Introduction to the World Economy

A J Brown

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415313575
• eBook ISBN: 9781136513732
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Well constructed and thoroughly competent"> - The Economist
"It is refreshingly differentThe new-comer to economics who studies this book should find it an interesting and invigorating task" - Economic Journal>
This book introduces readers to some of the salient features and problems of the world economy and gives some indication of the main ways in which economists set about the task of analyzing them.
After a general account of what economies are and how they work, the book's discussion develops with reference to broad statistical facts in relation to the following issues: why the world economy is as we find it; why productivity varies from one community to another; how prices are formed; how national economies have grown; what determines an economy's occupational structure; how local specialization comes about; how the pattern of international trade has grown and changed and what the main sources of insecurity in economic life are.

CHAPTER 1

Economies and their Outcomes

What an Economy is

AN economy, in the sense in which the word will mostly be used in this book, is a system by which people get a living. The British economy, for instance, is the whole collection of farms, factories, mines, shops, banks, ships, roads, railways, aircraft, offices, schools, cinemas, hospitals, houses, and the rest—looked at not as features in the landscape, but as going concerns, fully manned—which provide the British people with the goods and services which they either use themselves or sell abroad in order to be able to buy imports. We can describe in corresponding ways the American economy, the whole world economy, or, at the other end of the scale, the economy of the City of Leeds or of the parish of Far Headingley.

The simplest kind of economy is one in which one person has to provide all the goods and services he uses, and has nothing to do with anyone else. Robinson Crusoe has for a long time provided economics textbooks with their favourite example of this, but the essence of most economies is a very high degree of specialization by the various producers in them, and, in consequence, enormous complexity. The number of different occupations which people attribute to themselves in British censuses runs to about 30,000 and even for its own purposes of classification the census needs about 700 different occupational headings. The number of different products is also enormous—British exports are classified under some 2,500 headings, many of which, in turn, cover a considerable variety of different goods.

All this means that any economy, except the very simplest kind, is a system of parts which depend upon each other in an extremely complicated way. A factory worker, for instance, may be one of thousands who are directly engaged as a team in his factory (and perhaps in other factories concerned with earlier and later processes) on the production of a particular line of goods (say glass bottles or nylon socks) which may be used by hundreds of thousands or even millions of people. If we take into account the indirect membership of the productive team—the people who manufacture the machinery it uses, or the machinery that helps to make that machinery—the scope of the interrelations involved in the production and sale of even one kind of good may expand to include portions of nearly every kind of productive organization in the economy. Moreover, the people who ultimately use the bottles or socks in question will be able to do so only because they earn money by taking part in ‘teams’ of equal complexity producing other goods. The demand for any particular kind of good depends upon the simultaneous, or slightly previous, production of all the other kinds.

The system of interrelations between the parts of an economy is thus so complicated that the task of studying it becomes rather like that of studying the physiology of a plant or an animal—which, like an economy, is made up of a vast number of units (cells in the one case, families in the other) each specialized to do one of a great many different jobs, and depending for its welfare on the working of the whole system. An economy is, indeed, in one sense harder to study than an animal or a plant, because it is not practicable to try experiments with it—the student has to be content with watching what he can see of its working in whatever combination and sequence of external circumstances the course of history may send. The questions which an economist asks about an economy are, nevertheless, rather similar to those which a biologist asks about his subject matter, and this analogy may help us to appreciate some, though by no means all, of the aspects of economies in general, and of the world economy as a whole, with which this book is concerned.

On Studying an Economy

Perhaps the first question to ask concerns the nature of what we may call the essential vital process of an economy. With living things these processes include feeding, digestion, and growth; with economies they include production, consumption, investment, and (again) growth. Any scientific study is concerned, wherever possible, with measurement, and we shall see that the measurement and comparison (between different economies, or for one economy between different times) of the rate at which these processes go on is a central one for economists.

