What is the subject matter of economics? What role does the “division of labor” play in defining this subject matter?
The subject matter of economics deals with social science concerned with administration of scarce resources. These resources can be objects and services that are capable of satisfying human needs and wants in both direct and indirect ways. This can be by helping to produce other objects and services whose use satisfies human wants. The administration of resources does not always create economic problems. There are lots of these resources that are more than enough to satisfy all of human wants and needs completely depend of them. One such resource example is “Air”. Such type of resources are known as free resources where it’s not necessary to organize its use because there is no side effects or waste for any inefficient use of such resources.
On the other hand, scarce resources are resources that are not sufficient to fulfill human wants and needs completely. Therefore, these types of wants can only be partially satisfied. This reflects the problems of administration which are the subject matter of economics. Firstly, one of the problems of administration is to make sure complete utilization of scarce resources, because incomplete utilization may cause dissatisfaction to human beings. Secondly, in cases where these scarce resources are fully utilized, there is still an ongoing administrative problem of allocating the resources as required by the different uses to satisfy various wants and needs. In such a case, when scarce resources are completely utilized, a complete satisfaction of any one want can only be gained at an incomplete or lesser satisfaction of other alternative wants and needs. Another problem of administration of the resources includes the distribution among the consumers of the resources or good/service produced with the use of those resources. Such problems would identify themselves even to a separated and completely self-sustained individual. Such an individuals’ to meet their needs and desires, would have to depend on their limited capacity to work and would confront the issue of how to best manage their energy and distribute their time between leisure and various kinds of work. This is identified as a problem of managing the scares resources of individuals’ time and energy but it is their personal issue that they may be left to resolve as best as they can. This is simply because their individual solutions to these issues have no effect or impact to other individuals’ goodwill. Division of Labour is the term that was first used by Adam Smith to describe the distribution and separation of the process of manufacturing into several well defined and simple operations that are later delegated to specific hands/workers or machines to perform. The quality and quantity of work undertaken by an organized workforce with the use of division of labor is far more superior to the work done through a non-divided labor. The use of Division of Labor principle helps increase productivity far better than an undivided. There are several reasons that help increase productivity with the use of this principle. Firstly, the workers tend to be very active, savvy, and skillful and therefore effective in their individual tasks allocated to them individually. This is simply because with the use of skill based workers it very efficient for the workers to take adequate time required to fulfill a specialized task and practice for the best results. This type of activity in turn provides better functionality with increased speed and accuracy without compromising with quality of the work done by that worker. Secondly, it also saves a lot of time that is otherwise wasted in the transformation or movement from task-to-task or department-to-department and provides better satisfaction to the workers. This is one of the very satisfying tactics for employers to provide their workers as it creates a lot of value to the skilled workers and in some cases reduces employee turnovers in organizations. Last but not the least, is the use of automation that can arise with the division of general production or manufacturing into more and more discrete and simple tasks. This can help several small tasks to become faster as there will be a substantial use of automation. This is simply because one a big task gets divided into several small tasks the speed of production with the use of skilled workers can help fasten the process of production or manufacturing in a workplace. With the use of this division principle it is also proven that there is a great reduction in the training costs as organizations does not need to spend a lot on training their workers for a complete production process. Hence, they can now train their workers for more simplified tasks that is cost efficient and can help them reduce the cost of production in the organizations.
Division of labor refers to specialization in the production process. Complex jobs can usually be less expensively completed by a large number of people each performing a small number of specialized tasks than by one person attempting to complete the entire job. The idea that specialization reduces costs, and thereby the price the consumer pays, is embedded in the principle of comparative advantage. Adam Smith, the father of economics had suggested that productivity would rise significantly when the division of labor principle was used. Output per worker would be raised while costs per unit produced would be reduced. Division of labor was applied, for example, in manufacturing plants that incorporated mass production techniques. In organizations that used mass production, each worker specialized in completing one specialized task; the combined work of several specialized workers produced the final product. For example, in manufacturing an automobile, one worker would assemble the dashboard, another would assemble the wheels, and yet another would paint the exterior. Since the time of Adam Smith, division of labor has been perceived as a central feature of economic progress. Two aspects of labor exist. First is the division of labor within firms; this concern the range of tasks performed by workers within a particular firm. Second is the division of labor between firms; this concerns the range of products or services the firm produces. The issue reaches its broadest scope in the controversies about globalization, which is often interpreted as a euphemism for the expansion of world trade based on comparative advantage. This would mean that countries specialize in the work they can do at the lowest opportunity cost. Critics however allege that international specialization cannot be explained sufficiently in terms of "the work nations do best", rather this specialization is guided more by commercial criteria, which favor some countries over others.
