Wenting
Cai
ENGL191
Final Paper
04/22/2012
Economics and Economy of China
Introduction
So, what are
the economics? I think the first impression in people's mind will be the study
of money, income, or anything about money. Actually it is a social science
which analyzes the production, distribution and consumption of goods and
services [1]. Since Adam Smith gave birth to the modern economics as a separate
discipline through his famous publication of The Wealth of Nations to
nowadays, modern economics already had over 200 years history. During that
period of time, many great economists like Alfred Marshall who created the
Neoclassical economics, John Maynard Keynes who created the Keynesian economics
and many others, they all made great contributions to integrating the theory of
economics. Also, I would like to talk about the Microeconomics and Macroeconomics--the
main two parts of economics. Finally, I would like to discuss the economy of China
which is the world's second major economy and also the world's fastest-growing
economy.
The
Definitions of Economics
Since each
great economist has his own views about the definition of economics, or the
evolution of this subject, there are maybe some differences in each definition
during the different times. In the dictionary, the definition of economics
which is, it is a social science which analyzes the production, distribution
and consumption of goods and services [2]. Some famous economists also gave the
definitions. For instance, the philosopher Adam Smith defined economics which
was called political economy at that time in his book The Inquiry into the Nature and Causes of the Wealth of Nations as:
“A branch of
the science of a statesman or legislator with the twofold objectives of
providing a plentiful revenue or subsistence for the people ... and to supply
the state or commonwealth with a revenue for the public services.” [3]
Another great
economist named Alfred Marshall extended the analysis of economics beyond
wealth and brought it to the microeconomic level. He gave a more specific
definition in his work Principles of
Economics:
“Economics is a
study of man in the ordinary business of life. It enquires how he gets his
income and how he uses it. Thus, it is on the one side, the study of wealth and
on the other and more important side, a part of the study of man.” [4]
The subject
keeps evolving so maybe more specific definitions will come out.
The
General History of Modern Economics
People start to
care about economic activities since thousands years ago. The writings about
economics could date back to ancient Greek, Roman,
China and India, etc. The
famous scholars such as Aristotle, Xenophon and many other scholars, their
writings about economy had profound effects on the creation of the theory of modern
economics. There are a lot of schools of economics; the main four are
Classical, Marxian, Neoclassical and Post-Keynesian economics.
In 1776, a
great Scottish economist and moral philosopher named Adam Smith who was cited
as the father of the modern economics and capitalism published one of the world’s
most important economic works – The Inquiry into the Nature and Causes of the Wealth of Nations, which laid the foundation of the
theory of modern economics. It was this great work, gave birth to the modern
economics as a separate discipline. This book mainly discussed three factors of
production – labor, land and capital which are the main contributors to the
wealth of nations and the free market. What’s more, he used the metaphor Invisible Hand
in the Wealth of Nations first and
that is a very important term in economics. Adam Smith’s the Wealth of Nations is usually recognized the beginning of
classical economics.
Marxian
economics was founded by Karl Marx which inherited the main theory founded by
Adam Smith. Of course, he did not follow the classical theory completely. He created
new theory based on the classical theory which was more suitable for the time
he lived. His famous work was Capital:
Critique of Political Economy which is a critical analysis of capitalism and
it was published in 1876.
After Classical
and Marxian economics, the Neoclassical and Keynesian economics era came. Today’s
mainstream economics were dominated by these two schools of economics.
Mainstream economics is a term used to refer to
widely-accepted economics as taught across prominent universities [6]. The most
influential economist during the time of Neoclassical economics was Alfred
Marshall. He was the founder of the Neoclassical economics which dominates
microeconomics and influenced the latter neoclassical economists as well as
John Maynard Keynes – The founder of the Keynesian economics. His famous work –
The Principles of Economics, published
in 1890, was the most important economic textbook in England for many years. He brought
us into the world of the Microeconomics and he wanted to apply mathematical methods
into economics in order to make the economics more accurate and more scientific.
So in his book, he brought the ideas such as demand and supply, elasticity and
marginal utility which were the analysis of microeconomics and he used some mathematic
methods to interpret economics. What’s more, Alfred Marshall popularized the
term ‘economics’ as a synonym for 'economic science' and a substitute for the ‘political
economics’ which was created by Adam Smith. Neoclassical economics was not
really followed Adam Smith’s classical economics. To some extent, the theory of
Classical economics is an important reference to economics and it influenced
the Neoclassical economics. The school
of Neoclassical economics
created a new world of economics which was more accurate and scientific than
classical economics.
