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ENGLISH LANGUAGE
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LANGUAGE IMPROVEMENT TOOLKIT (LIT) QUIZ-05
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BASED ON ECONOMICS
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1. The History of Economics
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READING MATERIAL
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(Q.1-Q.10): Economics in the Ancient World
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Economics in its basic form began during the Bronze Age (4000-2500 BCE) with written documents in four areas of
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the world: Sumer and Babylonia (3500-2500 BCE); the Indus River Valley Civilization (3300-1030 BCE), in what is
today’s Afghanistan, Pakistan, and India; along the Yangtze River in China; and Egypt’s Nile Valley, beginning around
3500 BCE. Societies in these areas developed notation systems using markings on clay tablets, papyrus, and other
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5U2U8R4L2L systems, arising in tandem with written
materials to account for crops, livestock, and land. These tr-accounting
language, eventually included methods for tracking property transfers, recording debts and interest payments,
calculating compound interest, and other economic tools still used today.
From the third millennium BCE onward, Egyptian scribes recorded the collection and redistribution of land and goods.
Sumerian traders developed methods to calculate compound interest over a period of months and years. The Code
of Hammurabi (circa 1810–1750 BCE), the earliest work of economic synthesis, specifies norms for economic activity
and provides a detailed framework
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for commerce, including business ethics for merchants and tradespeople.
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The first millennium BCE saw the emergence of more detailed written treatises on economic thought and practice.
The Greek philosopher and poet Hesiod, writing in the eighth century BCE, laid out precepts for managing a farm in
his Works and Days. Athenian military leader, philosopher, and historian Xenophon built on this in Oikonomikon, a
treatise on the economic management of an estate. In Politics, Aristotle (circa 350 BCE) took these ideas further,
concluding that while private property ownership was preferred, the accumulation of wealth for its own sake was
“dishonorable.”
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The Guanzi essays from China (circa the fourth century BCE) laid out one of the first explanations of supply and
demand pricing; the crucial roles of a well-managed money supply and a stable currency. Among key insights was
the notion that money, not armies, ultimately won wars.
In Western Europe during the Middle Ages, economic theory was often blended with ethics, as seen in the work of
Thomas Aquinas (1225-1274) and others. Few of those writers went into the amount of detail that Ibn Khaldun (1332-
1406), Tunisian historian and philosopher, did. In Al-Muqaddimah, Ibn Khaldun analyzes economic issues such as
the perils of monopolies, the benefits of division of labor and the profit motive, and the rise and fall of economic
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empires. The importance of his work was recognized by Machiavelli and Hegel, and many of his ideas prefigured
those of Adam Smith and those who followed him centuries later.
The Father of Modern Economics

Today, Scottish thinker Adam Smith is widely credited with creating the field of modern economics. However,
Smith was inspired by French writers publishing in the mid-18th century, who shared his hatred of mercantilism. In
fact, the first methodical study of how economies work was undertaken by the French physiocrats, notably Quesnay
and Mirabeau. Smith took many of their ideas and expanded them into a thesis about how economies should work,
as opposed to how they do work.
Many economic theories today are, at least in part, a reaction to Smith's pivotal work in the field, namely his 1776
masterpiece The Wealth of Nations. In this treatise, Smith laid out several mechanisms of capitalist production, free
markets, and value. Smith showed that individuals acting in their own self-interest could, as if guided by an "invisible
hand," create social and economic stability and prosperity for all.
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Even devout followers of Smith’s ideas recognize that some of his theories were either flawed or have not aged well.
Smith distinguishes between “productive labor,” such as manufacturing products that can be accumulated, and
of their performance.”
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“unproductive labor,” such as tasks performed by a “menial servant,” the value of which “perish[es] in the very instant
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One could argue that in today’s service-dominant economy, the excellent execution of services creates value by
strengthening a brand through goodwill and in numerous other ways. His assertion that “equal quantities of labour, at
all times and places, may be said to be of equal value to the labourer” ignores the psychological cost of working in
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hostile or exploitative environments. As an extension of this, Smith’s labor theory of value—that the value of a good
can be measured by the hours of labor needed to produce it—has also largely been abandoned.
The Dismal Science: Marx and Malthus
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Thomas Malthus and Karl Marx had decidedly poor reactions to Smith's treatise. Malthus was one of a group of
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economic thinkers of the late 18th and early 19th centuries who were grappling with the challenges of emergent
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capitalism following the French Revolution and the rising demands of a burgeoning middle class. Among his peers
were three of the greatest economic thinkers of the age, Jean-Baptiste Say, David Ricardo, and John Stuart Mill.
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Malthus predicted that growing populations would outstrip the food supply. He was proved wrong, however, because
he didn't foresee technological innovations that would allow production to keep pace with a growing population.
Nonetheless, his work shifted the focus of economics to the scarcity of goods rather than the demand for them.
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This increased focus on scarcity led Marx to declare that the means of production were the most important
components of any economy. Marx took his ideas further and became convinced a class war would be sparked by
the inherent instabilities he saw in capitalism. However, Marx underestimated the flexibility of capitalism. Instead of
creating a clear division between two classes—owners and workers—the market economy created a mixed class
wherein owners and workers held the interests of both parties. Despite his overly rigid theory, Marx accurately
predicted one trend: businesses grow larger and more powerful to the degree that free-market capitalism allows.
The Marginaltr-Revolution
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As the ideas of wealth and scarcity developed in economics, economists turned their attention to more specific
questions about how markets operate and how prices are determined. English economist William Stanley Jevons
(1835-1882), Austrian economist Carl Menger (1840-1921), and French economist Léon Walras (1834-1910)
independently developed a new perspective in economics known as marginalism.
Their key insight was that, in practice, people aren't actually faced with big-picture decisions over entire general
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2Geconomic
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to buy, sell, or produce each additional (or marginal) unit. In doing so, people balance the scarcity of each good
against the value of the use of the good at the margin.
These decisions explain, for example, why the price of an individual diamond is relatively higher than the price of an
individual unit of water. Though water is a basic need to live, it is often plentiful, and though diamonds are often purely
decorative, they are scarce. Marginalism quickly became, and remains, a central concept in economics.
Speaking in Numbers
Walras went on to mathematize his theory of marginal analysis and made models and theories that reflected what he
found. General equilibrium theory came from his work, as did the practice of expressing economic concepts
statistically and mathematically instead of just prose. Alfred Marshall took the mathematical modeling of economies
to new heights, introducing many concepts that are still not widely understood, such as economies of scale, marginal
utility, and the real-cost paradigm.
Keynes and Macroeconomics

John Maynard Keynes developed a new branch of economics known as Keynesian economics, or macroeconomics.
Keynes styled the economists who had come before him as ‘classical’ economists. He believed that while their
theories might apply to individual choices and goods markets, they did not adequately describe the operation of the
economy as a whole.
Instead of marginal units or even specific goods markets and prices, Keynesian macroeconomics presents the
economy in terms of large-scale aggregates that represent the rate of unemployment, aggregate demand, or average
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price-level inflation for all goods. Moreover, Keynes’s theory says that governments can be influential players in the
economy—saving it from recession by implementing expansionary fiscal and monetary policy to increase economic
output and stability.
The Neoclassical Synthesis
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By the mid-20th century, these two strands of thought—mathematical, marginalist microeconomics and Keynesian
macroeconomics—would rise to near-complete dominance in the field of economics throughout the Western world.
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This became known as the neoclassical synthesis, which has since represented mainstream economic thought. It is
taught in universities and practiced by researchers and policymakers, with other perspectives labeled as heterodox
economics.
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Within the neoclassical synthesis, various streams of economic thought have developed, sometimes in opposition to
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one another. The inherent tension between neoclassical microeconomics (which portrays free markets as efficient
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and beneficial) and Keynesian macroeconomics—which views markets as inherently prone to catastrophic failure—
has led to persistent academic and public policy disagreements, with different theories ascendant at different times.
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Most prominent is monetarism and the Chicago School, developed by Milton Friedman, which retains neoclassical
microeconomics and the Keynesian macroeconomic framework but shifts the emphasis of macroeconomics from
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fiscal policy (favored by Keynes) to monetary policy. Monetarism was widely espoused through the 1980s, '90s, and
2000s.
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Several different streams of economic theory and research have been proposed to resolve the tension between micro-
and macroeconomists. This attempt incorporates aspects or assumptions from microeconomics (such as rational
expectations) into macroeconomics, or further developes microeconomics to provide micro-foundations (such as price
stickiness or psychological factors) for Keynesian macroeconomics. In recent decades, this has led to new theories,
such as behavioral economics, and to renewed interest in heterodox theories, such as Austrian-school economics,
which were previously relegated to the economic backwaters.
Factoring in Social Benefit

