A Dive into the Big Economies

By Mashhood Raza Khan

How do political conditions lay the economic foundation of a country? How can the discovery of oil make a country have the richest royals, or the biggest hedge funds? How can tourism advance an economy at the base level and how it can be totally devastating at times? How can laws in some countries make it the hotbed for the world's richest? How can the deadliest monarch give the status of high-end to its fashion-house? How did Hong Kong become the most capitalistic from a communist nation? How can China be communist and the world's biggest economy at the same time? How can a tiny country in the Middle-East surrounded by its violent enemies be the tech hub of Asia? How can India be a global superpower? How is the UAE shifting from oil-based country to tourism and tech-based country? This book answers a lot more than just these questions.

 

This book does not just contain huge mathematical equations or complex graphs, but analysis of an economy through history, geopolitics, law, and the political order of that country. It contains the concept of economics from the basics through analysis of an economy in its simplest and most intuitive form. 

 

• Language: English
• Publisher: Mashhood Raza Khan
• Release date: Apr 9, 2022
• ISBN: 9798201627645

Mashhood Raza Khan

Mashhood Raza Khan is a student of class 12 at St. Michael’s High School, Patna of batch ‘23, at the time of publishing this book. He’s also a national- level air-pistol shooter and a published author. 

Book preview

FOREWORD

When I started to learn economics, I would get scared thinking that it is complicated with a lot of definitions, complex graphs, and mathematical equations. I was really interested in reading the business and finance sections of newspapers and magazines, but I couldn't understand it completely. It was at the time of the COVID lockdown that I got some free time from my academics and learned about economics, business, and finance through videos at various learning sites. That is where I got the inspiration to write this book.

Economics is not some sort of complex evil monstrosity with multi variables Calculus being the only tool that makes it useful in real-life scenarios. Economics is simply based on reasoning and logic. Simply put, economics is a social science that studies how people interact with things around them. In short, it is the study of human behaviour. There are multiple economic agents who interact and try to optimise. They are basically doing what's best for them-being logical. All the other complicated concepts of economics stem from logic. Logic defines strict principles of validity in terms of rules. These rules can be enumerated in the language of logic.

We all know how the global economy has changed significantly over the past few decades, in the way that it is organised and governed by collaborating nations. In this book I've tried to explain the economy of many big economies individually without using complex maths and graphs, but historical events, political alignment & decisions of the government, inventions, gifts from nature, hard work, and smart people are the factors for the current economic state of an economy.

Economics must be read by everyone not only from the mathematical, conceptual perspective but from the lenses of simple logic to explore what political decisions from the people at the top, and historical events that have led us to the current conditions.

INTRODUCTION:

BRIEF HISTORY OF

ECONOMICS

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Economics in the Ancient World

Economics began during the Bronze Age (4000-2500 BCE) with written documents found in four parts of the world where once existed the greatest civilisations: Sumer and Babylonia (3500-2500 BCE); the Indus River Valley Civilization [parts of modern-day Afghanistan, Pakistan, and India] (3300-1030 BCE); along the Yangtze River in China; and in Egypt’s Nile Valley, beginning around 3500 BCE. Civilizations in these areas learned to make an account through a notation system for crops, livestock, and land on clay tablets, papyrus and other materials.  These accounting systems, arising in tandem with written language, eventually included methods for tracking property transfers, recording debts and interest payments, calculating compound interest, and other economic tools still used today.

During the third millennium BCE, Egyptian scribes first recorded the collection of and redistribution of land and goods. Sumerian traders developed methods to calculate compound interest over a period of months and years. The Code of Hammurabi (circa 1810–1750 BCE), the earliest work of economic synthesis, specifies norms for economic activity and provides a detailed framework for commerce, including business ethics for merchants and tradespeople.

