Ponzi Scheme

Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

Decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses. For more information, please read pyramid schemes in our Fast Answers databank.

A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi did not invent the scheme (Charles Dickens' 1857 novel Little Dorrit described such a scheme decades before Ponzi was born, for example), but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors' money to support payments to earlier investors and Ponzi's personal wealth.

Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational in the economic sense if a government will likely bail out those participating in the Ponzi scheme.

The Madoff investment scandal occurred after the discovery that former NASDAQ chairman Bernard Madoff's asset management business was actually a giant Ponzi scheme. Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On March 12, 2009, Madoff pled guilty to 11 felonies and admitted to operating the largest investor fraud ever committed by an individual. According to a federal criminal complaint, client statements showing $65 billion in stock holdings were fictitious, and no stocks were ever purchased since the scheme began in the 1980s.

Concerns about Madoff's business had surfaced as early as 1999, when financial analyst-whistleblower Harry Markopolos informed the SEC that he felt it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. Others felt it was inconceivable that his growing volume of accounts could be competently serviced by his documented accounting/auditing firm, a three-person firm with only one active accountant.
Sister project Wikinews has related news: Madoff prosecutors want assets from wife and children

Madoff had been under 24-hour monitoring and house arrest in his Upper East Side penthouse apartment since December, 2008. However, after accepting Madoff's plea, Judge Denny Chin immediately revoked his $10 million bail and remanded him to the Metropolitan Correctional Center pending sentencing. Chin declared that because of Madoff's age, wealth, and sentencing prospects, he is considered a flight risk.

Madoff's lawyers filed an appeal, and prosecutors responded with a notice of opposition. On March 20,2009, an appellate court denied Madoff's request to be released from jail and returned to "penthouse" home confinement until his June sentencing. Prosecutors have filed two asset forfeiture pleadings which include lists of valuable real and personal property as well as financial interests and entitities.

Some involved in the case as well as other unrelated observers have opined that the actual loss to investors could be far less than reported. Former SEC Chairman Harvey Pitt estimated the actual net fraud to be between $10 and $17 billion, because it does not include the fictional returns credited to the Madoff's customer accounts.

The SEC came under fire for not investigating Madoff sooner, despite complaints from Markopolos and others. In testimony before Congress after the scandal broke, Markopolos claimed it was very easy to prove mathematically that Madoff was running a scam. He said it took him five minutes to make an initial assessment of the fraudulent nature of Madoff's purported high investment returns and about four hours to work the detailed math calculations.

Reference:
http://en.wikipedia.org
http://www.sec.gov

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Swaps Market

Swaps are private agreements between two companies to exchange cash flows in the future according to a prearranged formula. In finance, a swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.

Interest Rate Swaps
The most common type of swap is a “plain vanilla” interest rate swap. It is the exchange of a fixed rate loan to a floating rate loan. Thus, an interest rate swap is an arrangement whereby one party exchanges one set of interest payments for another. In the most common arrangement, fixed rate interest payments are exchanged for floating interest payments over time.

In this, one party, B, agrees to pay to the other party, A, cash flows equal to interest at a predetermined fixed rate on a notional principal for a number of years. At the same time, A agrees to pay B cash flows equal to interest at a floating rate on the same notional principal for the same period of time.

The reason most commonly put forward concerns comparative advantages.
Example: Company A and B, both wish to borrow USD10 million for 5 years. A has a company rating better than that of B. B would like to have the loan on the fixed rate, while A on the floating rate. See the table of borrowing rates motivating interest rate swap.

Fixed Floating
A 10.00% 6-month LIBOR + 0.30%
B 11.20% 6-month LIBOR + 1.00%

LIBOR is the rate of interest offered by banks on deposit from other banks in the eurocurrency market. One month LIBOR is the rate offered for 1-month deposits, 3-month LIBOR for three months deposits, etc. LIBOR rates are determined by trading between banks and change continuously as economic conditions change. Just like the prime rate of interest quoted in the domestic market, LIBOR is a reference rate of interest in the International Market.

The difference between the two fixed rates is greater than the difference between the two floating rates. B pays 1.20% more than A in fixed rate markets, and only 0.70% more than A in floating rate markets.

B appears to have a comparative advantage in floating rate markets, while A appears to have comparative advantage in fixed rate markets.

It is this apparent anomaly that allows a profitable swap to be negotiated. A borrows fixed rate funds at 10.00% p.a., while B borrows floating rate funds at LIBOR + 1.00% p.a.
We assume that A and B get in touch with each other directly (no intermediary).

Assume the negotiation result is that A agrees to pay B interest at 6-month LIBOR on USD10 million, and B agrees to pay A interest at a fixed rate of 9.95% p.a. on USD10 million.
When the external borrowings of A and B are taken into account, we obtain the following scheme:

Lenders <-(10%)- Company A <-(9.95%)- -(LIBOR)-> Company B -(LIBOR + 1%)-> Lenders

A has three sets of interest rate cash flows:

• It pays 10% p.a. to outside lenders


• It receives 9.95% p.a. from B


• It pays LIBOR to B

Total cost to A will be LIBOR + 0.05% (10 – 9.95) p.a., instead of LIBOR + 0.30%.

