A Different View of Externalities in the Context of Global Warming and Climate Change

An externality is a cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities can be both positive or negative. A positive externality is anything that causes an indirect benefit to individuals. A GSM operator that uses the new technology to make phone calls cheaper and the vaccination of people against infectious diseases are examples of a positive externality. A negative externality is anything that causes an indirect cost to individuals. A factory's wastes that destroy plantations and some fishermen catch fish with purse seine in shallow waters with the desire to maximize their profit are the examples of negative externalities. This concept, first mentioned by Knut Wicksell, was later developed by Alfred Marshall.

However, the theories and methods put forward to internalize negative externalities have examined the social costs incurred at the local level; The threats posed by external costs, which have global effects such as global warming and climate change, for today's and future generations, have been ignored in the context of externalities.

Today, global warming and climate change are predicted to turn more than 143 million people into climate migrants due to the rise in hurricanes, storms, sea level rises, food, and water scarcity which depends on extreme drought and epidemic diseases. This entire migration movement will take place in Sub-Saharan Africa, South Asia and Latin America, representing 55% of the developing world population. In addition to the famine and natural disasters triggered by global warming and climate change, millions of people have migrated to Europe since 2013 as a result of political instability. This results in xenophobia as well as shrinking Europe's economic resources. Global warming and climate change cause some species to become extinct and migrate because of the inability to keep up with the changing climate conditions. Besides, the rapid proliferation of mosquito, tick and pest species that cause plagues are predicted with the disruption of nature.

In other words, from an economic point of view, negative externalities occur at the global level that threatens both our present and future generations. So, who will pay for the social and economic costs of negative global externalities? What is a daily marginal social cost that we have to bear in return for the marginal social benefit of making the earth livable one more day? Or, is it not an economic and social problem of homo economicus which seeks its self-interests in a narrow and rational way, because the costs of the global negative negativities mentioned above will be reflected to the next generations?

Merkantalizmi İktisadi Düşünceye Hazırlayan Ekonomik Şartlar ve Sömürge Hareketleri

Devletin gerçek zenginliğinin kaynağının değerli madenler olduğunu savunan Merkantilist iktisadi düşünce kabaca 1450-1750 yılları arasında uygulama alanı bulmuştur. Merkantilizm,  ülkeye değerli maden girişini ve ülkeye giren madenlerin de yeniden çıkmaması için ihracatı teşvik edici, ithalatı sınırlayıcı korumacı politikalar öngörmüştür.   

Merkantilist İktisadı Düşünce'yi hazırlayan şartlar arasında feodalizmin çözülmesi ve merkezi devletlerin kurulması, yeni buluşların deniz aşırı ticarete katkıları, dinde reform hareketeri, matbaanın bulunuşu ve yaygınlaşması, ekonomik ve sosyal yapıdaki değişimler başlık olarak sıralanabilir. Bu yazıda merkantilizmi hazırlayan ekonomik şartlar ve sömürge hareketlerinden bahsedeceğim.

10. ve 15. yüzyıllar arasında gelişen ticaret, kapitalist ekonominin ortaya çıkışını ve kent merkezli ekonomik sistemden ulus merkezli ekonomik sisteme geçişi sağlamıştır. Bu ekonomik dönüşümün en önemli özelliği ise 12. yüzyılda başlayan, ama 16. yüzyılın ikinci yarısında hızlanan fiyat artışlarıdır. Tüm malların fiyatları 1550-1660 yılları arasında ortalama olarak iki kat artmıştı. 1650 de buğdayın fiyatı Paris pazarında 1500'dekine göre 15 kat daha pahalıydı. Bu yüzyılda ortaya çıkan enflasyonun en önemli nedeni Amerika kıtasından Avrupa'ya akan yeni bulunmuş değerli madenlerdir. Maden miktarı, üretilen mal ve hizmetlerin hacminden daha hızlı arttığı için, madenin değeri azalmış, bu da fiyatların yükselmesine yol açmıştır. Üretim temposunun hızlanması ve artması, üretim tekniğinin gelişmesi ve yeni buluşlar, servetlerin birleşip şirketlerin kurulması coğrafi ufukların genişletilmesini zorunlu kılmıştır. Yeni pazarlara ve kaynaklara ulaşma hırsı denizaşırı ülkelerin keşfine, sömürgecileğe ve daha da zenginliğe yol açmıştır. 

Altın hırsının kamçıladığı keşiflerin ve sömürgelerin ilk sonucu Avrupa'da görülmemiş çapta bir sermaye birikimi olmuştur. Güney Amerika medeniyetlerinin yüzyıllar boyunca biriktirmiş olduğu hazineler silah zoruyla Avrupa'ya taşınmıştır. Afrika sahillerinden yüzbinlerce esir Amerika kıtasındaki plantasyonlarda çalışmaya gönderilmiş ve bu ticaret astronomik karlara yol açmıştır. 16. yüzyılda 900.000 Afrikalı köle, esir tacirleri tarafından Amerika'ya götürülmüştür. Satış yerine ulaşan her köleye karşılık 5 zenci ya Afrika'da öldürülmüş ya da yolda ölmüştür. Daha sonraki yıllarda hızlanan bu ticaret Afrikayı 60 milyon insandan yoksun bırakmıştır.

