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Saturday, October 30, 2010

Leftward movement versus rightward movement

Leftward movement versus rightward movement

Since rightward movement is regarded in all European traditions as corresponding to that of the sun, and hence beneficial and joyous, circling to the left is necessarily ‘backwards’, reversing the norm. Folklore links leftward circling with bad luck, cursing, witchcraft, and raising the Devil. Until the 19th century, this was purely a Scottish and Irish belief, though one which intrigued English observers, as shown by quotations in the OED (under ‘sunways’ and ‘withershins’) and in Opie and Tatem (1989: 383-6). The few English references in Victorian times concerned the bad luck involved if a funeral or bridal procession moved anticlockwise. Nowadays, popular writers have built up a conventional picture of black magic rituals, in which turning withershins causes evil, and the belief has become more widespread.

A circling movement made by turning to the right is described as a ‘right-handed’, ‘clockwise’, or ‘sunwise’ turn, and is regarded as bringing good luck. Though the belief is strongest in Scotland and Ireland, it was customary in parts of England in 19th century country funerals to carry the coffin sunwise round the churchyard (Hereford Times (20 Mar. 1838), cited in Opie and Tatem, 1989: 384). Recent instances of the idea in England are that when making sauces, puddings, or cakes the stirring must always be done clockwise, or the cooking will go wrong; that ropes should be coiled clockwise; even, that in stirring tea and laying a table one must never go ‘against the sun’ (Opie and Tatem, 1989: 385-6). The primary reason why this direction of movement is said to be ‘sunwise’ appears to be that in order to remain facing the sun as it moves from east through south to west, one has to pivot round constantly to one's right.

Thursday, October 28, 2010

Fallacy of division vs Fallacy of composition

Fallacy of division vs Fallacy of composition (W)

A fallacy of division occurs when one reasons logically that something true of a thing must also be true of all or some of its parts.

The converse of this fallacy is called fallacy of composition, which arises when one fallaciously attributes a property of some part of a thing to the thing as a whole.

13.3 Investment and Aggregate Supply

Macroeconomics / Rudiger Dornbusch - HB171.5 .D619 2006

13.3 Investment and Aggregate Supply

Investment is an important component of AD. Investment also increases capital, increasing the productive capacity of the economy. In the short run, investment does not matter for AS but in the long run it does. A little back-of-the-envelope arithmetic can help us to make sense of this apparent contradiction.

We saw in Insight 13.1 that a year’s worth of investment is typically about 1/15 of the capital stock. Suppose someone found a policy to increase investment by 25 per cent more than it would otherwise have grown. (The historical record suggests that no one has come up with an idea nearly this effective – but hope springs eternal!) Over the course of a year the effect of the policy would be to increase capital by about 1/60 extra, or about 1.6 percent. Looking back at what we learned about growth accounting in C3, this would translate into an increase in GDP of about 4/10 of 1 per cent. The notion that short-run policy might increase investment by 25 percent is probably outlandish. The short-run supply side effect of any realistic policy will probably be too small to measure.

While the short-run supply-side effects of stimulating investment are likely to be quite limited, increasing investment may be among the most important tools for long-tem prosperity. The effect of modest annual increases in the capital stock can accumulate to be quite large over long periods. We can see the evidence for this by looking at the very high rates of investment as countries move into modern development, with very high rates of growth sustained for considerable periods.

Investment and government

This chapter has concerned itself with private investment. We should, however, make a few brief comments concerning the importance of public investment. In particular, economists are often concerned about the consequences of short-run crowding out of private investment by government budget deficits, which are assumed to mostly fund government consumption expenditure.

However, recent developments in the theory of FP have begun to focus on the importance of government investment behavior in determining private sector investment performance. A traditional responsibility of government is to supply mush of the economy’s basic infrastructure, which largely takes the form of the provision of public goods that the private sector would not otherwise provide. It is quite possible that private business will be more likely to make more profitable investments in an economy that has large quantity of high-quality infrastructure, much of which may need to be provided by the government. By this we mean public infrastructure such as the transport infrastructure (for example, roads, railways and airports), the communications infrastructure (such as telephone cables) and the social infrastructure (such as schools, universities and the legal system).

