European Economics (Lectures)


Revision of key ideas for European economics
Emily Fenton
Flashcards by Emily Fenton, updated more than 1 year ago
Emily Fenton
Created by Emily Fenton over 9 years ago

Resource summary

Question Answer
Macroeconomics Deals with money, wealth, resources Measures materialism (the material world) using prices, GDP, total output, etc Looks at the big picture
Microeconomics Deals with purchasing power, data per capita, etc, as well as material stuff (things we want) Also looks at standards of living and how to measure that
Average Income Conundrum If everyone has equal money, we have communism (which limits trade and causes stagnation because there are no incentives)
WWI: Command Economies During the war Britain and Germany created efficient command economies; resulting in high productivity capacity. It is successful strategy during times of war Inspired Italy (Mussolini) and Germany (Hitler) later on, because it seemed to work so well before
Scientific Mentality Caused by the changes of the Renaissance, Scientific & Industrial Revolutions, Enlightenment Convinced that there is a scientific law for the perfect economy, society, political system; if only we could find it
Industrial Revolution Spin-off Effects (2) 1. Materialism in Europe (created a capitalist/consumer society) 2. Focus on scientific explanation for everything (Newton, Darwin, Freud, Nietzche, Marx)
Darwin and the Scientific Revolution Focus on the survival of the fittest; presents a "capitalist" point of view
Freud and the Scientific Revolution Everything revolves around our animal instincts (such as killing, sex) and at a certain point that is what drives all political changes
Nietzche and the Scientific Revolution There is no God, no truth, and no beauty; man is small and the world is random so we must just do what we can to survive
Marx and the Scientific Revolution If there are laws of nature (governing physics, for example) why can there not be laws for a perfect society?
Applied Technological Advancement Leading to WWI (4) 1. Energy: steam, coal and later electricity allowed for more efficient factories 2. Transportation: widespread building of canals and railroads 3. Machine technology: interchangeable parts, use of energy, systems of mass production (Fordism), use of chemicals, electricity, petrol engines 4. Culture: radio, movies, rise of the entertainment industry
Improving Social Conditions Leading up to WWI (4) 1. Medicine: germ theory, vaccines, access to health care, importance of sanitation 2. Education: mass-schooling, health education 3. Labour productivity: increased due to better health, further education (people live longer and are better at their jobs) 4. Unions: working to improve living standards; weekends, work days, limiting child labour
Central Banks One of the first central banks was the Bank of England. The idea is that it becomes a lender-of-last-resort, regulates currency, fosters trust in the financial system. As well as that, they are useful: safeguarding funds, allows for credit, acts as a middle-man.
Lender-of-Last-Resort Central banks will lend money when there are no other options (no other way of increasing money supply); intended to prevent financial panic and bank runs
Government Bonds Secure investment in the government; goes through the bank (as a middle man). Safe option because the interest rates are low and the return is secure. However, it requires trust in the government.
British Gold Standard System (1870-1914) British pound pegged to the value of gold. Others begin following the Gold Standard system as well, and are so also pegged to the British pound. This was okay, because for a long time it was stable. Using the Gold Standard it is impossible to have the power to control currency, even if it is necessary Gold Standard system falls apart when Britain pulls out in order to devalue the pound during WWI
Drawbacks of the Gold Standard System (4) 1. Necessity of having gold 2. Can't regulate business cycle due to fixed exchange rates 3. Can't devalue currency even if it is necessary 4. Takes away power of monetary policy
Nationalism as a Zero-Sum Game You must compete because other nations are; and you must win to prevent someone else from winning
Cause of WWI: Democracies vs. Monarchies Monarchies don't mind sending their people to war as much as democracies, because only an elite few make that decision. In a democracy, the rulers are accountable and "the people" (who would be the soldiers) have a say.
Why does Britain Abandon the Gold Standard System? In order to set the value of their currency (in order to fund the war). As their prices go down to the "natural" level, their exports rise because their stuff is cheaper than everyone else's who still use Gold Standard.
