in the region, the trend data across those decades is
interesting. In the most recent survey, 202 IT execs were polled and asked a load of
questions pertaining to their IT budgets and staffing expectations for 2009 and 2010. The
survey was pe
rformed in March, and the report came out in late June, and I just found out
about it last week, so there is a pretty big lag. Since the survey questions were asked, the
American economy seems to have stabilized some, and now economists are projecting
that

we could even exit the recession that started in December 2007 by the end of
September. (We won't know if this has happened until early next year thanks to all this
lagging.)

Computer Economics says that in a typical recession, fewer than half of IT execu
tives
polled say they will be increasing their IT operational budgets, and indeed, in the spring
when the survey was done, 38 percent of those polled said they were cutting budgets and
only 45 percent said they were increasing IT spending; 17 percent said
they would spend
about the same amount this year as they did in 2008. The report says that this is not as bad
as the situation was in 2002, in the wake of the dot
-
com and ERP busts and the 9/11
terrorist attacks, which sent the world into a recession. Back

then, only 36 percent of IT
shops polled by Computer Economics said they would increase IT budgets. In many
cases, companies were already drunk with excess capacity thanks to IT binge spending,
and it took many years to burn off that capacity. (That's my
analysis. Computer
Economics had some fuzzy logic about the downturn being led by technology in 2002
-
2003 and the 2007
-
2009
recessions

being led by real estate and financial collapses. Who
bought all of those servers back in 2000 and 2001?

Every company i
n every industry on
earth was worried that the Internet was going to leave them behind
.




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When average across all companies surveyed by Computer Economics, IT budgets are
expected to be flat as a pancake in 2009, just like they were in 2004. The company
rec
kons that, based on what survey respondents
said

the average IT operational budget in
North America grew 2.5 percent in 2005, rose by 4.1 percent in 2006, peaked at 5 percent
growth in 2007, and declined to only 4 percent growth in 2008. As you can see, IT

managers and their bosses in the boardrooms of North America are keeping IT budgets on
a shorter leash than in the late 1990s, when budgets were growing at double
-
digit rates.

If there is a worrying metric, it is that some 49 percent of IT execs said they

would
actually spend less dough than they had allocated to them for the budget in 2009, which
means more pressure to cut costs than they are already under. Only 9 percent of the execs
surveyed said they would spend more than they were budgeted.

IT budgets

are also on the decline versus company revenue, according to Computer
Economics. In 2004, the IT budgets of the companies surveyed averaged 1.9 percent of
revenue, which shrank to 1.7 percent in 2005 and rose to 2 percent of revenue in 2006. In
2007, that

ratio between the IT budget and company sales slipped to 1.8 percent, and fell
further to 1.5 percent in 2008. It is anticipated to be 1.5 percent in 2009. The amount of
IT budget money spent per user is also on the wane. Last year, companies spent $6,924

per user for IT operations, down from $7,583 in 2006 and $8,010 in 2006. (Those are
inflation
-
adjusted figures.) For 2009, Computer Economics was told that the average IT
spending per user would rise to $7,284, but it remains to be seen if companies hit t
hose
targets
--
particularly with so many IT managers expected to make deeper cuts than their
then
-
current budgets back in March had already done.

As you might expect, manufacturing and retail companies have been hit the hardest in
terms of IT budgets, while

energy, healthcare, services, and banking and financing firms
have held up. (Banks didn't really take the hit
--
remember, we bailed their sorry
assets

out.) Discrete manufacturers report a 5.5 percent decline in IT budgets, and process
manufacturers are ta
king a 2.5 percent hit. As a group, retailers are expecting to take a 1
percent budget hit in 2009. Energy companies report a 1 percent increase in IT budgets,
services companies expect to spend 4 percent more, healthcare companies are looking at a
4.7 per
cent increase, and those banks are expecting to spend 4.9 percent more. If I didn't
call your name there, your IT operational budgets across your industry are flat. Sorry.



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So that was the operational budget. The capital budgets have already been frozen. In

2006, IT capital budgets across the companies polled by Computer Economics rose by 5
percent, and increased by 4 percent in 2007. In 2008, capital budgets were flat, and they
are anticipated to be flat this year, too. Server spending is down, but could re
cover in the
second half of the year. (We'll see. I remain skeptical.) Some 48 percent of the IT execs
polled said they would be able to spend all of the hardware and software budgets they
have been allocated, but 43 percent said back in March they probabl
y wouldn't be able to.
Only 9 percent say they will be able to spend more. I wanna know who these companies
are.