B also has three sets of interest rate cash flows:

• It pays LIBOR + 1.00% p.a. to outside lenders


• It receives LIBOR from A


• It pays 9.95% p.a. to A

Total cost to B will be 10.95% p.a. (9.95 + 1), instead of 11.20%.

The swap arrangement improves the position of both A and B by 0.25% p.a.. The total gain is therefore 0.50% p.a., which is derived from a – b, where:

a is the difference between the interest rates facing the two companies in fixed rate markets; a = 1.2%.
b is the difference between the interest rates facing the two companies in floating rate markets; b = 0.70%.

Role of Financial Intermediary
Usually, A and B do not get in touch with each other directly to arrange a swap. They each deal with a financial intermediary such as bank. The total potential gain (0.5% p.a.) has to be split three ways between A, B and the financial intermediary.

Lenders <-(10%)- Company A <-(9.9%)- -(LIBOR)-> Financial Institution <-(10%)- -(LIBOR)-> Company B -(LIBOR+1%)-> Lenders

A has three sets of interest rate cash flows:

• It pays 10% p.a. to outside lenders


• It receives 9.90% p.a. from the financial institution


• It pays LIBOR to financial institution

Total cost to A will be LIBOR + 0.10% (10 – 9.90) p.a. instead of LIBOR + 0.30%.

B also has three sets of interest rate cash flows:

• It pays LIBOR + 1.00% p.a. to outside lenders


• It receives LIBOR from the financial institution


• It pays 10 % p.a. to the financial institution

Total cost to B will be 11.00% p.a. (10.00 + 1) instead of 11.20%.

The swap arrangement improves the position of both A and B by 0.20% p.a.. The financial institution’s net gain is 0.10% p.a. The floating rate it receives is the same as the floating rate it pays, but the fixed rate it receives is 0.10 % higher than the fixed rate it pays. The total gain to all parties is as before 0.50% p.a.
The financial institution has two separate contracts, one with A and the other with B. If one of the companies defaults, the financial institution still has to honor its agreement with the other company. In most instance, A will not even know that the financial institution has entered into an offsetting swap with B and vice versa.

Currency Swaps
In its simplest form, this involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equivalent loan in another currency.
Example: Suppose that company A and B are offered the fixed rates of interest in US dollars and sterling. See the table of borrowing rates motivating currency swap.

US Dollars Sterling
A 8.00% 11.60%
B 10.00% 12.00%

A is clearly more creditworthy than B since A is offered a more favorable rate of interest in both currency.
The difference between the rates offered to A and B in the two markets are not the same. B pays 2% more than A in the US dollar market and only 0.4% more than A in the sterling market.
A has a comparative advantage in the US dollar market, while B has a comparative advantage in the sterling market.
Suppose A wants to borrow sterling while B wants to borrow dollars.

Total gain to all parties will be 1.6% p.a. (2.0% - 0.4%), which is the difference between the difference in dollars and sterling.

Lenders <-($ 8%)- Company A <-($ 8%)- -(£ 11%)-> Financial Institution <-($ 9.4%)- -(£ 12%)-> Company B -(£ 12%)-> Lenders

Total cost to A will be 11.6% Sterling, instead of 11.6% Sterling (gain 0.6% p.a.). Total cost to B will be 9.4% Dollar, instead of 10% Dollar (gain 0.6% p.a.). The financial institution will gain 1.4% Dollars and lose 1% Sterling, net gain 0.4% (ignore exchange rate risks).
Total gain to all parties is 1.6% p.a., that is the gap between the difference in dollar and sterling interest rates.

Risks of Swaps

• Basis Risk: risk that the index used for an interest rate swap does not move perfectly in tandem with the floating rate instrument specified in a swap arrangement.


• Credit Risks: risk happens when one party of the swap arrangement fail to meet its payment obligation.


• Sovereign Risks: reflects potential adverse effects resulting from a country’s political conditions. Various political conditions could prevent the counterparty from meeting its obligation in the swap agreement.

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The Thought of Economic Theory from Philosopher, The Merchantilist and Physiokrat

Writer: Yohan Naftali
Supervisor: Prof. H. Masngudi, PhD.
Jakarta 2006

PART I
Analysis of the Philosopher Thought
Thought of the philosopher has influenced thoughts of economists after. Economic theories have been built for centuries and continue to be refined at this time. The Philosophers proposed the basics of economic thinking that will be adopted, updated and tested by scientists in the next period. Economics is not started by Adam Smith (1723-1790), known as the father of economics, but economics has been far introduced before.

