As the US and China are developing into a trade war, let us consider the implications of globalization and protectionism and there effect on the developing world.
Just south of Florida lies the ostracized paradise of the idyllic island nation of Cuba. The now communist state, led by Raul Castro, has evolved from one of America’s allies to now a nation that the USA fails to see eye to eye with. The Obama administration made attempts to redeem their relationship and things looked up for the future between the two countries. Yet Donald Trump’s new government has different plans, leaving Cuba in an insecure position for its future with its superpower neighbour.
A Troubled History
In 1898 the USA helped Cuba gain their independence from being a colony of Spain. For the next half decade, Cuba and America were essentially allies. However much of the trade was done on America’s terms and for their benefit with all oil refineries owned by the USA, 90% of the communications and energy business as well as other entities. This was made possible under the rule of the dictator Fulgencio Batista. In 1959 the Cuban people rebelled against him under the new leader Fidel Castro.
Following the USA’s failed invasion attempt to regain control, Castro made deals with the then USSR leader Khrushchev, making Cuba communist. After the periods of high tension during the Cold War, the USA taught the world a lesson in how to hold a grudge. It was incredibly difficult to travel between the two countries and the trade embargo between the two countries prevented all American businesses from conducting business with Cuban interests.
The Obama Thaw
In December 2014, following months of secret talks, the then US President Barack Obama and Cuban leader Raul Castro simultaneously announced an agenda to open up the rift between the Cold War enemies. Political prisoners were swapped and over the next two years, Cuba opened up to the west. The US embassy in Havana was re-opened following its closure in 1961 and many American companies began to stake their interests in the nation.
Google attempted to help the island improve their communications by introducing their data servers into the country. Airbnb is also investing in the country, now offering over 1,000 listings in Havana. Due to the removal of the travel ban, US Airlines and cruise companies have now resumed operating to the island. Theoretically, these moves are highlights of a potentially brighter future between the two countries.
Obama’s critics declare that he failed to make sufficient concessions on the human rights issues in the country due to the lack of democracy. The Cuban communist regime does not permit any other party and hence does not allow free elections. Opposition to the communists are frequently harassed or detained. In the earlier times of Castro’s rule, oppositions to the revolution were executed.
And now Trump
Recently in June 2017, Trump slammed the Obama administration’s foreign policy and outlined his plans saying he proposes, “cancelling the last administrations completely one-sided deal with Cuba.” Despite these bold words by the new president, the reality reflects a far more partial shift. The new foreign embassies remain open in Havana and Washington and there will be no further restrictions on the types of goods that can be taken out of Cuba by American citizens. However, the new administration aims to tighten travel regulation and commerce with the Cuban nation and in the process, Trump has instructed Rex Tillerson to increase opposition to the UN who propose to fully lift the trade embargo.
To the Future
The relationship between America and Cuba have been marred for decades. No simple agreement is going to change this and the lack of free market economies in Cuba makes it harder for the USA to seek trade deals and to open the country due to the monopolised power of planning from the government. The USA seeks to open negotiations for the future; yet as with many matters of international relations with the new president, much speculation rises around the issue. There is not much we can do but wait for future developments on the ever-going roller-coaster relationship between Washington D.C and Havana.
When discussing the careers of the future, there is often talk of several jobs being automated with technological advances in robotics. However, robots are still a long way from taking over, and in the meantime, the changing nature of labour market means that there will be new jobs in the future that do not exist now, but what are these jobs?
To begin looking at this issue, it is important to look at the present before looking at the future. So what jobs exist now that did not exist say, 15 years ago. Facebook started out of Zuckerberg’s Harvard dorm room in 2002; YouTube was only launched in 2005 and Instagram only started sharing photos in 2010. 15 years ago, it would be unheard of for companies to pay high salaries for social media managers and digital marketing specialists, in fact, social media did not even exist at the time.
However, now we live in the digital age and social media has become a massive advertising tool that connects billions across the world. The iPhone stormed the world in 2007 and started the software dynasty, creating the billion-dollar industry of app development, fifteen years ago the word 'app' did not even exist yet now millions have jobs as software and web developers. Even CoverShr would not have existed as blogs are a product of the growth of the web and the technology, without the internet, was not available.