Sömürge hareketleri sonucunda, Prof. Dr. Ömer Lütfi Barkan'ın verdiği bilgilere göre 1521-1560 yılları arasında İspanya'ya 18.000 ton gümüş ve 200 ton altın ithal edilmiştir ve gerçek miktarın bunun iki katı olduğu sanılmaktadır. Meksika'da, Peru'da elde edilen harp ganimetleri ve soygunlar sırasında bir defasında 1.300.000 ons altını ele geçirdikleri olduğu gibi, normal insan büyüklüğünde altından yapılmış heykeller, yemek takımları, çiçek, hayvan, kuş heykelleri de ilk devirlerin ganimetleri arasındaydı. 1500-1550 yılları arasında Avrupa'da altın stoğundaki artış 57 kat olarak hesaplanmaktadır. Yılmaz Öztuna'nın Batı kaynaklarına dayanarak belirttiğine göre, Ferdinand döneminde (1459-1516) İspanya'nın geliri tam 32 kat artmıştır.

Dönemler	Gümüş	Altın	Dönemler	Gümüş	Altın
1503-10	-	5	1581-90	2103,0	12,1
1511-20	-	9,2	1591-1600	2707,6	19,5
1521-30	0,1	4,9	1601-10	2213,6	11,8
1531-40	86,2	14,5	1611-20	2192,3	8,9
1541-50	177,6	25,0	1621-30	2145,3	3,9
1551-60	303,1	42,6	1631-40	1396,8	1,2
1561-70	862,9	11,5	1641-50	1056,4	1,5
1571-80	118,6	9,4

Tablo: Amerikadan İspanya'ya ithal edilen Altın ve Gümüş Miktarları (Ton)

Merkantilist dönemde hızla gelişen ticaret, değişik ülkelerdeki tüccarların çıkarlarını çatışır hale getirmişti. Tüccarlar rakiplerine karşı kendilerini koruyacak bir merkezi güce ihtiyaç duyuyorlardı. Bu dönemde mutlak monarşiler ve merkezi devletlerin kurulması ticaretin gelişmesiyle birlikte bir iktisat politikasının uygulunmasını gerektiyordu. Merkantilistler "tüccarın karının ulusal çıkarla özdeş olduğunu, ülkenin gücünü oluşturduğunu ileri sürdüler. Altın ve gümüş zenginliğine dayalı güçlü devlet anlayışı, kral ile tüccarlar için ortak çıkarı teşkil ettiği için merkantilist öğreti mutlak monarşi ve yeni gelişen devletlerin öğretisi olarak aşağı yukarı 300 yıl, dönemin hakim iktisadi düşüncesi olarak varlığını korudu.

Yararlanılan Kaynaklar:

Kazgan, Gülten, İktisadi düşünce veya Politik İktisadın Evrimi, Remzi Kitabevi, 2014

Cem, İsmail, Türkiye'de Geri Kalmışlığın Tarihi, Türkiye İş Bankası Kültür Yayınları, 2011

Sander, Oral, Siyasi Tarih, İmge Kitabevi, 2012

Küresel Isınma ve İklim Değişiklği Bağlamında Dışsallıklara Farklı Bir Bakış

Dışsallık, bir ekonomik faaliyet ve işlem nedeniyle o işlemin tarafı olmayan üçüncü şahıslar üzerine düşen maliyet ya da faydaları ifade eder. Bir ekonomik birimin üretim veya tüketim faaliyetlerinden elde ettiği özel faydanın yanında, diğer ekonomik birimlere fayda sağlıyorsa "dışsal fayda" veya pozitif dışsallık; zarar veya maliyet yüklüyorsa "dışsal maliyet" veya "negatif dışsallık söz konusudur. Bir fabrikanın atıklarının tarlaları tahrip etmesi, bazı balıkçıların karlarını azamileştirmek  arzusuyla sığ sularda gırgırla balık avlaması negatif dışsallıklara örnek iken; bir GSM operatörünün yeni teknoloji kullanması sonucu tüketicilerin telefon görüşmelerini daha ucuza gerçekleştirmesi, bulaşıcı hastalıklara karşı aşı olmak pozitif dışsallıklara örnektir. İlk defa Knut Wicksell tarafından dile getirilen bu kavram daha sonra Cambridge Okulu'nun kurucusu olan Marshall tarafından geliştirilmiş; Ellis, Falhlner, Scitovsky, Coase, Buchanan ve Stubblebine dışsallıkların teorik çerçeveye oturtulmasında katkıda bulunmuşlardır.

Fakat  negatif dışsallıkları içselleştirmeye yönelik ortaya atılan teori ve yöntemler lokal düzeyde oluşan sosyal maliyetleri incelemiş; küresel ısınma, iklim değişikliği gibi global düzeyde etkileri olan dışsal maliyetlerin bugünün ve geleceğin nesilleri açısından oluşturduğu tehditler dışsallıklar bağlamında göz ardı edilmiştir.

Bugün, küresel ısınma ve iklim değişikliğinin 143 milyondan fazla insanı kasırgalar, fırtınalar, deniz seviyesindeki yükselmeler, aşırı kuraklığa bağlı olarak ortaya çıkacak gıda ve su kıtlığı ve salgın hastalıkların artacak olması nedeniyle iklim göçmenine dönüştüreceği öngörülmektedir. Bütün bu göç hareketi gelişmekte olan dünya nüfusunun %55 ini temsil eden Sahra altı Afrika, Güney Asya ve Latin Amerika'da gerçekleşecektir. Küresel ısınma ve iklim değişiklğinin tetiklediği kıtlık ve doğal felaketlere ek olarak Orta Doğu ve Batı Afrika'daki siyasi istikrarsızlığın sonucunda milyonlarca insan 2013 yılından beri Avrupa'ya göç etmektedir. Bu da Avrupa'nın ekonomik kaynaklarını küçültmenin yanı sıra yabancı düşmanlığına sebep olmaktadır. Küresel ısınma ve iklim değişikliği bazı canlı türlerinin neslinin değişen iklim şartlarına ayak uyduramamaları sebebiyle tükenmesine, bazılarının göç etmelerine neden olmaktadır. Salgın hastalıklara yol açan sivrisinek, kene ve zararlı böcek türlerinin dünyanın doğal dengesinin bozulması sonucu yakın gelecekte hızla çoğalması öngörülmektedir.

