Definition of Economics

Is the existence of different wages a problem for societies, and if so, how can it be remedied?

Adam Smith, and Karl Marx, both believed that labour value lies at the heart of all economic value. Commodities, goods, and services arise from the interaction of land, labour, and capital. Since Land is fixed until new land is cleared or built by workers, and since capital enhances labour and is invented by people, they both thought that the only people who added value in economic transactions were workers. This theory of labour value was qualified in the second half of the twentieth century by the elevation of entrepreneurialism as a factor of production. The enterprising businesspeople who took on risks, brought factors together, and who were rewarded with profit having been prepared to make losses, were elevated to a ‘fourth factor.’ This idea makes some sense, but also serves to undermine the idea that labour value on its own creates economic value. If labour has value, some argue that the value of time taken from a life to work should be viewed equally. This means t...

Inequality, Part One: the greatest market failure?

Income inequality arises when different consumers have different incomes, and different people have different talents. It could also arise because of the source of income or the value of the talents. For instance, employees might have different incomes from each other because of different marginal labour products, different factor returns to their labour, or different elasticities of labour. People might have different skills for which there is a greater or lesser need and employers, or the purchasers of labour might have different demands. Equally, entrepreneurs often take greater risks than others, and thereby expect and receive greater rewards than those who do not take risks. There might be different factor returns to capital or land, which result in various levels of profit, dividend, or rent, for those who do not live by the return to their labour value. A functional market would bring all these diverse groups together as suppliers and consumers and would matc...

Should economically less developed countries fix their exchange rates or let their currencies float freely?

An exchange rate represents the value of one currency in terms of another. Central banks can attempt to ‘fix’ these rates by declaring a value at which the currency will be exchanged. They can then defend this rate against market speculation, should there be any, by manipulating interest rates, using currency controls, or buying and selling currency on the international markets. No one country can ‘hold out’ against the markets however, even if it is the biggest in the world, for very long, as exchange markets can mobilise more money than exists in any one country at any time. Therefore, countries which fix their rates either do so at a realistic level, and allow their currency to be traded, or use another currency internationally to that which is used domestically. In addition, some countries use a foreign currency for trade, and simply make any trade in their currency outside their own borders illegal. The reasons for which a country might choose to fix its exchange rate are ...

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