Economy and Public Finance: A Comprehensive Guide
Economy and Public Finance
Introduction
This document explores the fundamentals of economy and public finance, covering key concepts, historical perspectives, and practical applications.
Economy
Definition and Scope
Economy, derived from the Greek words “Oiko” (administrator of a home) and “Nomos”, encompasses the study of monetary, credit, and banking systems, as well as foreign investment. It is broadly divided into formal science (logic and mathematics) and factual science (natural, bio-physical, chemistry, psycho-cultural, sociology, etc.).
Historical Development
The origins of political economy can be traced back to ancient Greece with Aristotle. It resurfaced in 1615 with Antonio Montchretien’s “Treatise on economic policy” and in 1771 with Pietro Verri’s “Meditation on political economy”.
Needs and Value
Human needs are categorized into natural (basic or physiological) and artificial (cultural). These needs can be further classified as absolute and relative, urgent and delayed, positive and negative, and so on. Carl Menger proposed four conditions for attributing value to an object: 1) Existence of a particular need, 2) Object possessing qualities that satisfy the need, 3) Knowledge of these qualities, 4) Possible disposition of the object.
Labor and Consumption
Labor, defined as conscious and rational human activity, produces useful goods and services. Consumption represents the end point of economic activity.
Public Finance
Roberto Guerra defines public finances as the study and methods of monetary income production by any state or public power. Aniceto Rosas and Roberto Santillan describe it as the science concerned with the study and methods of earning money.
Productivity and Economic Growth
Productivity is a concept closely linked to economic growth. Economy as an art emphasizes human free will in achieving economic goals.
Economic Schools of Thought
Patristica: Formed by the Church Fathers, focusing on evangelization and the economic-Christian model.
Mercantilism: Prioritized industry over agriculture, advocating for industrial protectionism and low agricultural prices.
Liberalism: Favored agriculture and opposed protectionism. The Enlightenment emphasized human reason over prejudice.
Physiocracy: Founded by Francis Quesnay, who proposed the theories of agriculture and the natural order. His “Tableau Economique” described a social structure with three classes: productive, sterile, and owners.
Classical Economics: Adam Smith, considered the father of economics, introduced the concept of division of labor in his “Wealth of Nations”.
German Historical School: Represented by Frederico Gentz during the Romantic period.
Marxism: Karl Marx formulated influential social theories based on his critique of capitalism.
Monetarism: Milton Friedman defended the quantity theory of money and became a prominent figure in neo-orthodoxy.
Production
Factors of Production
Alfred Marshall identified four factors of production: land, labor, capital, and organization.
Capital
Capital refers to instruments of production created by labor. It can be classified as savings, fixed assets, financial capital, free capital, loan capital, private capital, and social capital.
Organization
Organization involves the ability to manage resources effectively to ensure successful production.
Natural Resources
Jorge L. Tamayo categorized natural resources into three groups: renewable, nonrenewable, and permanent. Erich Zimmermann stated that resources are the foundation of security, abundance, power, and wealth.
Services
Services are intangible economic activities that satisfy human needs. Tourism, for example, involves the movement of travelers.
Market and Exchange
Offer and Demand
Offer refers to the quantity of goods offered for sale at a given price per unit of time. It is closely related to demand, which represents the quantity of goods purchased at a given price per unit of time.
Taxes
Taxes are economic contributions, either monetary or in-kind, imposed by the state or an authority on citizens.
Market Structures
A market is a place where buyers and sellers interact to exchange products and services.
Monopoly: A market structure characterized by a single seller controlling the supply of a particular good or service. Examples include Telefonos de Mexico and Pemex.
Credit and Banking
Credit
Derived from the Latin word “credere” (to trust), credit involves confidence, responsibility, and solvency. It can refer to accepting a debt or granting a loan.
Functions of Credit
Credit facilitates capital allocation, supports production, influences pricing, and promotes efficiency in the market.
Elements of Credit Operations
Credit operations involve three key elements: loan, maturity, and confidence.
Types of Credit
Public Credit: Refers to credit extended to a country, state, or province. The state acts as the borrower, while the lender can be another entity.
Private Credit: Credit granted to individuals.
Central Banking
Central banks are state-established and controlled institutions that centralize commercial banking functions to regulate monetary and credit volume.
Bank of Mexico
Established by presidential decree on August 28, 1925, the Bank of Mexico serves as the central bank of Mexico.
Regulatory Role of Central Banking
Central banks act as stabilization funds by managing international payments.
Banking Legislation in Mexico
Mexico’s first Code of Commerce was enacted in 1884, followed by the Banking Law in 1897. The Ministry of Finance held its first banking convention in 1924.
Fiscal Policy and Public Expenditure
Fiscal Policy
Fiscal policy involves government intervention in the economy through adjustments to taxes, public debt, and public expenditure.
Public Finance
Public finance deals with the resources acquired by the state and their proper allocation.
Types of Taxes
Direct Taxes: Levied directly on the taxpayer, such as property tax or wealth tax.
Indirect Taxes: Taxes on consumption, goods, customs duties, and other items.
Public Expenditure
Public expenditure refers to the amount of money spent by the state to fulfill its duties.
Expenditure Budget
The expenditure budget outlines the state’s planned spending.
Public Debt
Public debt arises when the state borrows money to finance public expenditures when normal resources are insufficient.
Conclusion
This document has provided a comprehensive overview of economy and public finance, highlighting key concepts, historical developments, and practical applications. Understanding these principles is crucial for navigating the complexities of modern economic systems.