Institutional Economics

Institutions - rulet of the game that not moral not internal, certain rules with external sanctions, certain organizations

Institution as a variable – institutions may differ.

Institutional system – set of institutions which in some way affect behavior or actions. These institution systems are influencing standard of living.

What else affects standards of living?

• Natural resources (resource scare, dutch desis – your currency is to strong, resources are to important for economy, it’s hard for productions, to much money for the government,) Natural resources are not indispensable.

• Location – difficulties in transportation, in china coasts developed faster, Silicon Valley, people have to move to better places, if mobility is hampered it is bad.

• Productive actions – innovations, North and South Korea. West and East Germany. Poland – Spain. There is no one good example of socialism.

Gold standard – hyperinflation was impossible, debase money (reduce amount of gold in money) – inflation 3-4% per year. Now, there are no physical limits. French revolution – huge inflation.

What is the solution?

• Dipolitisation of money – you take the power from the politicians.

  • You may introduce a currency from another country. Panama – dollar, Montenegro – Euro.

  • Currency boat – you can copy the exchange rate to another currency.

  • Currency union – one bank many countries.

Independent central bank is dangerous but it is still the best idea.

• Structure

  • Informal institution (family, friends)

  • Formal institution (state institutions, laws, legal firms)

Informal institutions were most popular in the past as a form of governing power. Modern system – formal institution.

Mafia is similar to the government.

Formal institutions:

• Legal framework (law; criminal law – defines certain actions as crimes, how repressive it is, crimes against the state(start your own company, print a newspaper) )

Types of organizations:

KGB – political police,

Mass coordination:

• Market – mass and regular transactions (if you have enough freedom)

Karl Marx

• Corporatism – gilds –

Consequences and causes of the welfare state

Government expenditure as one of the measures of the government intervention in the economy.

There is no more fundamental thing for the economy than the role the government plays in it.

There are many ways to measure the role of the government in the market:

• Index – Fraser Institute Index

• Ownership

• Intervention

Definitions

There are two main industrial structures of public finance:

• The general government sector consists of all government units and all nonmarket nonprofit institutions that are controlled and mainly financed by government units

Definitions

• Budgetary central government

• Non-budgetary funds (social security funds)

• Local government

50% Budgetary central government

100% General government

700 bilion zł – expenditures of polish government

• So-called tax expenditures – 66 bilion złotych

• In nominal or real terms

• Corruption and informal sector

• In absolute or relative terms

Good deflators - rational deflators – let say you produce computers in one year you produce 10 computers, for 10 dollars, next year you produce 15 computer for 12 per unit.

General government expenditure in developed countries in a historical perspective (% of GDP)

Definitions

Welfare state = social expenditure

Social expenditure = social transfers = social protection, health and education

Social protection = old-age pensions + invalidity pensions…

Why is this so interesting?

Social expenditure responsible for the differences in the government expenditure.

Consequences:

Social expenditures influences growth.

Rahn Curve 1

Explaining the Impact on Growth

• Inefficiency of government in providing goods and services (government intervention in these markets)

• Redistributive aspects of government activity (secondary distribution)

  • It discourages good behavior – labor and work, if you don’t have any incentives you won’t go to work. It encourages just to get those privileges. Rent seeking – is start to made some actions to receive help from the government.

  • Some parties are not encouraged to pay taxes

  • disincentive for saving if you are getting medicine and pension for you.

• The nature of financing social expenditure (the other side of the two above mentioned factors) all benefits have to be financed by taxes,

1. Structure:

-the legal framework

- the system of organization

- the mode of coordination

2) Dimensions

- Political system (all the institution, execution of political power, organizations of political power, electoral law)

- Economic system (institution that strongly influence economic behavior, earning money, saving, choosing your job, property rights, various types of enterprises )

- Civil society (3^rd sector, neither the state nor enterprises, workers are important they organize, freedom of association, pressure groups; ideological and lobbyist(they are want to get protection and subsidies, more anti competitive laws, anti-state groups), )

What organization is indispensible for the state:

• Police without police there is no state

Government – has monopoly in physical protection.

There is a lot of private contractors in army.

Essence of communism is no private ownership and private business. You need a lot of police to do that.

Subsidies always require more taxes or capital.

Property rights

• Controller rights (the right to fire something)

• Cash flow rights (you have right to obtain something)

What is characteristic for government owned companies: controller rights (government workers,). It is not part of competitive markets. There are no incentives. If there are financial incentives this is bribery. They don’t care how much money will be paid to the government.