British War Economy (4 major points) 1. Government regulates supply of raw materials: takes over food industry and begins rationing 2. Nationalization of railways 3. Creation of "state" factories lead to almost full employment 4. State financing raises taxes on income and consumption, as well as pushing people to buy bonds
Rationing A method employed by the British during WWI to carefully control the amount of food available to people. Individuals would get "ration cards" which told them how much they could get of every-day items such as wheat, sugar, eggs, etc.
German War Economy (5 major points) 1. Companies financed by banks (with a focus on luxury goods) 2. War ministry takes over raw materials/resources 3. Hindenburg Program 4. Restriction of civil consumption 5. Encouraging people to buy bonds
Hindenburg Program 1916 Total mobilization of labour in strategic heavy industry sects. The program included a compulsory labour force of all men between 17-60.
Soviet Revolt of 1917 The Czar was not prepared to implement the economic reforms which the people desperately needed, and so was overthrown resulting in a Civil War.
Serfdom Lowest class of people in a feudal society: expected (and required) to work for the nobility that owned the land where they lived. Russia had a serf class until the revolutions of the early 20th century.
Stalin Comes to Power in Russia 1930 1. Collectivizes agriculture 2. Defeudalization 3. Modernization 4. Responsible for the starvation of millions
Versailles Treaty Treaty signed at the end of WWI (1918) with idealist notions of world peace. One major aspect of the Versailles Treaty is President Wilson's introduction of his 14-point plan
US President Wilson's 14-Point Plan Included open diplomacy, freedom of the seas, free trade, reduction of military forces, formation of the League of Nations, etc. Very optimistic and idealist plan (possibly naive and unrealistic)
League of Nations International organization intended to maintain world peace after the end of the first World War. Was the precursor to the United Nations (* was economically naive)
German Reparations after WWI (3) 1. France occupies the Rhur valley (Germany's main industrial strength) 2. Germany forbidden from remilitarizing 3. Steep monetary reparations (unrealistic figures causing Germany to later print money and cause rampant inflation)
3 Political Classes of the Age of Ideology Working class: radicals Middle class: liberals Upper class: conservatives
Radicals Working class people fighting mainly for universal (male) suffrage; against the requirements of land ownership, employment, etc. to vote
Liberals Middle class men in favour of the parliamentary vote; meaning men of property can vote (still in favour of keeping the radicals from voting)
Conservatives Upper class who want the power to remain in the hands of the aristocracy (definitely keeping out the radicals!)
Bureaucratic State Increasingly secular government which can manipulate both society and the economy
German Deductive Systems vs. Anglo-American Inductive Systems Germany: tendency to be deductive, meaning create a perfect system first and then fit reality into it. For example, Marx wanted to change the economic system because he felt that politics, culture and society would follow suit. Anglo-America: tendency to be inductive, meaning using "the facts" and building a system based around them
Fascism An alternative to communism; promised to keep most private property private, but to collectivize key industries and have them government-regulated Extreme form of economic interventionism, emphasizing the supremity of the state
Weimar Republic Aristocratic system in Germany before WWI which was contested during the revolutions of 1919 which resulted in the creation of the German Republic; legacies of the Weimar republic remained however resulting in a division of the left and the right.
Smoot-Hawley Protection Act Act to increase taxes on imports into the US by 50%, dramatically damaging European economy who just lost a huge market. Intended to promote domestic market and home industry; HOWEVER it also reduced the US ability to export goods because other countries followed their example
Fisher Equation Money Supply + Velocity = Price Level + Real Output
What does the Fisher Equation Tell Us About Main Causes of the 1929 Crash? When, after WWI, the Gold Standard was re-implemented, they could no longer control prices. Gold Standard system is so ridged that governments couldn't do much when the crisis hit other than print more money
Dawes Plan (1924) A reaction to the hyperinflation in Germany to prop up their economy with loans from the US to put them back on track. Also returned the Rhur valley back to Germany, and restructured the German reparations (a bit) In reaction to the fear that communism would take over in Germany while the state was weak
Problems with the Dawes Plan The Dawes Plan was a short-term solution to a much bigger problem; the loans still have to be paid back eventually, and the reparations were still crippling.