Thought economics theory had been introduced by the philosopher, starting from the Greek philosopher. Adam Smith (1723-1790) itself is actually a scientist in the field of philosophy. Actual science of economics has a very closely with the philosophy. So, economics is the development of the philosophy. Therefore need to learn the very thought of the philosopher to increase knowledge.

Xenophon (440-355 BC) and Plato (427-347 BC) contributed in the early thinking about economic theory about cost and benefit of the division of labor. In the work of Plato (427-347 BC) The Republic supports the ideal city-state dominated by a controlled by the wise king. This thought started early thinking about the economy. Plato (427-347 BC) explain that division of labor can provide the opportunity for people to choose jobs that match with theirself.

Thought Plato (427-347 BC) also affects thought Adam Smith (1723-1790) that proposed the free market economic system. However scientists that support free market economic think that Plato (427-347 BC) does not support freedom of the market because of a strong government role in managing the economy. This is different from the thought Aristotle (384-322 BC), which provides support for the freedom of thought and influence the Adam Smith (1723-1790) about the role of government restrictions.

Aristotle (384-322 BC) also has theory of economics. Aristotle distinguished between oikonomi, who investigate domestic regulations which is the original meaning of the term for the economy, and chrematisti who learn the rules and the exchange, this ideas can be called as a precursor for the development of the theory of economics.

Aristotle explained that the head of the household must strive for fulfilment. If an "oikos" has the own advantages, so excessive can be exchanged with goods. Based on this it can be concluded that the goods can be used with two-way, that is to be used or to be exchanged with other goods. Consequently there can be obtained from understanding the economics about use value and exchange value. Activity of the exchange of goods done by the trader as their livelihood, it is in line with the goals of chrematisti, even though the Greek philosopher had less appreciated with traders profession.

Lack of appreciation for trader profession continues until the 18th century in which the physiocrat considered as "classe sterile”, so the Christian expert state that trader profession as inappropriate profession. Next St. Thomas Aquino (1225-1274) review the economic from the point of morality is not that trade is a contemptible, but the way the traders in the trading of blame. Calvijn Johannes (1509-1564), born in france called Jean Chauvin, also known as John Calvin, defend interest and money collection is the “fruit” from the diligence and activities of the trader. Calvijn Johannes (1509-1564) defend the proof that interest is not rejected by the Bible.

Martin Luther (1483-1546) also revealed traders’ profits should only as the replacement of the risks and their works, not because profit from the lack of goods situation. Calvijn Johannes (1509-1564) defends the profit came from trader’s diligence activities, Calvijn Johannes (1509-1564) also defend the collection interest.

Aristotle (384-322 BC) stated that interest on money has influence in many centuries, according to him money was to facilitate the exchange of goods among households, and the money will be measured so that it can be comparable. Based on the opinion money can be used as a means of trade, the unit value and a means to store wealth. While the views expressed interest that "is the money cannot bear interest" because of the benefits received by the creditor is not as a result of economic power that is part of the money, but it does not act other than a disadvantage against debtor. St. Thomas Aquino (1225-1274) also submitted disclaimer of money’s interest, the scholastic in the mid-century, and in the environment of Islam. However, in the realization, borrowing money requires works, costs and potential hazards, then the thought about interest can replace the loss arises.

Views of philosopher enrich the views of economists and provide a basic idea in the next economy. Their thought had pioneering the development of economics. By learning the views of the philosopher, can provide insight about the dynamics of the theory of economic development from time to time.


PART II
Analysis of the Merchantilist Thought
Before the 16th and 17th century trading voted as a low degree profession, the mercantilist has focused attention on the economic activities in trade, especially foreign trade. Thought the mercantilist was the view of society and the state of the trade. Gold that flows from foreign to domestic trade as a result has been to strengthen the state. They also often called mercantilist carpenters economics in the 16th – to 17th century.

The old mercantilist also known as the bullion, such as the Hales, Miles, Gerald de Malynes (1586-1641) and Edward Misselden (1608-1654) states that the country should bring gold as much as possible and keep the gold, in this view, money is equated with prosperity.

Gerald de Malynes (1586-1641) and Sir William Petty (1623-1687) argued that the decline in interest rates and increased trade, as a result of the increase in the money circulating. Opinion is that interest rates for money rejected by the classical economists and thereafter up to John Maynard Keynes (1883-1946) wrote a book titled General Theory of Employment, Interest and Money that ask for the attention of the truth Mercantilist. In this opinion Keynes who defend the Mercantilist with the theory that is known as liquidity preferences motivation.

Charles d'Avenant (1656-1714) states that the property in the form of wealth is just dead money. Therefore, the level of consumption should be enlarged to the community, especially luxury goods produced in the country. Further recognized by the mercantilist noble metal will flow to Western Europe in the century to 16 and thereafter result in improving the general level of prices in the country, thus emerge the quantity of money theory. In that simple theory stated that the balance between the prices level with the amount of money circulating. Raised one percent of money circulating will cause price increase one percent. It therefore means that the price elasticity coefficient of the outstanding amount of money equal to one.