Now, what about the next fifteen years and beyond? Data is becoming more and more important and is set to rule the future. This sentence may be ambiguous but consider Facebook. The social media website gathers information about you such as your favourite foods and music, lifestyle, habits etc. This information is invaluable to companies to give more targeted ads and to specifically target you personally. Uber holds data on common trips, eBay and Amazon hold data on consumer purchasing patterns. However, this data is often unstructured or has no structure at all. Statisticians and data miners will see incredible demand for their work as data becomes the new gold for business.
As well as this, globalisation is occurring all around the world, and to adjust to this we need to start thinking global, not local. According to Javelin Strategies, 20% of all online trades are already being done with foreign currencies and this is only expected to grow, so the those with knowledge of global finance and exchange rates are also going to see increased demand for their skills as well as strategists, systems architects and management consultants who can create companies’ international frameworks to expand with the new interconnected nature of the world.
The digital era is still growing, so this means that software developers in all aspects are going to be in demand. Technology is the future, with billions of people now gaining access to the web and its ever-expanding network, skills in programming will be in demand, and it is for this reason that the government is proposing that programming is added to the curriculum for all students.
However, this is a very limited summary of what the future can hold, fifteen years ago, nobody could have predicted the expansion of social media and the internet, and I am not attempting to predict the next breakthrough. The future holds a plethora of opportunity in new and existing fields that we would have never previously considered. Automation is a real possibility and some jobs will be replaced by robots, however, the future demands new skills and requirements.
“Talent, hard work and determination are the most important skills.”
To be successful you've got to be creative, be adaptable and although you may not know where you will end up, or even if that career exists today, trust that your talent, hard work and determination are the most important skills and they can be applied to almost all careers. So if you take one thing from reading this today, don’t limit yourself to the opportunities that are available today, invest in yourself and pioneer the future.
What can a degree do for you? It is, in essence, a piece of paper that a university has provided you in recognition of your ability within a subject. That piece of paper, of course, does have its uses of course when attempting to find a job, however not having a degree does not mean that you cannot be successful.
The founders of Apple, Microsoft, Uber, Whatsapp and Facebook are all college dropouts. Steve Jobs, Bill Gates, Travis Kalanick and Jan Koum all went on to become hugely successful and none of them owned a piece of paper that acknowledged their talent. Talent comes from you, and no recognition from a university will change an individual’s motivation, desire and passion.
By no means am I trying to imply that gaining a degree is a waste of time, it is most definitely not. In fact, graduates are expected to earn £9,500 a year more than those who did not go to university and this figure can become much larger. However, I would like to question is it the people who go to university who are successful, or is it the time they spend at university that makes them successful.
Oxford and Cambridge pride themselves on being the best universities in our country, however, are their league topping results a result of their teaching and facilities or the nature of their students being the most academically gifted among the nation? I would argue that it is the latter. The founders of the global corporations that I listed earlier almost all managed to make their way into the Harvards, Yales and Ivy Leagues of our world, yet they did not need their support to be successful. What they did need was creativity and entrepreneurial flair, something that no university will be able to teach.
For those with the potential to access university, the modern labour market is beginning to provide alternate routes and career paths. School leavers programs are becoming widely popular among financial, software and engineering firms. To name a few IBM and Ernst & Youngs offer school leaver programs that let people enter the workforce directly after their A-levels, giving the opportunity to earn income from day one and also to even gain formally recognised qualifications such as the ACA for accounting.
Overall, going to university and getting that degree is what many students around the country aspire too. It is not a bad aspiration and is highly credible, however, this is no excuse to follow it blindly, there are more options available to you and getting a degree should not limit your entrepreneurial flair. The students make the university, not the other way around. So, by all means, go to university, but just know that there are more options available.
The law of demand states that the quantity demanded for a good has an inverse relationship to its price. This is self-explanatory if we look at a general example of a bar of chocolate. At a high price, few people will want to buy a bar of chocolate, but equally that same bar of chocolate at a low price will mean that many people will want to buy it.