In the first millennium BCE, more detailed written treatises on economic thought and practice emerged. The Greek philosopher and poet Hesiod, in the eighth century BCE, laid out precepts for managing a farm in his Works and Days. Athenian military leader, philosopher, and historian Xenophon in Oikonomikon, a treatise on the economic management of an estate. In Politics, Aristotle (around 350 BCE) took these ideas further and concluded that while private ownership of property was preferred, the accumulation of wealth for its own sake was dishonourable. Around the fourth century BCE the Guanzi essays from China laid out one of the first explanations of supply and demand pricing; the crucial roles of a well-managed money supply and a stable currency. Among key insights was the notion that it was money, not armies, that ultimately won wars.

In Western Europe during the Middle Ages, economic theory was often blended with ethics; few of those writers went into the amount of detail that Ibn Khaldun (1332-1406), Tunisian historian and philosopher, did. In Al-Muqaddimah, Ibn Khaldun analyzes economic issues such as the perils of monopolies, the benefits of division of labour and the profit motive, and the rise and fall of economic empires. Many of his ideas prefigure those of Adam Smith and those who followed him centuries later.

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The Father of Modern Economics

Scottish thinker Adam Smith is widely credited with creating the field of modern economics. However, Smith was inspired by French writers publishing in the mid-18th century, who shared his hatred of mercantilism. Smith took many of their ideas and expanded them into a thesis about how economies should work, as opposed to how they do work. Smith believed that competition was self-regulating and governments should take no part in business through tariffs, taxes, or other means unless it was to protect free-market competition. Many economic theories today are, at least in part, a reaction to Smith's pivotal work in the field, namely his 1776 masterpiece The Wealth of Nations. In this treatise, Smith laid out several of the mechanisms of capitalist production, free markets, and value. Smith showed that individuals acting in their own self-interest could, as if guided by an invisible hand, create social and economic stability and prosperity for all.

Even devout followers of Smith’s ideas recognize that some of his theories were either flawed or have not aged well. Smith distinguishes between productive labour, such as manufacturing products that can be accumulated, and unproductive labour, such as tasks performed by a menial servant, the value of which perish[es] in the very instant of their performance. One could argue that in today’s service-dominant economy, the excellent execution of services creates value by strengthening a brand through goodwill and in numerous other ways. His assertion that equal quantities of labour, at all times and places, may be said to be of equal value to the labourer ignores the psychological cost of working in hostile or exploitative environments. As an extension of this, Smith’s labour theory of value—that the value of a good can be measured by the hours of labour needed to produce it—has also largely been abandoned.

The Dismal Science: Marx and Malthus

Thomas Malthus and Karl Marx had decidedly poor reactions to Smith's treatise. Malthus was one of a group of economic thinkers of the late 18th and early 19th centuries who were grappling with the challenges of emergent capitalism following the French Revolution and the rising demands of a burgeoning middle class. Malthus predicted that growing populations would outstrip the food supply. He was proved wrong, however, because he didn't foresee technological innovations that would allow production to keep pace with a growing population. Nonetheless, his work shifted the focus of economics to the scarcity of goods, rather than the demand for them.

This increased focus on scarcity led Marx to declare that the means of production were the most important components of any economy. Marx took his ideas further and became convinced a class war was going to be sparked by the inherent instabilities he saw in capitalism. However, Marx underestimated the flexibility of capitalism. Instead of creating a clear division between two classes—owners and workers—the market economy created a mixed class wherein owners and workers held the interests of both parties. Despite his overly rigid theory, Marx accurately predicted one trend: businesses grow larger and more powerful to the degree that free-market capitalism allows.

The Marginal Revolution

As the ideas of wealth and scarcity developed in economics, economists turned their attention to more specific questions about how markets operate and how market prices are determined. English economist William Stanley Jevons (1835-1882), Austrian economist Carl Menger (1840-1921), and French economist Léon Walras (1834-1910) independently developed a new perspective in economics known as marginalism.

Their key insight was that in practice, people aren't actually faced with big-picture decisions over entire general classes of economic goods. Instead, they make their decisions around specific units of an economic good as they choose to buy, sell, or produce each additional (or marginal) unit. In doing so, people balance the scarcity of each good against the value of using the good at the margin.

These decisions explain, for example, why the price of an individual diamond is relatively higher than the price of an individual unit of water. Though water is a basic need to live, it is often plentiful, and though diamonds are often purely decorative, they are scarce. Marginalism quickly became, and remains, a central concept in economics.