John Locke (1632-1704) revealed that in this case to be considered not only the amount of money circulating, but also the speed of money circulation. In this case, the rotating speed of the money is not the same for all economic subjects. According to his estimation, volume of money needed for a country with the same 1 / 15 of annual wage income plus ¼ of the large land owners each year plus 1 / 20 of income each year the merchants. Richard Cantillon (1680-1734), an Irish banker and adventurer who emigrate to Paris, says the amount of money that is required is the same as the 1 / 9 of the national net.

The simple form of quantity of money theory later is enhanced by Irving Fisher (1867-1947), professor in economics from Yale and founder of the flow of monetarist, with the formula M x V = P x Q (M Money is the quantity of circulating money, V is the Velocity speed money or money's annual rotation, P Price is the general price level, Q is the quantity of trade goods produced / are for one year). This means that in terms of speed of money circulation is fixed (constant) and the same amount of goods sold, the price level determined by the amount of money. Irving Fisher (1867-1947) in this case was to distinguish between the money that is base money like a coin, paper money and other money in the form of giro money, deposits, and so is in the bank.

The bullion argued that export of gold should not be allowed, but the export value must be greater than imports. Pieter De La Court (1618-1685) from the Netherlands make proposals to his government:

• To promote the shipyard with the low taxation to carry goods from abroad.


• Collect tax from overseas ships.


• All items that can be made at home should not be burdened too much tax.


• All raw materials should never be burdened tax.


• All import items must be burdened foreign customs.

David Hume (1711-1776), a classic economic leaders, criticizing the idea merchantilism with the automatic mechanism of the Price Mechanism Flow-Spice or PSFM. Idea from the mind merchantilism says that the state / king of the rich / prosperous when X> M so that the LM will be more and more. This means that the Money supply (Ms) or the amount of money circulating more. Money supply or when the amount of money circulation increased, while production still / does not change, there will be inflation or price increase. Growth rates in the country will increase the price of goods exports (PX), so that the export quantity (Qx) will decrease.

With critics from David Hume (1711-1776), the theory of pre-classical or merchantilism considered irrelevant. Then Adam Smith (1723-1790) contribute their thoughts in a book titled "An Inquiry into the Nature and Causes of the Wealth of Nations" in the year 1776. So that the classical theory appears or absolute advantage of Adam Smith (1723-1790). Adam Smith Society (1723-1790) are as follows:

• Size prosperity of a country is not specified the number of LM too.


• Kemakmuran a country determined by the size of the GDP and foreign trade contribution to GDP formation of the country.


• To increase the GDP and foreign trade, the government should reduce the interference so that the hands are free trade.


• With the free trade will lead to competition or competition is increasingly tight. This will encourage each country to do the specialization and the international division of labor based on the benefits of absolute or absolute advantage of the country respectively.


• Specialization and the international division of labor based on the absolute advantage, will spur increased productivity and efficiency so that it was increasing GDP and foreign trade or international.


• Increased GDP and international trade is synonymous with the increased prosperity of a country.

Sir William Petty (1623-1687) in the year 1679 has been calculated that UK national income next birth knowledge "Political Aritmathic". The calculation of national income continues to grow and become important issues in the economy until today. National income has made measurements on the success of a government in managing the economy.

Gregory King (1648-1712) in the year that is almost the same materials to create the same image kurva demand for grain in a concrete incident. According to the law changes in the King preferred wheat in succession with 1 / 10, 2 / 10, 3 / 10, 4 / 10 and 5 / 10, make a price change in the direction with the 3 / 10, 8 / 10, 16 / 10, 28/10, and 45/10. Thought is being developed in the theory of demand and supply by the economist.

It is observed that but one-tenth the defect in the harvest may raise the price three-tenths, and when we have but half our crop of wheat, which now and then happens, the remainder is spun out by thrift and good management, and eked out by the use of other grain; but this will not do for above one year, and would be a small help in the succession of two or three unseasonable very destructive, in which many of the poorest sort perish, either for want of sufficient food or by unwholesome diet.

"We take it that a defect in the harvest may raise the price of corn in the following proportions:

Defect raises the price above the common rate
1 tenth ............... 3 tenths
2 tenths ............... 8 tenths
3 tenths ............... 16 tenths
4 tenths ............... 28 tenths
5 tenths ............... 45 tenths

So that when corn rises to treble the common rate, it may be presumed that we want above one-third of the common produce; and if we should want five-tenths or half the common produce, the price would rise to near five times the common rate." (The Works of Sr William D'Avenant Kt, vol. ii, pp. 224, 225, edited by Sir C. Whitworth, London (1771)).

PART III
Analysis of The Physiokrat Thought
The physiokrat's figures are François Quesnay (1694-1774), Pierre Samuel du Pont de Nemours (1739-1817) and Charles Gide, in which flow from this understanding of how important the mastery of nature. If the pioneer of economics is the merchantilist, then the physiokrat referred to as base of economics.

