4th Period Summaries

Warren Edward Buffett

  1. Born in Omaha, Nebraska during the Great Depression. Currently resides there.
  2. Started Berkshire Hathaway in 1966 alongside a friend
  3. CEO since 1970
  4. Currently one of the wealthiest men in the world
  5. Berkshire Four sectors have workings with almost every major company in our economy
  6. Companies includes, Dairy Queen and Fruit of the Loom
  7. Oracle of Omaha
  8. People head is warnings
  9. People hang on to Buffett’s every word
  10. Economic Strategies
  11. “Economic Moat”
  12. Patience
  13. Focus on long term investments
  14. When he speaks, the market follows

21st Century Immigration

Major source of population and cultural change

Affects employment, healthcare, and education

Controversy in economic benefits, job growth, and work force

Business Pros

Increases productivity

More efficiency

Lowers product costs and worker costs

Increases pay for highly skilled workers

Take jobs that wouldn’t exist or that Americans don’t want

No direct correlation between immigration and unemployment

Business Cons

Take jobs from Americans

Wage-lowering effects

Increases unemployment

Economic Migrant–Person who immigrates to get a job or high financial status

Government Services

Many don’t pay their taxes

Receive a lot of government services

Health care

  • 33 percent don’t have health insurance
  • High medical costs
  • Contributes to health care system through joining work force (medcaid/medicare taxes)

The Arab Oil Embargo

  • OPEC, Organization for Petroleum Exporting Countries, restricted its oil output in 1973 for countries that supported Israel instead of Egypt in the Yom Kippur War.
  • The embargo negatively affected the U.S., a country that was so accustomed to an abundance of fossil fuels and their low prices.
  • The once strong U.S. economy slumped into a recession as inflation and interest rates rose and a trade deficit was experienced.
  • Outsourcing and printing of new money further contributed to the recession, making it the worst one since the 1930’s.
  • This all shows that cartels are powerful and that OPEC, as a cartel has a lot of control over the U.S.
  • So, the U.S. has to find ways through alternative energy sources to become less dependent on oil and natural resources as a whole because they will run out.

Summary-Adam Smith

  • His economic beliefs lay the foundation for the beliefs of capitalism and conservatives today
  • 2 major works: “Theory of Moral Sentiments” and “Wealth of Nations”
  • Traveled Europe with Duke of Buccleuch, Henry Scott, acting as his tutor
  • As he traveled Europe, he observed the negative aspects of mercantilism
  • Came to agree with the Physiocratic philosophers who opposed mercantilism
  • Physiocrats impacted his economic theory, yet Smith did not agree completely with them
  • Smith believed in laissez-fairre economics
  • He believed the “invisible hand” naturally guides the economy
  • He believed the there are endless opportunities for wealth in an economy, and the market and division of labor will continue to grow and increase
  • Government intervention, according to Smith, only hindered the possibility for this endless opportunity for wealth
  • His beliefs and policies still apply to economics today, especially within the beliefs of the Republican Party

Globalization

  • Globalization
  • To develop an integrated global economy
  • Pros
  • Technology improves
  • Production increases
  • Goods are produced at cheaper costs
  • Larger financial markets
  • Creates perfect competition
  • Cons
  • Interdependency
  • If one firm fails it can cause several others to fail too
  • Disease spreads easily
  • Sweatshop labor occurs
  • Brain Drain
  • The intelligent people from a poor country leave to a wealthier country and the poor country stays in poverty without educated people
  • Pollution increases
  • Cultural effects
  • Shares culture
  • Ex: food
  • Customs in cultures lose significance
  • Creates one uniform global culture not individual cultures

Summary of Great Depression

  • Roaring 1920s to devastation in the 30s
  • President Hoover villain…….President FDR hero

Causes:

  • Speculation – on stock market
  • Buying on margin –buying on bad loans
  • Deflation
  • Bank failures- Bad loans

Impact

1929-Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.

American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933

Obama and FDR are using sort of the same recovery plan.(Keynesian Idea)

