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Overview
Why should a library manager think about economics? Why look at economists? What is economics? Brief review of history The contexts for economics
Personal Economics Microeconomics Macroeconomics Crucial persons before the Nobel Prize Nobel Prize Winners
The economists
What is economics?
First, lets look at economics. What is it? To answer that question, I will first briefly review the history of economics. Then, describe the contexts for economics , the major concerns of economics, and finally the major schools of thought about those concerns.
How do we decide what to produce with limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living today and in the future?
Progress in economic thought toward answers to these questions tends to take discrete steps rather than to evolve smoothly over time. A new school of ideas suddenly emerges as changes in the economy yield fresh insights and make existing doctrines obsolete or at least obsolescent. The new school may eventually become a consensus view, then a stimulus for the next wave of new ideas. This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society's goals.
Mercantilists
Mercantilism was the economic philosophy adopted by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation's wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad. Accordingly, the leaders of those nations intervened extensively in the market, imposing tariffs on foreign goods to restrict import trade, and granting subsidies to improve export prospects for domestic goods. Mercantilism represented the elevation of commercial interests to the level of national policy.
Physiocrats
Physiocrats, a group of 18th century French philosophers, developed the idea of the economy as a circular flow of income and output. They opposed the Mercantilist policy of promoting trade at the expense of agriculture because they believed that agriculture was the sole source of wealth in an economy. As a reaction against the Mercantilists' copious trade regulations, the Physiocrats advocated a policy of laissez-faire, which called for minimal government interference in the economy.
Classical Economics
The Classical School of economic theory began with Adam Smiths work, The Wealth of Nations. In Smith's view, the ideal economy is based on a self-regulating market system. He described it as an "invisible hand" that, if each individual pursues self-interest, results in producing the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissezfaire, into his own economic theories, but rejected the idea that only agriculture was productive. While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased only arithmetically.
Utilitarianism
Coming at the end of the Classical tradition, John Stuart Mill parted company with the classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Marginalism
Classical economists theorized that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services.
Marginalists provided modern macroeconomics with the basic analytic tools of supply and demand, consumer utility, and a mathematical framework for using those tools. Marginalists also showed that in a free market economy, factors of production - land, labor, and capital - receive returns equal to their contributions to production. This principle was sometimes used to justify the existing distribution of income: that people earned exactly what they or their property contributed to production.
Marxism
The Marxist School challenged the foundations of Classical theory. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately be succeeded by a world without private property.
Advocating a labor theory of value, Marx believed that all production belongs to labor because workers produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce. Marx predicted that capitalism would result in growing misery for workers as the effort of capitalists to maximize profit would lead them to adopt labor-saving machinery, creating an "army of the unemployed" who would eventually rise up and seize the means of production.
Institutionalism
Institutionalist economists regard individual economic behavior as part of a larger social pattern influenced by current ways of living and modes of thought. They rejected the narrow Classical view that people are primarily motivated by economic self-interest. Opposing the laissez-faire attitude towards government's role in the economy, the Institutionalists called for government controls and social reform to bring about a more equal distribution of income.
Keynesianism
Reacting to the severity of the worldwide depression of the 1930s, John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. The Classical view assumed that in a recession, wages and prices would decline to restore full employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people's incomes, would prevent a revival of spending. He insisted that direct government intervention was necessary to increase total spending. Keynes' arguments provided a rationale for the use of government spending and taxing to stabilize the economy. Government would spend and decrease taxes when private spending was insufficient and threatened a recession; it would reduce spending and increase taxes when private spending was too great and threatened inflation. His analytic framework, focusing on the factors that determine total spending, remains at the core of modern macroeconomic analysis.
Current Theories
Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, economic theories are constantly changing, and starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new approaches. From this search, new theories emerged: Monetarism, which updates macroeconomic analysis before Keynes. It reemphasizes the critical role of monetary growth in determining inflation. Rational Expectations Theory provides a contemporary rationale for the pre-Keynesian tradition of limited government involvement in the economy. It argues that the market's ability to anticipate government policy actions limits the effectiveness of government intervention. Supply-side Economics recalls the Classical School's concern with economic growth as a fundamental prerequisite for improving society's material well-being. It emphasizes the need for incentives to save and invest if the nation's economy is to grow.
Future Theories
It seems to me that we are now in an economic context in which the change is at least as dramatic as that involved in the addition of an industrial economy to the agricultural economy during the 19th century. Of course, it is the addition of an information economy to the industrial and agricultural economies. This implies to me that there will need to be new economic theories that recognize new facts of life. Now, the agricultural and industrial economies obviously will continue to function, as did the agricultural when the industrial revolution occurred. But the agricultural economy changed in very important ways as it was affected by the industrial revolution. And, in the same way, there should be changes in both the agricultural and industrial economies as they are impacted by the information revolution. Since libraries are a significant component of the information sector of the economy, their role in the information revolution, and in the economic theories to deal with it, must be understood.