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A rising cohort of economists has emphasized the importance of factoring in inequalities in income distribution and
social well-being when measuring the success of a given economic policy. Pre-eminent among them is Anthony
Atkinson (1944-2017), who focused on income redistribution within a given country.
Also highly regarded and noteworthy is Amartya Sen, a professor of economics and philosophy at Harvard University,
whose work on global inequality won him the Nobel Prize for Economics in 1998. Sen’s work is also notable for
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tr-reintroducing
5J2C8G4H2G0H ethical behavior into his analysis. This concern ties Sen’s thinking back to the writing of the earliest
economic thinkers, who saw over-accumulation of wealth by individuals or groups as ultimately harmful to society.
2. Networked Society: Case studies
(Q.11-Q.22): 1) The story of Saroo
The long road home
A small child is accidentally separated from his family and ends up thousands of miles away from home. Twenty-
five years later, he is able to use the connected satellite imagery of Google Earth to find his way home again. Sound
like a fairy tale? It happened to Saroo Brierly.
Over twenty years ago in the city of Khandwa, India, five-year-old Saroo boarded a train with his brother. He fell
asleep and awoke a few hours later to an empty carriage travelling in an unknown direction. The two brothers had
lost each other. Saroo couldn’t find his way back home, and after surviving on the streets of Calcutta was eventually
adopted by an Australian couple living in Tasmania.
This could have been the end of the story. Instead, images of his mother and the streets of his childhood lingered in
his memory. Unable to forget his former life in India, he began browsing Google Earth in hopes of finding his
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hometown and long lost family. He spent the next six years searching for his home online, a task akin to finding a
needle in a haystack.
Finally, Saroo spotted something he recognized: the same train station he and his brother had left from 25 years ago.
to India in hopes of finding his family.
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He had found his hometown after years of searching. Now a man in his 30s, he packed his bags and got on a plane
By comparing his own visual memories with a virtual map, Saroo found his childhood home – and the best part of it
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all, his mother was there to greet him.
The Broader Perspective
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Saroo’s remarkable adventure highlights the amazing potential of decentralization of information made possible in
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the Networked Society. The availability of free digital maps on connected devices has completely transformed
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methods of exploration and travel. As people continue to map out and define the world digitally, the applications of
future innovations will enable even more stories like this one.
2) Remote schooling Bhutan

Higher education
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Online project connects students across the country.
Being a small, remote nation, Bhutan does things a bit differently than the rest of the world; for example, Bhutan is
the only country in the world to measure development by Gross 2U8R4L2L0L
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Happiness. Thanks to online connectivity,
the country has kept its individuality and implemented an innovative approach to education.
“To enhance Gross National Happiness, we need technology. We need to balance material progress with spiritual
balance, spiritual growth, with environmental preservation and with our culture.” – Tshering Tobgay, Prime Minister
of Bhutan.
In 2014, Bhutan, in cooperation with Bhutan Telecom and Ericsson, officially launched the iSchool project aimed at
providing access to high-quality education for all students across the country via video conferencing. This gives
students the ability
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interact
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schools were selected to test the project initially, but all students in Bhutan have access to the lessons, which are
uploaded directly to the web, and will soon benefit from interactive functionality.
“To improve the quality of education you cannot do it on your own, you have to collaborate. This is online education,
but this is more than that. This is distance education, but it is more than that. It is live. It is interactive.” – Tshering
Tobgay.
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Broader Perspective
Expanding education is essential to ending poverty and ensuring a high quality of life. Mobile technology has made
remote schooling projects possible, and with access to previously unavailable knowledge, students’ socio-economic
opportunities are significantly increasing. Education is a basic human right.
3) Ikure techsoft
Wireless healthcare
Connectivity brings remote healthcare to rural India. Despite efforts by the Indian government, the majority of the
country’s poor still lacked access to basic healthcare – until now. Sujay Santra and his team of dedicated doctors
have turned the impossible into a reality by connecting the many doctors in the city with remote villages in need of
healthcare services. By allowing doctors and patients to communicate remotely, Santra has effectively established a
chain of rural healthcare centers.
The initiative, iKure Techsoft, addresses the basic healthcare needs of remote areas, where there are neither doctors
nor hospitals. It uses the Wireless Health Incident Monitoring System and tablets to send patient information to the
cloud instantly, connecting rural villages and doctors located in urban areas. This makes quality healthcare affordable
and accessible to even the most remote areas.
Three-hours’ drive from Kolkata is the rural village of Bolpur. The residents here can quickly receive a diagnosis, pick
up needed medication and book a follow-up appointment. This fast and inexpensive healthcare is improving the quality
of life for India’s rural residents.
“We cannot create doctors overnight, we cannot create hospitals overnight, what we can do is effectively orchestrate
the existing resources at hand using technology” –Sujay Santra, founder iKure Techsoft.
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Existing mobile networks can be leveraged to bring knowledge and critical services to remote areas that lack
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resources and infrastructure. Providing health services to everyone on the planet is a prime example of applying
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technology for good. The Networked Society enables new solutions to global problems by connecting those in need
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to those who can help. - Facebook + Internet.org Connectivity as a human right Affordable internet access for all.
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A group of Facebook engineers traveled to Africa to test run a new app by using a local phone and sim card. It didn’t
go very well. Finally one of the engineers managed to send an emoticon via the messenger service; it took 40 minutes
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and used up almost an entire monthly data plan.
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Slow networks with insufficient app coverage are a common problem in many parts of the world and it can be narrowed
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down to these obstacles: the connection is either too expensive or too slow, or both. The solution in this case was to
develop a light version of the application better suited to networks with poor connectivity. As a result, Facebook’s app
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became accessible to many more people around the world.
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Africa is not the only region that experiences these barriers to connectivity, so Facebook posed the question: How do
we make the internet more affordable, more accessible and less data consuming?
The initiative Internet.org was launched in 2013 by Facebook, Ericsson, MediaTek, Opera, Samsung, Nokia, and

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Qualcomm. They are working together to provide internet for all, ensuring that apps and information is accessible to
everyone around the world.
Providing internet access to the two-thirds of the world not yet connected,
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allows
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abundance of information and services. From growing small businesses to increasing democratic participation, the
quality of life improves for each individual. Connecting everyone also allows society at large to benefit from the
wealth of creative ideas that will have a global platform.
MAERSK LINE
Connecting oceans
Connectivity optimizes 8Q
tr-5U2U8R4Lthe efficiency
2L0L of cargo shipping fleet Today, over 90 percent of all cargo is delivered by sea,
and Maersk is leading the industry with the largest fleet of cargo ships. Of course, efficiency is of the utmost
importance when managing 17 million containers through 125 countries. Remote management can do just that.
Seeking a way to improve their shipping processes, Maersk Line began working with Ericsson in 2011. Their
collaboration was a project called the Remote Container Management Program, which aimed to connect the entire
Maersk fleet, resulting in the building of the world’s largest floating mobile network.
Over 350 connected vessels give Maersk the ability to monitor each connected container in their fleet in real time,
tr-giving 2G0H8E degree of control over each step of the journey. The data collected also provides the company an
a higher
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opportunity to innovate further in areas of importance, such as efficient delivery of cargo, environmentally friendly
processes and adaptability to often unpredictable conditions at sea.

There is no place on Earth that cannot be connected. This opens up new opportunities for industries to optimize
their processes, no matter what they are or where they operate. Mobile technology allows industries to more
efficiently distribute time and resources, regardless of their magnitude.
3. Digitizing our economy with smart cities
(Q.23-Q.30): Back in the mid-twentieth century there was much talk of traffic jams and urban congestion being
eliminated in the future. While the same was planned through infrastructure development, large-scale increase in
urban population coupled with limited resources resulted in further aggravation of issues. However, technology
advancement and adoption is now changing the very nature cities and the advent of the smart city concept. With Big
Data, Internet of Things, Machine to Machine and Mobility coming together, cities are evolving from mere population
centers to models of social and economic development centres.
In India, the government’s focus on building 100 smart cities in the country has created a lot of buzz on the subject.
It is a welcome move for countries and states to think in this direction and will ensure better citizen services in the
digital economy which is all set to unfold.
Smart cities, smart infrastructures and smart environments

A city can be defined as being smart when it uses digital tools to substantially enhance efficiency for public services,
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utilize innovative and disruptive technology for creating and delivering services to citizens and in the process makes
dramatic positive economic and social impact to the society as a whole.
The applications for digital tools across different independent functions of the ‘smart city’ have been catching up of
late. Today’s cities are looking up to technology to provide solutions to a wide range of issues –be it connected meters,
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for gas, water or electricity or Intelligent transport systems for Traffic management, congestion and parking, or from
intelligent energy management systems installed in the home, in the building or in a whole area to connected cars,
providing connectivity in the in the car for emergency calls and several similar smart solutions.
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However, while smart cities are rightly expected to be revolutionary in the coming years, the developments and
technology adoption stages differ around the world. For example, in Europe, we witness smart infrastructure for water,
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gas, electricity, transportation, telecom, which is well managed and invested. In India, components of smart cities are
being deployed in existing cities for better city management.
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A recent initiative by the Government of Bihar, which was supported by us, aims are improving city security with the
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help of integrated fleet management, public emergency calling facilityalong with a surveillance system in the city of
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Patna. Similar technology deployments like these are fast penetrating existing cities with overstretched infrastructure
and overloaded population to find smarter ways to perennial problems like traffic, security and other public services.
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The context in the Middle East is however different since they are not starting the adoption process for existing
infrastructure, instead building them smart from the very beginning. We have been working on such projects in Riyadh,
Saudi Arabia and Dubai and find the scale to be phenomenal.
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We also find adoption in China to be quite interesting, like new Pudong area in Shanghai. In the U.S., San Francisco
and New York City are really moving ahead and trying to improve the relationship with citizens through technology.
From the Indian context, the aim is to bring a balanced approach in the expansion of urban areas while addressing
challenges of urban living. We have been using small components of ‘smart spaces’ in different public services over
the last few years. Several state transport departments are evaluating intelligent transport systems, machine to
machine enabled fleet management solutions while citizen interfacing departments are looking at cloud solutions to
store citizen data 8Q
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Bringing together smart city technology