This rule stays the same for the vast majority of goods and services in the global economy from chocolate bars, to legal services, to the production of automobiles and undermines the fundamentals of economics. However, this may not always be the case.
Why is it that we find rappers and sports stars bragging about their jewellery, their clothes, their cars amongst a plethora of other things? The main reason behind this is that these goods act as a status symbol to the party who has purchased them. For an item to be a status symbol it must show that the owner is someone who wants to be seen as wealthy, and the only way an item is able to do this is with a large price tag.
Hence, we find cars that are sold for millions of pounds, enough money for a regular family to buy their house outright and still have money left over. Would the Jay-Zs and Conor McGregors of our world buy your regular family’s Ford Mondeo? They fulfil the purposes they require, being reliable at getting you from point A to point B and suit the clear majority of the world. However, we are more used to Jay Z showing off his car collection of Rolls Royces, Ferraris and Porsches. These vehicles fulfil the same purpose but act as status symbols.
A status symbol only works if it is exclusive. Owning a Rolex is special because it puts you in a limited group of people who have the potential to buy a Rolex and it does this through the high price tag it commands. If a Rolex was cheaper then the reputation and status behind it disappears. Hence this is why we see watches, cars and other luxury goods with price tags and high demand from the wealthy that break the fundamental laws of economics. These goods are known as Veblen goods and are an anomaly to the expectations of society. Veblen goods include the most expensive items and cater to the most well off in society. Further examples include Vintage Don Perignon, Louis Vuitton bags and everything for sale in Rodeo Drive in Los Angeles.
A similar concept can also be seen with Giffen goods. The good sees the positive relationship between price and demand due to the income effect of the higher price outweighing the substitution effect. However, Giffen goods are even less known than Veblen goods as their concept is limited to the poorest of societies with limited choices of good, and even then, there are some economists who do not consider them to exist.
The idea is that if you have a staple good, let’s say bread, and the price increases we expect that fewer people buy the good. However, if you were in a society where there were limited substitutes for the staple bread you would be forced to cut consumption of other more luxury foods as your disposable income (income after all necessities have been paid for) has reduced. This means that you are forced to buy more bread as it is still the cheapest foodstuff available to compensate for your reduced ability to buy the luxury item which means that the increases in price have increased the demand.
Veblen and Giffen goods cover such a small portion of the goods and services of the economy that they are largely ignored by economic models. Yet it is still important to be aware of these anomalous goods that may or may not even exist in the case of Giffen goods.
The UK unemployment rate has fallen to its lowest level since 1975 and is currently estimated at 4.3% in the latest figures. This news should be good for all but these figures hide a darker secret as several firms, including the high street giants of Sports Direct and McDonald's are coming under fire for their increasing use of zero-hour contracts. As UK unemployment reaches record lows, the number of employees on these contracts has risen to record highs, it is estimated that 910,000 workers in the UK are employed in this way representing around 3% of the workforce.
So, what is a zero-hour contract?
In the majority of cases, these contracts allow firms to employ workers with no obligation to provide a minimum number of hours whilst at the same time, workers are not obliged to accept any work offered either. They are often used for employment within the agricultural, hotel, retail and healthcare sectors. The main argument for their use is the flexibility that it should theoretically provide employees. A work rota per week is typically published and staff are free to swap shifts and change arrangements as per their needs. Supposedly, this is beneficial for university students who work part time around their studies and those moving out of the labour force to supplement their income by working part time. However, this assumes a Utopian world, and the harsh reality for many workers is not reflective of these ideals.
One issue is that the demand for labour is in many cases seasonal; for example it is a commonplace for retailers to use zero-hour contracts to offer more hours of work from May to December as their turnover increases in these months, due to the holiday season in the run up to Christmas and equally in the agricultural industry, more hours of labour are needed during harvest than other times of the year. This means that employees are not guaranteed hours of work per week in times when the demand for labour is reduced.