Yani kısaca, iktisadı açıdan bakıldığında hem bugünümüzü hem de gelecek nesilleri tehdit eden global düzeyde negatif dışsallıklar oluşmaktadır. Peki, global negatif dışsallıkların oluşturduğu sosyal ve ekonomik maliyetlerin bedelini kim ödeyecektir? Yerküreyi bir gün daha yaşanabilir kılmanın marjinal sosyal faydası için katlanmamız gereken bir günlük marjinal sosyal maliyet nedir? Yoksa, yukarıda bahsi geçen global çaplı negatif dışsallıkların maliyetleri sonraki nesillere yansıyacak olması sebebiyle çıkarlarını dar çerçevede ve rasyonel biçimde ele alan homo economicus un ele alması gereken iktisadi ve sosyal bir sorun değil midir? 

Where is the invisible hand now?

We see a dramatic decrease in consumption and production, but at the same time, we can observe that the big businesses cry for the government to rescue them? Where is the invisible hand that magically coordinates the market in such an efficient way that we will always reach the most efficient, wealth maximizing outcome? Although all those hardworking CEOs beg the government to help them in bad times (once again), in good times they argue that a free market is the best solution while taxes, regulations and government intervention just undermines the optimal outcome.

Everyone arguing for a market-based solution should now celebrate that the invisible hand will destroy all those inefficient companies because they did not save enough capital in good times or were imprudent to adjust themselves to the prospective economic situation. After this creative destruction, we will see new and innovative companies rising. Airlines were mismanaged by spending money on share buybacks instead of having enough cash to withstand an epidemic. Shale oil companies knew that an oil price below 50 USD would make them unprofitable. Huge profits were harvested for the entrepreneurial risk in the good years, but no one wants to take the entrepreneurial risk in bad times. According to neoclassical (financial) economics, those huge profits exist precisely because of the possibility of a significant downturn, and they are a risk premium that is paid for taking this risk.

CEOs and businessmen publicly tell you in good times that low skill workers have to adjust to the new economy, that they will temporarily lose their job, but by acquiring new skills they can get better jobs and contribute to the economy. However, as soon as it is  faced such a situation as a company, they cry for the government to rescue them with taxpayers' money which is the money of those workers that are laid off without a second thought. Capital gains and business tax rates are lower than the tax rate on labour, but companies are rescued first with the taxpayers' money. At the same time, workers are dying because of a privatized and broken healthcare system. Instead of funding a nationalized healthcare system with taxes on labour, mismanaged companies are rescued.

All those free-market enthusiasts are now experiencing the destructive and cruel power of the invisible hand and do not want to bear it, but in good times the invisible hand is their friend. Privatize the profits and socialize the loss. That is not a free market nor capitalism - that is a crooked economic system based on the exploitation of the lower and middle class.

How can you justify that within a neoclassical framework arguing for capitalism and a free market?

Malthusian Theory Of Population, Sociological and Economic View of The Population Issue

Industrialization, revolution in agriculture, deep-rooted economic and social transformations such as immigration from the countryside to cities, and rapid urbanization took place in Western Europe in the 19th century. In the same period, there was a significant demographic change. Throughout the 19. century, deaths in the West, especially infant deaths, declined. Despite this change in fatalities, the fertility rate did not decrease immediately. Prolonged life expectancy and not falling of fertilities immediately caused the rise of the population rapidly.

	1801	1850	Rate of Increase
France	28,2 million	36,4 million	%30
England	16 million	32 million	%100

In the first half of the 19th century, while the population increased by 30% in France, in England.

There was a 100% population increase. In 1911, the population of England reached 45 million. The culminating point has been realized between 1870 and 1880 in Western Europe.

Malthus: The Controversial Name of Modern Demography

Malthus argued in his "An Essay on the Principle of Population" that

"population, when unchecked, increases in a geometrical ratio; subsistence only increases in an arithmetical ratio." (Chapter I, paragraph 18, lines 1-2)

His second argument is that population growth reduces material welfare due to diminishing returns to labor on fixed land supply.

According to Malthus, the difference between population growth and food sources needs to be balanced. But how? The fertility of the population has to be controlled.

There are two ways to do it:

1. Repressive or negative obstacles: They are defined as "the uncontrolled obstacles," such as famine, wars, plagues that increase the death rates.
2. Preventive measures: These measures aim at reducing the fertility rate. For instance, prostitution (non-reproductive sexual activity), moral restrictions (moral values that do not allow to have children without getting married), later marriage age (thereby delaying the age of having children), preventive checks to the population that limited birthrates.

Besides, Malthus strongly opposes social aids, which can be defined as the core of a social state. According to him, these aids spread poverty, contrary to ending poverty. The struggle for life is by nature and prevents people from laziness. Poverty is the guilt of the poor!

After Malthus, Neo-Malthusians, who was influential in the 20th century, suggested controlling poverty through contraceptions. What surprising is that even though contraceptives were suggested to prevent poverty, they were used to guarantee the future of kids by non-poverty families. Families had children as they can provide a bright future to their kids. That is to say; it made an adverse effect.