To create a ‘smart city’ several technology building blocks are required, ranging from NFC to machine-to-machine
(M2M), Wi-Fi and IT integration, as well as supporting telecom services such as 3G and 4G connectivity (for
application access and monitoring , for example).
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mobile networksare at the heart of smart cities and are enabling people to do more on the move. With the
increasing mobile penetration in India of more than 900 million mobile subscribers and extensive 4G rollouts expected
in the coming months, a large piece of the smart country puzzle is being addressed. Also, as networks offer more
cloud-based services and storage, richer content and citizen services applications can be available to end-users.
Smarter devices, faster networks and cloud becoming ubiquitous will all contribute to this digitization of society.
Internet of Things (IoT) will also play a key role in smart city development. The sheer weight of Big Data generated
by the IoT will impact everything, for example, traffic flow information – town planners will be able to gather the data,
analyze it and use it to tailor future policy and projects.
The future will witness integrated services, based on gathering data through sensors and delivering it to smart devices
to make life easier for both citizens and administrations all of which will be enabled through the smart adoption of
technology.
4. Political economy
(Q.31-Q.44): What Is Political Economy?
Political economy is an interdisciplinary branch of the social sciences. It focuses on the interrelationships among
individuals, governments, and public policy.
Political economists study how economic theories such as capitalism, socialism, and communism work in the real
world. Any economic theory is a means of directing the distribution of a finite amount of resources in a way that
benefits the greatest number of individuals. These ideas can be studied both theoretically and as they are used in the
real world. In the real world, public policy is created and implemented around these economic theories. Political
economists study both the underlying roots of these policies and their results.
analyzing economic factors.
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In a wider sense, political economy was once the common term used for the field we now call economics. Adam
Smith, John Stuart Mill, and Jean-Jacques Rousseau all used the term to describe their theories. The shorter term
"economy" was substituted in the early 20th century with the development of more rigorous statistical methods for
Types of Political Economy
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The term political economy is still widely used to describe any government policy that has an economic impact.
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Political economy is a branch of social science that studies the relationship that forms between a nation's population
and its government when public policy is enacted. It is, therefore, the result of the interaction between politics and the
economy and is the basis of the social science discipline.
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As mentioned above, there are several notable types of political economies:
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 Socialism: This type of political economy promotes the idea that the production and distribution of goods and
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wealth are maintained and regulated by society, rather than a particular group of people. The rationale behind
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this is that whatever is produced by society is done so because of those who participate, regardless of
status, wealth, or position. Socialism aims to bridge the gap between rich and poor, eliminating the ability of
individuals or groups to control the majority of power and wealth.
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 Capitalism: This theory advocates profit as a motive for advancement and the ability of free markets to regulate
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and drive the economy on their own. The idea behind capitalism is that private individuals and other actors are
driven by their own interests—they control production and distribution, set prices, and create supply and demand.
 Communism: Individuals often confuse communism with socialism, but there is a distinct difference between
these two theories. Communism was a theory developedtr-by 5U2U 8R4L
Karl 2L0L8Q
Marx, who felt that capitalism was limited and
created a big divide between rich and poor. He believed in shared resources, including property. Unlike socialism,
however, under communism production and distribution are overseen by the government.
Those who research the political economy are called political economists. Their study generally involves the
examination of how public policy, the political situation, and political institutions impact a country's economic standing
and future through a sociological, political, and economic lens.
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History and Development
The roots of political economy as we know it today go back to the 18th century. Scholars during the period studied
how wealth was distributed and administered between people. Some of the earlier works that examined this
phenomenon included those by Adam Smith and John Stuart Mill.
But the term is probably best ascribed to the French writer and economist, Antoine de Montchrestien. He wrote a
book called "Traité de l'économie politique" in 1615, in which he examined the need for production and wealth to be
distributed on8Ean entirely larger scale—not in the household as Aristotle suggested. The book also analyzed how
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Smith was a philosopher, economist, and writer who is commonly referred to as the father of economics and of the
political economy. He wrote about the function of a self-regulating free market in his first book, which was called "The
Theory of Moral Sentiments."His most famous work, "An Inquiry into the Nature and Causes of the Wealth of Nations"
(or "The Wealth of Nations") helped shape classical economic theory. It was also used as the foundation for future
economists.
Mill combined economics with philosophy. He believed in utilitarianism—that actions that lead to people's goodwill
are right and that those that lead to suffering are wrong. In essence, he believed that economic theory and philosophy
were needed, along with social awareness in politics in order to make better decisions for the good of the people.
Some of his work, including "Principles of Political Economy," "Utilitarianism," and A System of Logic" led him to
become one of the most important figures in politics and economics.
Importance of Political Economy

Political economy studies both how the economy affects politics and how politics affect the economy. As political
parties come to and leave power, economic policy often changes in a country based on the ideology and goals of the
party in power.
Political changes can impact many areas of the economy, which can in turn impact elections and government policies.
These include:
 Monetary and fiscal policy
 Food security
 Global trade
 Labor supply, demand, and crises
 Gross domestic product (GDP)
 Financial inequality
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 Disaster management
 Environmental stability13
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As the economies of more countries become interconnected through globalism and international trade, the politics of
one country can have a strong impact on the economy of another. Understanding the relationship between political
power and economic decisions in one country can help other countries predict how their own economies will be
impacted.
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Understanding political economy can also help a country's economy become more resilient. If the government leaders
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in power at any given moment are forward-thinking, they can put laws and policies in place that create the greatest
possibility for economic stability and growth, regardless of changing political power.
Political Economy in Academia
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Political economy became an academic discipline of its own in recent years. Many major institutions offer the study
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as part of their political science, economics, and/or sociology departments.
Research by political economists is conducted in order to determine how public policy influences behavior,
productivity, and trade. Much of their study helps them establish how money and power are distributed between
people and different groups. They may do this through the study of 8R
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specific fields such as law, bureaucratic politics,
legislative behavior, the intersection of government and business, and regulation.
The study may be approached in any of three ways:

 Interdisciplinary studies: The interdisciplinary approach draws on sociology, economics, and political science
to define how government institutions, an economic system, and a political environment affect and influence each
other.
 New political economy: This approach is studied as a set of actions and beliefs, and seeks to make explicit
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assumptions lead to political debates about societal preferences. The new political economy combines the
ideals of classical political economists and newer analytical advances in economics and politics.
 International political economy: Also called global political economy, which is slightly different, this approach
analyzes the link between economics and international relations. It draws from many academic areas including
political science, economics, sociology, cultural studies, and history. The international political economy is
ultimately concerned with how political forces like states, individual actors, and institutions affect global economic
interactions.
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Modern Applications of Political Economy

Modern applications of the political economy study the works of more contemporary philosophers and economists,
such as Karl Marx.
As mentioned above, Marx became disenchanted with capitalism as a whole. He believed that individuals suffered
under regimented social classes, where one or more individuals controlled the greater proportion of wealth. Under
communist theories, this would be eradicated, allowing everyone to live equally while the economy functions based
on the ability and needs of each participant. Under communist regimes, resources are controlled and distributed by
the government.
Most people confuse socialism and communism. It's true there are some similarities—notably, that both stress
bridging the gap between rich and poor, and that society should relegate equilibrium among all citizens. But there are
inherent differences between the two. While resources in a communist society are owned and controlled by the
government, individuals in a socialist society hold property. People can still purchase goods and services under
socialism, while those who live in a communist society are provided with their basic necessities by the government.
5. The Origins of the Law of Supply and Demand

(Q.45-Q.52): The law of supply and demand, which dictates that a product’s availability and appeal impacts its price,
had several discoverers. But the principle, one of the best known in economics, was noticed in the marketplace long
before it was mentioned in a published work—or even given its name.
The law of supply and demand defines the relationship between the price of a given good or product and the
willingness of people to either buy or sell it. Generally, as the price of a good increases, people are willing to supply
more and demand less.
John Locke
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Philosopher John Locke is credited with one of the earliest written descriptions of this economic principle in his 1691
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publication, Some Considerations of the Consequences of the Lowering of Interest and the Raising of the Value of
century England.
rs .
Money. Locke addressed the concept of supply and demand as part of a discussion about interest rates in 17th-
e
Many merchants wanted the government to lower the cap on interest rates charged by private lenders so that people
could borrow more money and thus purchase more goods. Locke argued that the free-market economy should set
k
rates because government regulation could have unintended consequences. If the lending industry were left alone,
n
interest rates would regulate themselves, Locke wrote: “The price of any commodity rises or falls by the proportion of
the number of buyers and sellers.”
a
Sir James Steuart.
p r
However, Locke did not actually use the term ‘supply and demand.’ Its first appearance in print came in 1767, from
Sir James Steuart
o
Sir James Steuart’s Inquiry into the Principles of Political Economy, published in 1796, was the first known printed
T
use of the term ‘supply and demand.’ When Steuart wrote his treatise on political economy, one of his main concerns
was the impact of supply and demand on laborers.
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0L8Q
Steuart noted that when supply levels were higher than demand, prices significantly decreased, lowering the profits
realized by merchants. When merchants made less money, they could not afford to pay workers, resulting in high
unemployment.
Adam Smith
Adam Smith dealt extensively with the topic in his 1776 epic economic work, The Wealth of Nations.
Often referredtr-to5Uas 4L2L