Young Plan (1929) American plan to further reduce German reparations because it became obvious that Germany could not pay. They extended the time period to 59 years. The plan was adopted in 1930, but abandoned by Hitler's government in 1933
Stock Market Crash (USA) Oct 29, 1929 The fault of speculation and "bubble"; government was raising interest rates, meaning credit was shrinking, no one was borrowing or spending, which added up limiting economic growth.
Speculation The assumption or expectation of huge profits from commodities
Bubble Happens when the value of a commodity is way above the actual output (Ex. Tulip bubble of the 17th century)
Barry Eichengreen's "Golden Fetters" The book that made him famous which reinterprets the Gold Standard system as the cause of the Great Depression Discusses how before 1914, the Gold Standard worked, and why it didn't after.
Why did the Gold Standard System Fail (According to Eichengreen) (2 factors) 1. WWI eroded international trust 2. Britain (centre of Gold Standard system) was replaced by USA as world hegemon
Causes of European Recovery in the 1920's (3 factors) 1. Independent spirit fostered after WWI: "go-in-alone mentality) 2. Lack of trust (another bi-product of WWI) 3. Believe that it was necessary to have military might in case of another war, and so a lot of investment in heavy industry
Black Thursday according to Europe The dramatic collapse of the US stock market, which Europe doesn't necessarily think is a problem UNTIL American loans dry up and everyone goes protectionist
5 Reasons that Deflation is Bad 1. Increases the burden of outstanding debts 2. Deflationary expectations reduce consumption: people think things will be cheaper "soon" so they wait 3. Increases demand for dollar balances 4. Reduces multiplier effect of banks and credit 5. Tends to limit effectiveness of traditional monetary policy: because monetary policy is based on growth and inflation
Beggar-Thy-Neighbour Protect your own nation at the expense of others, even though it really hurts everyone in the end
Abandonment of the Gold Standard for the Second Time When F. D. Roosevelt is elected US president in 1933, he abandons Gold Standard system AGAIN and dismantles it totally in the US. Everyone follows suit by 1936, and this is followed by a slight recovery in the US and Europe
Say's Law Supply creates its own demand
Self-Regulation of the Market In line with Adam Smith's theory of the market's "Invisible Hand"; basically that when left alone supply and demand meet organically (Anti-government intervention)
Protectionism What happens when trade barriers are created in order to "protect" one's own economy. It makes exporting and importing extremely difficult, which in the end hurts everyone. Protectionist policies are one of the main factors making the Great Depression so bad.
Cartels Favoured by Britain after the Great Depression: when competing firms agree to control prices and monopolize markets (maybe by fixing selling or production prices, or instating production requirements)
Aspects of "New Economics" (4) 1. Statistic keeping 2. Money as an independent variable 3. Rejection of Say's Law 4. Rejection of "automatic recovery" of the market (it is the governments responsibility to create recovery)
Keynesian Economics Failure in the 70's-80's Keynesian economics couldn't respond properly to the oil crisis of the 1970's, leading to stagflation. This caused a return to supply-side economics (and later neo-liberalism with Reagan and Thatcher)
Demand-Side Economics Keynesian theory believing that if the government feeds money to consumers, they demand more, encouraging supply to increase. One way of achieving this is to print money, or reduce taxes to consuming classes.
