Методические указания: профессиональный английский язык для студентов 5 и 6 курсов заочного факультета специальность 060800: Экономика и управление

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No one has ever succeeded in neatly defining the scope of economics. Economists used to say, with Alfred Marshall, the great English economist, that economics is "a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing"— ignoring the fact that sociologists, psychologists, and anthropologists frequently study exactly the same phenomena. Another English economist, Lionel Robbins, has more recently defined economics as "the science which studies human behaviour as a relationship between (given) ends and scarce means which have alternative uses." This definition — that economics is the science of economizing — captures one of the striking characteristics of the economist's way of thinking but leaves out the macroeconomic approach to the subject, which is concerned with the economy as a whole.

Difficult as it may be to define economics, it is not difficult to indicate the sort of questions that economists are concerned with. Among other things, they seek to analyze the forces determining prices — not only the prices of goods and services but the prices of the resources used to produce them. This means discovering what it is that governs the way in which men, machines, and land are combined in production and that determines how buyers and sellers are brought together in a functioning market. Prices of various things must be interrelated; how does such a "price system" or "market mechanism" hang together, and what are the conditions necessary for its survival?

These are questions in what is called "microeconomics," the part of economics that deals with the behaviour of such individuals as consumers, business firms, traders, and farmers. The other major branch of economics is "macroeconomics," in which the focus of attention is on aggregates: the level of income in the whole economy, the volume of total employment, the flow of total investment, and so forth. Here the economist is concerned with the forces determining the income of a nation or the level of total investment; he seeks to learn why full employment is so rarely attained and what public policies should be followed to achieve higher employment or more stability.

But these still do not exhaust the range of problems that economists consider. There is also the important field of "development economics," which examines the attitudes and institutions supporting economic activity as well as the process of development itself. The economist is concerned with the factors responsible for

self-sustaining economic growth and with the extent to which these factors can be manipulated by public policy.

Cutting across these three major divisions in economics are the specialized fields of public finance, money and banking, international trade, labour economics, agricultural economics, industrial organization, and others. Economists may be asked to assess the effects of governmental measures such as taxes, minimum-wage laws, rent controls, tariffs, changes in interest rates, changes in the government budget, and so on.


It is social science that seeks to analyze and describe the production, distribution, and consumption of wealth.

The major divisions of economics include microeconomics, which deals with the behaviour of individual consumers, companies, traders, and farmers; and macroeconomics, which focuses on aggregates such as the level of income in an economy, the volume of total employment, and the flow of investment. Another branch, development economics, investigates the history and changes of economic activity and organization over a period of time, as well as their relation to other activities and institutions. Within these three major divisions there are specialized areas of study that attempt to answer questions on a broad spectrum of human economic activity, including public finance, money supply and banking, international trade, labour, industrial organization, and agriculture. The areas of investigation in economics overlap with other social sciences, particularly political science, but economics is primarily concerned with relations between buyer and seller.

Construction of a system

David Ricardo's Principles of Political Economy and Taxation (1817) was, in one sense, simply a critical commentary on the Wealth of Nations; in another sense, it gave an entirely new twist to the developing science of political economy. Ricardo invented the concept of the "economic model," a tightly knit logical apparatus consisting of a few strategic variables, an apparatus that was capable of yielding, after a bit of manipulation, results of enormous practical import. At the heart of the Ricardian system is the notion that economic growth must sooner or later be arrested, owing to the rising cost of growing food on a limited land area. An essential ingredient of this argument is the Malthusian principle — enunciated in Thomas Malthus' Essay on Population (1798)—that population tends to increase up to the limits set by the existing supply of food, thus holding down wages. As the



labour force increases, extra food to feed the extra mouths can be produced only by extending cultivation to less fertile soil or by applying capital and labour to land already under cultivation (with diminishing results because of the so-called law of diminishing returns). Although wages are held down, profits do not rise proportionately because tenant farmers outbid each other for superior land. The chief beneficiaries of economic progress, therefore, are the landowners.