Maths in Economics

Walras went on to mathematicise his theory of marginal analysis and made models and theories that reflected what he found. General equilibrium theory came from his work, as did the practice of expressing economic concepts statistically and mathematically. Alfred Marshall took the mathematical modelling of economies to new heights, introducing many concepts that are still not widely understood, such as economies of scale, marginal utility, and the real-cost paradigm.

The theories developed by Walras, Marshall, and their successors would develop in the 20th century into the neoclassical school of economics—defined by mathematical modelling and assumptions. Later, statistical methods were applied to economic data in the form of econometrics, giving economists the ability to propose and test hypotheses empirically and in a methodologically rigorous manner.

Introduction to the Macroeconomics

John Maynard Keynes developed a new branch of economics known as Keynesian economics, or more generally as macroeconomics. Keynes styled the economists who had come before him as classical economists, and he believed that while their theories might apply to individual choices and goods markets, they did not perfectly describe the operation of the economy as a whole.

Keynesian macroeconomics presents the economy in terms of large-scale aggregates that represent the rate of unemployment, aggregate demand, or average price-level inflation for all goods. Keynes's theory says that governments can be powerful players in the economy and save it from recession by implementing expansionary fiscal and monetary policy—manipulating government spending, taxing, and money creation—to manage the economy.

The Neoclassical Synthesis

By the mid-20th century, these two strands of thought—mathematical, marginalist microeconomics and Keynesian macroeconomics—would rise to near-complete dominance of the field of economics throughout the Western world. This became known as the neoclassical synthesis, which has since represented the mainstream of economic thought as taught in universities and practised by researchers and policymakers, with other perspectives labelled as heterodox economics.

Economic theory grew out of societies’ need to account for resources, plan for the future, and exchange and allocate goods. Over time, these basic accounting tools grew into financial models of increasing complexity, blending the mathematics required to calculate compound interest, with ethics and moral philosophy. Economics as a system to understand and control the material world and mitigate risk emerged and evolved across the globe in a staggered fashion—the Fertile Crescent and Egypt, China and India, ancient Greece and the Arab world. As societies grew wealthier and trade grew more complex, economic theory turned to the mathematics, statistics, and computational modelling that economists use to help guide policymakers.

SOCIALISM vs.

CAPITALISM

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Socialism and capitalism represent opposing schools of thought, and their central arguments touch on the role of government in the economy. Capitalists believe that the government should allow the free market to determine supply and demand. On the other hand, socialists believe that the government is responsible for ensuring economic equality by introducing programs that benefit the poor such as free education, higher taxes for the rich, and subsidised healthcare systems. In a capitalist economic system, the work of managing resources is left to private enterprises, and the free market is allowed to dictate product prices.

In socialist economies, the government owns and manages the economic resources such as money and other forms of capital. The citizens of the country work to generate wealth, which is then distributed to everyone. It is characterised by worker’s self-management of the means of production and is based on the premise that what is good for one citizen is good for all of them. Everything that the people produce is a social product, and it is distributed to all citizens that participated in the production process. The government manages the education and healthcare systems, and the citizens pay for the resources through higher taxes.

A socialist economy ensures that the basic needs of the people are met. The basic needs include things like shelter, education, healthcare, economic security, etc. The government manages the use of resources and the production of products or services that the people need, which is referred to as central planning. Even though the population under socialism is taken care of, it does come with some shortcomings. For example, the workers see few incentives to work hard to generate more income and wealth.

Also, when the government distributes wealth to everyone, the citizens who put more effort into the production process feel less connected to the income they generated. Looking at socialism vs. capitalism systems around the world, examples of socialist economies include the People’s Republic of China, North Korea, and Vietnam.

The government manages the means of production, which ensures that there is fairness in resource utilisation and distribution. Private enterprises are not allowed to exploit the means of production for their personal gains. It diminishes class distinctions between the poor and the rich since wealth is distributed to everyone. But the state ownership of resources leads to inefficiencies since workers lack incentives to work hard and reduce costs of production.