However, there are some flaws associated with the use of Division of Labor as well. Although it raises the output person and uses the “learning by doing” strategy; in some cases it reduces the motivation level of the employees within an organization as well. This in turn can lead to reduced productivity in an organization. The more career driven employees that try to seek job satisfaction with the type of work they do might tend to leave organizations due to the routine work as they would want to see differentiation in their job tasks and not follow a daily routine. THIs is one of the biggest factors that will have a direct negative impact on an organization’s productivity. Several workers that do not see any satisfaction might turn into being undisciplined. They will tend to be less punctual with increased rate in absenteeism. These are all the factors associated in reduced productivity levels of an organization.
Why do some economists argue that “unemployment is voluntary” while others insist on the notion of “involuntary unemployment”? Outline the main arguments of both of these groups of economists.
In simple words, Unemployment is nothing but a labor market state during which an individual is without a job and is actively looking for work. There is nothing that states whether this unemployment be categorized to be either voluntary or involuntary but this state can also qualify to be known as Involuntary Unemployment. However, the number of persons in an economy without jobs because they choose to be unemployed can be said to be Voluntary Unemployment. An example of a voluntarily unemployed person is one who rejects a position while looking for one with better pay or benefits. Most frictional unemployment is considered voluntary because one is looking for work rather than taking any job one finds.
Before Keynes’s General Theory of Employment, Interest and Money came into the picture, the mainstream economists’ categorized unemployment into two types. Both of these types related to the supply side of the labor market. Unemployment can be conceived as a short termed concept arising from the choice of workers to participate in the labor market and engage in a job search voluntarily. This is pretty much a situation where individuals can find themselves to be temporary with several jobs. This is usually known as a state of frictional unemployment. However, unemployment was also seen as a concept arising due to the existing institutions creating barriers within the labor market. These can include trade unions, government labor policies, and monetary policies. At some extent it is also the market power of organizations that presumed to avoid the downward adjustment of real time wages to shortfalls in demanding labor. If this is the case, those works can be said to be involuntary unemployed because of the labor market imperfections and conditions provided to work. However, if wages were the only factor that can be left to adjust with complete freedom to match fluctuations in the labor demand and supply it can be said that competition would clear the labor market leading to the state of equilibrium at full employment that is compatible with the presence of only voluntary unemployment.
From such orthodox analysis, it ensures that the existence of job scarcity within the labor market can never be a long term issue until the institutional forces to persist to prevent the market clearance. This conception of labor market was particularly challenged by Keynes. He recognized the existence of frictional unemployment and challenged the neoclassical view of unemployment as a concept of supply side that resulting from wage rigidity. For him the labor market could never be analyzed in isolation but is rather dependent on the conditions of the cumulative product market. The state of aggregate effective demand for goods and services in the economy sets the constraint on the employment level through the derived demand for labor but not the mechanism lacking the competitive downward wage adjustments in the labor market which generated unemployment. Reduction of real wages is not guaranteed even if the workers accepted a reduction of their money wage. This is even in the most unlikely situation. It is factual that Keynes argued that a cut in the wages could only make things worse and result in high unemployment because of the negative feedback effect on the current and expected potential sales proceeds. He stated this type of unemployment to a demand constrained economy which is stuck in a state of an under employed equilibrium (involuntary unemployment). He states that “individuals are involuntary unemployed if a small rise in price of wage/goods relative to the money wage where both aggregate supply of labor willing to work for the current money wage and the aggregate demand of that wage would be greater than the existing volume of employment. “
If the gap between the labor supply and demand persist will a fall in the real wage those individual job hunters could be considered in a situation of Involuntary Unemployment. This is pretty much a state of non-zero elasticity of employment and output due to the changes in the aggregate demand. According to him, the primary cause of involuntary unemployment is the job scarcity and the inadequacy of existing demand and not the worker obstinacy in resisting a cut in their wage as stated by the neoclassical economists.