the
2U8R 0L8Q of Economics, Smith explained the concept of supply and demand as an _____ that
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naturally guides the economy. According to Smith, the invisible hand is the automatic pricing and distribution
mechanisms in the economy. Smith described a society in which bakers and butchers provide products that
individuals need and want, providing a supply that meets demand and developing an economy that benefits
everyone.
It is important to note that Smith’s ideas haven’t gone without critique over the years since his ideas were first
8E
5J2C8G4H2G0H
tr-published, though. Over time, his ideas have been added to in order to represent the changing times and include
concepts such as marginal utility, comparative advantage, entrepreneurship, the time-preference theory of interest,
and monetary theory.
Additionally, Smith didn’t properly explain pricing or a theory of value and failed to see the importance of the
entrepreneur in breaking up inefficiencies and creating new markets.
Alfred Marshall
After Smith’s 1776 publication, the field of economics developed rapidly, and the law of supply and demand was
refined. In 1890, Alfred Marshall’s Principles of Economics developed a supply-and-demand curve that is still used
to demonstrate the point at which the market is in equilibrium.
One of Marshall’s most important contributions to microeconomics was his introduction of the concept of price
elasticity of demand, which examines how price changes affect demand. In theory, people buy less of a particular
product if the price increases, but Marshall noted that in real life, this behavior was not always true.
The prices of some goods can increase without reducing demand, which means their prices are inelastic. Inelastic
goods tend to include items such as medication or food that consumers deem crucial to daily life. Marshall argued
that supply and demand, costs of production, and price elasticity all work together.
Ibn Taymiyyah
Though these theorists are the figures frequently mentioned when discussing the origin of the law of supply and
demand, other scholars across the world also contributed to its development.
m
For example, Islamic scholar Ibn Taymiyyah, who died 300 years before Locke’s aforementioned publication, has
o
recorded writings about the law of supply and demand, though he didn’t use those exact terms. He discussed how
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prices are determined by demand and supply and not by the unjust actions of people involved in the transaction.
The Law of Supply and Demand
rs .
Though Sir James Steuart was the first to use the phrase ‘supply and demand’ in his 1796 publication, Inquiry into
e
the Principles of Political Economy, many other scholars and thinkers are credit with discussing the origins of the
theory, such as Adam Smith, John Locke, Alfred Marshall, and Ibn Taymiyyah.
n k
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the
buyers of that resource. Generally, as price increases, people are willing to supply more and demand less and vice
versa when the price falls.
a
p r
Let’s say a company has a large supply of houseplants and sets the price of each at $20. If it isn’t selling well due to
low demand, the price may be lowered. If more people start buying the plant at the lower price (meaning the demand
The Bottom Line
To
has increased), the price may increase as the supply of the plants decreases.
Despite the origins of the law of supply and demand beginning hundreds of years ago, it’s still a topic frequently
referenced and utilized today in economic theory and discussions.
tr-5U2U8R4L2L
The
0L8Q theory has developed over time to
accommodate recent technological and economical advancements, but the basic ideas of the theory remain largely
the same.
6. Money as Debt
(Q.53-Q.64): For most of us, the question: “Where does money come from?” brings to mind a picture of the mint
printing bills and stamping coins. Money, most of us believe, is created by the government. It’s true, but only to a
0L8Q
point. tr-5U2U8R4L2L
Those metal and paper symbols of value we usually think of as money are indeed produced by an agency of the
federal government called the Mint. But the vast majority of money is not created by the Mint. It is created in huge
amounts every day by private corporations known as banks.
Most of us believe that banks lend out money that has been entrusted to them by depositors. Easy to picture, but not
the truth. In fact, banks create the money they loan, not from the bank’s own earnings, not from money deposited,
but directly from the borrower’s promise to repay. The borrower’s signature on the loan papers is an obligation to pay
8G4H2G
5J2Cbank 0H8E
tr-the the amount of the loan plus interest, or, lose the house, the car, whatever asset was pledged as collateral.
That’s a big commitment from the borrower.
To demonstrate how this miracle of modern banking came about, consider this simple story:
The Goldsmith’s Tale
Once upon various times, pretty much anything was used as money. It just had to be portable and enough people
had to have faith that it could later be exchanged for things of real value like food, clothing and shelter. Shells, cocoa
beans, pretty stones, even feathers have been used as money. Gold and silver were attractive, soft and easy to work
with. So some cultures became expert with these metals. Goldsmiths made trade much easier by casting coins,
standardized units of these metals whose weight and purity was certified.
To protect his gold, the goldsmith needed a vault. And soon his fellow townsmen were knocking on his door wanting
to rent space to safeguard their own coins and valuables. Before long, the goldsmith was renting every shelf in the
vault and earning a small income from his vault rental business.
Years went by and the goldsmith made an astute observation: Depositors rarely came in to remove their actual,
physical gold, and they never all came in at once. That was because the claim checks the goldsmith had written as
receipts for the gold, were being traded in the marketplace as if they were the gold itself. This paper money was far
more convenient than heavy coins, and amounts could simply be written, instead of laboriously counted one by one
for each transaction.
Meanwhile, the goldsmith had another business. He lent out his gold charging interest. Well, as convenient claim
check money came into acceptance, borrowers began asking for their loans in the form of these claim checks instead
of the actual metal.
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As industry expanded more and more people asked the goldsmith for loans. This gave the goldsmith an even better
idea. He knew that very few of his depositors ever removed their actual gold. So, the goldsmith figured he could easily
o
get away with lending out claim checks against his depositors’ gold, in addition to his own. As long as the loans were
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repaid, his depositors would be none the wiser, and no worse off. And the goldsmith, now more banker than artisan,
would make a far greater profit than he could by lending only his own gold.
.
rs
For years the goldsmith secretly enjoyed a good income from the interest earned on everybody else’s deposits. Now
e
a prominent lender, he grew steadily richer than his fellow townsmen and he flaunted it. Suspicions grew that he was
spending his depositors’ money. His depositors got together and threatened withdrawal of their gold if the goldsmith
didn’t come clean about his newfound wealth.
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Contrary to what one might expect, this did not turn out to be a disaster for the goldsmith. Despite the duplicity inherent
a
in his scheme, his idea did work. The depositors had not lost anything. Their gold was all safe in the goldsmith’s vault.
p r
Rather than taking back their gold, the depositors demanded that the goldsmith, now their banker, cut them in by
paying them a share of the interest. And that was the beginning of banking. The banker paid a low interest rate on
deposits of other people’s money that he then loaned out at a higher interest. The difference covered the bank’s cost
To
of operation and its profit. The logic of this system was simple. And it seemed like a reasonable way to satisfy the
demand for credit.
However this is not the way banking works today. Our goldsmith banker was not content with the income remaining
after sharing the interest earnings with his depositors. And the demand for credit was growing fast, as Europeans
spread out across the world. But his loans were limited by the amount
when he got an even bolder idea.
of 0L
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gold
8Q his depositors had in his vault. That’s
Since no one but himself knew what was actually in his vaults, he could lend out claim checks on gold that wasn’t
even there. As long as all the claim check holders didn’t come to the vault at the same time and demand real gold,
how would anyone find out? This new scheme worked very well, and the banker became enormously wealthy on the
interest paid on gold that did not exist.
The idea that tr-

the banker 0L8Q just create money out of nothing was too outrageous to believe, so, for a long time,
8R4L2Lwould
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the thought did not occur to people. But the power to just invent money went to the banker’s head as you can well
imagine. In time, the magnitude of the banker’s loans and his ostentatious wealth did trigger suspicions once again.
Some borrowers started to demand real gold instead of paper representations. Rumours spread. Suddenly, several
wealthy depositors showed up to remove their gold. The game was up. A sea of claim check holders flooded the
street outside the closed doors of the bank. Alas, the banker did not have enough gold and silver to redeem all the
0H8E
tr-paper
5J2C8Ghe had
4H2G put into their hands. This is called a ‘run on the bank’ and is what every banker dreads.
This phenomenon of a ‘run on the bank’ ruined individual banks and, not surprisingly, damaged public confidence in
all bankers. It would have been straightforward to outlaw the practice of creating money from nothing. But the large
volumes of credit the bankers were offering had become essential to the success of European commercial expansion.
So, instead, the practice was legalized and regulated. Bankers agreed to abide by limits on the amount of fictional
loan money that could be lent out. The limit would still be a number much larger than the actual value of gold and
silver in the vault. Quite often the ratio was 9 fictional dollars to an actual dollar in gold. These regulations were
enforced by surprise inspections.
It was also arranged that, in the event of a run, central banks would support local banks with emergency infusions of
gold. Only if there were runs on a lot of banks simultaneously would the bankers’ credit bubble burst and the system
come crashing down.
The Money System Today