Capitalism is an economic system wherein individuals or private corporations own and operate the resources and means of production. The business owners in the economy make the decisions on how the resources will be utilised, while the prices of goods and services are determined by competition in the free market economy.

Unlike socialist economies, the government has minimal control over what private enterprises produce, when the product is produced in the quantity required to produce. The only role that the government plays in a capitalistic market is to enforce laws and regulations with the aim of creating a fair field for businesses to operate.

Private enterprises own the means of production, and they operate them for a profit. The profit they earn from the business allows them to purchase new raw materials, pay operational expenses and salaries, and still retain some earnings for reinvestment and expansion.

For large corporations, the management assumes the greater role of maximising the shareholder value by investing in portfolios that earn the investors a high return on their investments. Corporations in capitalist economies are also treated the same way as individuals, and they can perform the same activities such as trading and suing as individuals. Also, capitalism gives businesses more incentives to work hard since they enjoy all the profits and wealth they generate from the economy.

Consumers enjoy a wider choice of products and services since the system allows firms to compete with other companies in the economy. Greater market efficiencies since businesses are encouraged to find innovative ways of cutting costs while retaining the quality of products. But in capitalist economy class distinction persists between the rich and the poor. The rich enjoy most of the profits generated by the business while the poor are paid salaries and wages for working for the rich. It also allows firms to create monopolies in the supply of products or services. The monopolies can abuse their powers by charging higher prices at the expense of the consumer.

DEVELOPED, DEVELOPING &

UNDERDEVELOPED COUNTRIES

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The main difference between developed, developing and underdeveloped countries is their economic status and the quality of life experienced by their citizens as a whole. Developed countries have a high quality of life, accelerated and trustworthy economy, and technological infrastructure. Meanwhile, developing countries have a less developed and less trustworthy economy and also a comparatively lower quality of life. On the other side, underdeveloped countries have the lowest indicators of socioeconomic development and the lowest quality of life.

Although we use the terms developed, developing, and underdeveloped to classify countries around the world, it’s quite difficult to quantify between these criteria. Even experts have not yet agreed on a single definition and criteria. However, Per Capita GDP (Gross Domestic Product) or Per Capita GNI (Gross National Income) are the parameters we usually use to measure the economic development of a country. Besides these experts also use some social factors like HDI (Human Development Index), life expectancy, high rate of industrialisation, and the height of technological infrastructure to categorise countries as developed, developing and underdeveloped.

Developed Countries

Developed countries are those that have a high quality of life, a mature and sophisticated economy, and developed technological infrastructure. The citizens enjoy access to good health care facilities and have access to higher education. In addition, these countries typically have more advanced post-industrial economies (i.e., the service sector provides more wealth than the industrial sector). Ideally, a developed country should have a higher Human Development Index (HDI) and a higher GDP as well as advanced technology and infrastructure.

Moreover, some other characteristics of developed countries include stable birth and death rates, the use of a disproportionate amount of the world’s resources, and a higher percentage of working women. Norway, Denmark, Austria, the US, Switzerland, and Canada are some examples of developed countries.

Developing Countries

Developing countries are those with a less developed industrial base and a comparatively lower HDI relative to developed countries. These countries are also making attempts to develop economically and socially using economic and social maintenance and proper policy implementation. But there are no clear criteria for this classification. Sometimes, we use the term low-income and middle-income countries interchangeably with developing countries to refer to their economic state. These countries also have a lower standard of living, and people do not have access to modern technology or infrastructure. Consequently, they may experience issues with employment, education, healthcare, and housing.

Furthermore, according to the data by the United Nations, there are 152 ‘developing’ countries in the world as of 2021, and these countries are located in Asia, Africa, Latin America, and the Caribbean. India, Indonesia, Nigeria, Saudi Arabia, and Russia are some examples.

Underdeveloped Countries

Underdeveloped countries are more commonly known as least developed countries (LDCs). These are a group of low-income countries facing severe structural hindrance to sustainable development. According to the UN, these countries have the lowest indicators of socioeconomic development, with the lowest Human Development Index (HDI) ratings.