Very soon after the General Theory came into the picture, several economists began to re-interpret Keynes’s analysis. Economist began to assume a labor supply function that is perfectly elastic up to full employment as a historically given money stage. The generation of Keynesian economists including Tobin and Modigliani from the 40s to 60s started to build macro models to explain unemployment on the basis of static wage rigidity assumption. They did this even though Keynes rejected the wage stickiness as an explanation for involuntary unemployment. During the early years of WWII, Patinkin re-interpreted the state of involuntary unemployment as a compelling disequilibrium not because of wage fixity but because of the sluggish adjustment of wages to labor market pressures. Whether any economist framed this issue to be static or dynamic setting them all analyzed the cause of involuntary unemployment to be the lack of adequate downward adjustment of wages and prices to shortfall in the aggregate effective demand.
In the later years of 70’s to 80s both approaches were quickly criticized by the new classical economist because of the problem of local inconsistence and insufficient microeconomic grounding. According to monetarists and classical economists, it is not wise to develop theories of economy that assumed rational behavior for an economic agent in the product market. However it is the irrational behavior as a supplier of labor services in the labor market that can be speculated – as done by Keynes. According to these economists because of those assumptions of continual market clearance new classical economists turned aside the fatigue arguments of disequilibrium theorists. Although the tries of new classical economists to purge involuntary unemployment from the modern macroeconomics; this concept is still shown resilience both by the new Keynesian and the Post Keynesian economists in the past half century. There are several new Keynesian models developed within a microeconomic framework which is compatible with the neoclassical theory. The post Keynesian models which follow Keynes’s original thoughts and insights emphasize the macroeconomic bases of their theories of involuntary unemployment where wage rigidity place no role even with some of them founded on the microeconomic foundations of Marshallian pedigree. The concept of Involuntary Unemployment is the code of Keynesian theory. Since Keynes’s General Theory, this particular concept has been hounded with criticism. It has remained to be a wedge that has separated between those who believe that a capitalist economy is prone to systemic instabilities as reflected in the existence of periodic recessions along with mass unemployment. For some who believe in the strength and ability of the self-correcting forces in the market economies, the actual unemployment is conceived as a short term transitional concept surrounding some stable and long term rate of unemployment. Today, one could find some strong Keynesian admirers who may also be prepared to do the away the concept of involuntary unemployment because of conceptual troubles and difficulties, the former concept still remain to be a very deeply ingrained concept in the professional vocabulary of contemporary economists.
Define the terms “constant capital,” “variable capital,” and “surplus value.” What role do these three factors play in the process of capital accumulation?
Capital was originated in the pre-capitalist societies. It was originated as money that agents and businessmen invested in trade or business operations with an interest in generating profit. However, as soon as the value of commodities did not satisfy its own law till labor power became an easily available commodity, capital came into play as a means of production through which a surplus value was generated from wage laborers. The wage relation with the laborers allowed a high degree of utilization and exploitation than ever before. The actual motive and interest of capitalist production is simply to filter the greatest possible surplus amount/value and constantly exploit the labor power to the maximum – as seen by Marx. According to Marx, as the number of cooperating laborers increased, the resistance to the domination of capital also increased. The amount and value of surplus filtered is the primary issue in the struggle of classes between capitalist and workers. Therefore, the expansion of capitalism by reinvesting the surplus value is known as the accumulation of capital. The money that is used to purchase a mean/s of production including labor that helps product finished or complete products and services that help create value and generate profit is known as the process of Accumulation of Capital. The factors associated with this process includes, Money, Commodities, Means of Production, Labor Power, and Production Process. This process begins with the expenditure on markets for labor power and means of productions and ends with money earned when a firm has sold its commodities. It is often though of the market as a moneymaking machine because this process begins and ends with the marketplace.
Capitalists have often trued to seek more and more surplus value out of their workers by increasing the duration and intensity of labor. This is identified as the Absolute Surplus Value by Marx. This type of measures intensifies the resistance of workers’. The alternative to reduce the cost of production is left with the bosses’ within an organization. For example; they can now try to buy materials and equipment at cheaper price. The counter position between the living and the dead simply depends on how and what the capital is invested. Variable Capital pays for labor power that creates new value for the capitalist. Constant Capital buys dead labor that transfers value already demonstrated to the new products. This capital is later divides between circulating constant capital such as raw materials. This is where its value is transferred while into the commodities immediately produced and several fixed capitals like building and equipment whose value is subdivided among the commodities that it helps product throughout its useful life. Hence, the value of every commodity consists of three components including variable capital, constant capital and surplus value.