Over the years, the fractional reserve system and its integrated network of banks backed by a central bank has
become the dominant money system of the world. At the same time, the fraction of gold backing the debt money has
steadily shrunk to nothing. The basic nature of money has changed.
In the past, a paper dollar was actually a receipt that could be redeemed for a fixed weight of gold or silver. In the
present, a paper or digital dollar can only be redeemed for another paper or digital dollar.
In the past, privately created bank credit existed only in the form of private banknotes, which people had the choice
to refuse just as we have the choice to refuse someone’s private cheque today. In the present, privately created bank
credit is legally convertible to government issued ‘fiat’ currency, the dollars, loonies and pounds we habitually think of
as money.
Fiat currency is money created by government fiat, or decree, and legal tender laws declare that citizens must accept
m
this fiat money as payment for debt or else the courts will not enforce the obligation.
o
So, now the question is: If governments and banks can both just create money, then how much money exists?
c
In the past, the total amount of money in existence was limited to the actual physical quantities of whatever commodity
.
was in use as money. For example, in order for new gold or silver money to be created, more gold or silver had to be
rs
found and dug out of the ground.
In the present, money is literally created as debt. New money is created whenever anyone takes a loan from a bank.
e
As a result, the total amount of money that can be created has only one real limit: the total level of debt.
Governments place an additional statutory limit on the creation of new money, by enforcing rules known as fractional
an k
reserve requirements. Essentially arbitrary, fractional reserve requirements vary from country to country and from
time to time. In the past, it was common to require banks to have at least one dollar’s worth of real gold in the vault
to back 10 dollar worth of debt money created. Today, reserve requirement ratios no longer apply to the ratio of new
money to gold on deposit, but merely to the ratio of new debt money to existing debt money on deposit in the bank.
p r
Today, a bank’s reserves consist of two things: the amount of government-issued cash or equivalent that the bank
has deposited with the central bank, plus the amount of already existing debt money the bank has on deposit. To
o
illustrate this in a simple way let’s imagine that a new bank has just started up and has no depositors yet. However
the bank’s investors have made a reserve deposit of $1,111.12 of existing cash money at the central bank and the
T
required reserve ratio is 9:1.
Step 1: The doors open and the new bank welcomes its first loan customer.
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He needs $10,000 to buy a car. At a 9:1
0L8Q
reserve ratio, the new bank’s reserve at the central bank, also known as high-powered money, allows it to legally
conjure into existence 9 times that amount, or $10,000 on the basis of the borrower’s pledge of debt. This $10,000 is
not taken from anywhere. It’s brand new money simply typed into the borrower’s account as bank credit. The borrower
then writes a check on that bank credit to buy the used car.
Step 2: The seller then deposits this newly created $10,000 at her bank. Unlike the high-powered government money
deposited at the central bank, this newly created credit money cannot be multiplied by the reserve ratio. Instead it’s
divided by the tr-
reserve ratio. 8Q a ratio of 9:1, a new loan of $9,000 can be created on the basis of the $10,000 deposit.
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Step 3: If that $9000 is then deposited by a third party, at the same bank that created it, or a different one, it becomes
the legal basis for a third issue of bank credit, this time for the amount of $8100. Like one of those Russian dolls,
where each layer contains a slightly smaller doll inside, each new deposit contains the potential for a slightly smaller
loan in an infinitely decreasing series.
4H2G 0H8Emoney
tr-Now,
5J2C8Gthe loan created is not deposited at a bank, the process stops. That is the unpredictable part of the
money creation mechanism.
But more likely, at every step, the new money will be deposited at a bank, and the reserve ratio process can repeat
itself over and over until almost $100,000 of brand new money has been created within the banking system. All of
this new money has been created entirely from debt, and the whole process has been legally authorized by the initial
reserve deposit of just $1,111.12, which is still sitting untouched at the central bank.
What’s more, under this ingenious system, the books of each bank in the chain must show that the bank has 10%
more on deposit than it has out on loan. This gives banks a very real incentive to seek deposits in order to be able to
make loans, supporting the general but misleading impression that loans come out of deposits.
Now, unless all the successive loans were deposited at the same bank, it cannot be said that any one bank got to
multiply its initial high powered money reserve almost 90 times by issuing bank credit out of nothing. However, the
banking system is a closed loop, bank credit created at one bank becomes a deposit in another, and vice versa.
In a theoretical world of perfectly equal exchanges, the ultimate effect would be exactly the same as if the whole
process took place within one bank. That is, the bank’s initial central bank reserve of a little over $1,100 allows it to
ultimately collect interest on up to $100,000 the bank never had.
If that sounds ridiculous, try this. In recent decades, as a result of steady lobbying by the banks, the requirements to
make a reserve deposit at the nation’s central bank have all but disappeared in some countries and actual reserve
ratios can be much higher than 9:1. For some types of accounts, 20:1 and 30:1 ratios are common. And even more
recently, by using loan fees to raise the required reserve from the borrower, banks have now found a way to
circumvent reserve requirement limitations entirely. So while the rules are complex the common sense reality is
actually quite simple. Banks can create as much money as we can borrow.
m
7. Nothing’s Free
and being willing to pay it.
. o
(Q.65-Q.74): Everything has a price, and the key to a lot of things with money is just figuring out what that price is
c
The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is
rs
overdue.
General Electric was the largest company in the world in 2004, worth a third of a trillion dollars. It had either been first
e
or second each year for the previous decade, capitalism’s shining example of corporate aristocracy.
Then everything fell to pieces.
n k
The 2008 financial crisis sent GE’s financing division—which supplied more than half the company’s profits—into
chaos. It was eventually sold for scrap. Subsequent bets in oil and energy were disasters, resulting in billions in write
offs. GE stock fell from $40 in 2007 to $7 by 2018.
a
p r
Blame placed on CEO Jeff Immelt—who ran the company since 2001— was immediate and harsh. He was criticized
for his leadership, his acquisitions, cutting the dividend, laying off workers and—of course—the plunging stock price.
Rightly so: those rewarded with dynastic wealth when times are good hold the burden of responsibility when the tide
To
goes out. He stepped down in 2017.
But Immelt said something insightful on his way out. Responding to critics who said his actions were wrong and what
he should have done was obvious, Immelt told his successor, “Every job looks easy when you’re not the one doing
it.” tr-5U2U8R4L2L
0L8Q
Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are
often invisible to those in the crowd.
Dealing with the conflicting demands of sprawling bloat, short-term investors, regulators, unions, and entrenched
bureaucracy is not only hard to do, but it’s hard to even recognize the severity of the problems until you’re the one
dealing with them. Immelt’s successor, who lasted 14 months, learned this as well.
Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often
it’s because we’re not good
8R4L 8Q identifying what the price of success is, which prevents us from being able to pay it.
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The S&P 500 increased 119-fold in the 50 years ending 2018. All you had to do was sit back and let your money
compound. But, of course, successful investing looks easy when you’re not the one doing it.
“Hold stocks for the long run,” you’ll hear. It’s good advice.
But do you know how hard it is to maintain a long-term outlook when stocks are collapsing?
Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s
5J2C8G4H2G 0H8E
tr-volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real
time.
The inability to recognize that investing has a price can tempt us to try to get something for nothing. Which, like
shoplifting, rarely ends well.
Say you want a new car. It costs $30,000. You have three options: 1) Pay $30,000 for it, 2) find a cheaper used one,
or 3) steal it. In this case, 99% of people know to avoid the third option, because the consequences of stealing a car
outweigh the upside.
But say you want to earn an 11% annual return over the next 30 years so you can retire in peace. Does this reward
come free? Of course not. The world is never that nice. There’s a price tag, a bill that must be paid. In this case it’s a
never-ending taunt from the market, which gives big returns and takes them away just as fast. Including dividends
the Dow Jones Industrial Average returned about 11% per year from 1950 to 2019, which is great. But the price of
success during this period was dreadfully high. The shaded lines in the chart show when it was at least 5% below its
previous all-time high.
c o m
rs .
k e
r an
o p
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This is the price of market returns. The fee. It is the cost of admission. And it hurts.
Like most products, the bigger the returns, the higher the price. Netflix stock returned more than 35,000% from 2002
to 2018, but traded below its previous all-time high on 94% of days. Monster Beverage returned 319,000% from 1995
to 2018—among the highest returns in history—but traded below tr-5Uits
2U8R 4L2L0L8Qhigh 95% of the time during that period.
previous
Now here’s the important part. Like the car, you have a few options: You can pay this price, accepting volatility and
upheaval. Or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can
attempt the equivalent of grand-theft auto: Try to get the return while avoiding the volatility that comes along with it.
Many people in investing choose the third option. Like a car thief—though well-meaning and law-abiding—they form
tricks and strategies to get the return without paying the price. They trade in and out. They attempt to sell before the
next recession and buy before the next boom. Most investors with even a little experience know that volatility is real
and common. Many then take what seems like the next logical step: trying to avoid it.
8Q
2L0Llook
4Lnot
But the Moneytr-Gods do
5U2U8R highly upon those who seek a reward without paying the price. Some car thieves will
get away with it. Many more will be caught and punished.
Same thing with investing.