Perhaps the second question which it is natural to ask about an economy is one with which the analogy from biology is less obvious. It concerns the way in which it is organized to carry out the vital processes which have just been mentioned. Does some central authority decide what shall be produced, and who shall produce it, and who shall get the products, or are these things determined, like the course of a highly improvised game of football, by the efforts of a large number of people towards different immediate objectives of their own, without any central organization? While the vital processes are essentially of the same nature in all economies, the degree in which they are governed by central organization, the nature of that organization (where it exists), and the nature of the game which is played between the various families and organizations in the economy in the absence of central direction are matters which differ widely from one economy to another.

We shall see, however, that in large economies, central control by an authority is not normally anything like complete and has sometimes not existed at all, and this brings us to a point at which the analogy between the study of an economy and that of an animal becomes closer again. Where, as normally happens, people have specialized jobs, so that they do not produce all of the things they and their families need, and are at the same time not simply issued by the authorities with what they are to have of the economy’s output of goods and services, a central feature of the economy must be a monetary system. Each person taking part in production must either be paid with, or must be able to exchange his product for, something which he can use as general purchasing-power which, in turn, he can use to buy the things he wants. The circulation of this purchasing-power in any economy (except the rare ones which are entirely centrally directed) is rather like the circulation of the blood in an animal. The rate at which it goes on varies with, and can be used with due care as a measure of, the level of vital activity in the system as a whole, and in some degree affects the activity of all or most of its specialized parts.

The fact that a change in the activity of any part of an economy affects other parts through the monetary mechanism, and that changes in those parts in turn affect the others (including the part where the initial change took place) has some very interesting consequences. It means that certain changes (particularly increases or decreases in activity), once started, tend to reinforce themselves, up to a point, at least. The level of activity in the economy as a whole shows a reluctance to remain steady which gives those responsible for economic policy some of their worst headaches. In this, economies are considerably more troublesome to those concerned with their welfare than are animals or plants, which have great capacities for adjusting themselves to changes in their circumstances without unnecessary fuss.

Growth is the other great function which economies display in common with living things, but here, as elsewhere, the analogy must not be pressed too far. Economies grow, it is true, by diverting part of their resources from being currently used up and directing them into the equivalent of ‘body-building’. To some extent, also, growth in an economy consists simply in its getting bigger—increasing the scale of its use of all kinds of resources and its output of all kinds of products. More significantly, however, it often involves the increase of output more than in proportion to any increase which there may be in the number of people in it or the amount of work they do—an increase in their output per head and their standard of living. This is made possible by changes in the methods of production—a change in the detail and efficiency (as distinct from the broad nature) of the vital processes of the economy to which living things show no very obvious counterpart. These changes, moreover, involve changes in the structure of the economy, by which we mean changes in the proportions of the people in it who do each kind of job, and also the creation of new kinds of job and the total disappearance of some old ones. Animals and plants in the course of growth also change their shapes, but with economies, it is the change in the standard of living they have reached rather than change in total size (as measured by their output) that tends to be associated with change in their structure. In a poor economy which is self-sufficient, for instance, over 70 per cent of the population may be farmers or their families; in a rich economy (also self-sufficient) the corresponding proportion may be only 10 or 15 per cent.

What Economies Provide

It is thus a feature of economies that their structures change and that this change puts the jobs of particular people in jeopardy. We have seen, too, that the level of activity in an economy is hard to keep steady (or to keep on a steadily rising path), so that there is a good deal of insecurity even apart from changes in structure. The most important questions about an economy, however, are perhaps those concerned, not with this uncertainty of its provision for the people in it, or even with its rate of growth, but with the general level of productiveness it has achieved, in relation to the number of people it has to support. It is in this that the economies of nations, and of regions of the world, differ perhaps most strikingly from one another.

These differences between the average provision which different economies make for the people in them are, in the nature of things, difficult to measure, but it is important to try since where a community’s material standard of living stands in the wide range of variation which is to be seen in the world is a matter which affects every phase of its life. Let us start, therefore, with some of the obvious and measurable differences, and try to generalize later.