In addition, poverty, human resource weakness (based on indicators of health, nutrition education and adult literacy), and economic vulnerability are the three criteria to classify a country as an underdeveloped country. According to UN data (in 2020), there are 46 countries falling into this category. Afghanistan, Bhutan, Cambodia, Malawi, Madagascar, Liberia, Mali, Zambia, and Ethiopia are some countries that fall under this category.

1.

ANCIENT EGYPT

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Ancient Egypt was amongst the first major human civilisations in existence. It also has been the most significant nation in the world for a good period of civilised history, the longevity of this society is hard to fathom. The most recognisable symbol of Egypt’s power and prosperity, The Pyramids were constructed about 500 years after the nation took shape. Cleopatra, the last Pharaoh of Egypt died in 30 BC some two and a half thousand years later. This means that the fall of Ancient Egypt happened closer to the construction of the Burj Khalifa than it did to the construction of The Pyramids. This vast timeframe is part of what makes Egypt and its economy so fascinating. It serves as a recorded journal of societal, and economic development from the foundation of civilization. It also means that the economy of ancient Egypt is not a singular case study, but rather a narrative of growth over an incredible time frame.

The economy of Ancient Egyptian represents an economy in its most basic form because it is free from a lot of the noise and distractions that make up modern economics. Targeted inflation, debt cycles, derivatives contracts, and even the financial sector are all crucial components of our modern and hyper-advanced economies. Since Egypt had none of these, we can explore the economy in its purest form which is trying to best harvest and allocate its resources to satisfy the central economic problems.

Central problem of an economy is the foundation of economics; there are so many resources available in the world, and humans have legendary hard to satisfy wants. A human that is well fed, with good shelter will yearn for better food and a better home. Even today’s billionaires don’t seem to be materially satiated regardless of how many yachts and planes and politicians and mansions they do own. This, of course, causes the issue that economists somehow have to figure out how these limited resources are going to be shared amongst a population of people with unlimited demands. There have been countless attempts to address this problem. The Egyptians were really the first to give this problem a proper crack, their solution for most of the history of the civilization was a centrally planned economy for the big picture stuff, with a pinch of personal liberty for smaller scale consumption.

There was a strict hierarchy of society with a foundation in farm labour,  and a pinnacle with absolute power residing in the hands of Pharaoh. Egypt was primarily an agrarian civilization, most of the time and effort of the nation’s workers was invested into growing enough food to feed the nation’s workers. This made farming the core of industry throughout Egypt’s history. These farms were owned by the state and administered through the temples that lined the banks of the river Nile. These temples were the centres of commerce, government, and religion all rolled into one and by reflection, the governance of Egypt was organised in the same way. All the food was farmed for and delivered to these temples, where it would then be distributed to workers based on fair and  standardised wages paid out in grain.

A simple farm labourer was normally paid around 200Kg of grain a month, depending on their experience and how plentiful the harvest was. These temples would also act as outposts for local government all while of course, still being places of worship.

Throughout the dynasties of Egypt, the pharaoh was respected as a god on earth. Which was an absolute win for his supreme control over religion, commerce, and the administration. When the annual harvest was better than ever people thanked their Pharaoh for that. When there was a famine and everybody was starving. The Pharaoh must be displeased.

This rigid hierarchy sounds like it made the vast working-class slaves to a bureaucratic social hierarchy. But in reality, they had a surprising amount of liberty. Even a low peasant could take a grand vizier to the equivalent of court, if they were somehow wronged by the vizier’s actions then they could demand compensation. A grand vizier was one step below the Pharaoh in the governing hierarchy. This shows a lot about how in many ways the people of ancient Egypt had a lot of liberty.

This liberty also spilled over into the economy, in a really weird sort of way. People were paid in grain but they could use that grain for pretty much whatever they saw fit, grain was a currency as much as it was a staple food source. There are depictions and records of cows selling for X amount of grain and or a shirt being sold for Y amount of grain on a fixed price list, today we call this system of exchange the Barter System.