Government spending to save economy

John Maynard Keynes

  1. Great Depression
  2. Government should expand money supply and increase circulation
  3. Consumer confidence would increase
  4. Normal flow of money would continue
  5. Government should increase spending on everything during weak economic times
  6. Keynesian vs. Classical
  7. Equilibrium: Keynes= market needs government regulation to achieve balance; Classical=market balance will be attained without intervention
  8. Labor: Keynes= workers will exhibit resistance to lower wages; Classical=if necessary, workers will surrender to lower wages
  9. Free Markets: Keynes= government regulation necessary; Classical=markets will achieve order on their own- “laissez-faire”
  10. Aggregate Demand
  11. Solely the sum of government spending, consumption and investment (did not like to include net exports because believed it was double-counting)
  12. Aggregate demand increases along with rising employment and national income
  13. Aggregate demand decreases as wages, income and consumption decrease; also as consumers save more
  14. Employment/Unemployment
  15. Believed cutting wages did not increase employment
  16. Government spending necessary to maintain highest national employment
  17. Wage “stickiness” (workers unwilling to accept lower wages) and price inflexibility (resistance to higher prices)
  18. Strongly influenced Franklin D. Roosevelt’s New Deal
  19. Modern Influence
  20. Politicians sometimes misuse theories to spend during both boom and recessionary times
  21. Obama stimulus package of $787 billion
  22. Created jobs/funded public works

John Nash Summary

  • Won Nobel Prize for Economic Sciences in 1994
  • He won it for his discovery and observations in non-cooperative game theory, specifically the Nash equilibrium
  • The Nash equilibrium is the outcome when all competing oligopolistic firms cheat and go beyond the limits of production set in collusion
  • It is harmful to all competitors because of overproduction which leads to surplus which eventually leads to loss of profit
  • Instead, the most efficient method is collusion, coming together and setting limits so all firms maximize profit
  • In US formal collusion is illegal so tacit collusion must take place which is an informal form of collusion
  • Nash is still alive and currently teaching at M.I.T.

Summary – Dan Ariely (author of book Predictably Irrational)

  • Severe burn accident and was hospitalized for three years. Here he questions the nurses “quick-pull” method – Does their way cause the least amount of pain?
  • Nurses had it wrong had been making a mistake repeatedly. People make the same mistakes without ever knowing it. These are cognitive illusions.
  • Behavioral economics is the merging of economics and psychology.
  • How a question is asked can influence a final decision. (Economist subscription and organ donor form)
  • Anchors. Imprinting. Once prices are established in our mind, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products.(auction)
  • Traditional Economics – people are rational

Behavioral Economics – people are predictably irrational

The Industrial Revolution

  • The industrial revolution refers to a profound economic transformation that resulted from technology and which started in Great Britain and later spread to the United States.
  • The first industrial revolution started in Great Britain and was influenced by the introduction of three new technologies; the steam engine, yarn and cloth machines, and furnaces.
  • The first industrial revolution indirectly impacted the U.S. because the growing demand of Britain called for an increase in the amount the U.S. supplied. The U.S. was also a market for the finished products that Britain produced.
  • The U.S. was also affected by the transfer of new technology such as mills/factories, coal furnaces, and transportation/communication systems.
  • The second Industrial Revolution took place after the Civil War in the United States.
  • The second industrial revolution was based on the completion of communication systems, the introduction of electricity, and the newfound application of science to industry.
  • The first industrial revolution caused a growth in the American economy by increasing supply and demand. The second revolution caused a further shift in the economy by cementing the movement from an agricultural society to a society based on mass production. These changes have lasted to modern times.
  • The industries became economies of scale by finding ways to produce more at a cheaper price. This knowledge has lasted to today and continues to be utilized by businesses.
  • Many of the entrepreneurs of the time such as Rockefeller and Carnegie became world renowned after dominating their field.

Dot-com Boom and Bust

The Boom- 1995-2001

  • Internet-based companies made unrealistic promises to investors
  • Over investing led to over spending
  • Nasdaq peaked on March 10, 2000

The Bust

  • Investors pulled out when they didn’t make money
  • Stock became worthless
  • Nasdaq dropped and has never seen such levels again
  • Many companies went bankrupt

Results

  • Surviving companies have become stronger, better known brand names
  • Bust changed the way people do business on the internet
  • Proved that the internet influences more than just online companies
  • Prompted people to focus more on what they were investing in and become “smart” with their money
  • Through devastating consequences, the Boom and Bust shaped the internet we have come to incorporate in our everyday lives

Karl Marx

  • Industrial Revolution- major technology advances, factories, laissez-faire capitalism
  • All of history is class struggles rich vs. poor
  • Unequal means of production = inequalities and gap between rich and poor (capitalism)
  • Equal means of production solves all inequalities (communism)
  • Private property is unfair because it allows the rich to make profit
  • Solution is revolution, then collective ownership and public property
  • Religion is used by rich to suppress poor, poor should revolt and get their fair share
  • Marriage is bad for women because it turns them into means of production

Milton Friedman

-Strong believer in the Classical school of thought after first being interested in the Keynesian school of thought.

-Thought household spending was based on what they expected to make in the coming years- permanent salary.

-Monetarism- Increased monetary growth increases prices but does not affect the output.