Morningstar once looked at the performance of tactical mutual funds, whose strategy is to switch between stocks and
bonds at opportune times, capturing market returns with lower downside risk.⁵⁰ They want the returns without paying
the price. The8Estudy focused on the mid-2010 through late 2011 period, when U.S. stock markets went wild on fears
5J2C 8G4H2G 0H
tr-of a new recession and the S&P 500 declined more than 20%. This is the exact kind of environment the tactical funds
are supposed to work in. It was their moment to shine.
There were, by Morningstar’s count, 112 tactical mutual funds during this period. Only nine had better risk-adjusted
returns than a simple 60/40 stock bond fund. Less than a quarter of the tactical funds had smaller maximum
drawdowns than the leave-it-alone index. Morningstar wrote: “With a few exceptions, [tactical funds] gained less, were
more volatile, or were subject to just as much downside risk” as the hands-off fund.
Individual investors fall for this when making their own investments, too. The average equity fund investor
underperformed the funds they invested in by half a percent per year, according to Morningstar—the result of buying
and selling when they should have just bought and held.⁵¹
The irony is that by trying to avoid the price, investors end up paying double.
Back to GE. One of its many faults stems from an era under former CEO Jack Welch. Welch became famous for
ensuring quarterly earnings per share beat Wall Street estimates. He was the grandmaster. If Wall Street analysts
expected $0.25 per share, Jack would deliver $0.26 no matter the state of business or the economy. He’d do that by
massaging the numbers— that description is charitable—often pulling gains from future quarters into the current
quarter to make the obedient numbers salute their master.
Forbes reported one of dozens of examples: “[General Electric] for two years in a row ‘sold’ locomotives to unnamed
financial partners instead of end users in transactions that left most of the risks of ownership with GE.”⁵²
Welch never denied this game. He wrote in his book Straight From the Gut:
The response of our business leaders to the crises was typical of the GE culture. Even though the books had closed
on the quarter, many immediately offered to pitch in to cover the [earnings] gap. Some said they could find an extra
$10 million, $20 million, and even $30 million from their business to offset the surprise.
m
The result was that under Welch’s leadership, stockholders didn’t have to pay the price. They got consistency and
predictability—a stock that surged year after year without the surprises of uncertainty. Then the bill came due, like it
accounting maneuvers. The penny gains of Welch’s era became dime losses today.
.c o
always does. GE shareholders have suffered through a decade of mammoth losses that were previously shielded by
rs
The strangest example of this comes from failed mortgage giants Freddie Mac and Fannie Mae, which in the early
2000s were caught under-reporting current earnings by billions of dollars with the intention of spreading those gains
out over future periods to give investors the illusion of smoothness and predictability.⁵³ The illusion of not having to
pay the price.
k e
n
The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so
hard to avoid paying the price of good investment returns?
a
The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so
r
when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something
p
wrong. And while people are generally fine with paying fees, fines are supposed to be avoided. You’re supposed to
make decisions that preempt and avoid fines. Traffic fines and IRS fines mean you did something wrong and deserve
o
to be punished. The natural response for anyone who watches their wealth decline and views that drop as a fine is to
avoid future fines. It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of
T
developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor. Few
investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors
who have never experienced a 20% decline. But if you view volatility as a fee,
tr-5U2U8R4L2L
0L8Qthings look different. Disneyland tickets
cost $100. But you get an awesome day with your kids you’ll never forget. Last year more than 18 million people
thought that fee was worth paying. Few felt the $100 was a punishment or a fine. The worthwhile tradeoff of fees is
obvious when it’s clear you’re paying one.
Same with investing, where volatility is almost always a fee, not a fine.
Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not
forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets
might be $10, tr-or5Ustay
2U8Rhome for free. You might still have a good time. But you’ll usually get what you pay for. Same
4L2L0L8Q
with markets. The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than
low-fee parks like cash and bonds.
The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and
uncertainty—not just putting up with it, but realizing that it’s an admission fee worth paying.
There’s no guarantee that it will be. Sometimes it rains at Disneyland. But if you view the admission fee as a fine,
8E
tr-you’ll
5J2C8Gnever enjoy
4H2G0H the magic. Find the price, then pay it.
8. Confessions
(Q.75-Q.82): As chief economist, I not only was in charge of a department at MAIN Chas. T. Main, Inc, A major
consulting firm and responsible for the studies we carried out around the globe, but I also was expected to be con
versant with current economic trends and theories. The early 1970s were a time of major shifts in international
economics.
During the 1960s, a group of countries had formed OPEC, the cartel of oil-producing nations, largely in response to
the power of the big refining companies. Iran was also a major factor. Even though the shah owed his position and
possibly his life to the United States ' clandestine intervention during the Mossadegh struggle—or perhaps because
of that fact — the shah was acutely aware that the tables could be turned on him at any time. The heads of state of
other petroleum-rich nations shared this awareness and the paranoia that accompanied it. They also knew that the
major international oil companies, known as "The Seven Sisters," were collaborating to hold down petroleum prices
— and thus the revenues they paid to the producing countries — as a means of reaping their own windfall profits .
OPEC was organized in order to strike back.
m
This all came to a head in the early 1970s, when OPEC brought the industrial giants to their knees. A series of
o
concerted actions, ending with a 1973 oil embargo symbolized by long lines at U.S. gas stations, threatened to bring
c
on an economic catastrophe rivaling g the Great Depression. It was a systemic shock to the developed world
economy, and of a magnitude that few people could begin to comprehend.
rs .
The oil crisis could not have come at a worse time for the Unite d States. It was a confused nation, full of fear and
e
self-doubt, reeling g from a humiliating war in Vietnam and a president who was about t to resign. Nixon's problems
were not limited to Southeast Asia and Watergate. He had stepped up to the plate during an era that, in retrospect,
the `little guys," including the OPEC countries, were getting the upper hand.
k
would be understood as the threshold of a new epoch i n world politics and economics. In those days, it seemed that
n
I was fascinated by world events. My bread was buttered by the corporatocracy, yet some secret side of me enjoyed
a
watching m y masters being put in their places. I suppose it assuaged my guilt a bit. I saw the shadow of Thomas
Paine standing on the sidelines, cheering OPEC on.
p r
None of us could have been aware of the full impact of the embargo at the time it was happening. We certainly had
o
our theories, but we could not understand what has since become clear. In hindsight, we know that economic growth
T
rates after the oil crisis were e about half those prevailing in the 1950s and 1960s, and that they have taken place
against much greater inflationary pressure. The growth that did occur was structurally different and did not create e
nearly as many jobs, so unemployment soared. To top it all off, the international monetary system took a blow; the
network of fixed exchange rates, which had prevailed since the end
tr-5U 2L0L8QWar II, essentially collapsed.
of4LWorld
2U8R
During that time, I frequently got together with friends to discuss these matters over lunch or over beers after work.
Some of these people worked for me — my staff included very smart men and women, mostly young, who for the
most part were freethinkers, at least by conventional standards. Others were executives at Boston think tank s or
professors at local colleges, and one was an assistant to a state congressman. These were informal meetings,
sometimes attended d by as few as two of us, while others might include a dozen participants. The sessions were
always lively and raucous.
When I look back at 8R 4L2L0L