Constant Capital is paid to the owners of materials, supplies and several other means of productions. Variable capital is paid to the immediate producers and Surplus Value is the remaining unpaid portion of living labor appropriated by the capitalist. With the involvement of all these components, the total value of a commodity can be expressed as a total of Constant Capital, Variable Capital and Surplus Value. The extraction of relative surplus value implies not only to the growth of Constant Capital at a better pace than Variable Capital but also means that the fixed capital grows very fast.
Furthermore to the process of Capital Accumulation, Marx has divided the production into two departments; Producers Goods and Consumers Goods. The output of producer goods re-enters the production as a constant capital and the output of consumer goods becomes the Variable Capital. Therefore, the advance of productivity, the expansion of constant capital ahead of variable capital implies also that Production Goods expand faster than Consumer Goods. The drive for Capital Accumulation, taking the form of relative increase of surplus value is the key factor for the increasing expansion of capitalism. All of the different components of capital don’t play the exact same role in producing the surplus value. However, the capitalist usually spends a particular part of their capital on the equipment, property, and other factors of production. The value generated from this part of capital is used as a ratio of the consumption of the means of production. Such constant capital remains to be the same size though out the entire production process. Normally the capitalists also use part of their capital to purchase several variable capitals such as labor or the Labor Power. The process of accumulation is also a process of increase in labor. With the increase in demand in a commodity and its price, accumulation tends to an increase in the value of labor power far more than its normal value. The accumulation of capital constitutes the driving force of capitalism and is only possible with capitalists being able to operate with a profit. These profits normally originate in the appropriation by the capitalist of the surplus value produced by the labor power they acquire or buy. Accumulation occurs when these capitalists convert/transfer a part of their surplus value into capital. This is one way they can expand to additional surplus value which leads to additional accumulation and expansion. From the value composition perspective, capital is basically composed of constant and variable capital. According to Marx, under static conditions capitalists are forced to accumulate capital due to the emergency of surplus value in the capitalist production to gather, accumulate and re-invest. The mass effect of all round expansion of production is an increase in labor demand, wake hikes, and declining surplus value as surplus plus value is simply the remains of the total produce over the subsistence produce. This provides another significant reason for a capitalist to accumulate. Generally, a capitalist society is seen to have continuous change. In vital situations and conditions a large share of surplus value is transferred to those producers that are capable of introducing the most advanced and efficient technology in production. This race for capital accumulation among capitalists forces them to use and adopt new technology with the interest of gaining larger profits. Surplus Value can be increased by reducing wage rates, by extending working hours. This in turn will increase the productivity of labor. According to Marx, it is very critical to increase the productivity of labor by making technological improvements. Such capital intensive techniques and tactics will help increase the total output of the production by a given labor force which increases the surplus value. In simple words, the capital accumulation is the operation where the profits are reinvested and reutilized with an interest in increasing the total quantity of capital. Capital as seen by Marx is an expanded value, or a sum of money/ies that are transformed to a large sum of money. The continuous and progressive state of capital accumulation is dependent on the removal of obstacles to the trade expansion. With more and more markets expand there are more and more new opportunities developed for the accumulation of capital. This is because more and more types of goods/services can now be traded in an open market economy. However, capital accumulation may also face resistance if people refuse to buy/sell/trade products and services. Stimulator of accumulation is “competition”. This is because if an organization doesn’t move forward it will go backward. In some cases organizations can protect themselves from moving backward if the law prevents in the markets they operate but the stronger organizations will always exploit the weaker organizations. When compared capitalist with the system of socialism; socialism would succeed capitalism only when the accumulation of capital can no longer sustain itself because of declining profit rates in real production compared to increasing productivity. A socialist economy would not base its production on the accumulation of capital but will strictly be focused on production that satisfies human needs. Marx uses his theory of history to the society and economy to identify the laws of motion of capitalist and contradictions between the forces and relations of production. When analyzing capitalism, he used certain principles that are known as Marxian laws or as laws of supply and demand by several economists.