First, what is the range of difference in the adequacy with which different economies feed their people? If we measure average food consumption per head in one of the most usual ways, by the energy-providing power of the diet, expressed in Calories—the range is surprisingly small; the values recorded for India, China, or the West Indies may be only 20 or 30 per cent. less than those for the United States or the United Kingdom. But qualitatively there is a very great difference. Diets in poor countries consist overwhelmingly of vegetable foods, often of a monotonous and sometimes unappetizing kind—rice in Asia, maize porridge in much of Africa and eastern Europe. They contain little fat or meat, and are sometimes deficient in constituents necessary to health. On the other hand, the diets of rich populations are largely derived from animals, either as meat or as dairy produce, and are altogether more varied.

In clothing, the contrast between the consumption of rich and poor communities is more obvious. The wealthy countries of western Europe and North America use from three to eight times as much of the main clothing fibres per head of their populations as India or China do. To some extent, of course, this is a matter of climate, but by no means entirely—parts of China have a climate as severe as any thickly inhabited region of the world. The variation in clothing consumption depends much more on means than needs. The same is true of housing. Information about this is very incomplete, but we know that, for instance, while in the United States or the United Kingdom more than four-fifths of the houses have more than one room to each person living in them, and about the same proportion have running water laid on, the great majority of houses in oriental countries, the Middle East, the Caribbean region, much of eastern Europe and the U.S.S.R. have more than two people to a room, and only a minority have running water. Without making any allowance for differences in facilities, it may be said that in the poorer countries there is only a fifth or a tenth as much houseroom in relation to population as there is in the richest.

But what is still more striking is that, while the poorest communities spend 80 or 90 per cent. of their incomes on food, clothing and housing, the richest communities not only have much more of these essentials but have more than half their incomes left for other things after they have paid for them. Broadly speaking, the rich countries manage to get about three times as much of the services of teachers and about ten times as much medical and hospital service in relation to their populations as the poor ones, but the really big discrepancies—differences of a hundredfold or more—lie in such matters as the number of radios or motor cars or the consumption of newsprint per thousand of the population.

The Difficulties of Comparison

It is these great differences between the relative amounts of different goods or services which two communities may be found to have per thousand of their populations which make it difficult to generalize further—to say that one of the two communities is, for instance, twice as well off as the other. In some kinds of goods it may be no better off, in others twenty times as well off; how are we to make a general comparison? This difficulty is one which economists encounter frequently, just because, as we have noted, their business is, largely, to try to sum up, in quantitative terms as far as possible, the main facts about economies; and economies are so complex that complete and detailed statements about them would be hopelessly clumsy. The obvious way out of it in the case in question—where we are trying to make a summary comparison of the amounts of all goods and services per head in two different economies—is to use some kind of average of the ratios between the amount of a good per head in one country and the amount of the same good per head in the other. But what kind of average? Should the ratio of consumptions of matches count as much in the average as that of the consumptions of bread?

Clearly it should not; the ratios of the amounts consumed per head of the various kinds of goods should be ‘weighted’ in some way so as to reflect the differing importances of these goods. But this brings us to the real difficulty. The relative importance of the different kinds of good may, as we have seen, be quite different in different countries. Motor cars and their running are of great importance in the United States, where expenditure on them is over a third of that on food; in the west European countries their importance is much less, expenditure on them being only something between a fifteenth and a fortieth of expenditure on food. In comparing total consumption per head in the United States with that in Europe, should we give food and motor cars the relative importance which they have in the American way of life or the European? Which we do may clearly make a good deal of difference to the answer we get.

