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Daniel E. Saros
Valparaiso University
Valparaiso, Indiana
Principles of Political Economy, 2e by Daniel E. Saros is
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CONTENTS
Daniel E. Saros
Valparaiso, Indiana
Daniel E. Saros
• Currency Crises
• The Theory of Purchasing Power Parity
• Marxist Approaches to Imperialist Finance
• A Marxian Approach to Exchange Rate
Determination
• Following the Economic News
• Summary of Key Points
• List of Key Terms
• Problems for Review
LIST OF FIGURES
Figure 14.4: The Pattern of the Real Wage and the Real
Value Added Per Worker, 1820-2006
PART ONE: AN
INTRODUCTION TO
ECONOMIC
THEORY
CHAPTER 1
THE DISCOURSE OF
ECONOMICS
What is Economics?
That is, the biologist can impose the conditions that she
finds most suitable to the testing of her hypothesis.
Economists generally cannot perform these kinds of
experiments.
The reader might recall that the vertical line has a slope
that is undefined (or one that we might say is infinite).
Similarly, the reader might also recall that the horizontal
P RINCIPLES 117
For example, suppose you are given the points (4,5) and
(12,3), and then are asked to find the equation of the
straight line that passes through the two points. These
points as well as the straight line that connects them are
represented in Figure 1.10.
Discourse
124 D ANIEL E. S AROS
Economics
Feudal system
Market capitalism
Invisible hand
Neoclassical economics
Mainstream economics
Orthodox economics
Heterodox economics
Scientific method
Entry point
Logic
Unidirectional causality
Mutual causality
Positive statement
Normative statement
Economic models
Independent variables
P RINCIPLES 125
Dependent variables
Cost function
Marginal cost
Economic forecasts
Point-slope form
Slope-intercept form
90 70
180 100
270 130
360 160
450 190
540 220
Notes
WHA
WHATT IS A GOOD SOCIETY?
The reason the PPF shifts inward in this case is that the
resources themselves have been lost. This loss of
resources is very different from the unemployment of
existing resources. In the latter case, the resources still
exist, but they are not employed. In the former case, the
resources are no longer available at all and so society’s
production possibilities have changed.
In the graph on the left in Figure 2.6, one can see that
the economy is producing a great deal of consumer goods
and relatively few capital goods at point A. Because the
economy invests little in new capital goods, the capital
stock grows only slowly. Therefore, the PPF experiences
a relatively small outward shift and the growth rate of
the economy is relatively low. In the graph on the right,
on the other hand, the economy produces a great deal of
capital goods and relatively few consumer goods. Because
it invests so much in new capital goods, the capital stock
grows very rapidly and the production possibilities
expand rapidly as well, as indicated by the outward shift
of the PPF. It is sometimes argued that the Japanese
economy grew much more rapidly than the U.S. economy
during the post-World War II period precisely because
the Japanese invested so much in new capital. The high
saving rate among Japanese households made possible
the accumulation of funds in banks, which then were
loaned to Japanese corporations who used the funds for
investment purposes. The so-called Japanese Miracle,
which included extremely rapid annual growth rates, was
the consequence. At the same time, U.S. consumers were
eager to consume after having experienced considerable
deprivation during the Great Depression and the
subsequent period of wartime rationing. Because
Americans spent a great deal of their income and saved
little, the economic growth rate was lower than Japan’s
during this period. In general, the example illustrates that
a tradeoff exists between present consumption and future
consumption. Just as individuals might postpone present
consumption to expand their future consumption
possibilities, entire societies may also postpone present
consumption and consume more in the future. Similarly,
P RINCIPLES 157
Theocratic governments
Economic problem
Technology
Wants
Land
Capital
Financial capital
Investment
Stock variable
Flow variable
Wealth
Income
Labor
178 D ANIEL E. S AROS
Economic efficiency
Full employment
Static efficiency
Dynamic efficiency
Productive efficiency
Allocative efficiency
Tradeoffs
Opportunity costs
Heterogeneous resources
Homogeneous resources
Cost-benefit analysis
Economic growth
Economic contraction
Unbalanced growth
Unbalanced contraction
Private ownership
State ownership
Allocation mechanisms
Market allocation
Market capitalism
Command socialism
Hybrid forms
Cross forms
Market socialism
Command capitalism
180 D ANIEL E. S AROS
Mixed economies
Barter economies
Transaction costs
Social formations
Social superstructure
Class exploitation
Notes
4. Ibid. 95.
5. Ibid. 95.
6. Ibid. 100-105. Rosser and Rosser provide a detailed overview
of these Islamic economic principles.
7. See Rand (1966).
8. The reader should notice the emphasis on the neoclassical
entry point in this statement of the economic problem. That is,
given resources, given technology, and given wants or
preferences are assigned a central place.
9. McConnell and Brue (1996), p. 25, postpone discussion of
allocative efficiency until the details of the model are
developed.
10. The use of the total opportunity cost and marginal opportunity
cost measures may be found in McConnell and Brue’s earlier
editions. For example, see McConnell and Brue (1996). p. 26.
11. OpenStax College (2014), p. 36, asserts that the controversial
nature of this question makes it a relevant question for
sociologists, philosophers, and political scientists.
12. See Bade and Parkin (2013), p. 141-144, for one example of
how this method is used to arrive at the allocatively efficient
quantities of the two commodities.
13. For an overview of these issues and an explanation of how the
debt crisis eliminated social welfare gains in the debtor
countries, see Carrasco (2011).
14. Rosser and Rosser (2004), p. 6, identify six dimensions but
agree that these two dimensions are the most important ones.
15. Ibid. p. 8. Rosser and Rosser also identify these four commonly
recognized types of economic system.