Polls have suggested that over a third of those employed on zero-hour contracts would like more hours a week and more stability in their income. Zero-hour contracts allow employers to offer hours as and when it suits the company, which can be detrimental to those on low incomes who need a guaranteed income. Without fixed hours, these people cannot guarantee their incomes so budgeting becomes near impossible which is unfair and exacerbates inequality as those on zero-hour contracts are often those with low income unskilled jobs.
A question to be asked is why don’t workers seek alternatives. In some cases, jobs are simply not available and this is the only option available due to the widespread use of zero-hour contracts. In the worst contracts, they contain exclusivity clauses stating that the worker is not able to work for another firm even if hours are not given.
Employee welfare and rights are a serious issue and it is not to be taken lightly. Recently, things have been getting better. Last year Sports Direct, a firm who came under severe scrutiny for their use of zero-hour contracts, offered its 18,250 shop staff on zero-hour contracts the option of a guaranteed 12-hour week. This move is welcomed but it begs the question is it enough?
On the other side of the world, New Zealand have gone one step further and banned this type of employment outright in the names of worker’s guaranteed rights and to avoid their exploitation. The UK is seeing more light being cast on the issue, as awareness is raised about exploiting firms such as Sports Direct are reforming and are moving to fairer and more equal contracts for its employees. Whether the UK can follow suit with New Zealand is yet to be seen but the issue still looms over the thousands of workers without guaranteed hours.
On the streets of Nairobi, the hustle of trade consumes everything around you, yet much of this happens without a banknote or coin in sight. In 2012, Uber made it possible for you to pay for your taxi by your phone, but this was possible in Kenya since 2007. In Kenya, you can pay for almost anything with your phone through the means of simple text message.
Once you are registered, you are able to pay into the system through any of the country’s 40,000 agents who credit the money to your M-PESA account, much like an Oyster Card top up in London. From here, it is now possible to trade with all others with an M-PESA account by quickly transferring funds by mobile text message. For these trades to occur, you do not need the latest smartphone straight out of California, but a basic $15 text-and-calls phone is sufficient.
M-PESA (“pesa” means money in Swahili) was launched by Vodafone’s Safaricom operator as a means of making small money transfers between users through text message. This new system grew, and until today more than 70% of the volume traded is done through this electronic means and not through cash. Vodafone’s system has an estimated user group of 30 million users today and records up to 529 transactions per second in everything from simple money transfers to loans to healthcare.
The mobile phone trades in Kenya are beneficial; they have been heralded by humanitarian aid organisations for their abilities to provide a simple method in a lesser economically developed country for workers in the cities to send back money to their families in rural villages. The sheer simplicity of M-PESA is what allows it to bring so many people into the financial world. Being backed by Vodafone’s Safaricom, each trade that occurs is logged and monitored, which has the added benefit of preventing money going into the black market economy and being used for crime as the cash economy is shrinking.
The funds held in Safaricom are not held by Safaricom contrary to popular belief: they are backed up by a trust and are out of the corporation's reach. The money is 100% backed up by pooled accounts in central banks and the M-PESA credits can be transferred to real money if needed. However, with the current widespread use of M-PESA with more than 2/3 of Kenyans using it, many do not have a need to convert M-PESA to cash, as so much trading happens through the mobile platform.
The developments in Kenya lead us to the question; what is the future of money? New technologies have seen a huge rise in plastic to be used over cash, with more and more people having credit and debit cards. Contactless payment and mobile phone payment is yet another new invention that allows trade to happen faster for small purchase items, reducing the need for people to hold cash. Some believe that with the rapid rate of technological increase, cash is coming to the end of its life.
However, the Bank of England is midway through the rollout of new polymer banknotes into the UK currency. The UK is not at the fabled point of a no cash economy yet. In less developed countries, the technology simply does not exist to provide a no-cash economy. So in the near future, banknotes and coins will still fatten our wallets, but Kenya acts as an example to all of us. It is possible to envisage a world without the need for cash through the use of mobile payments, however, that future is still a long way away, but Kenya is yet again first in the race towards it.