When Malthus asserted his theory, the world population was 990 million. Now, the world population is 7,8 billion. In this period, agricultural production increased due to developments in agricultural technology. However, the increase in the production of food products is continuously progressing in a way that will disrupt the balance of nature, pollute the environment, change the structure of foods, and make living conditions difficult for the next generations. 

It is necessary to look at Malthus' thesis again from this point of view and to answer the question of what we can do to leave a better world to the next generations without polluting the environment more.

The Economic Policy of Wearing Mask In Consideration of Externalities and Turkey Example

In economics, an externality is a cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities might be both positive or negative. Positive externalities are benefits that are infeasible to charge to gain; negative externalities are costs that are infeasible to charge to avoid. In other words, in both negative and positive externalities, consumers don’t pay, and producers are not paid for costs or benefits. Planting trees is an example of a positive externality, while air pollution is an example of a negative externality.

Externalities stem from the selfishness of people, and it undermines the social benefits of the public. Despite the fact that people consider their own interests in their economic and social activities, they ignore the social benefits and costs of their activities.

If we adapt mask example to externalities, not wearing a mask and infect other people is an external cost while wearing a mask and prevent other people from infection is an external benefit. People suppose that other people wear mask, or they ignore the social benefits of wearing a mask because some people have low-risk perception. Thus, the consumption and production of masks remain below the social optimum level. At that point, the most rational political selection is to subsidize and mandate the use of masks. In other words, It is the best way to be given masks to free to the public by the government. Because the cost of wearing one mask and shortening the spread of pandemic one day is much less than the cost of causing one more COVID-19 case.

In Turkey, the government has started the distribution of masks freely through pharmacies and obliged to wear mask in public places in the early days of April. The graph below shows the positive impact of subsidizing wearing mask. After the third week of April, daily new cases start decreasing clearly. It definitely prevented the uncontrollable spread of cases. It needs to be lasted until shortening the marginal benefit of pandemic one day economically becomes equivalent to the marginal cost of wearing a mask.

Başlık ekle

(source:https://www.worldometers.info/coronavirus/country/turkey/)

How Physiocracy inspired Karl Marx and Liberal Economics and Their Conflicts

Physiocracy inspired Karl Marx and liberal economics thinkers despite being developed in the second half of the 18th century, lasting from 1760 to 1770 in the short term.

The term of physiocracy means “rule of nature.” According to Physiocrats, natural law is perfect and ideal order governed by God. They suggested the functioning of society occurs in a “natural law” as it happens in physical events in nature. This argument of Physocrats is asserted “Laissez Faire Laissez-Passer” statement by Vincent de Gournay, who is the pioneer of Physiocracy. This slogan, which is attributed to Liberal Thinkers, particularly to Adam Smith, was stated the first time by Vincent de Gournay, and it was adopted by Liberal economic thinkers later on.

However, there was a conflict between physiocrats and liberal economic thinkers concerning the source of natural law. In both Physiocracy and Liberal Economics, the reason why it has not to be intervened to economic activities is the existence of natural law. But, according to Physocrats, natural law is a divine law. In this law, producers and consumers have the right to behave for their own interests, and this natural law based on the personal property and the freedom of economic activities continue by itself. On the other hand, Adam Smith claims that the source of natural law is not divine; it is the result of the economic behaviors of producers and consumers. He claims that without government intervention, an economic balance is provided by the lead of human interests. Created this economic balance, producers reach a maximum profit, and consumers reach a maximum benefit. The power that provides this balance is the interests of humans. Adam Smith names this power as an “invisible hand.”

Tableau economique written by F. Quesnay inspired Karl Marx, and “surplus” production term constituted one of the headstones of his theory. However, Marx argued that surplus is the qualification of labor in the economic process, while Physiocrats argued that surplus is in the production power of land and his arguments on this known as “surplus value theory.”

According to Karl Marx, surplus value is the excessive value that the capitalist owns over the wages that workers are paid.

Moreover, Physocrats not only inspired Karl Marx and Liberal Economics thinkers, and they also inspired American political economy theorist Henry George and promoted the “single tax” theory on land because the income of land and real estate owners increased excessively in the growing population of 19th century. Besides, Wassily Leontief, who is Russian origin and awarded with Nobel economics, was inspired by Tableau Economique in his Input-Output Model that shows product and service flow in the economy of a country in a fixed term. Today, the Input-Output model is used in economic planning in many countries.

In conclusion, even though Physiocracy didn’t spread around the world and had influence in the short term, its arguments had a significant impact on famous political-economic thinkers and schools of thought for economics. Therefore, its importance in economic history has never been ignored while studying economics.

What Is A Tariff?

In March, President Donald Trump set two tariffs. He set a tariff on steel imports and aluminum imports. Import is goods that are bought from another country. Export is goods that are sold to another country.
Tariffs are a tax on imported goods. Businesses and people inside the country will pay extra money when buying goods from another country. That extra money is the tariff. It goes to the U.S. government.
Governments use tariffs to help their own businesses. They want people to stop buying goods from other countries. Tariffs also help the government make money.

The Effects Of Tariffs
Here is an example. Cocoa beans are used to make chocolate. Turkey needs to import cocoa beans.
Turkey imports many cocoa beans from the Republic of Cote d’Ivoire, a country in West Africa. Imagine if Turkey set a tariff on imported cocoa beans. Three things would happen.
First, cocoa beans from the Republic of Cote d’Ivoire would cost more. Chocolate makers in Turkey would have to pay the extra tariff. However, what if Turkey had its own cocoa bean farmers? Then, these Turkish farmers could sell cheaper cocoa beans than those from the Republic of Cote d’Ivoire. Chocolate makers would buy more beans from Turkish farmers because they are cheaper. Turkish farmers would make more money.
Second, the tariff would harm the Republic of Cote d’Ivoire. The farmers in the Republic of Cote d’Ivoire would have to lower their prices. Otherwise, people would stop buying cocoa from them. These farmers would make less money.
Finally, Turkey would buy less cocoa from the Republic of Cote d’Ivoire. The two countries would not trade as much as before.