16. Ibid. p. 389-390.
17. Ibid. p. 397.
18. Ibid. p. 389-390.
184 D ANIEL E. S AROS
Consumers’ incomes:
Consumer expectations:
Number of sellers:
P RINCIPLES 207
Factor prices:
Production technology:
Equilibrium
•
214 D ANIEL E. S AROS
•
•
The reader should draw the graphs for cases 2-4, perhaps
with the help of an instructor.
Market
Resource market
Product market
Market demand
Market supply
Market equilibrium
Methodological individualism
Individual demands
Individual supplies
Law of demand
Substitution effect
Income effect
Horizontal summation
Change in demand
Normal goods
Inferior goods
Substitutes
Complements
Law of supply
234 D ANIEL E. S AROS
Change in supply
Taxes
Subsidies
Equilibrium
Excess supply
Surplus
Excess demand
Shortage
Consumers’ surplus
Producers’ surplus
Total surplus
Price ceiling
Deadweight loss
Price floor
Market failure
Public goods
Externalities
Pigouvian tax
Notes
We can now see that the total value (TV) of the sugar
produced in the day and the total labor (TL) embodied
in the final product for the day are calculated as follows:
Just like the constant capital, the variable capital, and the
surplus value correspond to the dead labor, necessary
labor, and surplus labor, respectively, they also
correspond to the specific parts of the total product.
That is, the constant capital corresponds to what we can
call the dead product (DP), the variable capital
corresponds to the necessary product (NP), and the
surplus value corresponds to the surplus product (SP),
as shown in Figure 4.14.
The worker works only part of the hour for herself and
the other part for the capitalist. Remember, each hour
worked creates the value equivalent of $15, according to
the MELT. Hence, $9 of value created in an hour
corresponds to necessary labor whereas the other $6 of
value created in an hour corresponds to surplus labor
when we view the problem in this manner. Hourly wages
rather than daily wages do nothing to change the fact
that the capitalist appropriates a part of the value that the
worker produces.
sometimes they are not paid their final wages, they are
given bad checks, or they are given debit cards that turn
out to be scams. According to one research study, “over a
quarter of immigrant day laborers … were victims of
wage theft after Hurricane Harvey.” In these situations,
the rate of exploitation of labor-power (s/v) becomes
infinite as the variable capital falls to zero.
Dialectical idealism
Dialectical materialism
Bourgeoisie
Proletariat
Necessities
Luxuries
Wealth
Commodity
Use value
284 D ANIEL E. S AROS
Exchange value
Value
Law of value
Universal equivalent
Fiat money
Market price
Commodity circuit
Surplus value
Capital
Labor-power
Value of labor-power
Instruments of labor
Objects of labor
Exploitation
Rate of profit
Labor process
Valorization process
Notes
3. Ibid. p. 57.
4. Ibid. p. 58.
5. Figure 4.1 is a slightly modified version of Prof. Nell's original
figure.
6. Marx reasoned that because the concept of use value is entirely
qualitative in nature, it cannot explain the quantitative
relationship of a commodity to other commodities (i.e.,
exchange value).
7. See Marx (1990), p. 131.
8. Marx (1990), p. 156.
9. Marx (1990), p. 272.
10. Ibid. p. 273.
11. Marx (1990), p. 276.
12. Marx offers a cautionary note to this effect. See Marx (1990), p.
325, footnote 5.
13. Kutz, Jessica. “After natural disasters, workers face
exploitation.” High Country News. Paonia, CO. 21 Jan. 2019: 5,7.
PART III
PART TWO:
PRINCIPLES OF
MICROECONOMIC
THEORY
CHAPTER 5
In this case, we know that the price of the good rises from
$4 per unit to $5 per unit and that the quantity demanded
subsequently falls from 22 units to 18 units. That is, we
know only the absolute changes in price and quantity
demanded. To convert our formula for the price elasticity
of demand from one that uses percentage changes to one
that uses absolute changes, we need to return to our initial
definition and make the conversion as follows:
In this case, for any price and slope, the price elasticity of
demand will be (or will approach) infinity.
As the reader can see, even when the price rises from
P1 to P2, the quantity demanded remains unchanged at
Q1. Because the slope of the demand curve is infinite in
this case, the use of the point elasticity formula yields the
following result:
As the reader can see, for any price above P1 the quantity
demanded will equal zero and for any price below P1
the quantity demanded will soar to infinity. Because the
slope of the demand curve is zero in this case, the price
elasticity of demand can be calculated as follows:
Elastic
Unit elastic
Inelastic
Perfectly inelastic
Perfectly elastic
322 D ANIEL E. S AROS
Arc elasticity
Point elasticity
Total revenue
Substitutes
Complements
Unrelated goods
Normal goods
Inferior goods
Neutral goods
Notes
THEORIES OF UTILITY
MAXIMIZA
MAXIMIZATION
TION
If the television will give the consumer 400 utils and the
computer will give the consumer 800 utils, then one
might conclude that the consumer should purchase the
computer to maximize total utility. The problem with this
line of reasoning is that it completely fails to consider the
prices of the products. The price of the television might
be $100 and the price of the computer might be $400. It
turns out that the consumer will choose to purchase the
television even though it gives the consumer less utility
because the price is so much lower than the price of the
computer.
The consumer will always purchase first the good that gives the
higher MU per dollar spent.
The top graphs in the figure show that the total utility
obtained from the consumption of water is very high due
to the large volume consumed. The marginal utility of
the last unit consumed is very low for that same reason.
The bottom graphs in the figure show that the total utility
obtained from the consumption of diamonds is very low
because of the small amount consumed. For the same
reason, the marginal utility of the last diamond consumed
is very high. The reader should also observe the straight
lines that are just tangent to the TU curves at the
quantities consumed. The slopes of the tangent lines
represent the marginal utilities. The relatively flat tangent
line in the top left graph indicates a low marginal utility.
The relatively steep tangent line in the bottom left graph
indicates a high marginal utility.