The physiokrat as a first look of the economy as a system that has been determined and as a system that is governed by laws apart, and on the basis of the calculation can be made and the forecast-forecast and they try to formulate the laws of this. The cohort is physiokrat sect Mercier De la Riviere (1720-1794), Boudeau, Robert Jacques Turgot (1727-1781), le Trosne, and Karl Friedrich von Baden-Durlach.

According to François Quesnay (1694-1774), a medical doctor, see the economic circulation (the flow of goods in society) such as the flow of blood in the human body. View of the basic principles physiokrat is in life to have to build natural order. A human organization that each individual knows their own interest, and further the best interests of the self that each person is himself. Finally own interests and the public fall together, so that when each individual to defend the interests exempt themselves, then the public will be well once chipped. (leisser faire, leisser Passer, le Monde de luis va alors meme).

The physiokrat develop the theory of harmony, ie harmony between individual interests and the interests of public (community). Next explained economic principles that made the basis of general economic theory physiokrat in which every individual seeks to obtain a certain result of the small-small. This theory of harmony will be the classic that read: every individual seeks to obtain as much income, and income can only be increased when the subject of economics to offer each other goods and a better or cheaper, and the government need not intervene. The government only served in the field justice, militia, and public works. This is a reaction on the intervention of the government so far is taught by the merchantilist.

If the merchantilist place foreign trade in the center view of economy, then the physiokrat place in the agricultural economy. Only agricultural give results that can be productive.

Sir William Petty (1623-1687) states that "labor is the father and active principle of wealth, as lands are the mother." Farmers reap more than sowed and this excess (or the "produit net") as goods (product) to the new economic community circulation.

Economic life as a whole as a system, François Quesnay (1694-1774) describes the relationship between the three groups of people.

• Classe productive; namely the farmers.



• Classe prosprietaires; ie the land owner.



• Classe sterile; ie the traders and industrialist.

The three groups of people that this is considered berperanan revenue in the community (national) described in a "Tableau Economique". Further added that the workers referred to as passive classe fourth group that has meaning in relation to consumption, not production.

In theory, the division of community income (national) is François Quesnay (1694-1774) stated that the farmers (classe Productive) produce F 5 billion. Among F 2 billion flow to the classe prosprietaires and F 1 billion flow to the classe sterile and for the purposes of Productive classe F 2 billion for its own purposes, their flocks and seeds.

Next of classe prosprietaires, F 1 billion used to purchase food, which means that flow back to the farmers. While F 1 billion more is used to obtain goods industry, which means to flow classe sterile. Reception F classe sterile 2 billion used to buy food. Thus at the end of the process of national income classe Productive receive back 3 billion F in which F 1 billion comes from the classe des prosprietaires and F 2 billion comes from the classe sterile. Based on the "Tableau Economique" organized Quesnay it can provide insight to a book or a national input-output analysis.

François Quesnay (1694-1774) further differentiates the concept of value and price that matches with the system used. While the pricing is differentiated between the price of basic goods and the price consumers must pay. Basic price according to François Quesnay (1694-1774) depending on the costs incurred to prepare the goods for the market. While the sale price to consumers, traders usually try to get the margin as big money.

Selling price of industrial products with the same basic price, which in this case the trader can only gain profit with prejudice consumers. Conversely for the products of agriculture so that the selling price can be a big profit to be done to bring additional investment "produit net".

Calculation of the physiokrat to submit to 2 / 5 of national income to the landowner because it deems them as the backbone of the country. Rent from land it receives, must pay taxes, and other social obligations (including the order of purchase luxury goods to encourage the progress of the craftsmen). Thus, the owner of the land (classe des proprietaires) is a circulation booster as the economy. So next on a slogan "when poor farmers, then miskinlah country (kingdom) and also poor king (head of state)" Pauvre paysans, Pauvre royaume, Pauvre roi. "

But according to the wage physiokrat stated that the amount of wages the same as the costs of living. But wages will increase when grain prices rise. So according to them, high prices has no effect for the welfare of working class.

When analyzing the mercantilist in shoptalk economic devote much attention to the monetary shoptalk, the physiokrat shows that the "curtain of money" to make vague symptoms economy. Therefore shoptalk economy is actually to look for money behind the curtain this case which followed a similar opinion by the classic book rising up to the General Theory of Employment, Interest and Money is written by John Maynard Keynes (1883-1946).

Money according to a theory called physiokrat Robert Jacques Turgot (1727-1781) revealed that the exchange of goods in the system used a common tool change and desired by people in general, namely the count sheep. Slowly making the price list of sheep in the abstract (in the chimera only). "Sheep abstract" then this is a calculation unit. This Thought will soon become standard noble metal (gold), which is supported by Adam Smith (1723-1790), regarded as the benchmark currency is more stable.

According to the theory of interest physiokat explained by Robert Jacques Turgot (1727-1781) in which that money cannot have children, but using the fruit theory, so can bear fruit.