In light of this positive relationship between private and public investment, perhaps we should be concerned about the decline in public investment expenditure in Australia, which has fallen from around 7 per cent of GDP in the 1960s and 1970s to around 4 percent of GDP today. Figure 13.20 (see ABS Time Series Statistic Plus, National Accounts Database, in dX Database) illustrates this decline. The suggestion could be that governments that tend to secure balanced budgets, or fiscal surpluses, by cutting public investment rather than public consumption, might in fact still be crowding out some private investment.

On the other hand, what we have seen around the world in the last 30 years is a shift towards private provision of many forms of infrastructure. Governments have devolved themselves of activities that were formerly assumed to be best provided by government, but are now assumed to be efficiently provided by the private sector – for example, the private provision of tool roads, the building of new airports and the renovation of old ones, and the move towards private education.

Nevertheless, certain types of public infrastructure investment are likely to be extremely important in facilitating private investment and driving long-run economic growth. The mix between government consumption and government investment in any FP changes that occur is something we should recognize as important.

Investment around the world

One reason that high-growth countries are high-growth countries is because they devote a substantial fraction of their output of investment. Table 13.3 shows the ratio of gross fixed capital formation of GDP to several countries. The investment ratios are determined by both the demand of capital, as studied in this chapter, and the supply of savings.

Table 13.3 Ratio of investment of GDP (%)

Country

1975

2002

Australia

22.1

24.1

NZ

19.3

20.3

US

17.6

18.2

Canada

24.4

19.6

Japan

32.5

25.6

Korea

24.9

26

Singapore

35.1

20.6

Bangladesh

5.5

23.1

Ethiopia

5.5

20.5

Source: International Financial Statistics Yearbook, 2003 and the World Bank World Tables in dX Database (ratio of total gross fixed capital formation to GDP)

Table 13.3 suggests that high rates of investment occur in rapidly growing countries but not necessarily in countries that have already become very wealthy. In both 1975 and 2002, Australia and NZ were wealthy countries with moderate growth rates. In 1975, Japan was a moderately well off country with a high growth rate. Over this period, both Singapore and Korea grew very rapidly, due in part of their high rates of investment, but Bangladesh and Ethiopia, had investment rates too low to support rapid growth. By 2002, although both countries remained relatively poor, their investment rates had picked up considerably.

The relatively low rates of investment in Australia, NZ, US and Canada, compared with their international competitors, is a source of long-run concern to policy makers.

The Wants of Man

Principles of Political Economy by Charles Gide, 1903 (second edition) – HB 173. G4513 1903 ssh

The Wants of Man

The wants of man are the underlying motive of all economic activity, and consequently the starting-point of economic science. Every living being requires for its development and the accomplishment of its purposes some help from without, and must assimilate certain elements of the outside world. From the plant (and even from the crystal) up to man, this necessity increases with increase of individuality. Every want felt by a living being gives rise to a desire, and consequently to an effort to obtain possession of the necessary exterior objects, because their possession implies gratification, whereas the lack of them means suffering. The wants of man have several characteristics, each of which is important because some great economic law is based on it. These characteristics are the following: -

(1) Human wants are unlimited in number. This feature distinguishes man from the inferior animals and is the mainspring of civilization in the strictest sense of the word. To civilize a people is to increase its wants.

The wants of humanity are at first like those of a child. At birth the child needs nothing but a little milk and warm covering; but soon he requires more varied food, more complicated garments, and toys; each year gives rise to new needs and new desires. The more he learns and sees, the more numerous and intense are these desires.

We are today conscious of a thousand wants that were unknown to our grandfathers, - wants of comfort, hygiene, cleanliness, education, travel, intercourse. It is certain also that our grandchildren will fell new wants. If we should discover, on another planet, beings superior to men, we should find among them a multitude of wants of which we in this world know noting. Nations are doomed if they are too easily satisfied, and if their desires to not extend outside the small circle of necessity. Nations whose people are content with a handful of ripe fruit and a sleeping-place in the shade will succumb in the international struggle for life. They are destined to disappear quickly from a world in which they scarcely know how to subsist.

