Term Paper: Economics There Is a Belief

Pages: 10 (2931 words)  ·  Bibliography Sources: 3  ·  Level: College Junior  ·  Topic: Economics  ·  Buy This Paper

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[. . .] Phillips Curve

Theories offer possible solutions to problems that do not have sufficient hard evidence to make one solution likely. In the case of economies, the process through which they are controlled is not known, and the interactions between elements within them are often not completely realized. The Phillips Curve was an attempt to understand the relationship between inflation and employment. Basically, Phillips said that as employment increased inflation would decrease. The reason for this seemed logical. He said that increased employment meant that people would receive higher wages because there would be less talent for employers to draw from. As this pool decreased, employers would have to pay higher wages to make sure that the people they employed did not leave for a job that offered higher wages for the same type of work. Because wages increased, he also believed that inflation would decrease as any rise in the cost of goods would be matched by an increase in wages. Unfortunately, this was proven to be a false premise during the 1970's. In Buzzeo's words, "it leads to the illusion that jobs can be magically created by simply increasing the price level. It is the economic concept that led to the supposed tradeoff between inflation and jobs that nearly wrecked the U.S. economy in the 1970s"

The myth perpetrated here is that because there seemed to be an inverse relationship between employment and inflation, the government could increase prices and wages would follow that curve. This proved to be false as people saw their wages decrease even as prices increased. Buzzeo talks about the creation of a new word, "stagflation," which incorporates the words stagnation (as in low or no economic growth and no growth in wages) and inflation. Buzzeo says that;

"As prices increase and public expectations are factored in, we find the economy in an inflationary environment with stagnant job growth & #8230; Productive capacity is diminished because entrepreneurs -- those individuals whose actions actually create jobs -- are uncertain about the future. And uncertainty is the greatest deterrent to productive investment. Without productive investment there is no economic expansion and no job growth & #8230; Jobs, in the long run, cannot be created by bringing the economy to a higher price level, which discourages productive investment and keeps relative incomes and activity at the same level."

The people who are responsible for actually creating the jobs in an economy see prices rising and they are forced to decide between hiring more people, or watching to make sure that the increased prices affect the viability of their company. Because business is built around making money, the decision is usually to let the workforce remain stable until the price of goods stabilizes. Buzzeo's point is that this myth is countered by simple logic. People are not going to lower their own capital when the price of production is increasing because they may not be able to afford the raw materials they need if they are spending too much on wages.

Deflation is Always Bad

As mentioned before, an economy goes through normal ups and downs. This natural cycle cannot be stopped by artificial means, but must be managed with production to the greatest extent possible. Of course the people who have control of the economy believe that they can flatten out the cycle and make the highs and lows easier on the people of the nation. This is usually not the case. Government does have a role in the economy, but it is generally best if that role is minimized and people who can actually aid in a recovery are given the ability to do so.

The highs and lows, for this argument inflation and deflation, are seen as evil entities that government must control at all costs. In actuality, both are natural consequences of the economic cycle that will eventually allow the system to run smoothly. In his article, Buzzeo discusses deflation and how it has been labeled as a bad outcome for the economy by many governmental economic leaders. In the early 1990's Greenspan lowered the federal rate more than it had been in decades and continued to increase the amount of capital released to the nation. The problem here is that it was a bubble of sorts, a false hike of the economy that did not allow for a natural flow. Deflation should actually allow the economy, and the people dependent on it, it to recover. As deflation happened, prices would drop, and less would be paid for goods which would stimulate buying activity (Buzzeo). Instead, costs for goods rose as money flooded the market, but this did not mean that producers were better able to buy what they needed. In many cases, the increased costs of materials meant that certain industries, such as manufacturing, stagnated.

Government

From the above list and the discussion of Keynesian principles it is easy to see a common thread. When government meddles with the economy, they generally get it wrong. The Western democracy was envisioned as for the people rather than being one of the old monarchies or autocracies which was government for government's sake. The people in government believe that they are doing the right thing, many times, when policy is conducted which actually threatens a stable economy, but the result of many decisions that have been made are based on faulty theories and evidence. Without proper study, people like Keynes have devised systems that threaten stabilization rather than create it.

One of the issues that the government has is that it is created for all of the people rather than just one segment. This means that politicians are forced to look at issues from a great deal of angles, and help as many people as they can. Representation in a republic calls for the greatest good rather than the best good sometimes. This means that if a group of people is crying loudly about losing jobs or some other issue, their representatives are paid by their constituents to pay attention. Unfortunately, that which is often not that which is right. When it comes to the economy, it takes longer for results to occur when the actual producers are allowed to help it stabilize. It seems, to many people, that government should get involved because they are able to create faster results. Unfortunately, these fast results often are not well planned, so they result in more harm than the good intended.

Of course there are also those politicians that enjoy the power they have acquired and wish to keep it no matter what the cost. Because politicians sometimes court special interests (labor, big business, and others), their judgment can be clouded from the job that they are actually supposed to be performing. This does not mean that they are buying votes, but they may listen to an idea that helps a certain constituency that will be better able to keep them in office than another that does not have that ability.

Conclusion

It would be false to assume that people create economic theories for their own aggrandizement or because they want to achieve some sort of lofty office for themselves. The fact is that most plans and economic theories, no matter how flawed or mythical, were probably started because the progenitor thought he or she was helping. Many times this is in fact the case. The problem comes when theories and plans that have been proven ineffectual or dangerous are continued despite strong evidence. Capitalism has been proven the greatest economic system regardless the naysayers (Mises). It is a system that can only be controlled by the people who produce. These producers create jobs because what they have to sell, no matter what it is, is desired by the public. Because the good has become popular, the producer must hire more people to produce it. Thus, more people have a wage and are able to consume. When there are more producers, there are, in turn, more consumers. The above listed myths are that because they somehow restrict production and thwart a producers natural urge to create jobs through the sales of the goods that are produced.

Works Cited

Buzzeo, Fred. "Job Creation and Other Economic Myths." Ludwig von Mises Institute, 2010. Web.

Hazlitt, Henry. Economics in One Lesson. New York: Harper & Brothers, 1946. Print.

Mises, Ludwig von. "Capitalism, Happiness… [END OF PREVIEW]

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