ECO600 Exercise sheet

ICMS

Week 1 Introduction: economic goals, needs/wants, ‘economic growth forever’

Your name: ____________Heman________________

1. Should the economic system’s final goal be only this: to give us ‘happiness’ by supplying us cool
cars, fancy smartphones, bottled drinks and Thai massages (things delivered by markets)? Is that
enough for well-being?

[There is no single answer, given that every human’s definition on ‘happiness’ is subjective. These
are my thoughts on it. You might have a different view. Express them].

For X, purchasing and viewing a certain object might give her great happiness (perhaps the ‘colour
field’ abstract paintings of Mark Rothko fills her heart with joy), whereas for someone else, Y, it
could be time spent creating a painting, or for Z, it could be time spent chatting and laughing with
a painter he loved. Thus, happiness could be obtained by consuming or using a good, doing an
activity, being with people who or being in a place which makes them happy.

So perhaps the economy should provide us a variety of things we subjectively feel will make us
happy or be well (well-being: happiness can be seen as a component of it). It should also enable us
to get other, objective things that can ensure our well-being: objective because everyone needs
good healthcare service, education, a pleasant environment, time to spend with good company,
peace of mind.

So perhaps the economy should provide is with a host of other things that give us well-being, not
just happiness. Perhaps it should help us meet our basic needs, feel safe and secure, achieve our
full potential (to be all that we can be); allow us to find meaning in our lives, be able to participate
in decisions that affect us (at work, in our families, communities or nationally), maintain ecological
balance so we always get good weather, a reliable supply of drinking water, and beautiful plants
and animals to nourish our minds and hearts.

We may or may not get all of these through consuming Apple’s latest gadget or a fancy Armani
shirt— things that the (market) economy currently gives us, right? What if producing ‘fast fashion’
results in planetary destruction?

If we take control of the economy, what other final goals do you feel it should provide you and your
society?
Week 1, Reading #1, Section 2.2-2.4 (pp. 41-44)

[The final goals in the parentheses are from Table 1.1, p. 44, in Week 1, Reading #1]

I’d want the economy to produce in a way that the clothing I buy lasts and does not destroy the
planet (ecological balance): currently, the fashion industry contributes to 10% of all carbon
emissions that cause climate change, and is the second biggest industrial polluter after oil.

I’d want the economy to continue to provide me a job which I am not bored of doing but gives my
life meaning, which provides me enough job security, free time and pays me fairly for the effort I
put in (a sense of meaning, security, fairness, enough time to establish good social relations or
realise my full potential).

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2. (a) Inputs used to produce goods and services so that profit can be made are traditionally divided
into land, labour and capital. They called these ‘factors of production’. Week 1’s Reading #1
categorises these as five different types of capital. What are they?
Week 1, Reading #1, Section 3.2 (pp. 48-49)

[You know these!]

(b) Bernie Sanders who hopes to become America’s next president in 2020 wants to force large
companies to make their employees slowly become the owners of the companies, thereby allowing
them to take control of the company and part of the profits. In Spain, the world’s largest worker
cooperative, Mondragon, involves workers agreeing to keep their salaries relatively equal: no one
earns excessively more than others.

What types of capital is especially important in these stories?

The Bernie Sanders case: social capital must be strong enough to demand the reconfiguration of
financial capital (ownership of the means of production which generates money/profits).

The Mondragon case: social capital, as workers need to have a sense of solidarity to work together
and agree to make sacrifices to make everyone better off (and to a lesser degree possibly financial
capital and manufactured capital also to be able to establish and run such a company).

It seems to me social capital is lacking in our society these days (social capital being “the sum of
the interpersonal links and civic participation of a person”); people have become increasingly
individualistic and more (which plays well into the hands of greedy businesses, because no one
negotiates pay rises as groups but as individuals: less bargaining power).

(c) Could some types of capital be in conflict with others? Which? How, do you think they conflict?
(One clue: the term, ‘labour exploitation’; see here).

- Labour capital (workers) vs. manufactured capital (private business owners) or financial
capital (the money financial system makes available for businesses to buy what they need
to produce things for the economy for profit): the goal of the financial system is to make
more and more profit with as little investment as possible, and this could (not necessarily,
but could) mean workers are ‘squeezed’ to work harder and longer for the same pay or
tricked to accept a ‘pay rise’ which is actually proportionately less than the effort they put
in (“paid peanuts”).