The Risks
There is also another problem. In our example, farmers in the Republic of Cote d’Ivoire would lose money because of the tariff. So, the Republic of Cote d’Ivoire might want to do something about it. It might set its own tariffs on goods from Turkey. It would hurt companies in Turkey.
These kinds of actions can lead to a trade war. That is when countries punish each other with tariffs. It is why experts usually do not like tariffs.

Capitalism Needs a New Economics Theory

The theory of today’s economy, that is, the neoclassical economics method, which was first modified by the theory of monetarist economics and then the theory of rational expectations, is, in fact, the theory of economy of the capitalist system. Thirty years ago, there were countries in the world with a mixed economic system that emphasized the capitalist system and its imitation of crony capitalism, as well as socialist systems. At that time, the neoclassical theory did not dominate by itself. For that reason, its universality was controversial. Because the market model, which is the decision-maker, has a limited place remarkably, a kind of centralized market management system called the planned economy model was the decision-maker. Today, the market economy has become dominant everywhere, with the globalization trend spreading all over the world. Thus, at first glance, the theory of neoclassical economics, which is the theory of capitalism, has become the universal theory of the economy in the global system. However, even if the dominancy of capitalism seems in the closest way to pure capitalism in some countries, in some other countries, it took place in the form of crony capitalism. Therefore, the universality of the neoclassical economic theory is still arguable.

Neoclassical economic theory is based on several assumptions. The most important of them are as follows:
(1) People rationalize and make decisions in this direction (assumption of rationality, thought of homoeconomicus.)
(2) The full competition system is exemplified in describing the markets (assumption of competition prevalence).
(3) Decisions are based on margins (marginality assumption).
(4) The purpose of the consumer to obtain the maximum benefit, the producer’s goal is to maximize the profit (maximization assumption).

Discussing the assumptions of a theory comes at a time when questioning whether that theory is in accord with reality. The debate about the neoclassical economic theory, which is long-lasting, can not fully explain the real life. So the results that come out of assumptions are not exactly in line with real life. However, a theory is established to define real-life events by reducing, classifying, and generalizing them. No matter how well-simplified, how well-categorized, and generalized it is, the theory does not work if the results do not fit into the real world. The assumptions of the criticized neoclassical theory are in the forefront of these criticisms since they have not been fully compliant with real life for a long time.

When we look at the landscape today, we can see that the prevalence of irrational behaviors, competition is everywhere under the feet, that people often make their decisions by considering the averages rather than the margins, not the maximization principle in many decisions of the consumer or the manufacturer. At this stage, my mind is stuck with the question, “Does the theory of neoclassical economics remain inadequate while explaining capitalism?” We argue that this theory does not work at all; the theory must be re-applied, and none of us maintains the validity of the theory. But none of us question whether capitalism has changed the quality. Neoclassical theory is a theory for an environment in which capitalism rules are applied. So if a company is going to sink, it will not be saved by the state. On the other hand, the state becomes unable to process the rules of capitalism when it goes to save the companies that are going to sink. Then it comes to discuss the theory is a wrong practice.

I think that capitalism can no longer be like the ideal form, but that it will continue to operate half-timely. In doing so, we have to start by changing assumptions. It would be much better to set up a theory based on half-patronized rationality, a distorted competition order, a lot of coincidence, and assumptions of motion appropriate for averages instead of margins. By incorporating the behavioral economy and the theory of chaos, the ambiguous logic, and the irrational expectation approaches, a new theory of economics will have to be established in accordance with the dominant crony capitalism.

It is not as easy as it seems. Because we are talking about a significant economics theory based on the assumptions of rationality, competition, maximization, and movement in margins, an entire economic theory can be upside down when you remove these assumptions.

What Is Keynesian Economics?

Keynesian economics is the use of fiscal policies (government spending and taxes) as a means to control the economy. This idea was adopted by the British economist John Maynard Keynes, one of the most important thinkers of the 20th century. Keynes's ideas shaped the modern world economy. Keynes is still respected and followed.

Keynes's masterpiece The General Theory (General Theory of Employment, Interest and Money) published in 1936 was written in response to the Great Depression. He argued that the government had a mission that they had previously ignored. This task was to keep the economy alive during trauma. The book was written to criticize the idea that the French Jean-Baptiste Say (1767-1832) would "each supply creates his own demand". According to Say's idea, in the economy as a whole, the production of goods was enough to create demand on its own.

Revitalizing the economy

Up to the Great Depression, the assumption was that the economy was largely self-regulating. The invisible hand left to itself will bring employment and economic efficiency to the optimum level. Keynes strongly opposes it. In periods of economic downturn, defend the claim that reducing the demand will cause the economy to shrink with a serious crisis and increase unemployment. The government's task is to revive the economy. The government can do this by borrowing money and creating employment in the neighborhood sector, increasing cash in infrastructure projects (eg roads, railways, hospitals and school buildings). Decrease in interest rates may not be enough, but it may stimulate the economy a bit.

According to Keynes, the extra expenditures the government will make are spread throughout the economy. For example, a new highway construction creates jobs for construction companies. That company's employees spend money on food, products and services, which hinders the economy from entering the crisis. The key in Keynes's argument is the idea of ​​multiplying.

