This week in History and Context of journalism, we have been looking at ‘Economic Theory’. Economics can be described as; ‘essentially a recurring crisis of over production and under consumption’.
Adam Smith wrote the ‘Wealth of Nations’ which argues that agriculture offers fewer possibilities to a division of labour, raising its prices compared with industry. "It is not upon many occasions so much the cause, as the effect of the division of labour. Competition should reduce the prices of these ‘talents’". Smith explained that the talents/skills of people should be paid for in accordance to comparative advantages.
David Ricardo, an English political economist, wrote The Labour Theory Value. His views contrasted those of Adam Smith’s. Within chapter 27 of The Labour Theory Value, it states: "Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity has it’s natural and its market price. The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase of diminution. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall."
Thomas Robert Malthus, an influential political economist introduced ‘The Iron Law of Wages’. This is a proposed law of economics that asserts that real wages always tend toward the minimum wages necessary to sustain the life of the worker. According to Malthus, population increases when wages are above the ‘subsistent wage’ and falls when wages are below subsistence.
John Maynard Keynes overturned the neo-classical economics that held that free markets would in the short to medium term automatically provide full employment, as long as workers were flexible in their wages demands. Keynes argued instead that aggregate demand (the total demand for final goods and services in the economy at a given time and price level) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment.
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Monetary policy rests on the relationship between the rates of interest in an economy (the price at which money can be borrowed) and the total supply of money.
Deflation is when prices fall across the economy. It makes money appear stronger but because people know prices are falling, they are put off our spending. Monetary policy has a limit and in deflation this limit is brought forward. It aims to lower interest rates in order to stimulate the economy. Central banks have lowered their interest rates to encourage people to borrow money and to spend. Even is interest rates are 0 the real interest rates will be positive if there is deflation. Nominal Interest Rate – Inflation Rate = Real Interest Rate.
John Kenneth Galbraith wrote ‘The New Industrial State’ whereby he states that the traditional mechanism of supply and demand is replaced by the planning of large corporations, using techniques such as advertising and vertical integration. (Vertical Integration – a method used to avoid the hold-up problem.) The book is about Galbraith’s account of modern economic life.
Galbraith argues that the ‘industrial system’ is practically controlled by a technostructure rather than shareholders. They do not act to maximise profit but principally to maintain the organisation and, as a secondary aim, to ensure its further expansion. (Technostructure – refers to managerial capitalism where the managers and other company leading administrators, retain more power and influence than the shareholders in the decisional and directional process.)
Chapter 2 of The New Industrial State - Imperatives of Technology:
On June 16, 1903, after some months of preparation, which included negotiation of contracts for various components, the Ford Motor Company was formed for the manufacture of automobiles. Production was to be whatever number could be sold. The first car reached the market that October. The firm had an authorised capital of $150,000. However, only $100,000 worth of stock was issued, and only $28,000 of this was for cash. Although it does not bear on the present discussion, the company made a handsome profit that year and did not fail to do so for may years thereafter. Employment in 1903 averaged 125 men.
- 61 years later the Mustang was invented. The public was well prepared for the vehicle. Plans carefully specified prospective output and sales; they erred as plans do and in this case by being too modest. In 1964, employment in the Ford Motor Company averaged 317,000. Employment rose due to new models being invented. "Virtually all of the effect of the increased use of technology are revealed by these comparisons. We may pass them in preliminary review."
- "Technology means the systematic application of scientific or other organised knowledge to practical tasks. Its most important consequence, at least for the purposes of economics, is in forcing the division and subdivision of any such task into its component parts. Thus and only thus, can organised knowledge be brought to bear on performance."
- With increasing technology the commitment of time and money tends to be made ever more inflexibly to the performance of a particular task. That task must be precisely defined before it is divided and subdivided into its component parts. Knowledge and equipment are then brought to bear on these fractions, and they are useful only for the task as it was initially defined. If that task is changed, new knowledge and new equipment will have to be brought to bear. Had Ford and his associates decided, at any point, to shift from gasoline to steam power, the machine shop could have accommodated itself to the change in a few hours. By contrast, all parts of the Mustang, the tools and equipment that worked on these parts were designed to serve efficiently their ultimate function. They could serve only that function.
- Technology requires specialised manpower. Organised knowledge can be brought to bear only by those who process it. However, technology does not make the only claim on manpower; planning, also requires a comparatively high level of specialised talent. To foresee the future in all its dimensions and to design the appropriate action does not necessarily require high scientific qualification. It requires ability to organise and employ information or capacity to react intuitively to relevant experience.
- These requirements do not reflect a higher order of talent than was required in a less technically advanced era.
- Employers working in the Motor industry should be skilled and talented within that field.
- The inevitable counterpart of specialisation is organisation. This is what brings the work of specialists to a coherent result. If there is a large number of specialists, this co-ordination would be a major task.
- From the time and capital that must be committed, the inflexibility of this commitment, the needs or large organisation and the problems of market performance under conditions of advanced technology comes the necessity for planning. Tasks must be performed so that they are right not for the present but for the time in the future when, companion and related work having also been done, the whole job is completed. And the amount of capital that, meanwhile, will have been committed adds urgency to this need to be right. So conditions at the time of completion of the whole task must be foreseen, as must developments along the way.
- In the early days of Ford, only days elapsed between the commitment of machinery and materials to production and the appearance of the car. If the car did not meet the approval of the customers, it could quickly be changed. There were many complaints to begin with such as cooling system not working, brakes not braking etc. The faults were soon recovered and this made no permanent harm to the manufacturing company.
- The more sophisticated the technology, the greater in general, will be all of the forgoing requirements. This will be true of simple products as they come to be produced by more refined processes or as manufacturers develop imaginative containers or un-openable packaging.
- A navy could be bought in the market.
- Technology under all circumstances leads to planing; in its higher manifestations it may put the problems and associated cost of planning beyond the resources of the industrial firm.
- Technology not only causes change it is a response to change. Though it forces specialisation it is a result of specialisation. Though it requires extensive organisation it is also the result of organisation.