One might think that the lower price of jewelry and the
smaller quantity purchased suggests an upward sloping
demand curve. That is, price and quantity demanded
appear to be positively related in this case. The problem
is that the demand curve shows the relationship between
price and quantity demanded when everything else is
held constant, including preferences. Because the
preferences change when the price changes, it is
impossible to derive the individual demand curve for a
Veblen good.
Utilitarianism
Marginal utility
Utility
Utils
Total utility
Marginal utility
Paradox
Cardinal utility
Ordinal utility
Commodity space
Commodity bundle
Budget line
Budget set
Indifference curve
Indifference map
Exogenous preferences
Endogenous preferences
Conspicuous consumption
Veblen Good
Notes
some money left over if that amount is not sufficient to pay the
price of an additional unit of either good.
3. The classical economists also recognized that the scarcity or
abundance of a good would influence its price, but we can
think of that characteristic as influencing the labor
requirement. For example, if water is plentiful in a region, then
the labor time required for its production will be lower.
4. Neoclassical textbooks frequently discuss this paradox, but
they typically do not acknowledge that the classical economists
possessed an internally consistent solution to the paradox. I
would like to acknowledge Prof. David Ruccio, whose lecture
on this topic in an introductory economics class at the
University of Notre Dame in the early 2000s influenced my
presentation of this topic. I served as a teaching assistant for
Prof. Ruccio at the time.
5. The loss of utility for person A will probably be slightly more
than 10 utils due to diminishing marginal utility.
6. Hunt and Lautzenheiser (2011), p. 338.
7. The reader should note that indifference curves with given
preferences never cross. The only reason they appear to cross
in this graph is because two different sets of indifference
curves are being placed on the same graph.
8. Centers for Disease Control and Prevention,
http://www.cdc.gov/tobacco/data_statistics/fact_sheets/
tobacco_industry/marketing/index.htm
9. Bogusky, Alex. “Big Tobacco’s Latest Ploy.” The New York Times.
The New York Times Company. 06 May 2019.
CHAPTER 7
THEORIES OF PRODUCTION
TECHNOLOGY AND COST OF
PRODUCTION
The firm’s total cost (TC) is simply the sum of TVC and
TFC. It can be expressed as:
P RINCIPLES 383
In each of the three cases (2A, 2B, and 2C), the quantities
of capital and labor exactly double, but the output
responds differently in each case. In the case of CRS,
output exactly doubles. In the case of IRS, output triples.
Finally, in the case of DRS, output only rises by 50%.
Production technology
Short run
Long run
Notes
THEORIES OF INTENSEL
INTENSELY
Y
COMPETITIVE MARKETS
In each scenario the explicit costs are the same and only
the implicit costs differ. Because the explicit costs are the
same in all three scenarios, the firm earns $10,000 in
accounting profit in all three cases. Because the implicit
costs differ, however, the economic profit is different in
each of the scenarios. Despite the positive accounting
profit of $10,000 in Scenario 1, the economic profit is $0
due to the implicit cost of $10,000. An economic profit
of zero might appear to be an unpleasant situation for
the firm, but in fact it is the opposite. The firm is earning
enough revenue to cover its explicit costs and the
P RINCIPLES 425
The graph on the left in Figure 8.4 shows that the area of
the box under the demand curve is equal to total revenue
since it is calculated as the product of price and quantity
demanded. Furthermore, an additional unit can be sold at
a price of $3 because the firm is a price-taker. The graph
on the right shows what happens to total revenue as the
quantity sold rises. It increases in a linear fashion because
432 D ANIEL E. S AROS
On the other hand, if the firm shuts down then its profits
from shutting down (πSD) are also:
1.
2.
3.
4.
5.
firm. That is, the firm could not earn a greater profit in
any other industry.
declines to P3, the firm will produce q3, and the break-
even point will be reached since P = ATC. When the price
declines further to P2, q2 is produced and the shutdown
point is reached since P = AVC. Finally, when the price
falls to P1, the firm maximizes its economic profit by
shutting down and producing zero units of output
because P < AVC. This analysis has allowed us to observe
the different quantities of output supplied at different
market prices, other factors held constant. In other
words, the short run analysis of profit maximization has
made possible the derivation of the firm’s output supply
curve. Because the intersections of MR with MC
determine the profit-maximizing output levels, we can
conclude that the supply curve is the MC curve above the
minimum AVC. In Figure 8.13, the supply curve is the
darkened portion of the MC curve plus the vertical axis
below the minimum AVC because the firm produces zero
units of output when the market price falls below that
level.
In the long run, firms also adjust their plant sizes, which
is a feature we ignored when explaining the adjustment
to long run equilibrium above. In chapter 7, we discussed
the U-shaped LRAC curve, but we did not include the
long run marginal cost (LRMC) curve. The LRMC
curve intersects the LRAC curve at its minimum point as
shown in Figure 8.19.
Accounting profit
Explicit costs
Implicit costs
Economic profit
Normal profit
Market structure
Market power
Perfect competition
Price-taker
Constant-cost industry
Increasing-cost industry
Decreasing-cost industry
Average profit
Prices of production
Transformation problem
Notes
THEORIES OF MONOPOLISTIC
MARKETS
The final case that we will consider for the short run is
the case in which the monopolist decides to shut down
as shown in Figure 9.12.
Monopolies
Price-setter
528 D ANIEL E. S AROS
Natural monopoly
Rectangle of redistribution
Harberger triangle
Rent-seeking activities
Price discrimination
Regulatory capture
Coercive monopoly
Monopoly capital
Concentration of capital
Centralization of capital
Economic surplus
Sales effort
Monopoly-finance capital
• Output
• Price
• Total revenue
530 D ANIEL E. S AROS
• Total cost
• Economic profit
• Will the firm operate in the short run?