Under the
influence of the Alfred Marshall’s economics theory, the next great economist
John Maynard Keynes found the world of Keynesian economics which had a great
impact on the economics. John Maynard Keynes is one of the most important
economists of the Western economics. His ideas had a profound effect on the
theory of modern macroeconomics and the economic policies of governments. He
started a revolution which was known as ‘Keynesian Revolution’ in economics
thinking with his great work -- The General Theory of Employment, Interest and Money, which was
published in 1936. He overturned the established Neoclassical and classical
economics. In this book, Keynes created the terminology and shape of
modern macroeconomics. Keynes thought:
“If the
microeconomic-level actions taken collectively by a large proportion of
individuals and firms, could lead to inefficient aggregate macroeconomic
outcomes, wherein the economy operates below its potential output
and growth rate [7].”
So he focused on
the macroeconomic-level actions in his great book. Keynes brought ideas such as
the consumption function, the multiplier effects, the marginal efficiency of
capital, the principle of effective demand and liquidity preference which were
the most important theory to teach in the Macroeconomics classes today. Keynes's
ideas about economic policy were accepted by Western economists and governments
during the World War II. By the time in 1950s and 1960s, Keynes’s economic policies
were successfully adapted by almost all the Western capitalist governments. Keynesian economics has three main principal
schools; Post-Keynesian economics, Neo-Keynesian economics and New Keynesian
economics. Post Keynesian started in 1936 which was the year of Keynes's great
work was published and it remained the closet spirit of Keynesian economics.
And it was also the most important school
of Keynesian economics. Neo-Keynesian
economics which was orthodox in the 1950s and 60s and by New Keynesian
economics, which together with various strands of neoclassical economics has
been dominant in mainstream macroeconomics since the 1980s. All three schools
made great contributions to integrate the theory of Keynesian economics.
Microeconomics
and Macroeconomics
Generally
speaking, Microeconomics and Macroeconomics are two main branches of economics.
Both of them are the basis of the economics. They discuss the economics from
two different angles – Individuals and the entire economy.
Here
is the definition of Microeconomics:
“Microeconomics
examines the behavior of basic elements in the economy, including individual
agents (such as households and firms or as buyers and sellers) and markets, and
their interactions [8].”
Microeconomics
was mainly established by Alfred Marshall. Its theory mostly comes from Marshall’s great work The Principles of Economics which is an
important book of microeconomics. Microeconomics discusses ideas such as supply
and demand, elasticity, monopoly, perfect competition and imperfect
competition, etc. which are all about the individual actions. There are many
goals that microeconomists tend to achieve, here is one of the goals:
“One important
goal of microeconomics is to analyze market mechanisms that establish relative
prices amongst goods and services and allocation of limited resources amongst
many alternative uses [9].”
Contrary to
microeconomics, macroeconomics study the entire economy, here is the
definition:
“Macroeconomics discusses
the whole economy which involves the "sum total of economic activity,
dealing with the issues of growth, inflation, and unemployment [10].”
The great
economist whose theory had profound effects on modern macroeconomics is John
Maynard Keynes. He thought the microeconomic-level actions had many
shortcomings which could cause inefficient aggregate macroeconomic outcomes if
these actions were taken collectively. So he focused on macroeconomic-level and
he created new models to discuss the whole economy and also he gave monetary
policies and fiscal policies to government in order to build a better economy. The
subjects discussed in today’s macroeconomics textbook are almost all from his
great work -- The General Theory of
Employment, Interest and Money, including aggregate demand and aggregate
supply, unemployment rates, GDP, inflation, recession and government policies which
are all about the whole economy behaviors.
The
economy of China
China
is an important part of the world’s economy which cannot be neglected. So far, China is the second economy of the world after
the United States.
Also, it is the world's fastest-growing major economy, with growth rates
averaging 10% over the past 30 years [11].
What’s more, China
is the largest exporter and second largest importer of goods around the world. The
coastal provinces tend to be industrialized but the hinterland is still
backward. Although China
achieved the great success in its GDP, there are still some flaws behind its
fast economic growth.