The library functions as a counterpart of the individual firm, so the issues in microeconomics apply to it. The library community, as a whole, is a significant part of the information sector of the economy. Therefore, the issues of macroeconomics apply to that community.
(2) Microeconomics
Microeconomics, or the economics of the firm, is concerned with the balance between costs and income, especially as determined by the interactions in the marketplace. The costs arise from labor, materials, and investment in and return on capital. The income derives from the customers, based on the prices charged and payments received from the sale of products and services. In arriving at that balance, the individual firm faces not only the forces of the marketplace but those of competition as well. It must therefore deal with changing costs and demands and changing competitive environments. Thus, in micro-economics, we are concerned with
The Marketplace, as the context for selling and buying The Individual Firm, its product or service production and costs The Customers, their Demands and the Income from sales to them
The Marketplace
What is the Marketplace? In this context, it is the place for meeting together of people for the purchase and sale of goods, publicly exposed, at a fixed time and place. (OED definition 1 for Market) It must be said, though, that a marketplace usually is much more than that and, indeed, is a social institution, a forum in which more than merely economic activities occur. Having said that, we will now focus on the economic role of the marketplace. Before doing so, though, I think it is important to recognize a possible confusion in terminology. Economists and businessmen, but especially the latter, both use the term market in two quite different ways. One is to refer to what I have called the marketplace and the other is to refer to the customers (i.e., the market) for a product of service. I will try to avoid the possible confusion by identifying the word market with marketplace and refer to the customers as customers.
Management of a Marketplace
There is, to some degree, the perception that a marketplace functions without management. Adam Smith referred to it as the invisible hand as though the processes occur almost without intervention. The facts, though, are that marketplaces must be managed. One need is to manage the process of agreement on the terms of exchange, that is, to manage the individual transaction. Price must be agree on. Product or service specification must be agreed on. Terms of delivery must be agreed on. But the other is to provide oversight on processes and transactions To ensure legality of trade To enforce standards and regulations To assure fair trading To determine effects on third parties (called externalities)
Asymmetric Information
Asymmetric information arises when the seller and the buyer have different information related to the transaction. Typically, the seller knows more about the good (and its defects) than the buyer Buyers cannot easily distinguish reliable goods from faulty goods The result of asymmetric information is that the decisions by the buyer and seller will not lead to the best result, for one or the other and therefore for the effectiveness of the market. In the case of the library, there are usually significant asymmetries between the knowledge of the library and its staff and that of the user. But, interestingly enough, this has been one of the strengths of the relationship between the library and its users, not a deficiency. And this is an issue worth pursuing!
Externalities
Externalities arise when there are effects of a transaction upon others not involved in it. Those effects might be negative (e.g. pollution) or they might be positive (e.g., R&D spillovers). With negative externalities, the effect of the market is that too much may be produced. With positive externalities, the effect of the market is that too little may be produced.
For the library, there would appear to be many externalities, with benefits from its existence and use arising in many ways. This is an issue well worth exploring!
Increasing Returns
Increasing returns to scale (what are called economies of scale) are in principle a good thing, since they improve the efficiency in use of fixed resources. But increasing returns to scale are inconsistent with perfect competition and therefore lead to market failure. Either small firms fail to exploit increasing returns Or increasing returns tends to lead to monopoly
For the library, the issue of whether there are economies of scale has been investigated, but the results to date have been at best equivocal.
Sources of Cost
There are three sources of cost:
Labor Capital, as the investment in the tools of production Materials that must be acquired for the substance of production
Usually, economists have focused on the relationship between the first two of those sources of cost and have created production models that are intended to represent that relationship. The most basic and, in many respects, simplest of them is the Cobb-Douglas Model. I have, in the past, applied the Cobb-Douglas Model to libraries and, in doing so, identified technical processing as part of the capital investment (along with the collection and the facilities), with library services as the labor in production of products and services.
Total Costs
Total costs of production are the sum of fixed and variable costs. If T = Total Cost, F = Fixed Costs and V = Variable Costs, then: TC = FC + VC Fixed costs have to be incurred whatever the scale of production. They are taken as constant within a pre-determined maximum scale of operation. It should again be noted that there will be dependence of the magnitude of fixed costs on the maximum scale of operation they can handle. Variable costs depend on the volume of production, the actual scale of operation.
Unit Costs
In economics, there are two measures of unit cost: Marginal cost is the additional cost of producing the next unit given that the company has already produced a number of units Average cost is the total cost for producing n units divided by n. That is, A = T/n If there are large fixed costs, then marginal cost will usually fall below average cost.
