The throw-away economy

broken-tin-opener

The throw-away economy refers to the prevalence of consumer goods which only last for a short period of time. When they stop working / no longer relevant, we throw them away and replace them with new goods.

This is in contrast to an economy where resources are more scare – and if a good is purchased, we expect to make it last a considerable time – repairing if necessary.

For example, in the past, if our socks had a hole, we would sew them up (‘darning’ your socks). But, these days, if socks get a hole, it is more convenient to throw them away and buy some cheap socks instead.

If average wages are £10 an hour. Why spend 30 minutes sewing your socks, when you can buy a new pair for £3? In the past, wages were much lower compared to prices. If you only earnt £1 an hour, then it is worth sewing your socks to save buying a new pair for £3.

Therefore, rising real wages make a throw-away economy more likely.

Repair shops

TV repair
TV repair. Photo Katie Chao and Ben Muessig – Flickr

 

In the past, there were many TV repair shops – if your tv or electronic goods broke down, you would try to have them fixed. In today’s world, if a TV broke down, we would be liable to throw away the TV and buy a new one. It is not so expensive and electronic goods are always offering new features. After a couple of years, your electronic goods can feel ‘outdated’ pretty quick. I have a stack of CDs I don’t play in CD players any more.

The problem of the tin openers

broken-tin-opener
Broken tin opener from a Pound Shop

 

The inspiration for this post has been the number of tin-openers we have got through in the past 12 months. We have bought four tin openers, all of which have ceased working after a short period of use. In each case, we have thrown it away and bought a new one. The first two were from Sainsburys and Asda. They cost about £4 and looked fairly robust. But, after a few weeks, they stopped working properly, and then failed completely. My lodger uses the tin-opener most, so I told him since I paid £5 for a tin-opener and it stopped working, he might as well go get one from a Pound shop. The first tin opener did open one can of Heinz soup then it snapped. 99p to open one tin! That is called a false economy!

He took it back to the 99p shop and the workers laughed. They obviously got returned tin openers all the time. He got a replacement, but that broke straight-away, even before opening a tin.

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Sectors of the economy

sectors-of-the-economy

The main sectors of the economy are: Primary sector – extraction of raw materials – mining, fishing and agriculture. Secondary / manufacturing sector – concerned with producing finished goods, e.g. Construction sector, manufacturing and utilities, e.g. electricity. Service / ‘tertiary’ sector –  concerned with offering intangible goods and services to consumers. This includes retail, tourism, …

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Different types of goods – Inferior, Normal, Luxury

normal-luxury-inferior-good

A list of different types of economic goods. Income elasticity of demand and types of goods Income elasticity of demand (YED) measures the responsiveness of demand to a change in income. Normal good A normal good means an increase in income causes an increase in demand. It has a positive income elasticity of demand YED. …

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The broken window fallacy

broken-window-fallacy

The broken window fallacy states that if money is spent on repairing the damage, it is a mistake to think this represents an increase in economic output and economic welfare. If money is spent on repairing a broken window, the opportunity cost is that individuals cannot spend money on more productive goods. The broken window …

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The relationship between economics and politics

Readers question: Why cannot politics and economics be seen in isolation?

Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties.

In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide.

Houses of Parliament london

In practice there is a strong relationship between economics and politics because the performance of the economy is one of the key political battlegrounds. Many economic issues are inherently political because they lend themselves to different opinions.

Political ideology influencing economic thought

Many economic issues are seen through the eyes of political beliefs. For example, some people are instinctively more suspicious of government intervention. Therefore, they prefer economic policies which seek to reduce government interference in the economy. For example,  supply side economics, which concentrates on deregulation, privatisation and tax cuts.

On the other hand, economists may have a preference for promoting greater equality in society and be more willing to encourage government intervention to pursue that end.

If you set different economists to report on the desirability of income tax cuts for the rich, their policy proposals are likely to reflect their political preferences. You can always find some evidence to support the benefits of tax cuts, you can always find some evidence to support the benefits of higher tax.