• Output
• Total revenue
• Total cost
• Economic profit
• Will the firm operate in the short run?
• What is the firm’s total fixed cost?
P RINCIPLES 531
Notes
THEORIES OF IMPERFECTL
IMPERFECTLY
Y
COMPETITIVE MARKETS
Recall that the more unique the product is (i.e., the more
differentiated it is), the steeper the demand curve will be
because fewer close substitutes exist for the product.
Similarly, if less product differentiation exists, then the
demand curve is flatter because more close substitutes
exist. In the extreme case that zero product
differentiation exists, the market is once again perfectly
546 D ANIEL E. S AROS
Characteristics of Oligopoly
Monopolistic Competition
578 D ANIEL E. S AROS
Oligopoly
Market share
Unconcentrated
Game theory
Duopoly market
Supply price
Cartel
Players
Simultaneous games
Strategies
Payoff matrix
Outcomes
Payoffs
P RINCIPLES 579
Dominant strategy
Best response
Dominant equilibrium
Suboptimal outcome
Nash equilibrium
Flexprice markets
Fixprice markets
Markup
Notes
The reason for the upward slope of the labor supply curve
facing the monopsonist is that the monopsonist faces the
entire labor market supply curve, which is upward
sloping. In general, as wages rise, more workers enter the
labor market.
As the wage rises from $11 per unit to $12 per unit, the
quantity of labor supplied increases from 3 to 4 units. The
MRC may be calculated by dividing the change in TRC by
the change in L as follows:
Because the MRC exceeds the wage, the MRC curve will
rise more quickly than the labor market supply curve
facing the firm. Therefore, we obtain the result shown in
Figure 11.20.
Wage-taker
Derived demand
Time constraint
Income/leisure tradeoff
Substitution effect
Income effect
Stable equilibrium
Unstable equilibrium
Monopsony
Industrial union
Craft union
Bilateral monopoly
Simple labor
Complex labor
Notes
PART THREE:
PRINCIPLES OF
MACROECONOMIC
THEORY
CHAPTER 12
MA
MACROECONOMIC
CROECONOMIC
MEASUREMENT
That is, 2001 has been selected as the base year and has
been used to calculate real GDP. Real Gross Domestic
Product (GDP) is the measure of aggregate output using
current year quantities and base year or constant prices.
It should be clear that Real GDP has risen between 2001
and 2003 but the increase is much less dramatic than the
increase in nominal GDP during those years. The reason,
of course, is that real GDP only increases because of the
increase in real quantities. Nominal GDP, on the other
hand, rises due to the increase in real quantities and the
rise in market prices. Because Real GDP allows us to
focus on changes in real production, it is argued to be a
superior measure of aggregate output.
who have tried to find work within the past four weeks
are considered unemployed. If workers have become
discouraged and have given up looking for work, then
they are considered outside the labor force. Discouraged
workers are thus not in the labor force. The four-week
cutoff is completely arbitrary and shows how social
values creep into the construction of macroeconomic
variables like unemployment. That is, some people find
this cutoff to be too short when counting people as
unemployed. These people wish to count more people as
unemployed. Other people find this cutoff to be too long
when counting people as unemployed. These people wish
to count fewer people as unemployed. The normative
content of the unemployment measure was discussed in
detail in Chapter 1.
The final step in the calculation of the CPI for each year
is to divide the price of the basket in the current year by
the price of the basket in the base year as follows:
Poverty threshold
Poverty
Near poverty
Deep poverty
Income deficit
Income surplus
Countercyclical
Conspicuous consumption
Quintile ratio
Lorenz curve
Gini coefficient
Flow variable
Intermediate goods
Multiple counting
Income-expenditure identity
Expenditures approach
Durable goods
Nondurable goods
Services
Inventory investment
P RINCIPLES 719
Depreciation
Stock variable
Government purchases
Net exports
Trade balance
Trade deficit
Trade surplus
Balanced trade
Income approach
Compensation
Rental income
Interest income
Profit income
Unincorporated businesses
Sole proprietorships
Partnerships
Unlimited liability
Corporate profits
Limited liability
720 D ANIEL E. S AROS
Dividends
Shareholders
Retained earnings
National income
Statistical discrepancy
Economic growth
Business cycle
Recessions
Expansions
Peak
Trough
Overshooting
Cobweb model
Imputed value
Labor force
Employed
Unemployed
Discouraged workers
Unemployment rate
Natural unemployment
Structural unemployment
Frictional unemployment
Cyclical unemployment
Full employment
722 D ANIEL E. S AROS
Potential GDP
Price index
GDP deflator
Inflation rate
Deflation
Substitution bias
Hyperinflation
i. What is NDP?
j. What is GNP?
k. What is net foreign factor income?
l. What is GDP using the income approach?
Notes
THE THEOR
THEORYY OF EFFECTIVE
DEMAND AND THE
NEOCLASSICAL SYNTHESIS
MODEL
The reader should notice that real GDP (Y) has replaced
DI in the consumption function. The reason, of course, is
the assumption that real GDP is equal to DI in this
P RINCIPLES 751
The reader will note that this equilibrium real GDP is the
same as the one calculated in the Keynesian Cross model.
Figure 13.16 shows the solution in a saving-investment
graph.
P RINCIPLES 759
Now we can also see the impact that a lump sum tax will
have on the equilibrium real GDP. When the lump sum
tax is imposed, it shifts the aggregate expenditures curve
down, which causes the equilibrium real GDP to fall as
shown in Figure 13.30.
778 D ANIEL E. S AROS
Aggregate Demand
between the general price level and the level of real GDP.
The AD curve thus slopes downward. An explanation
must be provided, of course, for the negative relationship
between the price level and aggregate expenditure.