Money makes the world go round, it really does. Look everywhere around you, and you will find money changing hands. Everybody has certain goods and services that they want to buy, and everybody around the world does this with money, making it so important. What is it about the concept of money that gives it this omnipresent rule in the global economy?
First, imagine you went back to primitive times when money was not yet a concept. Say, for example, you were a farmer and produced potatoes. You could not survive off potatoes alone and you don’t have the skills to make all the other items that you need or want. If you wanted to eat something other than potatoes, say fish; you would have to go out yourself and find a fisherman who was willing to trade your potatoes for his fish. This is great if your only exchange was potatoes and fish, but let’s make it more realistic.
There is no guarantee that two given people will have goods that the other needs. Say you wanted to eat chicken and the butcher has no need for potatoes, you would need to trade your potatoes for another item that the butcher wants, say for example new knives to get your chicken. When you go to the blacksmith to trade your potatoes for knives, he may not want the potatoes either, he may want a new shirt. To get your chicken you are now in a situation where you have to find someone to trade your potatoes for a shirt, then the shirt for knives and then the knives for chicken. In today’s economy with millions of goods and services on offer, the ideas of trading goods and services until you get what you want are ridiculous, it would take far too long and would be unbelievably inefficient.
This is where money comes on, acting as a placeholder or a medium of exchange. When you go to the butcher for your chicken, you can pay in money, which the butcher can then just use to buy the knives himself, without further need of bartering. The placeholder makes transactions so much easier and gives a universal means of exchange for all parties.
Now another issue that money solves is the issue of value.
Some goods are very difficult to barter with. It is difficult to know how many potatoes are worth the value of a table (I apologise for the poor example) as the two products are unrelated and are difficult to compare. However money acts as a measure of value, both potatoes and tables can have value in monetary terms, giving a suitable means to compare the two products allowing easier transactions.
With money acting as a means of value, it can also act as a store of it. Going back to the situation of the primitive potato farmer, he is in a situation where his crop will eventually rot. If he wanted to store money for a large payment, for example, if he wanted to buy a new horse, he would be unable to save in potatoes. The ability to trade potatoes for money allows individuals to have a store of value and to retain their purchasing power in the future if you chose to not spend today.
Another benefit of using money is that it can act as a standard of deferred payment. In today’s world credit is synonymous with transactions. This function of money allows people to delay payment and settle debt in a much easier way than bartering with goods and services that could potentially rot and are sometimes not equivocal. Money makes the financial transaction far easier as its value is guaranteed.
However, having said this, it is worth mentioning that money cannot carry out these purposes without people’s confidence in the system, or else there is a risk that it will lose its acceptability. When this happens people will not have faith in money to be able to hold value for goods and services. A real-world example of this was in Zimbabwe, where hyperinflation occurred and the value of money dropped rapidly, making the money worthless, destroying people’s savings and their confidence to trade with it as they did not know if they could make purchases.
Overall, money in whatever form cash or bank deposits is an underlying factor that glues the global economy. By reducing the need for bartering, money has been able to allow economic trade for centuries through its means of exchange, measure of value, store of exchange and its standard for deferred payment. So be thankful for those pieces of paper in your pocket and the numbers on your statement. Without them, the world really would not go round.
Other than the “popular” board game that you may have unwillingly played with your family, a monopoly refers to an economic market situation where there exists only one firm that provides a good or service. This type of market means that there is no competition, no substitutes and limited opportunity for new firms to enter the market due to a large barrier to entry.
A monopoly is a not a good situation for a market to be in, as the providing firm has no incentive to compete, as the firm has nobody to compete with. There is no price in providing cheaper goods or services as there is nobody else to buy them off, and there is no point in improving the product offered, as there is no alternative. If we look at a standard marketplace, say that of the smartphone industry: firms such as Apple and Samsung spend millions on research and development to provide new features, whilst other firms, such as the newly emerging OnePlus, employ price competitiveness through providing cheaper handsets with just as many features. In stark contrast to this, a monopoly only has one provider. Pure monopolies are very rare, and some argue that they do not exist, but a good example is Windows operating system before the rise of iOS and Linux. Bill Gates and Windows were in a position where they had limited incentive to improve or cheapen their operating systems as people would have purchased from them regardless.