- Natural capital (ecosystems) vs. labour capital and manufactured capital (people as a
whole)

Anything else you can add?

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3. In a world with fixed amounts of resources, we have a trade-off: if we make more of some
products, then we have to make less of other products. Can you sketch a production possibilities
frontier (PPF) diagram to show this? There is one way we can make more of all products in an
economy. What is it? Answer: by creating economic growth. Show this this effect in the PPF by
adding another line to it:

More of everything produced. For this to happen, we need to dig out more resources, make more
equipment and have a larger workforce than before (to go beyond ‘limited resources’).

4. The economist John Komlos classified three groups of goods that people need and want.
Week 1, Reading #2

(a) What are these three groups? What makes people need or want the goods from each group?

[Answers are in the reading material]

(b) Select two goods that you own that were once not a need but had suddenly become like a need.
Categorise them according to the three groups above (e.g., earlier, my _________ was a ‘comfort
good’ but now is a ‘necessity’ because _______).

- Smartphone: I remember growing up ‘in the old days’ with only a land line phone at home.
I was fairly happy with that situation at that point. I didn’t feel I ‘needed’ a smartphone.
Now it is a comfort good: I seem to presumably need it to lead a ‘dignified life’ or to
‘function well in society’ (my boss wants to be able to contact me by phone). I don’t think
it’s a luxury good for me: I’m not using it because it’s a trendy social status marker (I also
was not ‘manipulated’ by friends or advertising to buy my iPhone… I got it because my
Samsung went out of order and the repair shop guy offered to sell me as a replacement a
cheap second-hand iPhone that was just as small as my Samsung— I like small phones,
they’re convenient).
- (Possibly a bicycle): I walk, but a friend is trying to convince me to buy and ride a bicycle
like she does. I don’t need a bicycle. But maybe once I own it and know its benefits, I might
then feel I need it and cannot be deprived of it. But since I am a poor lecturer, I cannot
afford to buy it, so I’m happily still walking and taking public transportation (but I did rent
a bicycle to cycle around bicycle-friendly Amsterdam— just for fun).

(c) According to marketing guru Dan Lok, do people want or need a product only because of its
‘features and benefits’, or because of something else as well? What ‘something else’?
Week 1, Reading #2, supplementary video

[Ask Dan Lok. He’ll tell you].

5. Economic growth is often seen as the biggest goal of economic policy in many countries.

(a) What is economic growth?

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The increase in the goods and services produced in a country, normally measured as a percentage.
The amount of goods and services produced in a country is called ‘gross domestic product’ or GDP.
More and more GDP from year to year? Then there’s economic growth.

E.g., 6% annual growth, meaning if last year $1 billion dollars’ worth of goods and services were
produced, this year the economy is producing $106 billion dollars’ worth of goods and services –
the economy now makes an extra $6 billion dollars’ worth of goods and services.

You might have even occurred to you that if the price of goods and services went up (things
became more expensive), then that extra $6 billion may not be an actual increase in the amount of
goods and services produced: it could be that there was no ‘real’ economic growth (the same
amount of goods and services were produced), just that the price level went up. So there is growth
only in name (or what we call ‘nominal’, which means ‘in name only’). That’s why economists
speak about real GDP and nominal GDP.

Referring to Week 1’s Reading #3:

(b) Explain why Herman Daly’s thinks never-ending economic growth is a problem. Next, what does
he say we should do about economic growth?

(c) Likewise, what is Bjorn Lomborg’s position on economic growth? Next, why does he say that we
do not have to worry about ‘limits to growth’ or running out of resources?

Lomborg’s argument was that humans are resourceful, and will be able to innovate new
substitutes for resources that are depleting. In addition, Lomborg argues that economic growth
can eventually deliver better quality of life (even if temporarily we may suffer environmental
degradation or pollution: see the environmental Kuznets curve hypothesis, here; see paragraphs 1
and 2 in the ‘Introduction’).

Daly’s argument is that economic growth can only be sustained if “the economy were not a
subsystem of a larger finite ecosystem, the economy were growing in a nonphysical dimension, or
the laws of thermodynamics were negated”. His argument is that we are witnessing widespread
environmental problems, caused by growth, which can eventually undermine the economy itself.
He says that without growth, the only way to cure poverty and bring about a better quality of life
we must share (redistribute wealth). But what might the obstacles to this?