Since the root of the trouble, according to Ricardo, is the declining yield of wheat per unit of land, one obvious solution is to import cheap wheat from other countries. Eager to show that Britain would benefit from specializing in manufactured goods and exporting them in return for food, Ricardo hit upon the "law of comparative costs" as proof. He assumed that, within countries, labour and capital are free to move in search of the highest returns; between countries, however, they are not. In these circumstances, Ricardo showed, the benefits of trade are determined by a comparison of costs within each country, rather than by a comparison of costs between countries. It pays a country to specialize in the production of those goods that it can produce relatively more efficiently and to import everything else; although India may be able to produce everything more efficiently than England, India is nevertheless well advised to concentrate its resources on textiles, in which its efficiency is relatively greater, and to import British capital goods. The beauty of the argument is that if all countries take full advantage of the territorial division of labour, total world output is certain to be larger than it will be if some or all countries try to become self-sufficient. Ricardo's law became the fountainhead of 19th-century free-trade doctrine, which would have been enough, if he had said nothing else, to give him a place in the economists' pantheon.

The influence of Ricardo's treatise was felt almost as soon as it was published, and for over half a century the Ricardian system dominated economic thinking in Britain. In 1848 John Stuart Mill's restatement of Ricardo's thought in his Principles of Political Economy brought it new authority. After 1870, however, most economists turned their backs on the range of problems that had concerned Ricardo and began to re-examine the foundations of the theory of value; that is, they became interested in the theory of why goods exchange at particular prices, so that for a while they devoted almost all of their efforts to the problem of resource allocation under conditions of perfect competition.


A few words must first be said, however, about the last of the classical economists, Karl Marx. The first volume of Das Kapital appeared in 1867; the second and third after his death, in 1885 and 1894. For a generation, therefore, the competitive market theorists jostled with the followers of Marx. By 1900 the


intellectual battle was over, and thereafter professional economists largely lost interest in Marx. Despite the Russian Revolution, despite what amounts to official endorsement of Marxism in one-third of the world, and despite the lingering influence of Marx's ideas, Marxian economics has been moribund ever since Marx's death in 1883. If Marx may be called 'the last of the classical economists," it is because to a large extent he found his economics not in the real world but in the teachings of Smith and Ricardo. They had espoused a "labour theory of value," which holds that products exchange roughly in proportion to the labour costs incurred in producing them. Marx worked out all the logical implications of this theory and added to it 'the theory of surplus value," which rests on the axiom that human labour alone creates all value and hence constitutes the sole source of profits. It is an axiom in the sense that it cannot be established in terms of the theory itself: it must be imported from without. To say that an economist is a Marxian economist is in effect to say that he shares the value judgment that it is socially undesirable for some people in the community to derive their income merely from the ownership of property. Since few professional economists in the 19th century accepted this ethical postulate and most were indeed inclined to find some social justification for the existence of private property and the income derived from it, Marxian economics fell on deaf ears. The Marxian system, moreover, culminated in three great generalizations: the tendency of the rate of profit to fall, the growing impoverishment of the working class, and the increasing severity of business cycles, of which the first is the linchpin of all the others. Marx's exposition of the "law of the declining rate of profit" is invalid; with it all of Marx's other predictions fall to the ground. In addition, Marxian economics had little to say on some of the practical problems that are the bread and butter of economists in any society. This is enough to suggest why Marxian economics failed to make many converts among academic economists. Marxists will reply that the reason is simply that academic economists have always been "lackeys of the capitalist class." Perhaps so, but the fact remains that Marx has had virtually no effect on modern economic thought.

The marginalists

The marginal revolution was essentially the work of three men: Stanley Jevons, an Englishman; Carl Menger, an Austrian; and Leon Walras, a Frenchman. Their contribution was the replacement of the labour theory of value by the marginal utility theory of value; their explanation of prices began with the behaviour of consumers in choosing among increments of goods and services (see utility and value). The idea of emphasizing the marginal or last unit proved in the long run to be more significant than the introduction of utility. It was the consistent application


of marginalism that marks the true dividing line between classical theory and modern economics. The classical political economists saw the economic problem as that of predicting the effects of changes in the quantity of capital and labour on the rate of growth of national output. The marginal approach, however, focussed on the conditions under which these factors tend to be allocated with optimal results among competing uses — optimal in the sense of maximizing consumers' satisfactions.