You may question, why don’t new firms simply come into the marketplace to undercut the monopolistic firm or provide a better product. In most cases, the markets that monopolies operate in require significant capital investment. Your average Joe could not simply start making accredited operating systems to compete with Microsoft, they would not have the expertise, reputation or the funds to do so.
I mentioned it before, but monopolies are quite rare, so a more important consideration must be given to markets in an oligopolistic (yes, that’s a real word) state. An oligopolistic market is similar, however, there exists a small number of large firms that provide iterations of the product, and similarly to a monopoly, it is difficult for new firms to enter the market as per the aforementioned reasons. In an oligopoly, firms go against what is expected of them and choose to collude as opposed to compete. This means that they operate together as if they were a monopoly, although there still exists a smaller amount of competition than what is expected.
A good example of this is the duopoly (again, a real word, referring to a type of oligopoly with two firms in the market) in the cola market between Coca-Cola and Pepsi. Albeit both drinks are relatively cheap, one could choose to undercut the other and due to the price inelastic demand increase their revenue, but they both sell at similar prices so they both make a profit. Alternate firms attempt to enter the market, but they do not have the marketing budgets to compete with the soda giants.
A further example is commercial airline routes in America. Most domestic routes within America are operated by three main carriers: United, American and Delta. Between them they represent 80% of all domestic flights and although competition exists, competitors do not have the funding to invest in capital equipment of airplanes and advertising to the scale of these market giants, resulting in higher than necessary prices for consumer and lower quality than what could be possible with the absence of an oligopoly.
It is worth mentioning that geography can also play a part in monopolistic nature of a firm. For example, in a certain area, a firm may hold a monopoly, whereas in a wider area they may be part of an oligopoly. For example, sticking with the aviation examples, Ryanair may be a monopoly in routes to Ireland, but they are part of an oligopoly with other budget airlines if we look at Europe as a larger area.
In conclusion, be aware of oligopolies, the most underrated yet important type of market that exists. Although there may appear to be competition in a market, this may not always be true as firms may have solved the prisoner's dilemma and have chosen to collude to allow the Pareto optimal outcome to have been used as opposed to the standard damaging Nash equilibrium.
What separates a good company to an extraordinary company? The answer is not a well-defined strategy, or even a key inspirational leader although these are important. Creating a successful company requires a business culture that works for everyone. This is something that is often ignored, yet according to James L. Haskett, culture can account for 20% to 30% of the differential in corporate performance when compared to uncultured companies. So, what is needed to become cultured, there is no hard and set answer but here are some things that I feel are relevant.
WHAT ARE YOUR AMBITIONS?
If you look at many corporate mission statements, you will find yourself bored with generic text about the aims of the company. A well-written mission statement that conveys the aims of the company simply and clearly can go a long way in giving employees the knowledge of the core values that they are required to represent. It allows everyone to work together to an understood common goal rather than be pigeonholed into a specific department.
Open and understandable mission statements can go a long way, but these values also must be attributed to yourself. Google, a pioneer in company culture advocates that all employees have open access to each other’s individual goals for the month that everybody is forced to right. This means that everyone knows what everyone else is working on, allowing greater collaboration and improves the value of goal sharing. It is scientifically proven that people are more productive with set goals, and the open nature of these goals allow increased productivity, which drives business growth.
FLATTEN YOUR HIERARCHY?
If you look at your typical corporate company, its structure is remarkably similar to that of an army. With the general/CEO at the top all way down to the recruits with numbers and number of complex layers in between. This works in the army where the top-down command is passed down to ensure discipline and order, but it comes at the cost of creativity. This will allow incremental growth to an extent, but what if an employee has a revolutionary idea.
In this structure, it will never blossom into the full potential that it holds due to the need to be passed up the command line. Google aims to flatten its hierarchy, giving an employee access to senior employees so they can make things happen. Creativity is put forward, and even if not all the ideas are good the chances of monumental change are greatly increased with each employee feeling more valued and able to contribute to the company as a whole.
