David Smith- 'Free Lunch' (Pt. V- On Robert Malthus)

After his discussion surround GDP, Smith touches on the works of three of the most influential economists that have shaped both how people see economics, and how economists think and tackle problems on a global scale: Robert Malthus, David Ricardo, and John Stuart Mill. First on the menu is Malthus- who many see as one of the main reasons that economics has been dubbed ‘The Dismal Science’- is often considered to be the first ever economics professor as he took up a role in 1805 in the East India Company as a ‘professor of modern history and the political economy’. He, very early on in his life, released a 50.000 word ‘Essay on Population’ that outlined his view that because “Population, when unchecked, increases in geometric ratio... [and] Subsistence only increases in an arithmetic ratio.” The human race will eventually run out of food unless populations are kept in check. With the benefit of hindsight, Malthus may have probably reconsidered his argument as it has been proved that food levels can be increased in a geometric manor as humans do not just eat crops, but also animal produce which can be bred at alarmingly high rates. This was not his only insight, however- Smith makes a point of highlighting his theorising of the ‘Law of Diminishing Returns’. This means that the marginal gains in output from using more factors of production reduce over time. Finally, Smith details Malthus’ thoughts around overproduction. Jean-Baptiste Say proposed that ‘Supply creates its own demand’, but Malthus argued that in the case of the labour market, for example, there was often a large surplus in the form of unemployment (this effect is amplified by price floors). 

Once again, guys, if you have any questions feel free to ask below, and make sure that you subscribe!

K

David Smith- 'Free Lunch' (Pt. IV- On GDP)

The next chapter is where the ‘Main Course’ picks back up from its previous interlude. In this chapter, Smith (now only referring to David) touches on the subject of measuring the size and health of an economy. Smith mentions that GDP may essentially be the ‘Gross-value added’ to an economy. Another point that is definitely noteworthy is the appearance of one of the very few formulae in this book. Smith uses the formula for GDP C+I+G+X-M =GDP or AD as an aid to help describe how all actions in an economy will link back to the GDP via its different components: consumer spending (C), investment by firms (I), government spending (G), exports (X), and imports (M) - if you’re studying A-level Economics, this will all come up in the macroeconomics section. In this section, there is also the beginnings of Keynesian economics’ application to society and Adam Smith’s theory playing a role with the use of incentives in society to effect changes in spending (to correct market failure etc). He then goes on to discuss the affects of not including the value of housework in the calculation of AD- in 2002, the UK’s Office for National Statistics estimated that £700 billion (That’s roughly the size of Switzerland’s GDP).

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K

David Smith- 'Free Lunch' (Pt. III- On Adam Smith)

The next ‘course’ is the first chapter entirely dedicated to a single economist- Adam Smith, the ‘Father of modern Economics’ (To avoid confusion, here, I shall refer to both David and Adam Smith by their first names). The chapter begins with a brief history of Adam’s life with aspects of his childhood upbringing with regards to his teachers and mentors being mentioned. Aside from this, the focus of this chapter is on Adam’s writing career and gradual rise to fame as ‘The Father of Economics’. Where he lacked in looks, he more than made up for in writing ability- Adam is most famous for his two books an Inquiry into the Nature and Causes of the Wealth of Nations and The Theory of Moral Sentiments. The latter of the two outsold Wealth of Nations by far, despite it not being nearly as important in the eyes of many. In Wealth of Nations, Adam used his experiences of travelling the world, meeting the likes of Voltaire and Quesnay, to present “The first synthesis of economics in its entirety.” It explained many of the phenomenon that have laid the foundations for much of econometrics (macro and micro) in that it began discussions on specialisation, absolute advantage, and free trade. It also gave birth to one of the most famous examples of the division of labour and specialisation that helped shape the construction industry, and put Adam on the £20 note- the pin factory. He cites the example of a pin factory in which workers make the pin in its entirety from start to finish, and could produce a fair number, but if each individual worker were to SPECIALISE in a specific task related to the production process, they could increase their output by somewhere between 240 and 4800 times. This revolutionary idea laid the foundations upon which the likes of Henry T. Ford built when he invented the moving production line for the ‘T-model’ Ford in 1912. After this, David speaks of ‘The Invisible Hand’ which, although only being referred to once in The Wealth of Nations, is one of the most famous pieces of writing Smith ever produced. This was the ‘Invisible Hand’ of the market, which helped keep the markets from failing- Adam also speaks of ‘liberty’ and that without it; the ‘Invisible Hand’ cannot operate properly. This is one of the main arguments for right-winged anarchists or just those who look on at the ‘laissez-faire’ government from the ‘Republican Ascendency’ days with nostalgia.