Neoclassical Keynesian economists provide three main
explanations for this negative relationship.11
Aggregate Supply
The next question that arises deals with the factors that
shift the AS curve. Basically, a change in any variable that
affects per unit production cost, other than a change in
the level of real GDP, will shift the AS curve. A rise in per
unit production cost will shift the AS curve to the left
because at each level of real GDP, the prices that firms
require will need to be higher. A fall in per unit
production cost will shift the AS curve to the right
because at each level of real GDP, the prices that firms
require will be lower. For example, a change in the
nominal wage rate will shift the AS curve. It is assumed
that when the price level changes, all other variables are
held constant, including input prices like wages. If the
nominal wage rate rises, then at any given level of real
GDP, per unit costs will be higher. The result is a
leftward shift of the AS curve as shown in Figure 13.36.
shift the AS curve to the right because per unit cost would
be lower at every level of real GDP.
general price level and the level of real GDP reach levels
from which there is no inherent tendency to change.
Figure 13.37 depicts an economy that has reached a
macroeconomic equilibrium state where P2 and Y2 are
the equilibrium general price level and the equilibrium
real GDP, respectively.
Unit costs rose because of the two oil price shocks that
increased the price of imported oil in the United States. In
1973, the Arab-Israeli War broke out which interrupted
the flow of oil to the West. Then in 1979 the revolution
in Iran once again led to a disruption of the flow of oil
westward. In both cases, tighter global supplies caused
the price of oil to skyrocket, raising production costs and
leading to stagflation. Because the inflation in this case
was the result of an aggregate supply shift, it is often
referred to as cost-push inflation to distinguish it from
the demand-pull inflation of the 1960s.23
In the year 2000, it became clear that the good times had
ended. A stock market bubble had been forming in the IT
sector for years. Asset price bubbles form when asset
prices rise significantly above levels that are consistent
with the real underlying values of the assets. In the case
of the IT sector, “irrational exuberance” had led to the
bidding up of IT stocks far beyond what would be
justified by the profitability of the associated companies.
When investors finally discovered to what extent the
stocks were overvalued, they dumped them, and the
804 D ANIEL E. S AROS
short run and the long run. More will be said about the
Post-Keynesian perspective in later chapters.
Consumption function
Autonomous consumption
Saving function
Autonomous saving
Reference line
Induced spending
Planned investment
P RINCIPLES 815
Actual investment
Paradox of thrift
Induced saving
Fallacy of composition
Multiplier effect
Animal spirits
Trade surplus
Trade deficit
Balanced trade
Tariff
Competitive devaluation
Mixed economy
Substitution effect
Income effect
Wealth effect
Interest-rate effect
Macroeconomic equilibrium
Sticky prices
Menu costs
Demand-pull inflation
Stagflation
Cost-push inflation
Great Recession
Neutrality of money
Notes
UNORTHODOX THEORIES OF
MA
MACROECONOMIC
CROECONOMIC CRISIS
Figures 14.2 (a) and 14.2 (b) show how the wages paid
(W) and the general rate of profit (r) change over time in
response to the overall fluctuations in economic activity.
between real value added per worker and the real wage
represents the surpluses extracted from workers.
Prices of production
Turnover time
Natural unemployment
Means of consumption
Simple reproduction
Conflict of interest
Primitive accumulation
Postwar SSA
Industrial unions
Craft unions
Structure of production
Hayekian triangle
Time preference
Producer credits
882 D ANIEL E. S AROS
Forced saving
Capital consumption
Consumer credits
Trade balance
Notes
THEORIES OF FINANCIAL
MARKETS
is that the future payments are not worth $500 today due
to the existence of discounting.
Rate of interest
Principal
Compound interest
Future value
Present value
Discounted
Bond
Coupon bonds
Term to maturity
Yield to maturity
Bond market
Money market
Money
Liquidity
Capital gain
Marginalist revolution
Walras’s Law
Stocks
Primary market
Promoters’ profit
Dividends
950 D ANIEL E. S AROS
Secondary market
Default
Purchasing power
Time preference
Time asymmetry
Profit of enterprise
Rate of profit
Notes
20. The graphs in Figure 15.19 have been re-created using Figures
4 and 5 in Lianos (1987), 46-47.
21. Ibid. p. 46-47.
22. Lianos (1987), p. 37-38, describes the complicated relationship
between the two rates throughout the business cycle.
23. As Lianos (1987), p. 52, puts it, “the real sector dominates the
monetary sector.”
24. Lianos (1987), p. 52, states that the “differences between
demand and supply create equilibrating tendencies but they do
not lead to equilibrium and stability of the interest rate,
because the moving force in this model is the process of
accumulation and income growth.”
25. McGugan, Ian. “Opinion; With bond market gloomy, why are
stocks still near record levels?” The Globe and Mail (Canada),
Ontario Edition. 30 May 2019.
CHAPTER 16
MONEY SUPPL
SUPPLY
Y MEASURES AND
THEORIES OF COMMERCIAL
BANK BEHA
BEHAVIOR
VIOR
I
n this chapter, we will do the following:
Medium of exchange
Barter economy
Unit of account
Store of value
Commodity money
Fiat money
Digital currencies
Mining
Money supply
Money stock
Liquidity
Currency
M1 money supply
Thrift institutions
P RINCIPLES 1031
Credit unions
M2 money supply
M3 money supply
Bank run
Balance sheet
Assets
Liabilities
Insolvent
Securities
Loans
1032 D ANIEL E. S AROS
Default
Loan losses
Cash reserves
Deposits
Borrowings
Discount loans
Discount rate
Bank capital
Reserve requirement
Excess reserves
Money multiplier
Industrial capitalists
Commercial capitalists
Commercial profit
Moneylending capitalists
Merchant capital
P RINCIPLES 1033
Interest-bearing capital
Bank capitalists
Unproductive labor-power
Notes
MONET
MONETAR
ARY
Y THEORIES AND THE
ROLE OF THE CENTRAL BANK
1. Atlanta
2. Boston
3. Chicago
4. Cleveland
5. Dallas
6. Kansas City
7. Minneapolis
8. New York
9. Philadelphia
10. Richmond
11. San Francisco
12. St. Louis
implies that the rising price level can occur even if the
money supply and velocity of money remain constant.