Therefore, in the process of Capital Accumulation it is important for a capitalist to decide if they want to consume the surplus with no or very less productivity or to accumulate it. With the use of capitalism, there is no such limit to the rate of exploitation or accumulation of capital. It is very impulsive for capitalist to accumulate the most of the surplus value. This is one of the reasons why they seem to raise the productivity level to make everyone richer. Centralization of capital is yet another mean where the capitalists concentrate the ownership rather than the production. However, the driving force of such concentration is forever increasing scale of production as well as the rising minimum efficient scale that is required to produce and sell competitively. In the centralization process the production might be divided into different locations/plants but share a common purpose identified by the single management team.
Define the concepts “concentration of capital” and “centralization of capital.” What affect do these two concepts have on the relationship between aggregate supply and aggregate demand?
Centralization of Capital is basically the increase in capital owned by an individual capitalist or by a group of capitalist through the incorporation of other capital holdings. The concept of Centralization differs significantly from the concept of concentration with respect to the source of increase in both of these concepts. First of all, the capital results from the capitalization of a portion of the surplus value. The concentration and centralization of capital are the two primary accumulation methods and techniques. The centralization is accompanied by the infuriated competitive struggle that marks both the confiscation of small scaled capital by large scaled capital and the formation of common-stock organizations. The concentration of major capital funds in the capitalist credit system and the use of such funds for issuance and allocation of stocks help making it possible to establish and operate large scaled enterprises that are beyond the means of individual capitalists. Financial Institutions usually grant credit to the larger capitalists and therefore, contribute to the backward competitive capabilities. The accumulation and centralization of capital causes the concentration of large wealth in hands of small financial dictatorship, the distress of class discrepancy and the requirement for faster concentration of production. The centralization of capital is specifically intense in the age of imperialism, particularly in the general crisis of capitalism. The centralization of capital has a very clearly appreciable within the financial and banking industry. In the earlier days, the centralization of capital was initially a horizontal process that involved the consolidation of enterprises in the same branch of an economy. However, it soon was a changing trend when it moved towards being vertical centralization where organizations assumed control over succeeding stages of the production process by acquisition of the sources of raw materials and taking over the production to produce finished goods. The modern characteristics state itself is playing an increasingly active role in the centralization of capital. In some economies even the largest concerns require state assistance in order to adopt and implement a modern technology to its maximum extent. The high concentration of financial and economic power in the hands of financial institutions are the key signs of higher stage of socialization of production and the increasing exploitation of the working people.
The concentration of Capital is a process of consolidation of several single capital accumulations through capitalization of a portion of surplus value. The concentration of capital tends to increase growth of the largest individual accumulations of capital within the totality of social capital. It varies from the centralization of capital that is the increase of capital in the hands of only one capitalist or a group of many. The two ways of capital increase are closely interconnected and different differentiate only in the source of the capital growth, in the case of the concentration of capital the source if surplus value. On the other hand in the centralization it is already an existing capital accumulation. The two methods of capital increase are closely related to each other but differ only in the source of capital growth. Firstly, in the case of concentration of capital the source is surplus value and in the case of centralization it is already existing capital accumulations. The concentration of capital is dependent on several factors. To begin with, at a given level of technology offering and the current rates of surplus value, the latter’s size is identified by the number of workers exploited in total. This is also dependent on the size of the capital. Capitalists can increase the appropriate surplus value only if they increase the size of their own capital. The minimum amount of individual capital required to operate an enterprise also increases with the development of capitalism and an increase in the level of technology. Concentration is the fundamental base of the centralization of capital. The centralization of capital at a large scale fastens the process of accumulation.
Concentration is simply based on the centralization of capital. Therefore, the centralization of capital fastens the accumulation process on a large scale. Due to the absorption of smaller capital the larger capital has a higher profit and accumulation rate. The concentration is typically dependent on several factors. It may be due to the technology and rates of surplus value that also depends on the capital size. Capitalists tend to increase surplus value by increasing their own capitals. Increase in the minimum amount of capital required to run an organization later increasing the development of capitalism as well as the growth of technology also are dependent of concentration.