White elephant – prestigious projects that don’t make any profits but they are very prestigious for the government.

Conclusion: avoid state ownership – there is no incentive.

Concentration of political power is dangerous.

Nomenclature principle – they are not chosen by members, they are nominated.

The main dimension of political system – the concentration of political power, how repressive is the system, the extend of political power (this includes whether private property is allowed).

Rule of law – refers to how the law acts, does the state acts mostly through law or through political police, if the state acts through political police,

Two concepts of the rule of law:

• Procedural (if the law is such that allows people to plan their life their actions, the law is not chaotic, the law should not be retroactive; you should not be punished on your acts, police is used against the law)

• Substantive: Clarity and consistency (law should not require something that is impossible, quality of the law, modern notion of the rules of law )

Those two have to be fulfilled for the law to be good.

Procedural features are important but not sufficient; nobody should be over the law, people should be equal to the law. There will be some individual dose.

Political succession – how do people in the government change,

There are 4 mechanisms of political succession: Hereditary (king to son, examples: Saudi Arabia, Cuba, Syria) Monopolistic organization: Organization has monopoly of power you have two types of organizations that have power in a country: party state ( you create an organization, you have a dual state, they exercise power, ministries, various commissions, ultimate power is in with the party) army (competition within an army, huntas, cliques, ) Chaotic – chaotic succession, one time army one time party, always changes Elections – political competitions, pluralism, you have to be able to organize party groups. General elections require certain democratic things: personal security, access to mass media, parties are allowed. There are two groups: Nondemocratic: Hereditary, Monopolistic organization, Chaotic Democratic: Elections

Theory of rational voter – self interested, what impact would it make if I would vote; it won’t change anything, People vote because of moral obligations.

Economy:

Socialism – monopoly of the state ownership, you have two types of economic system, what are feasible

D- Democracy

C- Capitalism

S- social economy – monopoly of state ownership

Non-D – non-democracy

1. D, C - may exist

2. D, S – there is any.

3. Non-D, C - may exist; north Korea some years ago, China makes a transition to this, XIX century systems – UK,

4. Non-D, S – possible

D,S - People would have to vote for the abolishment of private ownership. People should be allowed to travel, they would see better life but they would still vote for private ownership. You can not maintain democracy with socialism.

Quazi socialists, mixed systems – they are full of problems, lots of foreigners.

Capitalism:

1)dominance of private ownership (largest privatization- Italy, France, Britain, )

- structure (crony capitalization – family of president, concessions, extra protection, exploit other people, courts are not independent, you cannot compete. Free market – entrepreneur capitalism.

- level of protection (you can have laws but you need protection, sometime the level of protection is negative, predatory states, fade states (the state is not a protector, the state officials are robbing you) Dominicana vs. Haiti.

2)extent types of regulations, labor regulations, minimum wages, there are some regulations which are clearly detrimental - anticompetitive regulations, regulations which limit flexibility of a market (Spain vs. Britain, France – high minimum wage, low skilled people are not employed) Hysteresis – the longer you are unemployed the harder it is for you to get a job. Poorer countries have more harmful regulations – they are poor because of that. You have developed countries, you have to sectors in Japan, one productive one not, Japan wanted to restrict production of cars and consumer electronics – now it is good, services are very poor, in services you don’t have competition, low effectiveness.

3) Monetary and Rate of Exchange, Two monetary systems: based on gold and fiat money(money supply and inflation). If you are under gold standard you cannot print money. Hyper inflation. There are 22 ways in which moderate inflation can harm the economy. Fiat money cannot be protected in any way. Politicians may be affreid of introducing taxes so they use hidden taxes – inflation. Independent central bank – is the answer, you need professionalists. You import other countries money - dollars and euro. Third you enter monetary union. Forth – currency board – you nominally preserve your currency, but money supply depends on other money. Central banks from times to time made huge mistakes.

Summing up: you have to kinds of money fiat and gold or silver based. You moved to central banks. They made mistakes. There is no perfect solution.

4)The size of the government, what is the budgetary spending relatively to GDP, spending -> taxes GDP, overall level and composition, you may have different level but the same structure. If you exceed certain level – 20% - you are lowering the rate of growth. There are channels. Before WWII no more than 10%, now it is 40%-60% in developed economies, huge change in relatively short time, transfers in cash transfers in kinds. Transfer in cash – pay as you go – money from taxes are immediately spend on pensions. One you start is difficult to stop. Transfer in kind – everything what is called free – education, health care. In XIX century social spending was 2%. There were unwritten rules, there were some unwritten rules, people should take care of themselves, then the state should take care of people. Stracture of taxes – every tax is harmful. The taxes that don’t change behavior are the least harmful. There are very few of them. Lump sum is good. Consumption taxes, property taxes. Composition of taxes matters. Harmful – dominated by direct taxes.