It turns out that this expression for the fiat money price
of commodity j is consistent with the Quantity Equation
that neoclassical economists describe. To understand the
relationship between the fiat money price equation and
the Quantity Equation, try adding up all the fiat money
prices in the entire economy. Because n commodities are
in circulation, we can write the following equation:
1090 D ANIEL E. S AROS
A
s Figure 17.24 shows, the average productivity in
the U.S. has risen considerably since 1950. The
general price level has also risen as shown in
Figure 17.25 for the period 1959-2017. This finding
seems to contradict the argument that rising productivity
lowers per unit cost and prices in a competitive market
economy. How do we resolve this paradox? To resolve the
paradox, we need only consider the formula for the price
of commodity j. When productivity increases, the SNALT
required to produce commodity j falls. Other factors the
same, the fiat money price of commodity j will fall. Other
factors are not the same, however, because the money
supply has grown enormously since 1959 as shown in
Figure 17.26.
P RINCIPLES 1093
Monetary policy
Federal Reserve
Quasi-public institution
Supervisor of banks
Issuer of currency
Processor of checks
Boom-bust policy
Quantity Equation
Velocity of money
Debt monetization
Exogenous variable
Endogenous variable
Notes
the federal funds rate when it uses its policy tools, which then
affects the general structure of interest rates throughout the
economy.
6. Neoclassical textbooks recognize the increased instability of
the M1 money velocity beginning in the early 1980s. For
example, see OpenStax College (2014), p. 655.
7. A similar equation, based on one that Sidney Weintraub
presented, is found in Snowdon, et al. (1994), p. 372.
8. Although I refer to the circulating paper money supply
throughout this discussion, the symbols may take electronic
form and so checkable deposits may also be included here.
9. Saros (2002). I prove this result for the case of V = 1 in Saros
(2006) and Saros (2007), p. 407-415. Fred Moseley has proven
the result for the general case where V is equal to any value,
which is a major contribution to Marxian monetary theory.
Moseley conclusively proves that Marx's theory of value does
not depend on the widespread use of a money commodity such
as gold. See Moseley (2004) and Moseley (2011). I was unaware
of Moseley's 2004 draft until after the RRPE review process
ended for my 2006 submission, which was published in
abbreviated form in 2007. I am thankful to Prof. Moseley for
recognizing my development of these concepts as "completely
independent" of his 2004 draft (see Moseley (2011), p. 102),
although the development of my diagrammatic approach was
certainly influenced by my reading of the introduction to his
edited volume. See Moseley (2005).
10. See Hunt (2002), p. 244. Hunt explains that, despite what critics
argue, nothing can be found in Marx’s mature writings to
suggest that he associated a falling real wage for workers with
their increasing misery.
11. See Wolff and Resnick (2012), p. 192-195.
12. Moseley (2004/2011) has written the equation this way.
P RINCIPLES 1121
THEORIES OF GOVERNMENT
BUDGET DEFICITS AND DEBT
Only some items have been listed in Table 18.1 with the
remaining items included in “Other” categories. Also, the
receipts and outlays have been divided according to
whether they are “on-budget” or “off-budget.” The federal
government’s unified budget includes all receipts and
outlays of the federal government. Some receipts and
outlays, however, are treated as off-budget because of a
desire to protect them from lawmakers, in the case of
Social Security, for example, or because it is viewed as a
part of the budget that should be able to achieve balance
independently, as in the case of the U.S. Postal Service.
That is, the total taxes owed are simply a fraction (t) of
the total income earned. In Chapter 13, we wrote the
after-tax consumption function as follows:
This result shows that the flat tax has made the graph of
the consumption function flatter. That is, the slope of the
line is smaller due to the tax. Without a tax in place, the
slope of the line is equal to the marginal propensity to
consume (mpc). Once the tax is imposed, the slope of the
line changes to (1-t) times the mpc as shown in Figure
18.12.
Taxing all wages and profits the same allows all income
to be taxed at a lower rate than if only wages or profits
are taxed. Of course, because workers are responsible for
creating all the new value (i.e., wages plus profits), if their
wages are taxed at all, then they not only have the profits
they produced taken from them, but some of their wage
income as well.
Fiscal policy
Balanced budget
Budget deficit
Budget surplus
On-budget deficit
On-budget surplus
Off-budget deficit
Off-budget surplus
Mandatory spending
Entitlement programs
Net interest
Federal debt
1190 D ANIEL E. S AROS
Complete accommodation
Median income
Flat tax
Actual budget
Automatic stabilizers
Austerity measures
Notes
1. Office of Management and Budget. Tables 2.1, 2.5, 3.1, and 3.2.
Historical Tables. Web. Accessed on February 21, 2018.
https://www.whitehouse.gov/omb/historical-tables/
2. Office of Management and Budget. Tables 2.1, 2.5, 3.1, and 3.2.
Historical Tables. Web. Accessed on February 21, 2018.
https://www.whitehouse.gov/omb/historical-tables/
3. See Bade and Parkin (2013), p. 827, for an explanation of how
changes in government spending, transfer payments, and taxes
may be used separately or in combination with each other as
part of a nation's fiscal policy. McConnell and Brue (2008), p.
209-211, also discuss the effects of changes in government
spending and taxes, separately and then in combination with
one another, where the policies reinforce one another in their
impact on real output. Samuelson and Nordhaus (2001), p. 504,
1194 D ANIEL E. S AROS
PART FOUR:
PRINCIPLES OF
INTERNATIONAL
ECONOMIC
THEORY
CHAPTER 19
THEORIES OF INTERNA
INTERNATIONAL
TIONAL
TRADE
That is, 1 unit of sugar costs the U.S. 1/2 units of corn.