If we desire a diminution in the number and intensity of wants that aim at wealth, which today make up too great a part of our social activity, this is in perfect agreement not only with Christian ascetics and mystics like Tolstoi, but even with such economist as John Stuart Mill. But this desire is conditioned on the assumption that these wants will be abandoned in order that nobler ones may take their place; for if we simply gave them up without filling their place, that would mean the retrogression of social life toward the animal state.

Moreover, it must be remarked that even purely economic wants are not devoid of moral value, for every new want constitutes a new social bond; generally we can satisfy our wants only with the aid of others, and this fact strengthens the feeling of solidarity. The man who has no wants – the hermit – suffices unto himself, which is precisely what a man should not do. As for the working classes, we should rejoice, not regret, that new wants and desires constantly plague their minds; for without new wants they would have remained in an eternal condition of slavery.

(2) Wants are limited in intensity. This is one of the most important propositions in political economy, for on it, as we shall see, is founded a new theory of value.

Wants are limited in intensity because every want is satiable, i.e. a certain amount of a certain kind or kinds of wealth will satisfy it completely. It is evident that a man needs only a certain amount of bread to satisfy his hunger, and a certain amount of water to slake his thirst. We may say that a want decrease in intensity up to the point of satiety. Then the want is extinguished and is replaced by disgust or even suffering. It is torture to suffer thirst; but it was also torture, in the Middle Ages, to undergo the” watering operation,” by which the victim was compelled to absorb excessive quantities of water.

The more natural a want is, i.e. the more physiological its nature, the more clearly drawn is its limit. It is easy to tell how many pounds of bread and how many pints of water a man needs. But the more artificial or social a want is, the more elastic is the limit marking its satisfaction. It is certainly not an easy matter to tell how many dresses would lead a fashionable woman to cry “Enough!” or the number of rubies desire by an Indian rajah, or how much money would completely satisfy the wants of a civilized man. Nevertheless, we may say that even these wants there is a limit; in these respects, too, satiety is inevitable. At all events each new possession gives less pleasure than the preceding one.

(3) Wants are competitive, i.e. one want can often be developed only at the expense of other wants which it abolished or absorbs. According to the proverb, the old must make room for the new; similarly, one want takes the place of another. This simple fact is the basis of an important economic law called the law of the substitution of wants. Progress consists generally in replacing inferior wants by higher wants. To combat drunkenness, for example, temperance societies have found nothing more successful than ‘temperance restaurants’ in which an effort is made to accustom people to drinking coffee or tea. We should also note that a material what may give way to an intellectual want (the saloon to the reading-room) or a moral want (when, for example, a laborer deprives himself of a drink in order to pay his dues to a benefit society, a labor organization, or a reform club.)

(4) Wants are complementary; they form groups. There is competition among wants of the same sort, among wants that are interchangeable; but there is harmony among wants of different kinds. The want of food is allied, in civilized societies, with the want of tables, chairs, table-cloths, napkins, glassware, knives, and forks. In order to obtain a maximum of enjoyment, many pleasures must be combined, and thus give rise simultaneously to large groups of wants.

(5) Wants, even acquired or artificial wants, tend to become a matter of habit. They become, as the popular expression aptly puts it, our second nature. This, as we shall see, is of great importance in the determination of wages. The customary plane of existence – the standard of living – cannot easily be lowered. There was a time when workmen wore neither shirts nor shoes, when they had wither coffee nor tobacco, when they ate neither met nor white bread; but today these wants are so deep-seated, they from so fundamental a part of our nature, that a workman, if he were deprived of them and suddenly reduced to the condition of his social equals in the time of good King Henry, would probably perish.

If we add, finally, that a habit which has been transmitted from generation to generation tends in time to become established through heredity, and that our senses are every day becoming more subtle and more exaction, we shall understand the despotic power that may eventually be acquired by a want that originally seemed to be futile or insignificant.

It must not be supposed, however, that wants once acquired are perpetual. There is, as we have said, a competition or rivalry among some wants. Some of them are vanquished and disappear. The show-cases of our museums are filled with objects that at one time satisfied a real want, but which now correspond to no human desire save that of collector of curios. But wants perish only when they are supplanted by others that are more strongly felt or whose satisfaction affords greater enjoyment.