Aggregate Demand is nothing but the total demand of products, services and goods that are produced in an economy over a period of time. Aggregate demand normally rises as a particular price level falls. This can be proven by real money balance effects, price and interest rates, as well as international competitiveness. The aggregate demand normally rises as the price level falls. Usually a change in one of the components of aggregate demand causes a shift in the demand curve very significantly. On the other hand, aggregate supply is the measure of the volume goods and services produced within an economy at a given price (aggregate) level. There is usually a positive relationship between the general price level and the aggregate supply. Rising prices normally signals the businesses to expand their production. This helps them meet a higher level of aggregate demand. Aggregate supply is determinant of the supply side performance of an economy. It is a reaction of the productive capacity of the economy and the costs associated with production within each sector. In the long run aggregate supply the determination is through the productive resources that are available to meet the demand and by the productivity of its factor inputs including labor, capital and land. When centralization occurs through existing capital redistribution where it places ownership and controls in fewer and fewer hands; larger organization can become capable to achieve economies of scale. This would lead to the lower average cost than what smaller would not be capable of achieving. Through this centralization the competition will increase to an extent where large, medium and small organizations will compete among each other which could later eliminate the smaller firms completely. In this case there will be a rise of “monopoly”. This monopoly will have a complete control on supply and demand in an economy.
Hence, there are several effects of centralization and concentration of capital on aggregate supply and demand. With centralization it is seen where organizations that are small will tend to lose the competition with the key tycoons in an economy. This will lead to a monopoly influencing the price levels in every sector the monopoly exists. This will have a direct effect on the aggregate demand and supply as people will now have very fewer options and very less substitutes but they sure can have a great price with only one large monopoly providing the goods and services. This may have adverse effect as the labor sources will not be centralized as well which may lead to higher turnover in the industries due to lack of places to choose and work.
On the other hand, concentration may have several effects on an economy as a whole that may significantly change the aggregate supply and demand. It may cause a natural result of competition. The sale of certain products will satisfy consumers but wil lead to market rates way higher than those if the capital was centralized. Also, fusions might cause due to the concentration due to the cooperation, mergers and acquisitions among companies that normally lead the price rise in a particular industry or a sector. Concentration may rise the profit levels as they are sure to rise the product prices in an economy. This is because if a product is sold by a few companies where they deal with the prices. Normally the market efficiency will depend on the competition levels of a particular market and not the total number of competitors. Concentration therefore doesn’t always mean market power and large amount of organizations doesn’t mean a power to compete.
Hence to conclude I must say that it is true that there are several monopolistic practices of capital such as trusts and cartels that Marx have remarked on. However, a lot of them normally create so called a joint venture or a stock corporation. Therefore, the capital is no longer being centralized but is distributed and/or scattered around. In addition to that, a lot of industries including service industry have shown to be significantly progressive. This is basically because of the largely distributed capital. Hence, we can now say that the graph or pivot of monopolies has remarkably reduced and smaller organizations based on joint ventures and corporations are truly the characteristics of the capitalist society of today.

Bibliography http://www.marxists.org/archive/marx/works/1863/theories-surplus-value/ http://www.internationalviewpoint.org/spip.php?article287 http://www.youtube.com/watch?v=rS3-_s-ghbk (video) http://www.isreview.org/issues/32/crisis_theory.shtml http://www.encyclopedia.com/topic/Marxism.aspx http://www-personal.umd.umich.edu/~delittle/books/The%20Scientific%20Marx.pdf http://webcache.googleusercontent.com/search?q=cache:RkDK18O00McJ:www-personal.umd.umich.edu/~delittle/books/The%2520Scientific%2520Marx.pdf+marx+theories+of+capital+centralization&cd=10&hl=en&ct=clnk&gl=ca http://www.conservapedia.com/Karl_Marx https://webspace.utexas.edu/hcleaver/www/387Lautonomistmarxism.html

What do Keynesian economists suggest would fix the problem of insufficient aggregate demand in the economy? Do you see any limitations to the applicability of Keynesian economic policies? Keynes has a macroeconomic view towards the economic variables of total supply and demand. He believed that they both work directly with each other and has nothing to do with the investment actions or decisions made by individuals. He recommends the government to spend and manager the total demand because of the leading gap between unemployment and inflation. He believes an economy can either witness unemployment or inflation but will not occur simultaneously. According to him the free market is pretty much generating a lot more or less demand. Therefore, he feels the need for government to manage the demand. His economic theory is typically founded on a circular flow of money where the cycle of money and earning s moves from one to another. It is where an individual’s spending moves toward another individual’s earnings and when they spend their income it is used to support another individual’s earning. This is a cycle that helps to operate, support and function an economy. Insufficient aggregate demand is what Keynes concluded on after researching the conditions of ongoing unemployment during the era of depression. He believed that the consumption demand had a lot to do with the depression era which affected the employment, income and investment demand in a negative manner. This was simply because the profit generating investments and opportunities were largely dependent on consumption of products and service that was significantly decreased during those times of depression. His solution to escape such an economic condition was to inspire aggregate demand with the means of government investments and spending. It also included lowered tax rates. He believed very strongly that lowering the taxes was one of the significant ways to foster aggregate demand. However, during those times when the tax levels and slabs were already low, his solution of reducing the taxes was highly unrealistic.