The world price of sugar also lies between the domestic
prices (i.e., 1/3 and 1 units of corn).
Since Thailand can trade with the U.S. to reach any point
on the straight line connecting these two points, it also
has a trading possibilities frontier (TPF). Thailand’s TPF
is represented in Figure 19.3 (b).
Let’s assume that the U.S. and Thailand have the PPFs
P RINCIPLES 1213
welfare gain for the nation may not be shared by all, and
so this criticism is worth considering when evaluating
the comparative advantage model.
profit rate, driving that profit rate down and pushing the
other nation’s profit rate up until equalization occurs.
Value ratio:
Quantity
Constant Variable Surplus
Nation Qroduced
Capital Capital Value
(q)
United
600 300 200 130
States (A)
Value ratio:
P RINCIPLES 1249
Rate of profit:
Comparative advantage
Absolute advantage
Heterogeneous resources
Homogeneous resources
Autarky
Partial specialization
Offer curves
Free trade
Kaldor-Hicks criterion
Retainable industries
Lockout phenomenon
Zero-sum game
Rational protectionism
Import tariff
Import quota
Dependency theory
Underdevelopment
Center
Periphery
Metropolises
Satellites
Lumpenbourgeoisie
Unequal exchange
Value ratio
Quantity
Constant Variable Surplus
Nation Produced
Capital Capital Value
(q)
Aggregate
Notes
BALANCE OF PAYMENTS
A CCOUNTING AND THEORIES OF
CURRENCY MARKETS
next. The prices of the Chinese Yuan and the U.K. Pound
had also fallen. The Yuan fell from $0.1382 to $0.1381,
and the U.K. Pound fell from $1.9671 to $1.9638. All
these currencies fell in value relative to the U.S. dollar
over the course of these two days. When a currency’s
value declines relative to another currency, we say that it
has depreciated against the other currency.
Next suppose that the demand for Yen falls in the U.S.
dollar-Yen market, as shown in Figure 20.13.
Currency Crises
In this case, the demand for the U.S. dollar rises, which
creates a shortage of U.S. dollars. The result is a balance
of payments deficit in Thailand. If Thailand wishes to
prevent a drop in the value of the baht then its central
bank must sell dollars, which pushes the value of the
dollar back down and the baht back up. If additional
increases in the demand for U.S. dollars occur, then the
central bank in Thailand must sell even more U.S. dollars
to prevent the fall of the baht. Eventually, it will run
short of U.S. dollar reserves and may be forced to
abandon the peg to the dollar, which is what occurred
during the 1997 currency crisis in Thailand.9
Credit
Debit
Current account
Trade balance
Trade deficit
Trade surplus
Balanced trade
Capital account
Financial account
Statistical discrepancy
Net debtor
Net creditor
Depreciated
Appreciated
Capital gain
Capital loss
Change in demand
Change in supply
Self-fulfilling prophecy
Devaluation
Revaluation
Currency crisis
1320 D ANIEL E. S AROS
Arbitrage
Imperialism
Notes
Absolute advantage
Accounting profit
Actual budget
Actual investment
Allocation mechanisms
Allocative efficiency
Animal spirits
Appreciated
Arbitrage
Arc elasticity
Assets
Austerity measures
Autarky
Automatic stabilizers
Autonomous consumption
Autonomous saving
P RINCIPLES 1335
Average profit
Balance sheet
Balanced budget
Balanced trade
Bank capital
Bank capitalists
Bank run
Barter economies
Best response
Bilateral monopoly
Bond
Bond market
Boom-bust policy
Borrowings
Bourgeoisie
Budget deficit
Budget line
Budget set
Budget surplus
Business cycle
Capital
Capital account
Capital consumption
Capital gain
Capital loss
Cardinal utility
Cartel
Cash reserves
Center
Centralization of capital
Change in demand
Change in supply
1338 D ANIEL E. S AROS
Class exploitation
Cobweb model
Coercive monopoly
Command capitalism
Command socialism
Commercial capitalists
Commercial profit
Commodity
Commodity bundle
Commodity circuit
Commodity money
Commodity space
Comparative advantage
Compensation
Competitive devaluation
Complements
P RINCIPLES 1339
Complete accommodation
Complex labor
Compound interest
Concentration of capital
Conflict of interest
Conspicuous consumption
Constant-cost industry
Consumer credits
Consumers’ surplus
Consumption function
Corporate profits
Cost-benefit analysis
1340 D ANIEL E. S AROS
Cost function
Cost-push inflation
Countercyclical
Coupon bonds
Craft unions
Credit
Credit unions
Cross forms
Currency
Currency crisis
Current account
Cyclical unemployment
Deadweight loss
Debit
Debt monetization
Decreasing-cost industry
Deep poverty
Default
Deflation
Demand-pull inflation
Dependency theory
Dependent variables
Deposits
Depreciated
Depreciation
Derived demand
Devaluation
Dialectical idealism
Dialectical materialism
Digital currencies
1342 D ANIEL E. S AROS
Discount loans
Discounted
Discouraged workers
Discourse
Dividends
Dominant equilibrium
Dominant strategy
Duopoly market
Durable goods
Dynamic efficiency
Economic contraction
Economic efficiency
Economic forecasts
Economic growth
Economic models
Economic problem
Economic profit
Economic surplus
Economics
Elastic
Employed
Endogenous preferences
Endogenous variable
Entitlement programs
Entry point
Equilibrium
1344 D ANIEL E. S AROS
Excess demand
Excess reserves
Excess supply
Exchange value
Exogenous preferences
Exogenous variable
Expansions
P RINCIPLES 1345
Expenditures approach