Supply-Side Economics Usually associated with neo-liberalism, supply-side economics theorizes that if manufactures produce more, it will encourage consumers to buy more. This can be accomplished by lowering taxes for everyone
Pro's of Fascism It can foster high growth in certain sectors (usually on a short term) and it can have low unemployment
Con's of Fascism "The people" and trade unions have zero power
Population Program in Germany Implemented after 1933 in order to increase the population. It included measures such as banning birth control as well as implementing "bachelor taxes" Intended to reinforce the feeling that it was German individual's duty to propagate
Schact Famous banking architect who believe that rearmament will lead to economic equality, and proposed totally recreating the German economy based on that
Elimination of the Free Labour Market in Germany Replaced with obligatory labour service; one one hand it may be better than being unemployed, but you don't get to choose your job
3 Ideas Behind Communist Economics 1. Socialism is a world movement which will totally replace capitalism 2. Central planning is key to overthrowing bourgeoisie (taking away private property) 3. The existence of a clear and obvious dichotomy between the rich and the poor
Soviet Growth of 1930's GDP grows by 61% (which is way more than the rest of the world), and they doubled per capita income. Gained them world admiration, though no one could figure out how they had done it
Seven major reconstructive changes after WWII 1. United Nations 2. Bretton Woods system 3. International Monetary Fund (IMF) 4. World Bank 5. Marshall Plan 6. GATT/WTO 7. NATO
United Nations Formed in 1945 as a sort of sequel to the League of Nations. Was an international forum which put moral pressure on would-be rogue states. Structured by a general assembly (deliberative body) and the secretariat general (administrative body) and an international court. Pro international trade and anti unilateralism
Bretton Woods System Intended to establish a stable international trade network, the system was agreed upon in 1944. It incorporated the US dollar as dominant currency, Gold Standard system and the IMF.
Nixon Shock US President Richard Nixon pulls out of the Bretton Woods system in 1971, because it couldn't deal with the pending crises.
International Monetary Fund (IMF) Intended to address the imbalances of payment as well as trade imbalances (current account surplus/deficits)
Marshall Plan Economic plan to help Europe (mainly Germany) with very few strings attached
Atlantic Charter Roosevelt and Churchill want to access the resources for trade and prosperity for all nations; one of the main clauses of the Atlantic Charter was that they wanted to guarantee some sort of free trade network. It lead to the proposals for the Bretton Woods conference
Why is Balance of Payments bad? (4 reasons) 1. Borrowing (to import or to pay off debts) is unsustainable 2. Surplus on your financial account means that foreigners have increasing claim on your assets 3. Consumer spending might be too big a part of GDP 4. Balance of payment deficit causes loss of confidence by foreign investors
Reasons that Balance of Payment Deficit is Good? (4) 1. Could occur during a period of inward investment: meaning borrowing to invest in own economy 2. Leads to growth which enables you to pay off debts 3. If big enough in floating system, it could cause automatic balances 4. (Appearance of) a strong economy which attracts investors
Keynes at the Bretton Woods Conference Representing the UK and wanting a central bank which can create money to lend to debtor nations (with strings attached)
Bancor The artificial currency Keynes proposed at the Bretton Woods conference to be lent to debtor nations
White at the Bretton Woods Conference Representing the US, he wanted a finite pool of actual national currencies to lend to debtor nations which was backed by gold, balanced by actual payments. He also advocated for the existence of automatic credit.
World Bank International bank for reconstruction and development, started at the Bretton Woods conference. Originally it was intended to fund the reconstruction of Europe after WWII (non-US loans) and was very conservative. This changed in 1968 when President Johnson wanted to use the World Bank to combat poverty within America
World Bank 1989 "New Image" Their goals change... Eradicating poverty and hunger, achieving universal education (increasing labour productivity), gender equality, decrease child mortality rates, improve maternal health, help to stop HIV, improve environmental sustainability, establish global partnership (for reach people who care) *** Criticized a lot for being neo-colonialist
GATT/WTO General Agreement on Tariffs and Trade/World Trade Organization Anti-protectionist organization intended to protect nations from another crisis as terrible as the Great Depression. With the regulation of tariffs and taxes, after 50 years world GDP has gone up more than 10%
Dumping Cheating by saturating the market with below-cost goods in order to wreck the competition, and thereby securing a monopoly. One of the rounds of the GATT/WTO agreements in 1964 addressed "anti-dumping" issues
World Trade Organization (WTO) Signed in 1995 and made the requirements of GATT formally mandatory; now companies must abide by the rules of WTO
NATO North Atlantic Trade Agreement was signed in 1949 and was originally a collective defense agreement directed towards the expanding Soviet Union. It requires that NATO members spend 2% of GDP on defense
Liberal Market Economy (LME) Capitalist model adopted since WWI by the Anglo-American world. In this model business are funded through investments on the stock market, venture capitalists and selling stocks to the public. It is risky, but allows more money to be made faster.