The root of economic downturn is caused by insufficient aggregate demand as Keynes states. According to him the total demand for products and services usually declines with organizations and businesses reflecting a downfall in their sales. Reduced sales urge organizations and businesses to cut production and promote reduction of workforce. Due to this the rising unemployment and falling profits constantly depress the demand which later on leads towards a feedback gap with abnormal and undesirable endings. However, only when an event or policy in place rises the aggregate demand this situation is reversed. The hurdle is that it is very difficult for us to see where the demand is generated and how well is it generated in what segments and for what reasons. The output if products and services in an economy is commonly separated into four ingredients. They include the government investment & purchases, exports, overall investment, as well as the consumption of the products and services offered. The demand is pretty much generated and/or expanded from any of these four components. However, in every case there are several forces that are rigidly working towards keeping the expenditure low. This is where the Keynesian theory recommends what we know as a “paradox of thrift”. According to him, if all households tend to save a lot, the interim results can reflect a lower aggregate demand which would then scale down the national income. However, such weaken income levels may prevent them (households) to meet their saving plans. That leaves the government as the demander of last resort. Calls for increased infrastructure spending fit well with Keynesian theory. In principle, every dollar spent by the government could cause national income to increase by more than a dollar if it leads to a more vibrant economy and stimulates spending by consumers and companies.
The two most significant components that are affecting the demand in general are due to the Consumption and Investment. Firstly, when talking about consumption it has been witnessed by several boards and their reports where consumer and population confidence is at its lowest to date. This is quite understandable why the consumers are so skeptic. There are several reasons why they would not have confidence including the declined real estate numbers, rising unemployment and less return on their long term investments and saving plans. This leads to lack of certainty that is far beyond their experience. Today, with several non-obligatory purchase decisions such like buying a property and/or a vehicle the normal reaction and attitude of consumers towards such decisions is to simply wait and watch. Secondly, when talking about investment, it is normal to see a decline in consumption should the investments are rising. This can be investments by organizations buying additional properties and equipment or even individuals buying new houses and vehicles. However, there is a lot of reasoning behind such investments being reduced over the last few years. The most promising reasons include the decline in the real estate prices concurrent with a constant grown in new properties being built at the same time. This means that the demand for houses will not be increasing for at least a couple of years from now. The same sort of decline can be witnessed in the near future where even businesses will find it hard to finance and invest on newer properties due to the stock market decline leading to higher interest rates. This is also the reason they may find it much difficult to finance any potential growth projects. According to Keynes and his general theory, an economy can and will suffer due to the lack of demand that may later promote involuntary unemployment. He believed that if government policies were placed with the interest to increase demand it can help dramatically reduce the rate of unemployment. He stated that if increasing the monetary supply was not sufficient enough to get private sector to invest and spend more. The government spending can also help fill that gap. Keynes knew well that when an economy had a lot of underutilized capacity (like we are witnessing today), and if they are more likely to have government spending to fulfill the gap in the economy, it can really help towards reducing the coming deficits. There might be several options such as Tax Reductions that can help create a fuller economy. However, the problem is that most of the middle class population will normally not use that extra cash towards purchasing any products or general shopping but will use it to pay off debts that they currently have. Tax reductions can only help the high income individuals as their amounts of reduction would be substantial but they tend to save more than actually spend on products and services. Therefore, the pressure to spend will be a lot on the government. They will have to spend a lot to create a fuller economy. However, it is critically important for them to spend it with a hard hand. They need to be spending wisely to avoid subsidy payments, grants and welfare they way they would have spent on it otherwise.