Explicit costs
Exploitation
Externalities
Fallacy of composition
Federal debt
Federal Reserve
Feudal system
Fiat money
Financial account
Financial capital
Fiscal policy
Fixprice markets
Flat tax
Flexprice markets
Flow variable
Flow variable
Forced saving
Free trade
Frictional unemployment
Full employment
Future value
Game theory
GDP deflator
Gini coefficient
Government purchases
Great Recession
Harberger triangle
Hayekian triangle
Heterodox economics
Heterogeneous resources
Homogeneous resources
Horizontal Summation
Hybrid forms
Hyperinflation
Imperialism
P RINCIPLES 1349
Implicit costs
Import quota
Import tariff
Imputed value
Income
Income approach
Income deficit
Income effect
Income surplus
Income/leisure tradeoff
Income-expenditure identity
Increasing-cost industry
Independent variables
1350 D ANIEL E. S AROS
Indifference curve
Indifference map
Individual demands
Individual supplies
Induced consumption
Induced saving
Induced spending
Industrial capitalists
Industrial unions
Inelastic
Inferior goods
Inflation rate
Insolvent
Instruments of labor
Interest income
Interest-bearing capital
Interest-rate effect
Intermediate goods
Inventory investment
Investment
Invisible hand
Issuer of currency
Kaldor-Hicks criterion
Labor
Labor force
Labor process
Labor-power
Land
Law of demand
Law of Supply
Law of value
Liabilities
Limited liability
Liquidity
Loan losses
Loans
Lockout phenomenon
Logic
Long run
Lorenz curve
Lumpenbourgeoisie
Luxuries
M1 money supply
M2 money supply
M3 money supply
Macroeconomic equilibrium
Mainstream economics
Mandatory spending
Marginal utility
Marginalist revolution
Market
Market allocation
Market capitalism
Market demand
Market equilibrium
Market failure
Market power
Market price
Market share
Market socialism
Market structure
Market supply
Markup
Means of consumption
Median income
Medium of exchange
Menu costs
Merchant capital
Methodological individualism
Metropolises
Mining
1356 D ANIEL E. S AROS
Mixed economies
Monetary policy
Money
Money market
Money multiplier
Money stock
Money supply
Moneylending capitalists
Monopolies
Monopolistic Competition
Monopoly capital
Monopoly-finance capital
Monopsony
Multiple counting
Multiplier effect
Mutual causality
Nash equilibrium
National income
Natural monopoly
Natural unemployment
Near poverty
Necessities
Neoclassical economics
Net creditor
Net debtor
Net exports
Net interest
Neutral goods
Neutrality of money
P RINCIPLES 1359
Nondurable goods
Normal goods
Normal profit
Normative statement
Objects of labor
Off-budget deficit
Off-budget surplus
Offer curves
Oligopoly
On-budget deficit
On-budget surplus
Opportunity costs
Ordinal utility
Orthodox economics
Outcomes
Overshooting
Paradox
Paradox of thrift
Partial specialization
Partnerships
Payoff matrix
Payoffs
Peak
Perfect competition
Perfectly elastic
Perfectly inelastic
Periphery
Pigouvian tax
Planned investment
Players
Point elasticity
Point-slope form
Positive statement
Postwar SSA
Potential GDP
Poverty
Poverty threshold
1362 D ANIEL E. S AROS
Present value
Price ceiling
Price discrimination
Price floor
Price index
Prices of production
Price-setter
Price-taker
Primary market
Primitive accumulation
Principal
Private ownership
Processor of checks
Producer credits
Producers’ surplus
Product market
Production technology
Productive efficiency
Profit income
Profit of enterprise
Proletariat
Promoters’ profit
Public goods
Purchasing power
Quantity Equation
1364 D ANIEL E. S AROS
Quasi-public institution
Quintile ratio
Rate of profit
Rational protectionism
Recessions
Rectangle of redistribution
Reference line
Regulatory capture
P RINCIPLES 1365
Rental income
Rent-seeking activities
Reserve requirement
Resource market
Retainable industries
Retained earnings
Revaluation
Sales effort
Satellites
Saving function
Scientific method
Secondary market
Securities
1366 D ANIEL E. S AROS
Self-fulfilling prophecy
Services
Shareholders
Short run
Shortage
Simple labor
Simple Reproduction
Simultaneous games
Slope-intercept form
Social formations
Social superstructure
Sole proprietorships
Stable equilibrium
Stagflation
State ownership
Static efficiency
Statistical discrepancy
Sticky prices
Stock variable
Stocks
Store of value
Strategies
Structural unemployment
1368 D ANIEL E. S AROS
Structure of production
Suboptimal outcome
Subsidies
Substitutes
Substitution bias
Substitution effect
Supervisor of banks
Supply price
Surplus
Surplus value
Tariff
Taxes
Technology
Term to maturity
Theocratic governments
Thrift institutions
Time asymmetry
Time constraint
Time preference
Total revenue
Total surplus
Total utility
Trade balance
Trade deficit
Trade surplus
1370 D ANIEL E. S AROS
Tradeoffs
Transaction costs
Transformation problem
Trough
Turnover time
Unbalanced contraction
Unbalanced growth
unconcentrated
Underdevelopment
Unemployed
Unemployment rate
Unequal exchange
Unidirectional causality
Unincorporated businesses
Unit elastic
P RINCIPLES 1371
Unit of account
Universal equivalent
Unlimited liability
Unproductive labor-power
Unrelated goods
Unstable equilibrium
Use value
Utilitarianism
Utility
Utils
Valorization process
Value
Value of labor-power
Value ratio
Veblen Good
Velocity of money
Wage-taker
Walras’s Law
Wants
Wealth
wealth effect
Yield to maturity
Zero-sum game
DATES OF COMPLETION