Let's say the American government has ordered a $ 10 billion plane ship to shipbuilding company Northop Grumman. We can think that the effect of this is the transfer of 10 billion dollars to the economy. However, according to the multiplying argument, the effect will be much larger. Northop Grumman will hire more people, make more profit, and spend workers' money on consumer goods. Total economic efficiency will increase much more than the initial money, depending on the "consumer tendency" of an average consumer.

If 10 billion dollars increased the American economic efficiency by 5 billion dollars, the multiplier is 0.5. If it has increased 15 billion dollars, it is 1.5.

Six Key Principles of the Keyneysen Economy

According to former presidential adviser Alan Blinder, six key principles lay behind Keynesianism. These:

1. Keynesists argue that the economy is influenced by both institutional and private sector decisions and that it sometimes behaves unevenly.
2. The short term is sometimes more important than the long term. Short-term increases in unemployment can lead to more damage in the long run, because it can cause permanent damage to the economy. It reminds us of the words of Keynes' famous' 'We will all die in the long run.' '
3. Wages, and in particular salaries, respond very slowly to changes in supply and demand. This means that unemployment is generally higher or lower than the economy's power.
4. Unemployment is usually very high and varied; recessions and crises are not an effective market reaction to unpleasant opportunities like invisible hand dictation, but rather economic disease.
5. Governments must actively stabilize the natural spikes and falls in the economy.
6. Keynesians tend to struggle with unemployment and give more importance to struggle with inflation.

Is the Keynesian Theory a Controversial Theory?

Keynesianism has always created controversy. Critics of it ask why we should assume that governments will better govern the economy. Is economic variability really dangerous? despite all these criticisms, the Great Depression of the 1930s was overcome by the ideas of Keynes. Franklin D. Roosevelt's program, known as the New Order, was presented as a reaction against the Krzysztyn and was a classic example of the government's spending billions in the recession to encourage the economy. It is still debated whether these policies or the Second World War ended the Great Horn. But the message from history is that government spending is working.

After the publication of the General Theory, governments around the world have greatly increased their spending. It is based on social reasons, such as improving the welfare state that will overcome the consequences of high unemployment, and Keynesianism, which emphasizes that governments should control the economy.

These interventions have worked for a long time, inflation and unemployment have declined considerably, and the economy has grown. But in the 1970s monetarists (monetarists) began criticizing Keynesian politics. One of the main arguments was that governments that implement fiscal and monetary policies on a regular basis to increase employment would not be able to fine-tune the economy. The time between the moment of realizing that there is a need for such a policy (eg tax reduction) and the effect of politics is very long. Even if the politicians problem is quickly identified, it takes time for the regulations to be written and approved. It takes longer for the tax cut to affect the entire economy. When the tax cuts finally start to work, the problem to be solved may already be worsened or destroyed.

Look at the business, Keynes came back after the 2008 crisis. Economics argues that governments should borrow and cut taxes by spending, when it is understood that the discounts on interest can not prevent the recession in America, the UK and other countries. At the end, these policies have been implemented, breaking away from the economic policies of the past twenty-five years. Despite everything, Keynes is back.

Different Types of Goods-2

I continue to lecture about types of goods on this article where i stayed at the previous post. There are two types of goods that need to be known and those types of goods have anomalies which are contrary to the law of demand. One of them is Giffen Good and the other one is Veblen Good. Let's start with Giffen good.

Giffen Good: A giffen good is a good that as price rises, demand increases and, as price falls, demand decreases. The increase in demand stems from the income effect of the higher price outweighing the substitution effect. It is hard to find empiricial evidence about it but it can be applied to extremely poor people who have limited diet.
Suppose that you are very poor and you can't afford other alternative expensive foodstuff. On the other hand, the price of your basic foodstuff is increasing. In that situation, you will end up buying more your basic foodstuff. Because, it is the only foodstuff that you can afford.

                                                          Diagram for Giffen Good

Veblen Goods: A veblen good is a good that as price rises, demand increases and, as price falls, demand decreasse because of its exclusive nature and appeal as a status symbol. A veblen good has an upward-sloping demand curve like giffen good.

Studies suggest that people get more satisfaction from buying expensive goods and very expensive goods are indicator of having a hıgher status in society. Besides, consumers think that more expensive goods have better quality. Very expensive goods-such as designer jewelry, pricey watches, luxury cars can be classified as veblen goods.

The Basic Similarity and Difference Between Giffen Good and Veblen Good: For both giffen good and veblen good, as prices rises, demand increases. But, for veblen good, people demand more because the good is indicator of having a higher status in society and people think that it is expensive because it is a better quality. For giffen good, people demand more because the income effect outweighs the substitution effect.

Different Types of Goods-1

First, i will tell you about income elasticity of demand and cross elasticity of demand in order to make easy to understand the type of goods.

Income Elasticity of Demand: It measures the susceptibility of demand in reaction to change in income.
Cross Elasticity of Demand: It measures the quantity of demanded one good in response to a change in price of another.

Normal good: It is a good or service that as consumer income increases, demand of the good rises but, at a rate lesser than the rate of increase in income. In other words, income elasticity of demand increase is positive but, less than one. For instance, if the demand for clothing increases by %8 when real income increases by %12, clothing is classified as a normal good and it is said that it has %12 income elasticity.

Luxury good: It is a good or service that as consumer income increases, demand of the good rises at a rate that bigger than the rate of increase in income. It means that income elasticity of demand is bigger than one. If the demand for sports cars increase by %15 when real income increases %10 then, it is classified as luxury good.