In the case of taxes, given that the government should be responsible for the cost of education that require large, they need sources of funding coming from taxes. But different types of taxes in a simplified "direct et impot unique" (single and direct taxes) imposed on the "produit net" of 3 / 10. Opinion about the tax physiokrat up to now still a lot of followers even with the reasons varies, of direct taxes and a single, as in the United States, Austria and Germany. This thought signals the bureaucratization on tax and justice of tax that still growing. More various taxes will lead the higher opportunities of illegal tax collection or corruption. Thought about the tax will continue to be refined.

Translated by Google Language Tools, you may submit better translation to improve this article.

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Classical Economic Theory

Thought of classical theory has brought major changes in the economic field. One of the thoughts of the classical theory is pioneering liberal economic system of thought. In the classical idea that the macro economy will grow when the economy driven by market. Role of government is limited to the problem of law enforcement, security and development to maintain infrastructure.

Thought of classical inspired "Washington consensus". Based on the "Washington consensus" government's role in the development focused on budget control, and the utilization/use of market power.


According to the "Washington consensus" (consisting of 10 macro-economic policy package), the role of government in development-oriented and should be limited to infrastructure development, health and education. Government intervention in the planning of development excessively feared cause "Government Failure", such as the excessive bureaucracy, corruption and so forth. Budget restrictions can reduce the deficit, because it will cause instability in the economy. Market power is used for developing an efficient market, free from monopoly, oligopoli, and external disekonomis. Therefore, government policies must be "Market Friendly".

Interest rate and foreign exchange rate must be determined by the market. Market price is considered as the actual price. Market is considered more efficient than the government's use of the economic sector, so that the economy will be optimized. Foreign trade will yield gains from trade, the flow of Foreign Dicert Investment will be more free to stimulate foreign investors to invest their funds, privatization of state-owned economy mengefisiensikan be considered. Therefore, the role of government is to deregulate. Here the emphasis the government to protect property rights.

IMF (International Monetary Funds) and the World Bank adopted a liberal trying to implement the "Washington consensus" as their bargaining power to the government of Indonesia. The Government of Indonesia on 12 Oct 2006 was effectively a loan to pay off all the IMF under the Extended Fund Facility scheme. Satisfaction of SDR 2,153,915,825, or its equivalent to U.S. $ 3,181,742,918 (USD / SDR = 1.47719) is the remainder of the loan should mature at the end of 2010. Loans settlement to the IMF will result in a loss of power to force the IMF "Washington consensus" to Indonesia. After loans settlement to the IMF, Indonesia is not obliged to follow more IMF's monitoring program, same with other countries that the macro economy is in good condition.

Liberal economic thought is based on the idea that the market itself know their needs better ,so that the government should not intervene in the market. Jean Baptiste Say (1767-1832) argued that "supply creates its own demand" so that there will be no surplus production. Adam Smith (1723-1790) have also argued that the "invisible hands" that will guide the individual to promote the interests of the community.

Could not be denied that globalization increasingly pushed by the fruit of classical thought. Free trade that has been defended by the classical try to break in the merchantilism and protectionist walls. Globalization makes the limit state becomes faded and widen market. Countries that have competitive advantages can enrich the economy. On the other hand, countries that are not ready in the face of competition in the global market will increasingly fall. Apart from the positive and negative sides of globalization, here every country must be prepared to have a competitive advantage.



Some of the classical economic such as Adam Smith (1723-1790), Thomas Robert Malthus (1766-1834), Jean Baptiste Say (1767-1832), David Ricardo (1772-1823), Johan Heinrich von Thunen (1780-1850), Nassau William Senior (1790-1864), Friedrich von Herman, John Stuart Mill (1806-1873) and John Elliot Cairnes (1824-1875) to obtain honor of Karl Marx (1818-1883) set up in keklasikan economic issues that are not obsolete kunjung . Unlike the Merchantilist and Physiocrats, the classic economic analysis focuses on the price theory. They try to complete the classic problems of economic research with the way demand and supply factors that determine price.

John Maynard Keynes (1883-1946) stated that the classical economic analysis focusing on the theory of the price, it is necessary to understand the direction of the perfect production tool. In this understanding classical economists assume the existence of unemployment is not a desired (involuntary Unemployment).

One of the results of the classical thought that influenced the world in the globalization era is thinking about international trade. Thought of the classical thought of merkantilis the only entrance to the noble metal and export-oriented minimize the import of goods from abroad.

The merkantilis laying emphasis on foreign trade. The physiokrat regard agriculture as a source of all prosperity. Adam Smith (1723-1790) as the classical express opinions in a book entitled "Inquiry into the Nature and Causes of the Wealth of Nations" that: "Employment is a nation that is financing the capital needs of the people that live in the home first, and with the results of this work can be purchased the needs of his life abroad." productive capacity of the work always increases because of the division of labor is the fundamental and tidy.

