It seems that everyone nowadays is talking about the ups and downs of the economy. Whether you're at the dinner table or at a cocktail party, a basic knowledge beyond supply and demand is likely to impress just about anyone. Below are 5 economic ideas that will keep heads turning and establish you as the smartest person in the room:
I. The Laffer Curve:
This concept states that a potential consequence of raising tax rates beyond a certain threshold is counter-productive for a government in raising tax revenues. In other words, taxes can get so high that the incentive to work diminishes, which ultimately decreases the overall taxes a government collects. This theory is in direct contrast with Supply-Side Economics, which contends that governments can collect more revenue by cutting tax rates (think Ronald Reagan). It is widely rumored that economist Arthur B. Laffer hastily wrote the Laffer Curve on the back of a cocktail napkin after a few drinks. I'm sure he was able to impress quite a few guests!
II. Public Choice Theory
An intersection between political science and economics, the Public Choice Theory states that despite the conventional belief that public sector actors (such as politicians) act in the public's best interest, they are actually more motivated by self-interest (like corporate executives and consumers). James M. Buchanan Jr. received the nobel prize in economics for the Public Choice Theory, which is often used to predict the results of political decision-making. Perhaps the next time you want your congressman to hear your thoughts, just tell him that you won't vote for him when he's up for re-election. That'll get his attention.
Monetarism, formulated by nobel prize winning economist Milton Friedman, postulates that the soundest way for a government to maintain economic growth without inflation is to carefully monitor the circulation of money. Monetarists mantain that prices and wages will eventually adjust in the long-run. They favor the laissez-faire approach to pretty much everything but the money supply.
A modification of Keynesian economics, Neo-Keynesianism is, in short, Monetarism's etenal rival. Neo-Keynesians believe that there are far too many institutioanl arrangements such as organized unions and collective-bargaining agreements that it is impossible for wages and prices to automatically adjust in the long-run. They maintain that economic growth without inflation can be achieved only when the government uses its own spending powers to influence demand.
V. Kondratieff Long Wave Cycle
Perhaps the most obscure of the five theories described, this theory was derived by Nikolai Kondratieff, who served as the head of the Society Economic Research Center in the 1920's. The theory maintains that modern capitalism has moved in long waves, or cycles, ranging from approximately forty to sixty years, and averaging around fifty. These cycles consist of alternating two to three decades of prosperity and high growth followed by two to three decades of stagnation and slow growth. The Russians were not too happy with Kondratieff because his theory suggested that capitalism is not doomed to fail, but will forever continue to bounce back. It's no surprise that Kondratieff, after being shipped off to Siberia sometime in the 1930's, was never heard from again. While surprisingly accurate, this theory is not presently accepted in mainstream economic thought.
While I highly recommend further reading on these economic concepts for a fuller understanding, the information in this article should suffice for basic conversations over drinks. If your guests or companion seems to know more than you, you can always resort to your lifeline: hastily sketch something on your cocktail napkin and make up your own theory. They'll never know.