As for staffing, Computer Economics says that nearly half of those companies polled (46
percent) are cutting staff this year, and a quarter are

making cuts of 10 percent or deeper
in 2009. Some 27 percent of those polled say they are keeping their IT employee ranks
the same, and another 27 percent report that they are hiring. It is not clear how the
numbers will wash out

10.2
Application of
Computer

Typically, undergraduate economics electives focus on content rather than methods, in
spite of the fact that empirical work is fundamental to the practice of economics.This
article describes an alternative approach to teaching content by using com
puter
applications that emphasise the empirical testing or applications of the theory. Students
enjoy economics courses more when they are taught in this way and lab assignments
provide opportunities to teach a broad skill set that is important to many und
ergraduate
economics majors.

In spite of persuasive arguments in favour of moving away from lecture/exam formats for
undergraduate economics classes, the vast majority of economics classes are still taught
in the ‘chalk
-
and
-
talk’ format.1 Some classes, m
ost commonly statistics or econometrics
,
have

an add
-
on laboratory component in which students do engage in active learning of
statistical techniques, while a few economics programmes contain separate, stand
-
alone
laboratory courses. In contrast, electives

in an economics curriculum typically focus on
content, rather than empirical methods. The important feature of all these approaches is
that the manner in which content is usually taught in an economics elective is divorced
from what students learn in thei
r methods classes.This article describes an alternative
approach that uses computer applications that integrate content and empirical


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methods.This approach attempts to help students develop an understanding of content in a
way

that more closely resembles t
he understanding of an empirical research economist.
The economics education literature supports the use of alternative teaching methods. For
example, Becker (1997) bemoans the fact that most undergraduate


10.3
International Review of Economics Education

Economics

courses are taught with lecture methods and urges academic economists to
adopt more active, hand
-
on teaching techniques. Salemi (2002) makes a strong case for
active involvement of students in the classroom, citing work of educational psychologis
ts
and instructional specialists, while Simkins (1999) argues similarly that ‘meaningful
learning’ requires the student to actively participate in the experience. While these and
many other articles provide evidence for the need for active earning generall
y, several
other articles discuss specifically the use of computer applications or labs in the
economics curriculum. King and LaRoe (1991) describe the economics curriculum at
Denison University that requires students to take a number of lab courses as par
t of the
economics major and presents some informal evidence about the effectiveness of this
departure from the traditional curriculum. The method described in this paper shares
many similarities with the approach described in King and LaRoe.However, the e
xercises
described here are slightly more sophisticated and occur within the class, not in a separate
lab period. In the same vein, Santos and Lavin (2004) describe a research curriculum that
teaches students how to find and chart macroeconomic data, acces
s journal articles and
write papers on economic issues. They present some evidence that this technique helps
students achieve ‘deep learning’. One final example of the effectiveness of computer
applications is found in Kendrick,Mercado and Amman (2006).The
y provide a series of
examples using computational economics that allow students to be creative and become
more deeply involved in their own education.With this literature in mind, this paper

describes one technique, integrating computer applications, that

also encourages active
learning economics electives courses.The second section of this paper describes the
overall structure of a lab based course.The third section discusses features of a good lab
assignment for an elective class.The fourth section provi
des

benefits and drawbacks of
this approach.The fifth section discusses some details of this method applied to a course
in economic growth.The sixth section provides some preliminary evaluation of this
technique, and the seventh section offers a concluding

thought. Example assignments are
included in the appendices. Structure of a lab
-
based elective
although

labs play a central


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role in a lab
-
based course, they do not need to dominate the class. In my course in
economic growth (described in more detail later
), students complete four labs during the
course of the semester with a partner and then complete one lab by themselves in lieu of a
final exam. In total, all five labs count for 25% of the course grade. In addition, students
are assigned a 15 to 20
.


