Crony Capitalism free essay sample

The economic and political environment are chancing faster than ever before. â€Å"Business success depends on managers anticipating and coping with change. To do this, managers must identify the characteristics of the environment in which they operate† (Nellis amp; Parker, 2006, p1). 1. Analysis The effect of government expenditures, taxation, and debt on the aggregate economy is of immense importance, and therefore great controversy in economics (Modigliani, 1987). Many factors influence aggregate demand besides monetary and fiscal policy. According to Keynesianism, desired spending by households and firms determines the overall demand for goods and services. When desired spending changes, aggregate demand shifts. If policymakers do not respond, such shifts in aggregate demand cause short-run fluctuations in output and employment. As a result, monetary and fiscal policymakers sometimes use the policy levers at their disposal to try to offset these shifts in aggregate demand and thereby stabilize the economy (Sloman, 2005). When policymakers change the money supply or the level of taxes, they shift the aggregate-demand curve by influencing the spending decisions of firms or households. By contrast, when the government alters its own purchases of goods and services, it shifts the aggregate-demand curve directly. Suppose, for instance, that the Italian Ministry of Defence places a â‚ ¬10 billion order for new helicopters with Finmeccanica. This order raises the demand for the output produced by Finmeccanica, which induces the company to hire more workers and increase production. Being Finmeccanica part of the economy, the increase in the demand for Finmeccanica helicopters means an increase in the total quantity of goods and services demanded at each level (Padoa-Schioppa, 2011). By how much does this â‚ ¬10 billion order from the government shift the aggregate-demand curve? The immediate impact of the higher demand from the government is to raise employment and profits at Finmeccanica. Then, as the workers see higher earnings and the firm owners see higher profits, they respond to this increase in income by rising their own spending on consumer goods. As a result, the government purchase from Finmeccanica raises the demand for the products of many other firms in the economy (Padoa-Schioppa, 2011). Because each euro spent by the government can raise the aggregate demand for goods and services by more than a euro, government purchases are said to have a multiplier effect on aggregate demand. This multiplier effect continues even after this first round. When consumer spending rises, the firms that produce these consumer goods hire more people and experience higher profits. Higher earnings and profits stimulate consumer spending once again, and so on (Sloman, 2003). The multiplier is an important concept in macroeconomics because it shows how the economy can amplify the impact of changes in spending. A small initial change in consumption, investment or in government purchases can end up having a large effect on aggregate demand and, therefore, the economy’s production of goods and services (Nellis amp; Parker, 2006). The other important instrument of fiscal policy is the level of taxation. When the government cuts personal income taxes, for instance, it increases households’ take-home pay. Households will save some of this additional income, but they will also spend some of it on consumer goods. The size of the shift in aggregate demand resulting from a tax change is also affected by the multiplier and crowding-out effects. When the government cuts taxes and stimulates consumer spending, earnings and profits rise, which further stimulates consumer spending (Sloman, 2003). Of course, Keynesianism has its critics, most of them conservatives who loathe the idea that government could ever play a beneficial role in the economy. One of the first major critics was Milton Friedman. Although he accepted Keynes’ definition of recessions, he rejected the cure. Government should butt out of the business of expanding or contracting the money supply, he argued. It should keep the money supply steady, expanding it slightly each year only to allow for the growth of the economy and a few other basic factors. Inflation, unemployment and output would adjust themselves according to market demands (Sloman, 2003). 2. Conclusion The process of interpretation suggests at least three findings. Firstly, monetary policy and fiscal policy are examples of a more general phenomenon: the use of policy instruments to stabilize aggregate demand and, as a result, production and employment. Secondly, in many countries economic stabilization is an explicit goal and a political purpose (Nellis amp; Parker, 2006). Finally, it emerges that governments and regulators are second only to customers in their ability to affect companies’ economic value (Krugman amp; Obstfeld, 2000). From the analysis emerges that managers have to able to read and interpret the environment in which they want to operate. In order to achieve company’s goals, it is extremely important to identify the strengths and opportunities and be aware of the weaknesses and threats that can influence the business (Watson amp; Head 2007). At the end of 2008, the world had entered a period of global recession, the analysis of fiscal policies that can influence national economics has become fundamental and of primary importance. In such an exceptional economic situation, there is a limit to what an individual firm can do.