China
achieves its great success in economics growth, especially in GDP, over the
past 30 years. After the World War II, although China was the winner, the war still
caused a huge loss of economy. People suffered from the starvation, poor, short
of health care and so on during the 1950s to 1970s. China influence the world economy
began in 1980s. At that time, Chinese government said that the economic reform
is the primary and the most important project that we need to do first. In
1978, Chinese government permitted foreign direct investment in some "special
economic zones" along the coast in order to accelerate the economic growth
in the coastal areas. Then, with the success of that decision, government
expanded the number of that coastal area in order to accept more foreign
investment. For the rural areas, Chinese leader made two steps to help people
get rid off the poverty. Step one is ‘reform in the countryside’ and the next
is ‘rural industrialization and enterprise reform. Until 1990s, the Chinese
economy continued to grow rapidly, at about 9.5%. China started to influence the
world economy. By the time in 2010, China's
GDP was valued surpassed Japan's
GDP value, and became the second largest economy
after the U.S [12].
It was amazing that the economy could grow so
fast in China.
But why the economy grows so fast in China over the past 30 years? There
are tons of views and answers about this question. And the reasons were different
because of the time was changing. There are many ideas such as the capital
investment, the labor efficiency, the cheap labor, the natural sources and the
huge exportation. According to a professor:
“China’s
economic growth can be attributed to two main factors: large-scale investments
financed by domestic savings and foreign investments; and a rapid growth in productivity
[13].”
In other words,
for simplicity, why its economy growth so fast that can be attributed to the
cheap labor, the huge exportations and capital investment.
Although
China’s
economy grows at an amazing rapid pace, there are still some flaws behind the
huge GDP. One of the important problems, which affect people’s daily life, is
inflation. Inflation means a rise of general price level in an economy during a
period of time. If the Inflation rate keeps going to a high number, there will
be some bad consequences such as unemployment, the depreciation of money and a
decrease in aggregate demand. According to the database:
“During the winter
of 2007–2008, China’s
inflation ran about 7% on an annual basis, rising to 8.7% in statistics for
February 2008, released in March 2008. Then, throughout the summer and fall,
however, inflation fell again to a low of 6.6% in October 2008. By the time in
2010, the inflation rate rose up to 5.1%, driven by a 11.7% increase in food
prices year on year [14][15][16].”
Under such high
rate of inflation, for the poor people, they face the money depreciate and the
increase in price level. For many Chinese government reasons, while their wages
goes slowly.
Other problems
such as the corruption, distributional inequities, damaging environment, rapid
deletion of nonrenewable sources and so on, they are all big problem which need
good solutions.
Anyway,
despite the fast-growing economy in China, there are a lot of problems
behind this that need to be solved.
Conclusion:
All in all, economics is an
important social science. Under the help of its theory, we could build our
world better and so live better. Nowadays, economics analyses were applied
around the society such as in the business and government. The creation of
economic theory cannot happen without many great economists' contributions.
Also, as a Chinese student, I am proud of the fast economic development in my
country. However, there are also many problems under the fast economic
development that cannot be neglected.
References
[2] ibid [1] Online Dictionary http://dictionary.reference.com/browse/economics?s=t
[3] The
Inquiry into the Nature and Causes of the Wealth of Nations, Book IV, Adam
Smith (1776)
[4] Marshall,
Alfred (1890 [1920]). Principles of
Political Economy, v. 1, pp. 1–2 [8th ed.]. London: Macmillan.
[5] Steven
M. Sheffrin (2003). Economics: Principles in action. Upper
Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 32.
[7] Wikipedia,
Keynesian Economics http://en.wikipedia.org/wiki/Keynesian_economics
[8] Wikipedia,
Economics http://en.wikipedia.org/wiki/Economics#Microeconomics
[9] Wikipedia,
Microeconomics http://en.wikipedia.org/wiki/Microeconomics
[10] ‘ Economics Glossary’. Monroe County
Women's Disability Network. Retrieved
2008-02-22. http://www.mcwdn.org/ECONOMICS/EcoGlossary.html
[11] "Report
for Selected Countries and Subjects"
[14] National
Bureau of Statistics of China
[15] "Stocks surge after China
stimulus" BBC News. November 10, 2008. Retrieved May 1, 2010.
[16] Cara Anna (December 12,
2010). "China
inflation rate at 5.1 percent".