Economies of Scale
Economies of Scale arise when the average cost declines as the scale of production increases. This will usually be the case when there are large fixed costs, since those fixed costs will be divided among a larger number of units. It will sometimes be the case when the learning curve results in increased efficiency. This will usually NOT be the case when the variable costs increase as the number of units increase. This can arise, in particular, when production consumes a scarce resource or results in decreased efficiency. In principle, one would expect a library to have substantial economies of scale, given the usually large capital investment in collection, building, and facilities. There have been studies made to examine whether that indeed is the case, but the results were at best equivocal.
For many industries, these groups may be either or both national and international. For the library, the first two of these groups are clearly present, the second being represented by inter-library loan. For public libraries, there is likely to be a significant level of use by government. For archives, as a closely allied activity, government may well be the primary customers.
(3) Macroeconomics
Macroeconomics tries to answer questions like the following: Why do prices change from one time period to another? Why does national employment vary from year to year? Why does average income vary among countries? The role of macroeconomics is to help in the following areas: Establishing social policy and making social choices Measuring national income Determining national fiscal policy Managing money and banking Dealing with inflation, unemployment, and economic growth Fitting a country into the world economy The tools of macroeconomics are valuable to library management in Fitting libraries into the national economy Determining the level of resources appropriate for libraries Guiding social and institutional policies with respect to libraries
Every transaction has a buyer and a seller. Every dollar spent by a buyer is a dollar of income for a seller.
The flow and essential equality of income and expenditure can be illustrated by the following diagram. In this diagram, I have highlighted, in blue, the flow of taxes, from households and firms to government. And I have highlighted in red the flow of wages, rents, and profits from governments and firm to income to households.
Markets for Goods and Services Input to Markets Order, pay for goods/services Pay taxes Provide goods and services Order, pay for goods/services Output from Markets Receive goods/services
Markets for Factors of Production Input to Markets Provide Labor, Money, Land Pay taxes Provide factors of production Order, pay for factors of production Pay income for wages, rents, profit Pay taxes Provide infrastructure Order, pay for factors of production Pay income for wages, rents Output from Markets Receive income
Individuals, Households
Firms
Pay taxes Provide infrastructure Order, pay for goods/services Receive taxes and fees Receive goods/services
Governments
Economists
It needs to be recognized that economic positions and theories are not like those about the physical and biological world. The things they deal with reflect the decisions of people, not the laws of the world, which presumably are independent of what people do. The positions and theories are the result of the work of individuals, called economists. They have brought to the process of creating those positions and theories their own views of what is right and what should be social policies., governing what people do. It is therefore essential to understand who these persons were and what their positions were. I will review a selected set of economists in two groups
Those who lived before the Nobel Prize for Economics Those who have been awarded the Nobel Prize for Economics
In addition, I will review a selected set of non-economists who have, in one way or another, influenced those economists.
Leon Walras Francis Edgeworth Irving Fisher Joseph Schumpeter John von Neumann
Note that I have listed these persons in three groups: Private Value Oriented Public Value Oriented Methodology Oriented These represent what I think are the three major approaches to economic practice, analysis, and theory. Of course, each of the persons, to one degree or another, falls into each group. The assignment made here simply reflect my own idiosyncratic view of the major emphasis of each of their objectives.
Private-Value Oriented
The next six displays present the economists that I identify as private-value oriented. Please recognize that each of the economists will be concerned with both public and private values, as well as methodology, so this assignment simply represents my own interpretation of the primary focus.
Public-Value Oriented
The next six displays present the economists that I identify as public-value oriented. Please recognize that each of the economists will be concerned with both public and private values, as well as methodology, so this assignment simply represents my own interpretation of the primary focus.
Methodology Oriented
The next five displays present the economists that I identify as methodology oriented. Please recognize that each of the economists is very methodology oriented, so this assignment simply represents my own interpretation of the primary focus.
Relevant Non-Economists
I think it is important to recognize and to include in this listing a number of persons who, while not economists, are very relevant to the development of economic positions and theories.
Marquis de Condorcet (1743-1794) Count Henri de Saint-Simon (1760-1825) Robert Owen (1771-1858) Charles Fourier (1772-1837) Adolph Lowe (1893-1995)
1974. Gunnar Myrdal and Friederich von Hayek "For their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social, and institutional phenomena." 1975. Leonid Kantovarich and Tjalling Koopmans "For their contributions to the theory of the optimum allocation of resources." 1976. Milton Friedman "For his achievements in the field of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy." 1977. Bertil Ohlin and James Meade "For their pathbreaking contribution to the theory of international trade and international capital movements." 1978. Herbert Simon "For his pioneering research into the decision making process within economic organizations." 1979. Theodore Schultz and Arthur Lewis "For their pioneering research into economic development, with particular consideration of the problems of developing countries."