those 8Q
discussions, I am embarrassed by the sense of superiority I often felt. I knew things I could
tr-5U2U
not share. My friends sometimes flaunted their credentials — connections on Beacon Hill or in Washington,
professorships and PhDs — and I would answer this in my role as chief economist of a major consulting firm , who
traveled around the world first class . Yet, I could not discuss my private meetings with men like Torrijos, or the things
I knew about the ways we were manipulating countries on every continent. It was both a source of inner arrogance
and a frustration.
When we talked about the power of the little guys, I had to exercise a great deal of restraint. I knew what none of
4H2G0H 8E
5J2C8G
tr-them could possibly know, that the corporatocracy, its band of EHMs, and the jackals waiting in the background would
never allow the little guys to gain control. I only had to draw upon the examples of Arbenz and Mossadegh—and more
recently, upon the 1973 CIA overthrow of Chile's democratically elected president, Salvador Allende. In fact, I
understood that the stranglehold of global empire was growing stronger, despite OPEC — or, as I suspected at the
time but did not confirm until later, with OPEC's help.
Our conversations often focused on the similarities between the early 1970s and the 1930s. The latter represented a
major watershed in the international economy and in the way it was studied, analyzed, and perceived. That decade
opened the door to Keynesian economics and to the idea that government should play a major role in managing
markets and providing services such as health, unemployment compensation, and other forms of welfare. We were
moving away from old assumptions that markets were self-regulating and that the state's intervention should be
minimal.
The Depression resulted in the New Deal and in policies that promoted economic regulation, governmental financial
manipulation, and the extensive application of fiscal policy. In addition, both the Depression and World War II led to
the creation of organization s like the World Bank, the IMF, and the General Agreement on Tariffs and Trade (GATT).
The 1960s was a pivotal decade in this period and in the shift from neoclassic to Keynesian economics. It happened
under the Kennedy and Johnson administrations, and perhaps the most important single influence was one man,
Robert McNamara.
McNamara was a frequent visitor to our discussion groups — i n absentia, of course. We all knew about his meteoric
rise to fame, from manager of planning and financial analysis at Ford Moto r Company in 1949 to Ford's president in
1960, the first company head selected from outside the Ford family. Shortly after that, Kennedy appointed him
secretary of defense.
m
McNamara became a strong advocate of a Keynesian approach to government, using mathematical models and
statistical approaches to determine troop levels, allocation of funds, and other strategies i n Vietnam. His advocacy
o
of "aggressive leadership" became a hallmark not only of government managers but also of corporate executives. It
c
formed the basis of a new philosophical approach to teaching management at the nation's top business schools, and
.
it ultimately led to a new breed of CEOs who would spearhead the rush to global empire .'
rs
As we sat around the table discussing world events, we were especially fascinated by McNamara's role as president
e
of the World Bank, a job he accepted soon after leaving his post as secretary of defense. Most of my friends focused
on the fact that he symbolized what was popularly known as the military-industrial complex. He had held the top
k
position in a major corporation, in a government cabinet, and now at the most powerful bank in the world. Such an
n
apparent breach in the separation of powers horrified many of them; I may have been the only one among us who
was not in the least surprised.
a
p r
I see now that Robert McNamara's greatest and most sinister contribution to history was to jockey the World Bank
into becoming an agent of global empire on a scale never before witnessed. He also set a precedent. His ability to
bridge the gaps between the primary components of the corporatocracy would be fine-tuned by his successors. For
o
instance, George Shultz was secretary of the treasury and chairman of the Council on Economic Policy under Nixon,
served as Bechtel president, and then became secretary of state under Reagan. Caspar Weinberger was a Bechtel
T
vice president and general council, and later the secretary of defense under Reagan. Richard Helms was Johnson's
CIA director and then became ambassador to Iran under Nixon. Richard Cheney served as secretary of defense
under George H. W. Bush, as Halliburton president, and as U.S.5Uvice president
tr- 2U8R4L2L
0L8Q to George W. Bush. Even a president
of the United States, George H. W. Bush, began as founder of Zapata Petroleum Corp, served as U.S. ambassador
to the U.N. under presidents Nixon and Ford, and was Ford's CIA director.
Looking back, I am struck by the innocence of those days. In many respects, we were still caught up in the old
approaches to empire building. Kermit Roosevelt had shown us a better way when he over - threw an Iranian democrat
and replaced him with a despotic king. We EHMs were accomplishing many of our objectives in places like Indonesia
and Ecuador, and yet Vietnam was a stunning example of how easily we could slip back into old patterns. It would
take the leading member
2U8R4L2Lof 8Q
0LOPEC, Saudi Arabia, to change that.
tr-5U
9. No Debt, No Money
(Q.83-Q.92):
“Only the small secrets need to be protected. The big ones are kept secret by public incredulity.” – Marshall McLuhan,
media “guru”
0H8E
4H2Gever
5J2C8Gyou
tr-Have wondered how everyone — governments, corporations, small businesses, families can all be in debt
at the same time and for such astronomical amounts? Have you ever questioned how there can be that much money
out there to lend? Now you know. There isn’t. Banks do not lend money. They simply create it from debt.
And, as debt is potentially unlimited, so is the supply of money. And, as it turns out the opposite situation is also true.
Isn’t it astounding, that despite the incredible wealth of resources, innovation and productivity that surrounds us,
almost all of us, from governments to companies to individuals, are heavily in debt to bankers. If only people would
stop and think – how can that be? How can it be that the people who actually produce all of the real wealth in the
world are in debt to those who merely lend out the money that represents the wealth?
Even more amazing is that once we realize that money really is debt, we realize that if there were no debt there would
be no money.
“That is what our money system is. If there were no debts in our money system, there wouldn’t be any
money.” – Marriner S. Eccles, Chairman and Governor of the Federal Reserve Board
If this is news to you, you are not alone. Most people imagine that if all debts were paid off, the state of the economy
would improve. It’s certainly true on an individual level. Just as we have more money to spend when our loan
payments are finished, we think that if everyone were out of debt, there would be more money to spend in general.
But the truth is the exact opposite. There would be no money at all.
There it is. We are totally dependent on continually renewed bank credit for there to be any money in existence. No
loans, no money — which is what happened during the Great Depression, the money supply shrank drastically as the
supply of loans dried up.
Perpetual Debt
That’s not all. Banks create only the amount of the Principal. They don’t create the money to pay the Interest. Where
m
is that supposed to come from? The only place borrowers can go to obtain the money to pay the Interest is the general
economy’s overall money supply. But almost all of that overall money supply has been created exactly the same way:
o
as bank credit that has to be paid back with more than was created. So everywhere, there are other borrowers in the
c
same situation, frantically trying to obtain the money they need to pay back both Principal and Interest from a total
.
money pool which contains only Principal. It is clearly impossible for everyone to pay back the Principal plus the
rs
Interest because the interest money doesn’t exist. This can even be expressed by a simple mathematical formula.
e
The big problem here is that for long term loans such as mortgages and government debt, the total Interest far exceeds
the Principal. So unless a lot of extra money is created to pay the Interest, it means a very high proportion of
foreclosures, and a non-functioning economy.
n k
To maintain a functional society the rate of foreclosure needs to be low. And so, to accomplish this, more and more
new debt money has to be created to satisfy today’s demands for money to service the previous debt. But, of course,
a
this just makes the total debt bigger. And that means more interest must ultimately be paid, resulting in an ever-
p r
escalating and inescapable spiral of mounting indebtedness.
It is only the time lag between money’s creation as new loans and its repayment that keeps the overall shortage of
money from catching up and bankrupting the entire system. However, as the bankers’ insatiable credit monster gets
To
bigger and bigger, the need to create more and more debt money to feed it becomes increasingly urgent.
Why are interest rates so low? Why do we get unsolicited credit cards in the mail? Why is the US government spending
faster than ever? Could it be to stave off collapse of the entire monetary system? The rational person has to ask: Can
this really go on forever? Isn’t a collapse inevitable? 5U2U8R4L2L
0L8Q
tr-
“One thing to realize about our fractional reserve banking system is that, like a child’s game of musical chairs, as long
as the music is playing, there are no losers.” – Andrew Gause, Monetary Historian
Money facilitates production and trade. As the money supply increases, money just becomes increasingly worthless
unless the volume of production and trade in the real world grows by the same amount. Add to this the realization
that when we hear that the economy is growing at 3% per year, it sounds like a constant rate. But it’s not.
This year’s 3%tr-represents
5U2U8R4L2L more real goods and services than last year’s 3% because it is 3% of the new total. Instead
0L8Q
of a straight line as is naturally visualized from the words, it is really an exponential curve getting steeper and steeper.
The problem, of course, is that perpetual growth of the real economy requires perpetually escalating use of real world
resources and energy. More and more stuff has to go from natural resource to garbage every year, forever, just to
keep this system from collapsing.
“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an
economist.” – Kenneth Boulding, economist
0H8E
tr-5J2C8G4H2G
What can we do about this downright scary situation? For one thing, we need a different concept of money. It’s time
more people ask themselves and their governments four simple questions. Around the world, governments borrow
money at interest from private banks. Government debt is a major component of total debt and servicing that debt
takes a big chunk of our taxes. Now, we know that banks simply create the money they lend and that governments
have given them permission to do this.
So the first question is: Why do governments choose to borrow money from private banks at interest when
government could create all the interest free money it needs itself?
And the second big question is: Why create money as debt at all? Why not create money that circulates permanently
and doesn’t have to be perpetually re-borrowed at interest in order to exist?
The third question: How can a money system that can only function with perpetually accelerating growth be used to
build a sustainable economy? Isn’t it logical that perpetually accelerating growth and sustainability are incompatible?
And finally: What is it about our current system that makes it totally dependent on perpetual growth? What needs to
be changed to allow the creation of a sustainable economy?
At one time, charging any interest on a loan was called usury and was subject to severe penalties, including death.
Every major religion forbade usury. Most of the arguments made against the practice were moral. It was held that
money’s only legitimate purpose was to facilitate the exchange of real goods and services. Any form of making money
from simply having money was regarded as the act of a parasite or of a thief.
However, as the credit needs of commerce increased, the moral arguments eventually gave way to the argument that
lending involves risk and loss of opportunity to the lender and therefore attempting to make a profit from lending is
justified. Today, these notions seem quaint.
m
“Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal — that there
is no human relation between master and slave.” – Leo Tolstoy
c o
Today, the idea of making money from money is held as the ideal to strive for. Why work when you can get your
.
money to work for you? However, in trying to envision a sustainable future, it is very clear that the charging of interest
rs
is both a moral and a practical problem.
Imagine a society and economy that can endure for centuries because, instead of plundering its capital stores of
e
energy, it restricts itself to present day income. No more wood is harvested than grows in the same period. All energy
is renewable: solar, gravitational or geothermal, magnetic and whatever else we discover. This society lives within
k
the limits of its non-renewable resources by reusing and recycling everything. And the population just replaces itself.
n
Such a society could never function using a money system utterly dependent on perpetually accelerating growth. A
stable economy would need a money supply at least capable of remaining stable without collapsing.
a
Changing The System
p r
If it is the fundamental nature of the system that causes the problems, tinkering with the system cannot ever solve
those problems. The system itself must be replaced.
o
Many monetary critics call for a return to gold-based money, claiming that gold has a long history of reliability. They
ignore the many scams that can be played with gold: shaving coins, debasing the metal, cornering the market, all of
T
which were abundantly practiced in ancient Rome, and contributed to its fall.
Some advocate silver, it being more abundant than gold and therefore more difficult to corner. Many question the
need to bring back precious metals at all. No one wants to go back to carrying
tr-5U2U8R4L2L
0L8Q heavy sacks of coins to go shopping.
It is a certainty that paper, digital, plastic or more likely biometric ID money would be the real medium of trade with
the same potential for creating unlimited debt money we have now. Beyond that, if gold again became the sole legal
basis of money, those who have no gold would suddenly have no money.
Other monetary reform advocates have concluded that greed and dishonesty are the main problems, and that there
may be better ways to create an honest and equitable money system than returning to silver or gold.
Inventive minds have proposed a variety of alternative ways to create money. Many private barter systems create
money as debttr-much 0L8Q do, but it is done openly and without charging interest. An example is a barter system
5U2U8Ras banks
4L2L
in which debt is expressed as pledges of hours of work, all work being valued equally at a dollar figure that then allows
hours to be equated with the dollar price of goods. This kind of money system can be set up by anyone who can
devise a way to do the accounting and find willing and trustworthy participants. Setting up a local barter money system,
even if it were little used now, would be prudent emergency planning for any community.
Monetary reform, like electoral reform, is a big topic, and one that requires a willingness to change and to think outside
the box. Monetary reform, again, like electoral reform will not come easily because the enormously powerful interests
8G4H2G0H 8E
tr-that
5J2Cbenefit from the existing system will do their utmost to maintain their advantage.
Now that we have seen that money is just an idea and that, in reality, money can be whatever we make it; here is one
very simple alternative monetary concept to consider. This model is based on systems that have worked in the past,
in England, and America, systems that were undermined and destroyed by the goldsmith-bankers and their fractional
reserve system.
To create an economy based on permanent, interest free money, money could simply be created and spent into the
economy by the government, preferably on long-lasting infrastructure that facilitates the economy, such as roads,
railroads, bridges, harbours, and public markets. This money would not be created as debt. It would be created as
value, that value being in the form of whatever it was spent on. If this new money facilitated a proportional increase
in trade requiring its use, it would cause no inflation whatsoever.
10. The Fundamentals of How India Makes Its Money