Once again, if you have any questions about key terms, or references to individuals that I've made, feel free to ask in the comments section below.

K

David Smith- 'Free Lunch' (Pt. II- On markets and taxes)

In the ‘Main Course’ of the book, Smith really begins to get into what makes consumers consume, and producers produce- this is talk of incentives in the Free Market system. Here, some of the key points about utility and how that affects our choices are made, with reference to the likes of Paul Krugman and Steven Landsburg and their thoughts on the subjects surrounding this topic. Smith also, briefly references indifference- which can be graphed and used in tandem with opportunity cost curves as a means of extension of the topic. He goes on to write of how utility and indifference culminate and allow for incentives to be used in the marketplace to correct a market failure. He quotes Landsburg on a reason for why low-fat foods can actually make people fatter:

“A scoop of ice cream a night would add 10 pounds to your weight, and you've

 decided that’s not worth it, so you don’t eat ice cream. Now along comes low-fat ice-cream that allows you to eat two scoops a night and add 10 pounds to your weight. That’s a better deal, and a perfectly rational being might well opt for it. So, when low-fat foods come along, some people sensibly become fatter.”

Smith, in the end of this chapter, finishes by briefly touching on the work of Arthur Laffer who theorised the ‘Laffer curve’ (see right) which shows how effective taxes are at different rates, and why having 100% or 0% income tax would be equally as useless, neither bringing in tax revenue- although not explicitly, as he goes into further detail on this a little later.

Hey guys, if you have any questions about anything that I've said, feel free to leave me them in the comments section!

K

David Smith- 'Free Lunch' (Pt. I-On the 2008 crash)

In his introduction, Smith explains how the financial crash of 2008 was cause by a mixture of over-zealous crediting agency, poor investments, and little foresight from a number of Wall Street (and other) banks and hedge funds. After its relatively small beginnings with the two Bear Stearns hedge funds failings, it snowballed into the bursting of the ‘housing bubble’ and eventual bailing out of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Corporation) which were so huge and ‘stable’ that their failings held very grave connotations for economists the world over.

In his 'Appetizer', Smith begins to define what economics really is, and how truly integrated it is with our society- he also explains that economics can be used to understand why there really is no such thing as a free lunch. Once the tone is set for the rest of the book, he begins to, really, delve deeper into the heart of the book. In the next chapter, the subject of housing is addressed, as Smith discusses the factors affecting house prices, and how the housing market is very different in the way in which it operates to that of ‘potatoes’. He also touches on ‘value added’ in reference to homes, and some basic theory surrounding equity.

The next installment of my review of 'Free Lunch' will be coming up in the next few days so, keep checking in!

K

A change of plans...

Hey guys, I just wanted to write this quick message about a slight change in the focus of this blog!
I've been REALLY busy recently, and I've gotten a little more into writing book reviews and reports on economics-y stuff, so what I'm going to do is start publishing them- piece by piece. I'll be reviewing some of the best economics books I can find about economics (be it micro or macro)! The first one that I'll be reviewing is 'Free Lunch' by David Smith- it is a brilliant read as David Smith acts as the reader’s trusty guide in this novel, letting them dip their toe into the ‘dismal science’ without being swamped by possibly confusing equations, diagrams, and unnecessarily verbose language. Smith begins by simplifying and succinctly explaining the main causes and effects of the 2008 deleveraging, showing the reader how vast the effects were, and what some of its implications were.

Keep and eye out,

K