1980. Lawrence Klein "For the creation of econometric models and their application to the analysis of economic fluctuations and economic policies." 1981. James Tobin "For his analysis of financial markets and their relations to expenditure decisions, employment, production and prices." 1982. George Stigler "For his seminal studies of industrial structure, functioning of markets and causes and effects of public regulation." 1983. Gerard Debreu "For having incorporated new analytic methods into economic theory and for his rigorous reformulation of the theory of general equilibrium." 1984. Richard Stone "For having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis." 1985. Franco Modigliani "For his pioneering analysis of savings and financial markets."
1986. James Buchanan "For his development of the contractual and constitutional bases of the theory of economic and political decision making." 1987. Robert Solow "For his contributions to the theory of economic growth." 1988. Maurice Allais "For his pioneering contributions to the theory of markets and efficient utilisation of resources." 1989. Trygve Haavelmo "For his clarification of the probability theory foundation of econometrics and his analysis of simultaneous economic structures." 1990. Harry Markowitz "For having developed the theory of portfolio choice." William Sharpe "For his contributions to the theory of price formation for financial assets, the so-called Capital Asset Pricing Model (CAPM)." Merton Miller "For his fundamental contributions to the theory of corporate finance." 1991. Ronald Coase "For his discovery and clarification of the significance of transaction costs and property rights for the traditional structure and functioning of the economy."
1992. Gary Becker "For having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including non-market behaviour." 1993. Robert Fogel and Douglass North "For having renewed research in economic history by applying economic theory and quantitative methods to explain economic and institutional change." 1994. John Harsanyi, John Nash and Reinhard Selten "For their pioneering analysis of equilibria in the theory of non-cooperative games." 1995. Robert Lucas "For having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy." 1996. James Mirrlees and William Vickrey "For their fundamental contributions to the economic theory of incentives under asymmetric information." 1997. Robert C. Merton and Myron S. Scholes "For a new method to determine the value of derivatives"
1998. Amartya Sen "For his contributions to welfare economics." 1999. Robert A. Mundell "For his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas." 2000. James Heckman "For his development of theory and methods for analyzing selective samples." Daniel McFadden "For his development of theory and methods for analyzing discrete choice." 2001. George A. Akerlof, A. Michael Spence, and Joseph E. Stiglitz "For their contributions to the analyses of markets with asymmetric information." 2002. Daniel Kahneman, For having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. Vernon L. Smith, For having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms
2003. Robert F. Engle, For methods of analyzing economic time series with time-varying volatility. Clive W. J. Granger, For methods of analyzing economic time series with common trends 2004. Finn E. Kydland and Edward C. Prescott, jointly For their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles
Gunnar Myrdal, the Swedish economist, played significant political roles in formulating and maintaining the socialist character of the Swedish political system. He wrote The American Dilemma, published in 1944, which documented the status of black American at the time. It was instrumental in the Supreme Court's historic 1954 anti-segregation decision. He also wrote Asian Drama, an inquiry into the poverty of nations, published in 1968, which similarly documented the status of underdeveloped Asian countries viz a viz developed Western ones. Milton Friedman, the American economist, is the champion of the "free enterprise system", to the level of fanaticism. Indeed, from his tutorship at the University of Chicago, has flowed an almost endless stream of economic conservatives that has led the policies, both economic and legal (see especially Richard Posner) of the United States for decades.
Vasily Leontieff, a Russian-born American economist, who formulated the concept of the "input-output matrix" that measures the inter-dependence of components of the economy and provides probably the most powerful single tool for understanding and managing national economies. Kenneth J. Arrow (1921-) is a U.S. economist known for his contributions to welfare economics and to general economic equilibrium theory. Arrows impossibility theorem holds that, under some well defined and presumably rational conditions, it is impossible to guarantee that a ranking of societal preferences will correspond to rankings of individual preferences when more than two persons and alternative choices are involved.
In 1994, John Forbes Nash, Jr. won the Nobel Prize for pioneering work in game theory. Nash was 66. While he was still only 21, he wrote a 27-page doctoral dissertation on game theory -- the mathematics of competition. The great John von Neuman, then at Princeton, had treated win-lose competitions. Now Nash showed how to construct mathematical scenarios in which both sides won. Nash put a whole new face on competition, and he drew the attention of theoretical economists. He had turned game theory into a tool. This young genius brought the field to fruition. He went on to MIT and for eight years dazzled the mathematical world. He worked in economics as well as mathematics. He even invented the game of Hex, marketed by Parker Brothers. Then, disaster! For 25 years, from about 1957, he suffered from paranoid schizophrenia. Mental illness wrapped about him like an evil cloud. Today, though, he is working on novel uses of the computer in a research post at Princeton. Nash has survived what looked like death.
Many of the Nobel Prizes were awarded for specific concepts (such as the "input-output matrix" by Leontieff), so it is natural to highlight them in the context of specific individuals.
The End