To sum up:

• Private ownership – the most important, cronic capitalism – bad, extensive anticompetitive regulations – bad, monetary system that leads to inflation – bed, each of this options is able to harm the economy, Equal treatment of entrepreneurs, competition, monetary regim that gives stability, modest ratio of taxes to GDP, people usually don’t like competition and they like others money – that why it is so hard to maintain a good country.

Individual decisions, actions – how much to work? What about innovations? Education?

Institutional system  actions  O

What is important for the conditions of life:

• Inflation (high inflation is dangerous for poor people, the rich have more options to protect their money)

• Unemployment (I pretend to seek job), employment, non-employed (you are retired)

• Long term growth

• Environment: pollution, the impact of economic impact on environment, socialist are much more distractive to environment than capitalists

• Inequality – equality, would you agree with the statement the lest inequality the better? Two concepts of equality: inequality of situation (inequality of income, ), inequality of opportunity (people of similar characteristics should have equal chances to achieve sth, ) Countries that are well developed have huge differentiation of incomes. If you smoke, you destroy your potential, education.

The income inequalities and power. Absolute Poor - People cannot afford certain goods. Relative poor – people that are beloved 40% of something are poor. To reduce poverty in poor countries - infrastructure, economy. Relative poor – higher taxes may be introduce to reduce it.

To have less regulations is not more expensive.

Actions which involve some elements of choice, how much to say? Whether to go on social benefits? What kind of education to get? What to buy? Explaining actions is to explain choice.

• Saving or investing

• Rubbin less or more (disractive action)

• Productive education, not negative education

There are 3 types of impact of institution to actions:

• Situational

• Selective

• Formative

There are 3 types of impact of institution to actions:

• Situational -

• Selective

• Formative

(Situaton,Dispositions) – elementary level of an individual  Action

Situation – is every situation, there are options, on an extreme situation you don’t have options.

Disposition – individual characteristics: cognitive - how people process information into decisions, motivational – what factors can be called motivations, how utility is defined,

Action is situation and disposition.

Level for decision making.

Some have more talents.

How this differences affect performance?

Formative – it is a hypothesis if two different nations would live under a different regulations they would change their coulture. Homo sovieticus – individuals that leaved under socialism for more than 50 years will expect something else from their parents. However, people will change their behavior under different circumstances . Cognitive dissonance – people will seek for harmony, people seek to reduce dissonance. Normal people don’t like to kill other people. Soldiers do kill other people. Ideological justification. You kill people for higher purposes – patriots. You create an image of an enemy that is a monster. Killing people is wrong. But killing monsters is ok. If you radically change the economy, people are facing very different incentives. Not all of them but slowly change their behavior, it is not so important if systems change people.

Institution system and long term economic growth

The differences in upward social mobility and economic growth

Differences in social mobility upword social mobility and economic growth, equality of opportunity. – essay topic for the end of may – 3 not enough 30 to much.

GDP

GDP per capita

GDP x (1 + r₁)….

300 hundred years ago everyone was poor, the masses were poor, differences in china were much slower than they are right now, continuous growth. It is modern phenomenon. This progress was very slow. XIX Poland was backward country in XIX century. Poorer country are not catching up because they are poor. XIX we have modern economic growth. Japan – first country with modern economic growth. One of the greatest history – why not India? This is about burocracy. India was not converging in fallowing changes. China has had a very unhappy history, it was at decay. China was stagnating. China missed a chance for democracy. China started to converged. You can not grow at the peace of 20 %. Then Africa – domestic system was poor before. They were based on slevery. Arabs were not very nice to local population.

You can’t be successful if you can’t have good economy.

Tt – growth through time

T= 1,2,3…………n

1. Systematic forces – defined in many ways. Growth theory – employment is it stagnationg growing or declining, capital – physical machinery(increase of capital is called investment), productivity – you measure labor productivity; how much machinery you use. Why countries differ in the level of employment. In the longer run you can’t grow only relying on employment. The only factor which can increase growth – is the productivity.

