Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Curing a Sick Economy of Four Afflictions


In This Chapter


Understanding recessions and how to get out of one


Looking at the causes of and solutions to hyperinflation


Seeing why financial crises can be so devastating


Investigating unemployment
A market economy is a wonderfully dynamic way of organising the production and distribution of goods and services, though if you’ve grown up in one, you can take it for granted. As the following funny but profound anecdote makes clear, that’s not the case for everyone. Shortly after the collapse of the Soviet Union, a Russian official asked the economist Paul Seabright: ‘Who’s in charge of the supply of bread to the population of London?’ Seabright replied, ‘Nobody…’!

When you think about it, the fact that no one is directing all the people involved in getting bread to consumers (the flour producer, the baker, the delivery driver, the shopkeeper and so on) is quite amazing! No one needs to tell them to trade, they just do it! They’re just trying to do the best for themselves, and in doing so, you get your fresh, tasty wholemeal loaf!

Similarly, we bet very few individuals have the knowledge and ability to create a single pencil from scratch, and yet you can easily go into a shop and buy one. Again, the market economy succeeds in co-ordinating the activities of many different individuals to a productive end.

Economists love markets, where individuals meet to trade for their mutual benefit. But however much you love something, you have to admit that occasionally it can misfire. For example, even a committed Robbie Williams fan may see the so-called swing period as just plain wrong! Similarly, even economists realise that market economies can sometimes get sick.

In this chapter, you get to play physician as we introduce four important illnesses that can afflict economies: recessions, hyperinflation, financial crises and high unemployment. Fortunately, macroeconomists have also worked out some ways to ‘treat’ these health threats and get an economy moving again, so we can discuss answers as well. We don’t worry too much about the finer details here but just lay out the basics. We cover all these topics in much more detail throughout the book: how to deal with recessions (in Chapters 10–11), hyperinflation (Chapter 5), unemployment (Chapter 6) and financial crises (Part V).