This was the foundation of free-market trade, where the people of the nation could help solve the central economic problem by picking and choosing what needs were fulfilled and what they went without. It was by no means perfect, using grain as a currency had its issues of course, but it certainly elevated the standard of living for even the lowliest egyptian labourer well above the subsistence lifestyle of their tribal peers.

Life in 3,000 BC was not easy, most people on earth at this point lived in very small communities of subsistence farmers, or hunter-gathers. Managing a group of a few hundred people was hard enough, let alone the hundreds of thousands of people that made up the Egyptian empire. Farming was rudimentary, and the larger the civilization the more mouths there were to feed. Fortunately, the banks of the Nile and accommodating weather of Egypt were extremely conducive to people and farming. The land was home to decent soils, consistent weather, and inbuilt irrigation with the seasonal river floods. Pisciculture appears to have existed on a very small scale. But practically all the fish consumed were caught in the Nile. Hunting, a leisure activity to the rich, and gathering played a small economic role over all, but may have been crucial to the survival of the poorest. This is what led to Egypt becoming one of the Cradles of civilization. It was easy for these early humans that did not have the technology to make a home in more hostile areas.

Since farming was so easy in this region as compared to other areas around the world it also meant more calories could be yielded from smaller plots of land with fewer humans needed to toil the fields. This is what allowed the formation of a more complex social hierarchy with scholars, craftsmen, priests, and governors who for the first time in human history did not work directly with the food they ate. By comparison, human settlements in less hospitable locations needed to have 100% of their population working most of the time of the day just to fend off starvation.

Food production in Egypt was actually so plentiful that even the farmers didn’t have to commit themselves to feeding a swelling population year-round. The Egyptian calendar was broken up into three very distinct seasons, the planting season, the harvesting season, and the flooding season. The planting and harvesting seasons are self-explanatory but as bad as flooded land sounds, it was a huge win for the nation. The annual river floods raised the river banks and deposited rich river soil onto the fields while also spreading water before robust irrigation. Besides making farming even easier, the floods freed up a lot of time for the farmers.

The dynasty dedicated this time towards the mother of all team building exercises.  These idle farmers would go on to form the labour force under the surveillance of the local temples for helping in the construction of quarries, canals, roads and of course, the pyramids under a system known as the Corvée. Every year able-bodied farmers and labourers were put onto construction projects during the floods. This system collectively known as the corvee, was akin to a form of slavery. These workers didn’t have a choice over whether or not they worked, and they didn't get paid for the time they put into these projects but they were free to go back to their regular lives once the flood season was over.

In many ways, this was a form of taxation, they weren’t getting the workers to pay back a portion of their paycheck but they were demanding that they pay back a portion of their time. Although in most of history these peasant workers still needed to pay regular tax on their grain. If they didn’t pay, they would be forced into additional corvee duty. An interesting side note is that this system was not relegated to the ancient history books. The corvee system used for the construction of public works only fell out of widespread use. Only in 1890 it came to an end after the occupation of Egypt by the British, who were at that point very anti-slavery.

Everybody from the ancient Greeks to modern archeologists have called this the product of slave labor, but it wasn’t that bad for the laborers who were dragged into work. Sure, the peasant workforce of the nation probably wasn’t thrilled about dragging stones all day, but it did serve as a form of vocational training. The pyramids were not just the result of brute force, they required meticulous planning, precise workmanship, the use of advanced tools and the coordination of many men. This was an opportunity for these workers to learn valuable skills that they could bring back to their towns and implement in their regular day work.

The other big advantage to the common man was that these works were not always taken out on vanity projects like big pyramids, oftentimes the work was done on much more utilitarian works. Things like roads and public places did work to increase the quality of life of the average egyptian, but no individual would invest the time and effort into building them unless they were specifically compelled.

It wasn’t known to them at the time but this was due to the tragedy of the commons. (i.e., nobody is going to pay for something they can get for free if someone else does it). If someone else builds a road there is nothing stopping other people from using it, if people get it for free why wouldn’t the original road builder just wait for someone else to build it so they can get it for free and so on and so forth until no road gets built. By forcing everybody that would benefit from a new road to help build that road, nobody feels hard down by and there is the added benefit of actually having a road. It is still an opportunity to gain some