Throughout the last three decades of the 19th century, the English, Austrian, and French contributors to the marginal revolution largely went their own way. The Austrian school dwelt on the importance of utility as the determinant of value and vehemently attacked the classical economists as completely outmoded. A brilliant second-generation Austrian economist, Eugen von Bohm-Bawerk, applied the new ideas to the determination of the rate of interest, putting his stamp for all time on capital theory. The English school, led by Alfred Marshall, sought a reconciliation with the doctrines of the classical writers. The classical authors, Marshall argued, concentrated their efforts on the supply side in the market; marginal utility theory was concerned with the demand side, but prices are determined by both supply and demand, just as a pair of scissors cuts with both blades. Marshall, seeking to be practical, applied his "partial equilibrium analysis" to particular markets and industries.

The leading French marginalist was Leon Walras, who carried the approach furthest by describing the economic system in general mathematical terms. For each product there is a "demand function" that expresses the quantities of the product that consumers demand as depending on its price, the prices of other related goods, the consumers' incomes, and their tastes. For each product there is also a "supply function" that expresses the quantities producers will supply as depending on their costs of production, the prices of productive services, and the level of technical knowledge. In the market, for each product there is a point of "equilibrium"— analogous to the equilibrium of forces in classical mechanics — at which a single price will satisfy both consumers and producers. It is not difficult to analyze the conditions under which equilibrium is possible for a single product. But equilibrium in one market depends on what happens in other markets (a "market" in this sense being not a place or location but a complex of transactions involving a single good), and this is true of every market. There are literally millions of markets in a modern economy, and therefore "general equilibrium" involves the simultaneous determination of partial equilibria in all markets. Walras' efforts to describe the economy in this way led the historian of economic thought Joseph Schumpeter to call his work "the Magna Carta of economics." Walrasian economics is undeniably abstract, but it provides an analytical framework for incorporating


all of the elements of a complete theory of the economic system. It is not too much to say that nearly the whole of modern economics is Walrasian economics. Certainly, modern theories of money, of employment, of international trade, and of economic growth are all Walrasian general equilibrium theories in a simplified form.

The years between the publication of Marshall's Principles of Economics (1890) and the Great Crash in 1929 may be described as years of reconciliation, consolidation, and refinement. The three national schools gradually coalesced into a single mainstream. The theory of utility was reduced to an axiomatic system that could be applied to the analysis of consumer behaviour under various circumstances, such as a change in income or price. The concept of marginalism in consumption led eventually to the idea of marginal productivity in production, and with it came a new theory of distribution in which wages, profits, interest, and rent were all shown to depend on the "marginal value product" of a factor. Marshall's concept of "external economies and diseconomies" was developed by his leading pupil, Arthur Pigou, into a far-reaching distinction between private costs and social costs, thus laying the basis of welfare theory as a separate branch of economic inquiry. There was a gradual development of monetary theory, which explains how the level of all prices is determined as distinct from the determination of individual prices, notably by the Swedish economist Knut Wicksell. In the 1930s the growing harmony and unity of economics was rudely shattered, first by the simultaneous publication of Edward Chamberlin's Theory of Monopolistic Competition and Joan Robinson's Economics of Imperfect Competition in 1933 and then by the appearance of John Maynard Keynes's General Theory of Employment, Interest and Money in 1936.

The critics

Before going on, it is necessary to take note of the rise and fall of the German Historical school and the American Institutionalist school, which levelled a steady barrage of critical attacks on the orthodox mainstream. The German historical economists, who had many different views, basically rejected the idea of an abstract economics with its supposedly universal laws; they urged the necessity of studying concrete facts in national contexts. While they gave impetus to the study of economic history, they failed to persuade their colleagues that their method was invariably superior. The institutionalists are more difficult to categorize. "Institutional economics," as the term is narrowly understood, refers to a movement in American economic thought associated with such names as Thorstein Veblen, Wesley Clair Mitchell, and John R. Commons. These writers had little in common aside from their dissatisfaction with the abstract theorizing of orthodox economics, its tendency to cut itself off from the other social sciences, and its preoccupation