This is the difficulty known as the ‘index number problem’; it is in principle insoluble, since one country’s consumption-pattern is just as good a basis for comparison as the other’s. In practice, a compromise or average is made between the two patterns in order to get a set of ‘weights’ reflecting the relative importance, for the purpose of the comparison, of different kinds of goods and services. But the compromise is bound to be an arbitrary one, and the more the consumption-patterns of the two countries in question differ, the greater is the inevitable margin of uncertainty attached to any comparison between their average consumptions per head, or standards of living. The average consumption and use per head of all goods and services in the United States was, in 1950, 3·3 times as great as that in Italy if American expenditures are taken as representing the relative importance of different things, but 5·6 times as great if Italian expenditures are taken for this purpose. In comparing the United States with India in this way the margin of uncertainty would be much greater.

There are other difficulties in making such comparisons. One is that we have not usually got information about all the goods and services which are used or rendered in a country. The services of housewives in looking after children, cleaning, and cooking, for instance, are not recorded, and are generally not estimated, though they obviously play an important part in making the standard of living what it is—a part, moreover, which is probably much more important, in relation to the total consumption of goods and services, in poor countries than in rich ones.

Nevertheless, so long as the difficulties and ambiguities of quantitative comparisons between the livings which different economies afford to their inhabitants are kept in mind, such numerical comparisons are well worth making. Perhaps the best way of making them for our present purpose is to look at the relations between successive pairs of economies which are not too far apart in the scale. Take, first, the United States and the United Kingdom. The former stood, in 1950, some 60 or 100 per cent. (according to the basis of comparison) above the latter. It is worth noting, however, that there are very considerable regional differences within the United States, the contrast between the rich areas of the middle Atlantic seaboard and the far west and the poor area of the south east being probably just about as great as that between the United States average, and the United Kingdom. In the richest parts of the United States, a total population of nearly fifty million lives at an average level which is more than twice the British on any basis of reckoning.

The other countries of north-western Europe do not differ very much from the United Kingdom in their standard of living; the general tendency is for them to be a little below. When we come to Italy, however, we find a contrast with the United Kingdom which in 1950 was perhaps rather similar to that between the latter and the richest parts of the United States—the average amount of goods and services per head was between two and three times as great in the United Kingdom as in Italy, though the contrast has probably diminished somewhat in the intervening years. Among the countries where the average amount of goods and services per head is not very different from that in Italy are the Soviet Union and (a little lower) Japan.

If we go down to about half the Italian level, we come to, or perhaps rather below, the living standards of the poorest countries in Europe (if we exclude Turkey)—Greece, Yugoslavia, and Albania—and into a group which includes most of the Caribbean countries and the poorer countries of South America. But these still stand to India much as California or New York stands to the United Kingdom, or the United Kingdom to Italy. And India is by no means at the bottom of the scale; China perhaps stands to her roughly as the United Kingdom stands to the United States, and there are very considerable populations in tropical Africa and elsewhere whose provision is smaller still.

It seems from this that the average provisions which considerable economies make for their people are spread over a range which, according to the method of measurement, can be computed as anything from rather less than twentyfold to over a hundredfold—the ratios for communities so diverse as the richest and the poorest in the world have little meaning, except that the contrast is very great. The reader may well ask what this contrast means in terms of welfare or happiness. The answer, unfortunately, can only be a vague one. We can say, for instance, that the expectation of life for a newly-born child is less than half as long in the poorest countries for which we have the informatio...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• CONTENTS
• PREFACE
• 1 ECONOMIES AND THEIR OUTCOMES
• 2 THE ESSENTIALS OF AN ECONOMY
• 3 THE FLOWS OF MONEY
• 4 HIGH AND LOW PRODUCTIVITY
• 5 WHAT DETERMINES PRICES?
• 6 GOOD AND POOR LIVINGS
• 7 HOW ECONOMIES GROW
• 8 THE BALANCE OF OCCUPATIONS
• 9 THE ROOTS OF SPECIALIZATION
• 10 THE PATTERN OF INTERNATIONAL TRADE
• 11 THE HAZARDS OF ECONOMIC LIFE
• 12 THE ORGANIZATION OF THE WORLD ECONOMY
• INDEX