Characteristics of a Company Driven by Stock Markets (LME) (5) 1. Short-term thinking 2. Aim to maximize profits at all costs 3. Take quality shortcuts 4. Request bail-outs at the drop of a hat 5. Minimizes labour
Cooperative Market Economy (CME) Capitalist model (common in Germany) which has a more corporate mentality; businesses are funded by banks which means there are more strings attached but that also makes them more secure. This tends to explain why German goods tend towards luxury goods
Path Dependency The idea that once a system is in motion it will continue in the same direction because this is the cheapest option
Foundations of Modernity (5) 1. Rise of the middle class 2. Women's rights 3. Hippie society 4. Baby boom (youth population) 5. Changes in mass media
Rise of the Middle Class Change in demographics, with the majority of people having the time, money and education to think critically of their surroundings
New Fears/Difficulties of the 50's Cold War tensions made people afraid of nuclear power. This fear was a major cause of the student movements of the 50's-60's protesting these Cold War tensions. This was mainly because the Cold War was being fought by political elites and didn't reflect public opinion
Servant's Revolution (and the 3 reasons for it) Before the 20th century, there were two types of people: people who had servants and servants themselves. This changed with the rise of middle classes for a few reasons. 1. Wage increases meant people couldn't afford servants. 2. Better employment opportunities arose for people who would have gone into service. 3. Technological advancement meant household chores were easier to accomplish with less manual labour
"Housewife Revolution" (5 factors) *The housewife revolution was only possible after female suffrage 1. Available jobs for women (less manual labour) 2. Education opportunities 3. Self-sufficiency for women (could live alone, move to the big city, etc) 4. Higher wages made more incentive to go out and work 5. Birth control pill took emphasis away from marriage and family
Mass Media in the US vs. UK Mass Media in the US: funded through advertising and directed towards the lowest common denominator (capitalist-style) Mass Media in the UK: run by "Oxbridge" elite with a mandate to educate and improve the masses
Gap Between Black Market and Control Prices The gap widened in Germany after WWII because black market goods are controlled "naturally" by supply and demand requirements and are inflation-dependent; compared to the legal prices which were often fixed/regulated
Policy Uncertainty This happens when it is uncertain which way a policy is going to lean. For example, in France and Italy (1945-46) communism was very popular and their investments went down because capitalists weren't sure whether capitalism would last/take over
Social Democratic Party German party which came into existence with a focus on nationalization of industry and retention of price controls
Confiscatory Taxation Taxes so high that they "take" everything you have
American Solution (5 aspects) To combat the fears of confiscatory taxation and nationalization: 1. Discredit political radicalism (WWII did that for them) 2. Bad reputation of Soviet-style communism (introduction of the Truman Doctrin) 3. Signing of th GATT (1947) 4. Introduction of the Marshall Plan (1948) 5. Signing of NATO (1949)
Truman Doctrine USA vowing to aid those countries resisting communist oppression. Mostly directed at Eastern Europe, but also in Asia and South America (Korea, Vietnam, Cuba)
European GDP Growth of the 1950's East Europe: 7% growth South Europe: 5-6% growth West Europe: 4.6% growth * West Europe is actually doing the best; higher GDP per capita, higher standards of living, more development
Foreign Workers After the second World War, North Western European growth was mostly fueled by the existance of foreign workers. Many workers came from the Mediterranean area to take up the many job opportunities there.
2 Categories of Reasons for Economic Growth 1. Factor inputs: changes in volume of resources used to produce GDP - more product 2. Technology: changes in growth can occur as a product of increases in output per unit (productivity)
Factors of Production That which facilitates production: land, labour, capital, entrepreneurship/management
OEEC (1948) Organization for European Economic Cooperation involved 18 nations (non-Soviet controlled states) who had been directly effected during both World Wars, and was first intended as a way of organizing the distribution of US cash from the Marshall Plan
Welfare State A nation state whose government is committed to ensuring economic and social well-being through the redistribution of wealth and other government sponsored programs Welfare states often contain components of democracy and socialism
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