HOW TO MAKE A DECISION?
Meritocracy. Nothing more and nothing less. Meritocracy is when those with the best ideas and the best suited and knowledgeable about a topic make the key decisions. If we look at a technological company. The underpaid programmer knows far more about the ins and outs of the code that is the core of what drives the business, he knows what is needed to change and how to do it. Logically he should have an important role in the decision-making process.
I am not promoting anarchy, with no structure, but those who know what they are doing are the ones that should be involved in making decisions as well as the executives. Strangely, what often happens is that the highest-ranking employee with the highest pay grade or the one who has been here longest is the one who calls the shots, not the one with the best insight and ideas to help the business. This needs to be changed.
Incorporating a good business culture involves more than these three ideas and it can often take months, if not years to incorporate these into the nature of the employees. However, it is something that should not be ignored, as corporate culture is what sets apart companies such as Google and Apple from the mediocre.
Macroeconomics can broadly be defined as a branch of economics that studies the behaviour, structure and decisions of economies as a whole. However, economics is a social science and with this, it creates varying opinions and beliefs leading to the schools of economics, that see the world in different ways and have varying explanations of economic phenomenon.
The father of economics, “Adam Smith,” is the originator of the classical theory that dominated economic thought during the 18th and 19th centuries. The classical school of thought introduced the idea of the, “invisible hand,” referring to the self-correcting market determining prices. Smith believed that free agents in an economy would work to maximise their utility/ profit, so firms will produce goods and services that consumers want and will compete to provide cheaper and higher quality goods. The classical school believes in “laissez-faire” policies and limiting market intervention believing it to be unnecessary and distorting of the price mechanism. Classical economists also believe in the supply of factors of production and that markets always work at their most efficient with transparent prices, wages and rates. (It is for this reason that the LRAS curve is vertical, as the classical school assumes that all economies operate with all factors of production utilized.)
Based on the works of John Maynard Keynes, Keynesian economics challenged the ideas of the Classical school by giving increased importance to the level of aggregate demand in causing issues of unemployment and growth. Keynesians believe that the economy can operate with not all resources being utilized, i.e. the economy is operating with spare capacity. Hence this school of thought believes in the idea of deficient demand causing a recession and unemployment. Following the 1920s Wall St. Crash the Keynesian school encouraged increased government expenditure and investment to increase AD to utilize the spare capacity in the economy to recover from recession.
Monetarist economics believes in the idea that economic performance is dependent on changes in the money supply, which is the only thing that should be managed. The key idea behind this is the importance of inflation to an economy’s health and inflation can be controlled by controlling the money supply. The monetarist view of economics believes that as the availability of money in a system increases, aggregate demand for goods and services goes up, encouraging job creation and growth. However, if the growth is too fast, demand will be greater than supply creating a disequilibrium leading to inflation. This is the basis of the monetary policy set by the Bank of England today. However, during Thatcher’s time as PM, she faced stagflation. Thatcher used contractionary monetary policy to combat inflation, however, in the process worsened the recession by limiting consumption.
Founded, by the Austrian economist Carl Menger, the Austrian school of economics uses priori thinking (without relying on the outside world) to discover laws of economics, as opposed to other schools that rely on mathematical modelling and statistical analyses. The Austrian school believe that price is determined by individual preferences to buy or not buy a good. They also believe that costs of productions are determined by subjective views of the potential other uses of a resource. This school of thought also prioritizes distinction between capital goods. Keynesian models equate a £10,000 tractor with the same productive potential as a £10,000 machine, whereas the Austrian school recognizes and accounts that the wrong type of capital can be detrimental, and the re-adjustment can be painful.
In conclusion, all the different schools have their benefits and followers, it is important to not only look at standard economic theory when discussing matters of importance and to widen your horizons to think in different manners. As the study of economics progresses, new schools have been introduced and in the future, there will still be more. For example, behavioural economics has become more popular following Thaler’s Nobel prize for the recognition of irrational agents in economic behaviour that have to be accounted for through psychological and social study in addition to standard economics.