Keynes considered and believed very strongly that the current deficiency in the aggregate demand would continue to be the same if government spending does not come into effect.
There are several limitations for adapting the theory and increasing the government spending because it is also possible that the consumers might also change their behavior due to the increasing spending by the government which is not ideal. If such behavior changes occur it can go opposite the constant efforts of increasing the aggregate demand. The causes may also include the investment demand to shrink due to the exceeding government spending. If this happens investors might reconsider investment opportunities that can be more profitable. Examples can include international property investments to benefit from the lowered taxation or increasing investments in long term bonds instead of fixed capital investments.
To conclude, I must say that although the Keynesian suggestion for a recessive economy is to increase government spending even if the turn out may not be of a great value it is quite a significant thought that it may stimulate a positive output. This can be supported by the theory that an economy and its activity is spending. Therefore, spending will encourage more spending as mentioned in the multiplier effect. However it is also true that several other opposing economists also suggest that the theories and suggestions placed by John Keynes will fail eventually. They believe that government spending will cause unsustainable production patters including housing bubbles. Why should trade unions care about equality, ecological sustainability, and democracy? Should they collaborate with unions in other countries? Why or why not?
A trade union is an association or a group of workers in an economy or a society whose purpose is to maintain and constantly improving the working conditions for the employees. Trade union’s objectives revolve around several key topics such as improved wages, better justified terms and work conditions, full employment, industrial democracy, collective bargaining. It was and at some extent is still best used to gain voice in the government. With all these objectives on the agenda, trade unions have been a great benefit being a positive force within societies. There are several reasons why trade unions bring this positive force.
However there are several models of unionization in an economy that differentiate from industry to industry and have a different effect on each model. The effect of trade unions depends on the structure of an organization’s product market. This includes how competitive an organization finds them competing with similar products sold by other organizations within their space. Some of these models include, monopoly union model, bilateral monopoly, right to manage model and efficient bargaining model. The trade unions must care about equality, ecological sustainability as well as democracy for several reasons with increasing competition in every industry and with an interest in maintaining healthy economic conditions and organizational stability. Equality is a key factor as it brings a lot for the employees and organizations create a special bonding with their workers that can benefit the organization with fewer turnovers in the employment – saving them a lot in training and development. Unions have proven to create greater workplace democracy. With the use of trade unions, workers have a collective voice while at work which brings equality, and economic security. They tend to provide a strong check to the almost total power of management in the workplace giving the workers freedom of speech on the decision making process that would later on have a significant impact on their working lives. Trade unions provide assistance to the workers in obtaining fair wages for them to live a quality life with financial security. Through trade unions they all get a cumulative power to demand better working conditions, benefit packages, and much more that can provide a valuable intangible asset in their lives. They have also proven to be providing greater security on employment. This is a significantly important because better job security later justifies for greater economic security.
In addition, unions play a much broader role in society. They help strengthen democracy of nation and the different societies within. Trade unions have been and are constantly playing an important role for increasing democracy not simply in workplaces but within several communities regardless of it being local, national or global. Trade unions create awareness and work towards better economic, social and environmental policies via different types of political actions and groups of people with similar goals, vision and/or aims. Trade unions have continuously promoted greater economic equality not only in democracies but also in different economies. They have been a significant force in process of democratizing several economies and nations. They tend to promote increased level of economy equality for multi-national citizens. This is one of the reasons why trade unions should collaborate internationally or globally to work together and achieve workplace democracy and equality not only nationally or within certain economies but GLOBALLY. Labor rights are an issue among several nations in the world but it is also a component that is required to achieve economic and social justice. Hence, this proves to be another reason of trade unions to collaborate globally where trade unions of western nations can help the so called “developing countries” in attaining better working conditions and fighting for both economic and social justice.
Hence, for a society to be justice oriented and democratic it needs to have a healthy and a free labor movement. It is the reason why nations with such working conditions that are actively participating in trade union movements tend to be promoting better democratic conditions, crystal clear justice system and work together as representative forms of government. In nations where there are no such union movements or where there are no trade unions witness the workers in these economies to be trapped in poverty with shocking work conditions.