10.4

Int
egrating Computer Applications i
nto Economics Electives

Page

final paper (25% of the course grade) in which they are required to use regression
analysis as evidence for at least one of the points made in the paper. In this upper
-
level
elective, student
s are also given a take
-
home midterm,which takes the form of a five
-
page
essay (20% of the grade), assigned to give an oral presentation of a journal article (10%),
take two quizzes early in the semester (5%) and are given a participation grade (15%).
Most

of the students in the class are accustomed to the lecture/exam format in

their
economics classes and the quizzes serve the purpose early in the semester to transition
them to a format that relies more heavily on papers, presentations and participation
(i
.e.poor performance on the quizzes signals the need for increased effort).This structure
is facilitated by the fact that the class is relatively small, with approximately 20
students.This particular course is taught at a highly selective liberal arts colle
ge and the
prerequisites include intermediate macroeconomics and microeconomics as well as
economic statistics. Instructors with less able or prepared students may wish to substitute
additional quizzes, in
-
class exams or problem sets that rely on the more
straightforward
textbook material for some of

the paper and presentation assignments.


Furthermore, lab assignments can be tailored to the sophistication of the students
;
a
ssignments

can focus more on descriptive statistics and graphing for students who ar
e
not familiar with multiple regression anlaysis.

Only five class periods are designated as labs, with the purpose of the lab periods being
simply to get the students started on the assignment.The topic of regression analysis does
spill over into other cla
ss periods in a variety of ways and some modification to
traditional lecture notes is required to integrate the lab experience

into the course content.
First, students often ask questions about the lab in subsequent class periods, especially
when the topic

of the class is related to their labs. In addition, in order to integrate the labs
into the course content, current and previous labs are often referenced in relation to the
theory being discussed.The

nature of the

lecture is also geared towards students
who will


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do empirical work as some time is spent discussing the empirical implications of the
theory discussed. Furthermore, the articles that students present are carefully selected to
include relatively simple but clever empirical strategies that the stu
dents explain to their
classmates. Finally, econometric issues are discussed in class on an as
-
needed basis.
Students in the class use the menu
-
driven STATA, which they learned in their economic
statistics class.The class requires access to a computer lab
at least five times during the
semester. Students work in pairs during the lab period so only one computer for every two
students is required.




International Review of Economics Education

Features of a good lab assignment intended to teach theory
.

The lab
assignments in such a
course consist of a small number of open
-
ended questions that students are required to
answer using regression analysis.The

nature of economics implies that much of what is
taught in economics classes has empirical implications and
the key to creating a good
assignment is to have students consider the evidence for these implications.The growing
availability of free or inexpensive economic data on the Internet makes empirical work
possible

in almost any economics elective. In designin
g the assignments, a key principle
to keep in mind is that the purpose of the assignments is not to teach econometric
methods, nor is it for students to produce irrefutable, publishable results, but to teach the
students the content of the elective course.
The overarching principle of

this method is that
it is the
process
of empirical investigation that generates the learning

opportunities.Therefore, the assignments should emphasise the implications of theory
discussed in class, rather than the application o
f a ‘technique of the week’ as can happen
too often when the focus is on learning statistics. Depending on the ability levels of the
students, the assignments might ask the students to replicate, with explanation, a result in
their textbook or in a course
reading.This same assignment can be made slightly more
difficult by asking the question in a different way than students have seen in course
material before. For

more sophisticated students, the question could require them to
extend material beyond that wh
ich was discussed in class.Assignments can also be made
more challenging by giving less direction on the data and variables that should be used. In
particular, assignments for which students are supposed to use all the data in a data set
supplied by the in
structor without transformations should be avoided because these kinds
of assignments can be completed by students without an understanding of the material.




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For example, in a macroeconomics,

money and banking, or monetary policy class,
students might be g
iven a reading on inflation/output tradeoffs in which estimation of the
Phillips curve is discussed. For example, Lansing (2002) provides a discussion accessible
to many undergraduates that demonstrates how the slope of

the Phillips curve may be
different
depending on the time period examined.A relatively straightforward assignment
would ask the students to reproduce this work with data from different time periods than
that used by the author, or different measures of inflation, to confirm that the conclusi
ons
are robust. A slightly more difficult assignment might ask the students to read the same
article but ask a less directed question, i.e. estimate the cost of a one percentage point
decrease in the inflation rate.

Of course, to answer this question, the
students need to
estimate a Phillips curve, but they first need to realise that they do and also to wrestle
with the issue of changing slopes.Alternatively, one might be interested in having
Int
egrating Computer Applications i
nto Economics Electives

studen
ts examine these
relationships for a subgroup of the population (e.g. using unemployment rates for
teenagers, females, Hispanic males, etc.) and discuss the policy implications of their