with the automatic market mechanism. They failed to develop a theoretical apparatus that would replace or supplement the orthodox theory. This may explain why the phrase "institutional economics" has become little more than a synonym for "descriptive economics." The hope that institutional economics would furnish a new interdisciplinary social science proved stillborn. (This is perhaps not surprising, because it was by abstracting purely economic forces from the totality of social interactions that economics got so far ahead of the other social sciences in theoretical rigour.) Although there is no longer an institutionalist movement in economics, the spirit of institutionalism is alive in such works as the Harvard economist John Kenneth Galbraith's The Affluent Society (2nd ed., 1969) and The New Industrial State (1967).

Returning to the innovations of the 1930s, the theory of monopolistic or imperfect competition remains somewhat controversial to this day. The older economists had devoted all their attention to two extreme types of market structure, that of "pure monopoly," in which a single seller controlled the entire market for one product, and that of "pure competition," characterized by many sellers, highly informed buyers, and a single, standard product. The theory of monopolistic competition gave recognition to the range of market structures that lie between these extremes, including (1) markets having many sellers with "differentiated products," employing brand names, guarantees, and special packaging that cause consumers to regard the product of each seller as unique; (2) "oligopoly," markets dominated by a few large firms; and (3) "monopsony," markets with a single monopolistic buyer and many sellers. The theory produced the powerful conclusion that competitive industries in which each seller has a partial monopoly because of product differentiation will tend to have an excessive number of firms, all charging a higher price than they would if the industry were perfectly competitive. Since product differentiation — and the associated phenomenon of advertising — seems to be characteristic of most industries in developed capitalist economies, the new theory was immediately hailed as injecting a healthy dose of realism into orthodox price theory. Unfortunately, its scope was not great enough. It failed to provide a satisfactory theory of price determination under conditions of oligopoly. In advanced economies many of the manufacturing industries are oligopolistic. The result has been to leave a somewhat undigested lump at the centre of modern price theory, a constant reminder of the fact that economists still lack an adequate explanation of the conditions under which the giant firms of rich countries conduct their affairs.

Keynesian economics

The second major breakthrough of the 1930s, the theory of income determination, was primarily the work of one man — John Maynard Keynes. Keynes asked questions that in some sense had never been asked before; he was interested in the level of national income and the volume of employment rather than in the equilibrium of the firm or the allocation of resources. It was still a problem of demand and supply, but "demand" here means the total level of effective demand in the economy, and "supply" means the nation's capacity to produce. When effective demand falls short of productive capacity, the result is unemployment and depression; when it exceeds the capacity to produce, the result is inflation. The heart of Keynesian economics consists of an analysis of the determinants of effective demand. If one ignores foreign trade, effective demand consists essentially of three spending streams: consumption expenditures, investment expenditures, and government expenditures, each of which is independently determined. Keynes attempted to show that the level of effective demand so determined may well exceed or fall short of the physical capacity to produce goods and services: that there is no automatic tendency to produce at a level that results in the full employment of all available men and machines. This fundamental implication of the theory came as something of a shock to exponents of the traditional economics who had been inclined to take refuge in the assumption that economic systems tend automatically to full employment. By keeping his attention focussed on macroeconomic aggregates, like total consumption and total investment, and by a deliberate simplification of the relations between these economic variables, Keynes achieved a powerful model that could be applied to a wide range of practical problems. His system subsequently underwent considerable refinement — some have said that Keynes himself would hardly have recognized it — and became thoroughly assimilated into the body of received doctrine (see economic stabilizer). Still, it is not too much to say that Keynes is perhaps the only economist to have added something really new to economics since Walras and perhaps since Ricardo.

Keynesian economics as conceived by Keynes was entirely "static"; that is, it did not involve time as an important variable. But a disciple of Keynes, Roy Harrod, soon developed a simple macroeconomic model of a growing economy; in 1948 he published Towards a Dynamic Economics, launching an entirely new speciality, "growth theory," which absorbed the attention of an increasing number of economists.

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