Systematic forces:

• Innovation based – more or less like productivity, it is usually defined as an innovation, wall-mart is a huge supermarket, is based on new business model, and marchal exploitation of working force. Innovations do not have to come from their countries. Innovations that come from other countries are called – technology transfer, transfer of foreign ideas to be apply at home. This may be the reason why poor countries catch up. Countries which are on the forefront of knowledge and technology cannot rely on other countries. This is why poor countries are growing faster. China is relaying of technology transfer. The USA cannot because there is no better country. Sectors differ in an average productivity in poor countries. Productivity is low. Once they start and apply new technologies.

• Situation specific and transitional growth mechanism – why situation specific? – there are in some situation but not in another. Under socialism certain sectors where unproductive. Everything what was tangible was prodactive. Services was not productive. Speculations was useless. Services were unproductive.

2. Causes of shocks

Systems witch block innovations:

• Systems which block investment, they keep investment at a very low level, many innovation require some investment, innovations could not be introduced

  • Low investments

  • Low savings - savings can be important from abroad, you can borrow, there is limited mobility of savings around the world, It is good to open for foreign investments, other countries are more susceptive, this is why it matters. Which country has the higher rate of savings in the world – China. In china it is almost 50% it is almost unbelievable. They have huge savings. They can afford large infrastructure policies. If you have to much capital. In Poland we have 20%. One of the motives to save is that you are afraid. You may be ill, some disasters. Why you should save if you are protected by the country? Losers who are subsidized – national champions.

• Specific to innovations -

Longer term growth triectory differ in the strengths of growth.

The second different is magnitude and frequency of growth.

Slowdowns don’t go beyond regular recession.

The systematic forces – they operate all the time or most of the time, although with different identity.

Remember that you should different level of causes.

Employment, capital and productivity.

Employment - how many people are working and how many hours they are working. One of the differences between the US and the rest of the world Americans work longer. People response to the incentives. Taxes are the incentives. E. Prescott has written the paper on working hours, the main reason for it is taxes. In country where work is taxed more people work less.

Capital – human capital, machinery, skills, labor, social capital, trust, physical goods.

Productivity – labor productivity, more sophisticated analysis purely quantitative thing. Total factor productivity by the definition captures all the changes. TFP – TOTAL FACTOR PRODUCTIVITY.

In the longer run productivity is the most important one.

What is behind this factors – institutions.

Institution system and economic growth – suggested paper to read.

If you have a lot of buorocracy you decrease productivity. They may create negative productivity. In China many people work in collectivists farms. They introduced simple incentives. The more you work the more you get.

Systematic forces:

• Innovation based vs. situation specific

Forces responsible for shocks

Dominicana and Haiti – they had the same GDP but Haiti state was not performing its basic function – protection. It was risky to invest there.

Mexico and Spain – Spain has 50% GDP, Spain opened to foreign investment, Mexico suffers three shocks, analysis of shocks is important.

Shocks or crises.

Crises are associated with capitalism.

Four types of institutional regimes:

• Socialism – by socialism – not Sweden but Soviet Union. State ownership means power. State ownership total power.

  • Qazi- Socialism – bit more private ownership, commerce trade, services, In social and quazi-social you can’t have full democracy. Most of oil producing countries. Libya, Saudi Arabia, Bahrain. All Arab countries.

• Non-socialism – non democratic regimes, socialism includes political power. In non-socialist regimes there is private ownerships. Private ownership have independence.

  • Normal capitalism – typical share of government enterprises is not higher than 20% something like OECD capitalism. We have various systems.

  • Crony capitalism – you don’t have dominance of state section. Within this private sector there are limited privilieged group. Some people are privileged because of power. Monopolistic position is allowed. There are modern sectors – mobile phones. You can get easily politicized. Monopolistic position by political influence. If there is a dispute people privileges have right. Cheap credits – banks know that if privileged person is less risky because it is protected by government. Crony capitalism is against competitiveness.

The biggest shocks has occurred under socialisms – Russia 1930. No opposition. Feedback was poor.

Under socialism there was no possibility of proper usage of credit. Poland went bankrupt in the 1980s. Romania, Bulgaria.

Cheap credit lead to over borrowing.

Types of crises:

• Fiscal – when financial market strike, it is reflected in interest rates. Reasons: systematic overspending, systematic overspending, expansion of the welfare state, rescue operation are not so bed but money may come back. Syndrome of to big to fail – they have too much money, they offer cheep credits. You would have to have very efficient procedure. Fiscal crisis cause deep recessions.

• Financial – there is a link between fiscal and financial crisis.

• Crisis in enclave – non-private institutions connected with state power.

