A key introductory economic concept, brought to us from Adam Smith, is the invisible hand that manages the workings of the market economy. However, is the current financial crisis an indication that the invisible hand has failed us? Should we be looking more at the invisible heart of community when we try to build an economic system? The first article linked below look at whether we may be more successful at delivering economic happiness and welfare if we follow the invisible heart rather than the invisible hand.
This way happiness lies Guardian (19/10/08)
Why do we need economic growth? BBC Magazine (16/10/08)
Questions
| 1. |
Explain how the ‘invisible hand’ allocates economic resources in a market economy. |
| 2. |
Assess whether the current financial crisis may indicate that the invisible hand has failed to allocate resources appropriately. |
| 3. |
Discuss whether the pursuit of economic happiness may be more appropriate than the pursuit of economic growth. |
“‘Capitalism,’ Schumpeter wrote, ‘is by nature a form or method of economic change and not only never is but never can be stationary … This process of Creative Destruction is the essential fact about capitalism”. In the article below William Keegan looks at this process of creative destruction and relates it to the current financial crisis and the downturn in the business cycle.
Moral hazard? It’s just another danger along the capitalist way Guardian (5/10/08)
Time To Drop The Baggage That Comes With Moral Hazard Financial Times (4/10/08)
Questions
| 1. |
Explain what is meant by the term ‘Creative Destruction’. |
| 2. |
Explain what is meant by the term ‘Moral Hazard’. |
| 3. |
“In theory, enlightened economic policies can moderate the workings of the business cycle”. Discuss possible policies that can moderate the workings of the business cycle. |
| 4. |
Discuss the extent to which the recent economic boom was an ‘asset-price boom’ rather than a ‘traditional one’. |
The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?
Consumed by crime Guardian (24/9/08)
Questions
| 1. |
Explain why an economic downturn may lead to increased levels of crime. |
| 2. |
Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth. |
| 3. |
Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth. |
The Phillips Machine may, in this era of super-computers modelling the economy, appear an outdated artefact. However, when it was first unveiled at the London School of Economics in 1949 it caused a sensation. The Phillips Machine is a model of the economy which uses water, pumps, valves and, in the case of the original, an electric motor scavenged from the windscreen wiper of a Lancaster bomber. For some photos of a Phillips Machine at the Science Museum, follow the links below:
Phillip’s Economic Computer (1949)
Enginuity article (Cambridge Engineering Department)
The computer model that once explained the British economy Guardian (8/5/08)
The computer model that once explained the British economy Guardian (8/5/08) (Cartoon)
Questions
| 1. |
Explain what is meant by the term ‘economic model’. |
| 2. |
What were the limitations of the Phillips machine? Assess whether the Phillips machine could be of value to modern economists. |
| 3. |
Discuss the value of economic models to policy makers when formulating economic policy. |
GDP is quite a good measure of a nation’s production of goods and services, but it doesn’t include many other factors relating to the standard of living in an economy and for this reason, various other measures of living standards have been developed. However, there is also another issue with GDP and that relates to how best to measure a country’s economic performance. Should we use GDP per head or GDP growth? Population changes can significantly distort economic welfare and so do need to be taken into account. The article below from The Economist looks at these issues in depth and considers the best way to measure economic performance.
Grossly distorted picture The Economist (13/3/08)
Questions
| 1. |
Explain how GDP per head can fall while economic growth is rising. |
| 2. |
Explain why the use of GDP per head as a measure of economic performance may lead to the definition of recession being flawed. |
| 3. |
Assess the principal factors that result in economic growth and GDP per head rising together. |