Adam Smith (1723-1790) explains the advantages of the division of labor with a sample needle factory. In the needle factory, a worker can make needle 20 a day. Results of Smith's visit to a factory which make division of labor, the 10 laborers can make 48,000 pieces needle, with the division of labor, there is worker that specialized for pull the wire, worker for cut, worker for sharpen, and other. Division of labor can improve the production of 20 needle per workers into 4800 needle per worker, in the other word, in this case division of labor, this method increase output 240 times.

The division of labor is often divided into the two, the first is to share the work to be simple so that all workers with a certain level of expertise can do the work. The second is a composite of the work of a share of production jobs into several parts. In its development, the concept of division of labor and continue to develop effective activities to work terspesialisasikan, and production activities in a more modern division of the labor happens belt system ("conveyor system").

Mass car production by Ford itself is also inspired from the concept of division of labor, so that production costs are cheaper. With the cost of production more efficient, the price offered can be more competitive with other products. While this concept of division of labor has been widely used in almost all industrial sectors.

Benefits of division of labor are:

1. Each person can do the work in accordance with their talent.


2. Can improve knowledge in the work so that more solid.


3. People are working on the same job on an ongoing basis so that they can avoid loss of time, this means more efficient.

Thinking about values by the classic still relevant to the development of the world at this time. For example in Indonesia, which has a problem in determining the selling price of some state-owned enterprise that is considered too low.

View of Adam Smith (1723-1790) on the concept of value can be divided into 2 and the value of the exchange rate. This raises paradok value, ie goods that have a value of (use value which is very high, such as water and air, but the exchange rate have a very low. In fact, it is said may not have any exchange rate. On the other hand, the value of goods that use less but can have a high exchange rate, such as diamonds. This new solved by the teachings of subjective value.

David Ricardo (1772-1823) state that goods has exchange value if it has function value.

Thus, the goods can be exchanged if the goods can be used. Someone will make something good, because it has the goods to the value needed by the people. Then David Ricardo (1772-1823) also make the difference between the goods and / or can be made in accordance with the willingness, on the other hand there are the limited goods or goods monopoly (such as paintings of renowned painter, antiquarian, the grape that is only grow on mountain slopes and so forth). In this case the goods are for the limited value is very subjective and relative willingness to pay in accordance with the prospective buyer's. While for the items that can be added by production in accordance with the wishes penukarannya based on the value of sacrifice that is required.

David Ricardo (1772-1823) revealed that the various difficulties arising from the academic value of work:

1. Please note the quality of work, quality of work is educated and not educated, the quality of work skills and so forth. The classical flow in this case does not take hours of work that is used for making goods, but the number of working hours and the normal operation is required to produce goods. Carey then from there and replace the value of academic work with the "theory of the cost of reproduction."


2. The difficulty that there is value in the workplace is that in addition to working much more productive services that assist the creation of goods that must be avoided. Then David Ricardo (1772-1823) states that a comparison between work and capital used in production may dikarakan fixed magnitude and only very few changes.

On the basis of the value of work, be on the side of the "natural price" (natural price) there are "market price" (market price). According to the classical (Adam Smith) "natural price" will occur when each of the residents have freedom of choice to create a product which according to him a more profitable and change when assessed by both. This is in line with the views of physiokrat. The term "natural price" (natural price) that is presented Smith with the same term Cantillon "valeur intrinsique" (intrinsic value), Turgot "valeur fondamental" (basic price), Say "prix Reel" (real price), Ricardo "primery / natural / necessary price "(price subject) and Cairnes" normal price "(normal price).

"Market price" could be different from the "natural price" in which the state will adjust the supply and demand on the goods concerned. Similarly, on the basis of certain considerations, the government regulations that may inhibit price adjustments with the natural market price. But anyway, the price will be the natural reference (guidelines) for the determination of market price.

Before Adam Smith wrote his book The Wealth of Nations (1776), Adam Smith has been writing science of economic philosophy in the year 1759, entitled "The Moral Sentiments." Like the physiokrat, Adam Smith thought that the interests of society and individuals have a natural harmony in which This agreement was created by the "invisible hands."

Meanwhile, in the book The Wealth of Nations, Adam Smith, among others, writing that "the nature and causes of the wealth of nations is what is properly called political economy" and just explain what the goal should be economic.



After Adam Smith describes the division of labor, exchange of goods, and money as a tool to promote the exchange of goods, to provide further analysis of symptoms and value price. There are three components, namely wage rates, land rent and profit. Work that is the size and price. Adam Smith distinguishes between working and productive work that is not productive. Work is productive work that produce physical goods and the real work that is not productive work that does not produce real physical goods. Assessed the importance of saving as well as obligations and as a good bread to have become the main religious. In this Leautaud Paul defines the store "l'Economie c'est l'art de ne pas vivre."

Adam Smith opinion about land rent is one of the factors that set the price. Then also raised that the land rent is due and not because of the high price of agricultural products.