Neo-liberalism, greed,

If the interest rate is higher than the rate of growth the country will bankrupt.

Debt/ GDP

Reforms: reducing spending, if you increase taxes, government consumption, entitlements, social spending, welfare, postponing retirement case, sickness benefits, reduce growth to spending.

Financial crisis – there are located in financial sector.

Financial sector

• Financial institutions – financial intermediaries, financial firms

  • Commercial banks, deposit taking institutions – they take various kinds of deposits, they paying some interests to other people and institutions, financial conglomerates, they are found from deposits

  • Non- banks; - insurance companies, - investment banks, hedge funds, they are financed by lending from financial markets

• Financial markets

  • Bank-based system

  • Market based system

There are different risks, there are different advantages as founded system. First we have diversification. With the founded system.

If there is no recession there is no financial crisis. Approximate reason for financial crisis is the previous boom. If credit is growing too fast there are certain risks. Asset bubbles. Financial assets like stocks. Housing bubbles are more dangerous.

Most serious financial crisis is connected with financial markets. Currency crisis – value of money collapses. Catastrophic devaluation. Currency crisis have happened in many crisis. The recent crisis Asian crisis 1989, the market had fixed currency exchange. The same was for borrowers. It is the nature of investment banking is that it is easily changed. The price is collapsing. Excessive borrowing. Fixed rate of exchange. In floating there are no abrupt changes. If chronic capitalism may be a cause as well. The same goal is the state of institution. In 1989 Balcerowicz negotiated foreign debt reduction – it decreased by 15%.

Raw materials are usually set in foreign prices. Prices rose faster than wages.

Financial crisis – is the crisis in financial sector, reasons; booms, debts , connected with recession.

BASIL II – what banks have it is around 8%.

Assets differ in risk. Some risk assets would require more capital . The higher capital the less profit. Capital ratio – is around 8%, you put various weights and calculate it. Someone decided that morgages are not risky but they were.

• Banks have fractional reserves,

• Procyclicality

How to reduce risk of serious financial crisis – paper by Balcerowicz

http://www.sgh.waw.pl/katedry/kmsp/materialy/how_reduce_risk_crises.pdf

31 of May – zero exam – 212 room (open questions, no encyclopedic knowledge required)

• Many types of goods, scarce goods prevails , we have to pay for scarce goods, most of goods are scarce.

• People live in groups

How to distribute ownership of goods:

• Ownership laws – property law

Two different kinds of goods:

• Consumption of goods,

• Means of goods – those goods that produce other goods, like machinery,

Nature of some objects cannot be common – tooth brush.

One can distinguish two types of common ownership of goods:

• Voluntary – based on self selection, not force, some monks live like that. Percentage of people that agree to such ownership rights is less than 2%. In socialism there was not full common ownerships. In block of flats there were common kitchens – people that eat together should be friends.

Ownership in respect to production goods. Very controversial; socialism vs. capitalism. Early belief of socialism. Social was very strong influential power. There were a lot of intellectuals after the second world war that supported it. Humanist only this bias. Engineers and mathematicians are against it.

Read Hayek, and R. Nozisk if you are interested.

Private ownership. There is no such a thing as a human nature.

Private ownership – was a source of degradation to man and prevents economic growth. Adam Smith in XVIII century proved it wrong.

Socialism was very influential. It was first established in Russia and then spread.

It is useful to distinguish to variables – ownership laws.

What is the relation in those two variables?

Property law

• Liberal – stock market, family enterprises,

• Socialist – property law, establish one type of enterprises, former Yugoslavia preferred form was workers manage – workers elected managers. Yugoslavia was deviation.

Ownership structure

• Ownership structure (if those criteria are fulfilled OS, PL) People usually to prefer to have more control over their money than less. Capitalism is based on choice. You don’t have to force people to build capitalistic democracies. Capitalism is based on choice.

• (socialist owner structure and you introduce ownership structure and you don’t privatize) State control enterprises are less competitive. They cannot compete. There require subsidies.

• (socialist ownership and socialist ownership structure) Expropriation – people are deprived of their ownership. Private entrepreneurship is crime. There are no voluntary introduction of socialism.

Institution change

Who can be insolvent?

• Private people

• States

• Businesses

• Local government

What has happened to buncrapcy law?

What happened if debtor couldn’t pay 2000 years ago – he become a slave.