Inferior good: It is a good or service that as consumer income increases, demand of the good falls. As consumer becomes finacially better, the demand for such goods fall because consumers can now afford higher priced goods and services. For example, a consumer prefer his personel car if his financial situation gets better rather than public transportation. In that case, public transportation is an inferior good.
It is a good that has a neagtive income elasticity. Because, demand of inferior good decreases at a rate more than the change consumer's income.

Complementary goods: It is a good or service that its use is dependant to another associated goods or service. For example, tennis ball and tennis racket, car and gasoline.
Complementary goods have a negative cross elasticity of demand. If the price for one good increses, the demand for both complementary goods fall. The more goods are linked eachother, the higher cross elasticity of demand.

Substitute goods: Substitute goods are two different goods which can be used to satisfy same needs. If the price of one good rises, the demand for the substitue increase. Hence, substitutes good have positive elasticity of demand.

What is Mercantilism?

Mercantilism is a movement of thought that is maintained between the Middle Age and Physiocracy between 1450–1750s. As this thought of movement was interpreted differently by thinkers, it was implemented differently in each country, and it is another article’s topic. So, first, I will explain the events leading to the existence of Mercantilism, then; I will indicate the objectives and principles of it.

Mercantilism is derived from the word ‘mercante’ which means merchant in Spanish. Mercantilism is a system of thought that asserts that valuable mines constitute the real wealth of states. Mercantilism defends the entry of mines to the country and prohibits the importation in order to prevent the exit mines from the country. Briefly, it advocates protective policies.

The events that cause the existence of Mercantilism

The collapse of feudalism and the emergence of central states between the end of the Middle Age and Indıstrial Revolution can be shown as

primary reasons for Mercantilism that cause its existence. I will indicate them below:

• The Collapse of Feudalism and Establishment of Cental States: With the collapse of feudalism, states founded newly needed new income resources to maintain their power. At that time, the essential income resource of states was foreign trade. So, foreign trade was encouraged.
• New Inventions: With the invention of the compass, it was facilitated trade with overseas countries. While products which are high in value but light in weight -silk, spice, and so on- were traded with medieval primitive transport vehicles, new trade routes were found with the developed maritime transport. On the one hand, new trade centers came to existence such as London, Lisbon, and Amsterdam; on the other hand, trade improved with geographical discoveries, and golden was imported to Europe, especially from American Continent.
• Religion reform and Renaissance Movement: The rapid spread of trade has caused the Catholic worldview to begin to be questioned. On the one hand, Luther argued that prices and interest rates should be at the control of the state, on the other hand, Calvin stated that the wealth attained by working in this world would be awarded in the next world, too. Renaissance, which symbolizes awakening in Science and Art, made widespread that the thought that prosperity and happiness of the individual should be prioritized.
• Change in Economic and Social Structure: The agriculture was a prevalent economic activity in this term. However, the manufacturing industry began improving. The money supply increased with gold and silver, which was brought from colonies, causing a rise in inflation. While wage- laborers became prevalent, rising prices militated in favor of debtors and cause impoverishment of wage-laborers.
• The Invention of Printing House and its spread: With the invention of the printing house in 1438 and its spread, reformist thoughts of thinkers became widespread quickly.

The Basis of Mercantilist Thinking

According to Mercantilist thought, the power of a country increases with the wealth of that country. The amount of valuable mines which that country has is the magnitude of its wealth. In that case, the goal of a state should be the politics that increase the input of valuable mines. As a result of this thought, economic activities came into prominence, being wealth became a goal for countries.

What is Cryptocurrency?

Crypto means ‘a person who adheres or belongs secretly to a party, sect or another group’; currency means something (such as coins, treasury notes, and banknotes) in circulation as a medium of exchange. The word cryptocurrency created by combining these two words, means encrypted currency. Cryptocurrency used via the internet is a virtual currency that is not bound to a central authority. Individuals or institutions can spend or earn money just as they do with real currency. Cryptography is the deciphering of messages in secret code or cipher; also: the computerized encoding and decoding of information. Reaching and capturing the stored data created by cryptography is quite difficult.
There are a few kinds of cryptocurrencies today: The most known is Bitcoin.
Litecoin, Namecoin, PPCoin, Ethereum, Dogecoin, Devcoin, Primecoin are also other cryptocurrencies that make a transaction on the internet.
Their secrecy stems from the transactions that they make on the internet. In other words, they are not circulated on the market physically, like Dollar or Euro. Their value arises from that people acknowledge the cryptocurrency as a barter item. Their value is determined according to supply and demand conditions.
Founded by Satoshi Nakamoto who is still not known whether he is a real person or not,
Bitcoin was the first of cryptocurrencies and was founded limited to 21 million units. Around 16 million units, Bitcoin was circulated on the internet until today. As of today, 1 Bitcoin is equal to $3921. Bitcoin can be divided up into 8 steps. Its one millionth (0,00000001) is called Satoshi. Calculated how many Bitcoin is circulated, we see that there are more than 62 billion dollars. For making a comparison, I should indicate that there are 1,5 trillion dollars circulated in the market.
Individuals can store their money via the virtual wallet that they create on the internet and make transactions via these wallets.
The most important thing that distinguishes cryptocurrencies from real money is that individuals don’t need to share their identities to make a transaction.
The most superiority of cryptocurrencies from others is that they are not bound to any central bank of a state; therefore, they are not influenced by the economic situations of states. Besides, because the accounts created by cryptocurrency are not known by whom they are created, and they can’t be controlled any authority, the systems are being open to every kind of illegal financial activity.
Suppose you will buy something on the internet, and you need a cryptocurrency account to purchase. First, You need to create a virtual wallet. Encoding the wallet is very important because, in case of no encryption, the wallet will be open to theft. After this stage, it is possible to make a transaction via cryptocurrency. You need to buy this virtual money from a website that sells and put it to your virtual wallet. Then, you are making your payment. When you make that kind of payment, whom, when, how much money you paid can’t be followed. In the same way, when another individual makes a transaction to you, it can’t be controlled.
On the ground that it causes to illegal money transfer, cryptocurrencies are not welcomed by governments. But, the usage of cryptocurrencies is increasingly growing.