Adam Smith did not make the difference between interest and hit the capital. Meanwhile, Jean Baptiste Say (1767-1832) share the "profit de l'industrie de l'entrepreneur" (the return):

1. Wages submit their property for industrial purposes (so the capitalist), penggatian "capitaux service."


2. Wages for the land owners for the "service foncier."


3. Replacement for the "industrial service" earned by the production process.

David Ricardo (1772-1823) states that the distribution of income is a matter of important public matter of economics. Physiokrat explain if the land is on lease as the productive capacity of land, while according to Ricardo (1772-1823) ground rent arising from the limitations (lack of) land. Theory of land rent Ricardo (1772-1823) known as the "Land Rent Theory differential" theory states that at this early stage, people will use the land that is fertile, and because keterbatasannya then will use the land less fertile. Each has a ground rent that is different. Land rent is the compensation that must be paid to the landowners for the use of "original and indestructible powers of the soil."

Meanwhile, Johan Heinrich von Thunen (1780-1850) states the difference between high-low land rent due to differences in location of the sales market. The close location of the land market with the resulting product will then press / to reduce the cost of transport products to market. As a result, land rent is relatively higher than the land that is located further from the market.

About poverty, David Ricardo (1772-1823) and Thomas Robert Malthus (1766-1834) revealed that the poverty population is due to "own fault" because it does not form a small family. This is seen as the resistance of the laws of the poor (poor law) that was valid in the UK. According to Ricardo (1772-1823) law tersebit will not fix poverty, only to reduce the prosperity of the poor and the rich both. This mainly arises from the theory of "wage fund" that had been diketengahkan by Cantillon, Turgot and Smith.

According to this theory of labor demand will depend on funds from the wage terakumulasi, rather than "funds which are destined for the payment of wages" which dihematkan, and each amount of money paid to that one, by itself reduced than the other. That is that the assistance to the poor is the wage disadvantage of funds, so the wage-wage work more.

According to William Nasau Senior magnitude average wage, depending on the comparison between the amount provided for the payment of wages, and the number of workers, in this there are also similar in Stuart Mill. However, the wages fund theory, this is a repetition of words that do not mean that there is no other than the cited case, that the wages of the average wage is the same as the fund, divided by the number of workers and the wage fund that can be known from the time the average wage with the number of people hired. If Ricardo (1772-1823) said that in the case of agriculture, mining and industrial production, the goods exchanged in comparison the amount of work, which is used to pembuatannya in marginal circumstances, the profit can now dipandangnya as a reward, though he does not put much attention to the this residue. Summary prognosis Ricardo (1772-1823) about the division of public revenue can be defined "rent increase, profit down, while wages remain."

About profit, so the decrease is a decreasing tendency, to be greeted by Marx (1818-1883) with the statement that is considered as evidence to explain the downfall capitalism. Meanwhile, according to Keynes rather use it to show the need for political konjungtur (Bussiness cycle) specific. Whereas for Ricardo (1772-1823) explained that the just-the first or early in the new opinion (Experiment) will be the first premium, while the latter will get the part, which is relatively small. This is in line with the theoretical advantage of the dynamic introduce by Joseph Schumpeter.

On the basis of the classical ideas about the profit decline, the country west-race competition for the "selling" the invention of and willing to pay for the research. For Indonesia alone, research is seen as a cost that will be useless terbuang, so that Indonesia continues to lag because it did not get the premium and be the first to obtain only a small part of production on the old technology products.

Trade issues have become important since the era filusuf make a trade if that morally acceptable or not. The merkantilis the trade even though the image still have a noble metal into a country (export oriented). They tried to explain the classical benefits of international trade cooperation.

Adam Smith started submitting absolute advantage theory (absolute advantage), while David Ricardo put improve the comparative advantage theory (comparative advantage). Unlike the opinion that Smith will make a profitable trade when a country's goods trade, which is absolutely menguntungkannya. Ricardo argued that a country will benefit from trade because each party to take efficient relative energy of each.

International trade theory by David Ricardo (1772-1823) which began with the supposition that the exchange of international traffic are valid only between two countries that between them there is no customs office wall, and the two countries is only gold money circulating. Ricardo (1772-1823) using the law of marketing together with the quantity theory of money to develop the theory of international trade. Although the country has a superior aboslut, but when the trade will be beneficial for both countries that do trade.

Trade theory has changed the world toward globalization with more quickly. If the first country that has the benefits of absolute reluctant to trade, thanks to "law of comparative costs" of Ricardo (1772-1823), English began to back the perdagangannya with other countries.

Thought has the classic diadakannya encourage free trade agreements between some countries. Theory of comparative advantage has become a dynamic comparative advantage states that comparative advantage can be created. Therefore, control of technology and hard work into success factors of a country. For the state of the technology will increasingly benefit from the presence of free trade, while countries that rely solely on the natural wealth will be lost in international competition.

Globalization is no longer avoided. How does not want, should be ready to face. Wrong government policies will make Indonesia fall. The control of technology and human resources development must be considered.



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