XIIX – imprisonment

Corporations – chapter 11 – gives a corporation to initiate buncrapcy under the court supervision

Insolvency

Commodity money – gold standard – fiat money(can be produced in any amount)

Fiscal contribution

Institutional system – level of the country

Church

There are two types of changes in institution systems:

• Intra-systemic – only one – usually.

• Transitions – more than one

Socialism:

• You don’t have button-up change

• Central systems are devoid of feedback system.

• They do not change main features.

• They are inefficient they can’t remove basic weaknesses of the systems.

Entrepreneurial capitalism

• Individuals have property laws which involve power

• There is room for spontaneous change

• This involves mechanism with feedback

• There is room for institutional inventions

• Market is not perfect, because people are not perfect.

• Errors of the market – even free markets, which are corrected sooner or later.

• Conglomerates are removed by more efficient smaller firms – in the US.

• Financial conglomerates are not, doctrine of too big to fail.

• Certain dysfunctions of markets are caused by the support of governments

Transitions – lead from one of a system to another one.

Pre capitalistic societies –> Capitalism

Adam Smith – he has shown virtues of the free economy.

• Socialism and quasi – socialism (Russia 1917, China since 1940s)

• Peoples democracies (East Germany, Moldova)

• Socialism ->

Russia

• In Russian history we have two stages.

• Some people had more freedom, convertibility of money, right to travel,

• Second Era was of Putin, Hodorkovsky affair, he amased great fortune and wanted to create opposition party, Putin imprisoned him, Then he said to oligarch, you can have your wealth but you cannot be active in politics. The media freedom, you don’t have full suppression of the media. Not a typical social dictatorship – Ukraine. More democratic than Russia. Georgia – market economy, under Shakashvily.

• It takes couple of years to privatize company

• Shock therapy

Observations:

• There is no democracy without capitalism

• Whenever you have socialism you don’t have capitalism

C0 – initial conditions , E – external conditions (events), P – policies

[C0, E, P] ->

Policies:

• Pr – reforms there are good or bad changes thus, they stimulate or stop growth, changes in the ownership structures, deregualtions or regulations, setting new institutions – stock exchange, new regulatory…

• Pnr:

  • – fiscal – what is the shape of annual budget, what is the rate of tax to gdp, do you tax work or property,

  • – monetary – legislations, regulatory bodies, public institutions have to do two things or they shaped microeconomic environment, interest rates are very important. Prices in the economy – horizontal prices – prices with influence more other prices – gas, oil, rate of exchange it affects prices of all exchange goods. Your export becomes cheaper – you are more competitive. Basically you have two regimes - you can’t make change the value of your money – in Euro zone – you can’t change value of Greek currency. If you belong to monetary union, you can’t have many central banks, you have official interest rates for all, but they can be too law for some countries. Credit is too cheap. Prices are growing. You can’t import houses. That is why they prices increase. You can import tradables. If everything is too expensive you have a bubble. Boom years are very pleasant. Usually there is an end to it. Not every ends in a bubble. If a country is a member to a monetary union. Imports are growing faster. Current account deficit. Import is growing faster than export. Prices are rising faster than other sectors. You cannot continue barrowing, owners of capital demand more interest because of interest. You cannot devalue your currency. What are the possible solutions for Greece: - cut public spending – taxes but it is dangerous they may hamper economic growth.

Conclusions:

• If your tax to GDP is 50 percent further increases in taxes are not good for economic growth

• Cut spending with do not encourage to work - replacement ratio, incentives are about ratios.

• Replacement ratio – ratio of two, income from not working to income to working. Income from working and not working cannot be the same. Most problems in words come from excessive spending. Kennsienism – you focus on demand not on supply. There is no country that would be successful fallowing this philosophy. You just give money to people. Demand is growing.

• If your taxes are high you focus on harmful spending. Harmful spending don’t encourage to work, for example some kinds of unemployment benefits. Social trap – you have weak incentives to work, and get benefits for ever. Skills are declining. Unemployment should be short. Hysteresis - the longer you don’t work the worse your skills are and the lower chances for employment. Increasing minimal paid is worse. If you have low skills, you contribute law to earnings of a company. So they want hire people that give more income that they earn. If it is impassible they will be unemployed. You identify which expenditures hamper incentives to work and cut them. Replacement ratio – how much money will you get if you will stop working.

• Internal devaluation, rich uncle – Germany. German and French banks bought Greece bounds.

• Supervisory Policies –

In china they introduced incentives for efficient work. They gave plots to small farmers. They dissolved small egalitarian societies.

C1 –

Initial conditions mater but they are not detrimental for the outcome.