Entelechy

This is a summary of Knowledge News article "Post-Holiday Simulation". This article discusses three competing strategies for stimulating economies.


There are two branches of study in economics :- Macroeconomics and Microeconomics. Macroeconomics looks at the total output of nations and the way it allocates its limited reasources land, capital and labor to maximize production and ensure prosperity for future generations. Microeconomics deals with these aspects at the individual level. Here we will concern ourselves with Macroeconomics.

As already mentioned each nation has limited resources to allocate in a way to maximize production and wealth generation. To do this the respective governments lay down policies (presented in the budget). The health of economy is measured using GDP (Gross Domestic Product) and Per Capita Income, the higher these indicators the more prosperous the economy. Also governments are concerned about the GDP growth rate i.e. the rate at which GDP is growing. Every government effort boils down to increasing the GDP growth rate.

How do we go about increasing the GDP growth rate?
Well there are three competing strategies for doing the same.

1) Increase jobs

This theory was proposed by the famous economist John Maynard Keynes(1883-1946). Keynes proposed that by increasing jobs people get money to spend. This increases the demand for products which inturn encourages manufactureres to produce more. Thus creating more jobs and wealth. In a depressed economy the best recourse for governments is to spend money on public utility projects thus artificially creating jobs.

2) Reduce taxes

This theory was proposed by the "monetarists" from the University of Chicago Business School. They said that the best stimulant for economy is money. Taxing removes money from economy and hence should be reduced. Reducing taxes will add surplus capital and in turn stimulate economy. Also as the economy flourishes even the reduced tax rate will yield more money in taxes. So it is a win-win situation for all.

3) Leave things as they are

And some economists say why put all the effort. Leave things as they are and the economy will work to prosperity on its own. This theory, first put forward by the father of economics Adam Smith(1723-1790), says that there is an "invisible hand" turning the wheels of economy , a market force that keeps the economy functioning. He said that this "invisible hand" through the natural operations of human behavior and self interest tends to produce a prosperous and efficient marketplace. He emphasized,however, that this hand only functions when governments provide an institutional and legal framework that makes the market truly competitive.



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