-Solution to inflation was to increase money supply at the same rate that GNP increased.

-Also said that to keep unemployment lower, economy needs a permanently accelerating inflation rate. When people adjust to high inflation rates, unemployment increases.

-Was the man to invent education vouchers and advocate for their use. Are now being used across the globe

-Opposed Keynesian principles

-His idea of monetarism is now forgotten along with his idea of deregulation. He would say that our government is putting to much money into the economy

Henry Ford

  • Henry Ford made a cheap durable vehicle, the Model T, which many Americans were able to afford.
  • Assembly lines were the key behind Ford’s mass production, winning him the nickname, “The Father of Mass Production”.
  • He helped win WWI & II with is B-24 Bombers.
  • He gave jobs to the unemployed since he needed a factory load full of workers in order to work the assembly lines.
  • Ford vehicles are still going strong today, forcing its competitors to work harder and ultimately result in better vehicles.

John Stuart Mill

  • Born in London, England during the 19th century
  • During that time, London was the center of the market place in England.
  • However, there was a shortage in housing, public sanitation was bad, and unemployment was still an issue.
  • Came up with the concept of the principle of utility.
  • “Actions are right in proportion as they tend to promote happiness; wrong as they tend to produce the reverse of happiness,” (Heydt).
  • Well known as the author of Principles of Political Economy and some of the applications to Social Philosophy (1848)
  • Believed in individual freedom as well as political freedom
  • Believed in laissez faire, but then started to believe that government intervention was good if the intention was to promote utilitarianism.
  • Believed that there are no “iron laws” of wages, and that laws of production are determined by natural laws; laws of distribution by the human will
  • Proposed to abolish the wage system and let producers elect management.
  • Therefore, profits in the long run would decline and new production would cease causing the population to remain at a constant level.

Paul Krugman

  • Won 2008 Nobel Prize in Economics
  • Writes a column in the New York Times titled “Conscience of a Liberal”
  • Teaches at Princeton and currently works on financial crises and currency
  • Theories include New Trade Theory and New Economic Geography
  • New Trade Theory
  • Using increasing returns to scale, transportation costs, and monopolistic competition, Krugman redefined international trade and explained why comparative advantage did not give an accurate portrayal
  • Explains why countries with similar economies trade more than those with different economies
  • Takes consumers’ desire for variety into account
  • New Economic Geography
  • Using the home market effect, increasing returns to scale, and transportation costs, Krugman explained why firms tend to concentrate leading to cities

Alexander Hamilton Summery

-Alexander Hamilton was the first Secretary of Treasury and set up the American Economy.

-Alexander Hamilton paid off $79 million worth of debt from the revolutionary war in a timely manner to gain the respect of European Nations.

-Hamilton set up the National Bank, and it is still used today.

-Hamilton set up the American Currency

-Hamilton believed in the Classical School of Thought and the American Economy was set up this way until the great depression. Today some Classical views are still seen in the Economy.

ALAN GREENSPAN

-Longest-serving chairman of the Federal Reserve Board, held post for 18 years

  1. Greenspan’s Belief
  1. Objectivist thinker
  2. Proponent of Laissez-faire capitalism
  3. Focused on keeping interest rates low and inflation under control
  4. Believed in little to no government intervention
  1. Important Events
  1. October 19, 1987 “Black Monday,” stock market’s largest one day percentage loss in stock market history
  1. Greenspan avoided economic collapse by promising Wall-Street that the Fed would give money and aid, returning consumer confidence and correcting the market
  1. Dot-Com Bubble, burst in 2000, causing technology companies to lose trillions of dollars
  1. Predicted by Greenspan who warned against “irrational exuberance” and that the stock prices were overvalued
  1. Housing Crisis and current recession
  1. Believed by many that Greenspan is to blame because of low interest rates and lax polices on mortgage lending caused the housing bubble to burst. Also the fact that he was a proponent of sub-prime lending caused the current credit and housing crises.

Thomas Robert Malthus (taken from 2nd Period PP)

  • His most famous work, Essay on Population (1798), was about the relationship between population growth and the food supply.
  • He argued that while population grows exponentially, the food supply grows linearly, so overpopulation will result in starvation and misery.
  • He believed that if people did not voluntarily have fewer children (“preventive checks”), then the population would inevitable decrease through famine (“positive checks”).
  • Malthus also examined other issues, such as rent and protectionism, but his work in these topics was not as acclaimed as his work on population.
  • Today, most economists agree that Malthus’s claims about population growth were true for most of history.
  • Critics argue that in recent history, technological advances in the field of agriculture have made it easier to meet the demands of population growth.