(Q.93-Q.100): India is currently one of the fastest-growing economies in the world since 2000. It is also the world’s
fifth-largest economy in nominal GDP terms.
Overall, in 2019, the economy of India grew at a rate of 5%. This growth was primarily due to strong demand for the
country's goods and services, in addition to a high level of industrial activity. The country, once a supplier of British
tea and cotton, now has a diversified economy with the majority of activity and growth coming from the service
industry. India is now considered a "global player" in the world of international economics.
In 2020-2021, India's economy has been hard hit by the reaction to the COVID-19 pandemic. During 2020 India's
GDP for the second quarter came nearly 24% below the second quarter of 2019, as COVID-19 motivated restrictions
on all non-essential businesses sharply curtailed economic activity.
Historical Development of India's Economy
regarding the manufacturing and the distribution of products.
c o m
In 1947, after gaining independence from Britain, India formed a centrally-planned economy (also known as a
command economy). With a centrally planned economy, the government makes the majority of economic decisions
rs .
The government focused on developing its heavy industry sector, but this emphasis was eventually deemed
unsustainable. In 1991, India began to loosen its economic restrictions and an increased level of liberalization led
to growth in the country's private sector. Today, India is considered a mixed economy: the private and public sectors
e
co-exist and the country leverages international trade.
Citizens can choose their own occupations and start their own private enterprises. However, in certain areas of the
k
economy, such as defense, power, banking, and other industries, the government maintains a monopoly. The
n
country’s economy has grown exponentially–from $288 billion in 1992 to $2.66 trillion in 2020.
Agricultural Sector
a
p r
Agriculture, once India’s main source of revenue and income, has since fallen to approximately 18.32% of the
country’s GDP, as of 2020. However, analysts have pointed out that this fall should not be equated with a decrease in
production. Rather, it reflects the large increases in India’s industrial and service outputs.
To
The agricultural industry in India currently faces some problems. First, the industry is not as efficient as it could be:
millions of small farmers rely on monsoons for the water necessary for their crop production. Agricultural
infrastructure is not well developed, so irrigation is sparse and agricultural product is at risk of spoilage because of
a lack of adequate storage facilities and distribution channels.
tr-5U2U8R4L2L
0L8Q
Today, India is the world's second-largest producer of fruit, and the global leading producer of lemons, bananas,
mangoes, papayas, and limes. While forestry is a relatively small contributor to the country's GDP, it is a growing
sector and is responsible for producing fuel, wood-based panels, pulp for paper, paper, and paperboard. An
additional small percentage of India’s economy comes from fishing and aquaculture, with shrimp, sardines,
mackerel, and carp being bred and caught.
Industrial Production
Chemicals aretr-big 8R4L2L0L8Q
5U2Ubusiness in India; The petrochemical industry, which first entered the Indian industrial scene in
the 1970s, experienced rapid growth in the 1980s and 1990s.
In addition to chemicals, India produces a large supply of the world’s pharmaceuticals as well as billions of dollars
worth of cars, motorcycles, tools, tractors, machinery, and forged steel.
India also mines a large number of gems and common minerals including iron ore, bauxite, and gold along with
asbestos, uranium, limestone, and marble. From 2019 to 2020, for example, India mined 729 million tons of coal
(which, surprisingly, was not enough to meet the country’s coal needs). Oil and gas were extracted at a rate of
4H2G0H 8E
5J2C8G
tr-34.2 million metric tons and 32.9 billion cubic meters, respectively, in the 2018 to 2019 year.
Information Technology (IT) and Business Services Outsourcing

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to approximately 55%
between 2019 and 2020. India–with its high population of skilled, English-speaking, and educated people–is a great
place for doing business.
Among the leading services industries in the country are telecommunications, IT, and software, and the workers are
employed by both domestic and international companies including Intel, Texas Instruments, Yahoo (YHOO), Meta
—formerly Facebook, Google, and Microsoft.
Business process outsourcing is a less significant but more well-known industry in India and is led by companies
like American Express, IBM, Hewlett-Packard, and Dell. BPO is the fastest-growing segment of the ITES
(Information Technology Enabled Services) industry in India thanks to economies of scale, cost advantages, risk
mitigation, and competency. BPO in India, which started around the mid-90s, has grown by leaps and bounds.
Retail Services
The retail sector in India is huge. But it's not just apparel, electronics, or traditional consumer retail that is booming;
agricultural retail, which is important in an inflation-conscious country like India, is also significant. However, in recent
years, the issue of agricultural wastage has come to the forefront. It is estimated that from 2018-2021, over 400,000
tons of wheat and rice were wasted due to storage and transportation issues. This is enough to feed over 80 million
people within the country. Reports suggest there is little storage for Indian agricultural products, and experts believe
that the solution to the massive waste issue is a combination of government policy, technology, and infrastructure.
The Indian government is purported to be exploring a range of options.
Other Services
m
Other parts of India’s service industry include electricity production and tourism. The country is largely dependent
on fossil fuels oil, gas, and coal but it is increasingly adding capacity to produce hydroelectricity, wind, solar,
and nuclear power.
c o
In 2018, over 10 million foreign tourists visited India. In 2018, the estimated foreign exchange earnings from tourism
.
in India was $28.585 billion. The World Travel and Tourism Council calculated that tourism generated 10.3% of
rs
India's GDP in 2019.
e
Medical tourism to India is also a growing sector. India's market for medical tourism is expected to touch the $9
billion mark by 2020, according to a report released by the Federation of Indian Chambers of Commerce and Industry
k
(FICCI) and Ernst & Young. Medical tourism is popular in India because of its low-cost healthcare and international
n
standards compliance. Customers come from all over the world for heart, hip, and plastic surgery procedures, and
a small number of people take advantage of India’s commercial surrogate facilities.
a
The Bottom Line
p r
India has become a rising economic power in the 21st century. Between the years 2011 and 2015, more than 90
million people in India rose out of extreme poverty, thanks in part to robust economic growth that has improved the
To
overall standards of living in the country. According to the World Bank, growth in India is projected to be 6% this
fiscal year; it is expected to rise to 6.9% between 2020 and 2021 and to 7.2% in the following year. Among the major
emerging economies, India is one of the fastest-growing. It has also become a focus of investors across the globe.
tr-5U2U8R4L2L
0L8Q
0L8Q
tr-5U2U8R4L2L
0H8E
tr-5J2C8G4H2G
Notes:
c o m
rs .
k e
r an
o p
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0L8Q
0L8Q
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0H8E
tr-5J2C8G4H2G

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The Father of Modern Economics

The Dismal Science: Marx and Malthus

Keynes and Macroeconomics

The Neoclassical Synthesis

Factoring in Social Benefit

to India in hopes of finding his family.

The Broader Perspective

2) Remote schooling Bhutan

The Broader Perspective

The Broader Perspective

Smart cities, smart infrastructures and smart environments

Bringing together smart city technology

analyzing economic factors.

Types of Political Economy

Importance of Political Economy

Political Economy in Academia

The study may be approached in any of three ways:

Modern Applications of Political Economy

5. The Origins of the Law of Supply and Demand

Sir James Steuart

Often referredtr-to5Uas 4L2L

The Law of Supply and Demand

The Bottom Line

The idea that tr-

The Money System Today

and being willing to pay it.

Then everything fell to pieces.

Same thing with investing.

When I look back at 8R 4L2L0L

10. The Fundamentals of How India Makes Its Money

Historical Development of India's Economy

regarding the manufacturing and the distribution of products.

Information Technology (IT) and Business Services Outsourcing

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