Value, Value in Use, Value in Exchange and The Paradox of Value

Value means the utility of a commodity. However, according to Adam Smith, the word value is used in two senses, These are explained below.

Value in Use: It is the satisfaction which an individual obtains from the use of a commodity. For example, water has a huge value in use, because it quenches the thirst. Life is impossible without it. The quality of water is the value-in-use of water.

Value in Exchange: It is the amount of goods and services which we may obtain in the market in exchange of a particular commodity. In other words, it is the price of a particular good which can be sold and bought in the market. For instance, if two kg of potatos can be obtained in exchange of one kg of carrot, then we may say that value of two kg of potatos is equal to one one of carrot.

The Paradox of Value (Diamond-Water Paradox)

Undoubtedly, water has a more utility than the diamond. In that case, how come the water is cheaper than the diamond?

Economists who realised that paradox deduce that the value can’t be explained by the utility. Then, it was understood that the paradox which was encountered here stems from the confusion between marginal utility and total utility. After the principle of marginal utility had come to existence, it was said that the value of a commodity is determined by not its total utility, instead, it is determined by its marginal utility. Because the production of diamond is difficult and it is found scarce in the earth surface, its marginal utility, hence, its price and value in exchange is high. But, its value in use is low.

On the other hand, even though the water is a vital ife-sustaining need, its marginal utility, hence, its price and value in exchange is low because it is found plenty of water in the earth surface. But its value in use is high.

What is the 'Law Of Diminishing Marginal Utility'?

As the quantity of a certain consumed goods increases in a specific term (when the consumption of other goods are fixed), marginal utility, which each additional unit of goods alter the total utility, gradually decrease. This is called the Law of Diminishing Marginal Utility.

In a situation that the Law of Diminishing Marginal Utility is valid, in the time that a goods or service is started being consumed, marginal utility starts decreasing from the first point while total utility is increasing at a decreasing pace. The relations between Total Utility and Marginal Utility can also be summarized as seen on the below.

MU makes an impact on the direction of TU. As a consequence,

• While TU is increasing, MU is always positive.
• While TU is decreasing, MU takes negative values.
• When TU is maximum, MU is zero.

(These consequences can be found out by checking on the chart below)

Example of Diminishing Marginal Utility

Suppose an individual who is quite hungry. She can buy a slice of pizza for $2. But, she buys five slices of pizza. She eats the first slice of pizza and gains certain positive utility from eating the food. Because the individual was quite hungry and this is the first food she consumed, the first slice of pizza has a high utility. While consuming the second slice of pizza, the individual’s appetite is becoming satisfied. She is not as hungry as before now. So, the second slice of pizza gives a smaller utility compared to the first. The third slice, compared to the before, holds even less utility because the individual is now not hungry anymore.

In fact, the fourth slice of pizza has given a diminished marginal utility as well, as it is difficult to be consumed because the individual experiences discomfort upon being full from food. Finally, the fifth slice of pizza cannot even be consumed. She is so full from the first four slices that consuming the last slice of pizza results in negative utility. The fifth slice of pizza refers the decreasing total utility and negative marginal utility that is experienced upon the consumption of any good. It is shown on the figure with arrows.

What is an ‘Increasing Opportunity Cost’ and 'Opportunity Cost'?

Increasing Opportunity Cost

The production possibility frontier (PPF) is a curve showing all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

I will explain ‘the increasing opportunity cost’ on the production possibility frontier which is below.

The PPF is concave to the origin. It is because in order for producing a commodity more, it should be given up producing another commodity in an increasing amount.

Let's consider the point A on the figure (produced 28 mobile phones, 10 cameras). In order for producing 10 more cameras, it has to be given up 4 mobile phones. It is indicated point B on the figure.

When it is moved forward point C, it has to be given up 6 mobile phones in order for producing 10 more cameras.

On the point D, it has to be given up 8 mobile phones in order for producing 10 more cameras which are same quantity increasing on each point.

As it is seen on each point, in order for having output of 10 more cameras, it is sacrified mobile phones an increasing quantity on each point. This is called 'Increasing Opportunity Cost'.

Opportunity Cost

Needs of human being are infinite. But, goods and services produced in order for satisfying infinite human needs are always scarce. In other saying, there is an imbalance between the quantity of goods and services produced with the intent of satisfying infinite human needs and finite natural resources. It is defined as the Law of Scarcity.

Because it is not possible to satisfy infinite human needs with finite resources, satisfying of some needs are needed to be given up or delayed. At this point, the logic of opportunity cost comes up. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action which is more beneficial.

An Example of Opportunity Cost?

Suppose you have 1 million dollars under-the-mattress saving. You have two options to use the money.

Option one: You can invest your money to deposit account with %10 annual percentage yield.

Option two: You can start your own business with %20 annual percent gain.

But, you don't have enough time and energy to start a new business. So, you are investing your money to deposit account with the %10 annual percentage yield. The opportunity cost of investing your money to deposit account is the %20 annual percent gain you could have got for starting a business.