Some economists may be scrupulously neutral and not have any political leanings (though I haven’t met too many). They may produce a paper that perhaps challenges their previous views. Despite their preferences, they may find there is no case for rail privatisation, or perhaps they find tax cuts do actually increase economic welfare.

However, for a politician, they can use those economists and economic research which backs their political view. Mrs Thatcher and Ronald Reagan were great champions of supply side economists like Milton Friedman, Keith Joseph, and  Friedrich Hayek. When Reagan was attempting to ‘roll back the frontiers of the state’ – there was no shortage of economists who were able to provide a theoretical justification for the political experiment. There were just as many economists suggesting this was not a good idea, but economists can be promoted by their political sponsors. In the US, the Paul Ryan budget proposals were welcomed by many Republicans because they promised tax cuts for better off, cutting welfare benefits and balancing the budget. (1) A popular selection of policies for Republicans.

Economic thought independent of politics

On the other hand, economists who stick to data and avoid cherry picking favourable statistics may well come up with conclusions and recommendations that don’t necessarily fit it with pre-conceived political issues.

Many economists may be generally supportive of the EU and European co-operation, but the evidence from the Euro single currency is that it caused many economic problems of low growth, deflation and trade imbalances.

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Economic goods – definition and examples

economic-good

Definition

An economic good is a good or service that has a benefit (utility) to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost.

economic-good

This is in contrast to a free good (like air, sea, water) where there is no opportunity cost – but abundance. Free goods cannot be traded because nobody living by the sea would buy seawater – there is no point.

However, with economic goods where there is some scarcity and value, people will be willing to pay for them (in some form).

Another feature of an economic good is that if it can have a value placed on the good, it can be traded in the marketplace and valued using a form of money.

An economic good will have some degree of scarcity in relation to demand. It is the scarcity that creates a value people become willing to pay for. It is the scarcity which creates opportunity cost. – For example, if we pick apples from a tree, it means that other people will not be able to enjoy them. If we devote resources to mining gold, the opportunity cost is that we can’t devote this time and effort to growing corn.

Readers Question: Can endangered plant/animal species be economic goods? If so then why?

Dodo_display
“Dead as a Dodo” But, was the Dodo an economic good?

Firstly, do endangered plants/animal species have a value to man?

  • Many endangered plants and species do have a benefit to humanity, even if we are not aware of them. For example, rare plants may hold the key to creating a vaccine for a disease. If we allow the plant to become extinct, then we lose this bio-diversity and future potential to treat human diseases. This is a clear example of how endangered plants could have a very high economic value.
  • It may be harder to make the case for endangered species. You could argue that some reptile on the verge of extinction has little or no value to humans, therefore some might not class it as an economic good.
  • However, others may disagree, they argue that when considering economic value, we shouldn’t just consider narrow human interest. We could argue that we should look at the issue from a less human-specific perspective. We should see all life as having an intrinsic value.
  • Furthermore, ecologists may argue that protecting the biodiversity of the planet should give joy to humans – we should get utility and satisfaction from being guardians of the planet rather than destroyers of life. Therefore protecting so called ‘useless’ species can actually give utility to humans because we can feel ‘good’ about being responsible citizens of the planet.
  • The difficulty is that a strict definition of an economic good says that the value of the good should have some market value and be traded. It is hard to put a value on the benefit of saving a rare species from extinction. But at least, some people would spend money to save a species from extinction because they feel it is a worthwhile act. Therefore, the rare species do have an economic value.

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Life-Cycle Hypothesis

life-cycle-hypothesis

Definition: The Life-cycle hypothesis was developed by Franco Modigliani in 1957. The theory states that individuals seek to smooth consumption over the course of a lifetime – borrowing in times of low-income and saving during periods of high income. The graph shows individuals save from the age of 20 to 65. As a student, it …

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Opportunity Cost Definition

opportunity-cost-definition

Definition – Opportunity cost is the next best alternative foregone. If we spend that £20 on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay. If you decide to spend two hours studying on a Friday night. The opportunity cost is that you cannot have those two hours for leisure. …

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