 Let me remind you that we are having the quiz on Tuesday. Okay, now I remember. It's Friday. Okay. All right, calm down. It was just a refresher for the morning. All right. All right. Okay. So we'll have the quiz on Friday. And we know you'll remember that the quiz covers part one. And this morning we are continuing with the first case in part two, the case of Britain, comparative politics, or British politics in comparative perspective. And last time we were discussing state tradition in history. And the plan for this morning is to continue with it. So we are, we've been, we've done a quick introduction, which was followed by British state in historical perspective. So this morning I'll continue with that and switch to political economy of economic and social policies in Britain in, again, in historical perspective. Okay. Where did we leave off? I think we just began to talk about, we did talk about new labor and third way, but we didn't talk much about conservative dominated coalition under David Cameron and Daniel Clegg, which was formed in 2010. May 10 was a surprise, the election on May 10 was a surprise for British citizens because the election did not produce a majority in the parliament. So no party had the majority of seats in the parliament. This is what we call hung parliament. So the parliament cannot move, it just feels hung. That there was no majority. This meant that for the first time since World War II, there emerged a British government which combined elements on both sides of the spectrum, political parties on both sides of the spectrum, political spectrum that is. So we have a conservative government, well, a conservative party coming together with left of center political party. So the conservatives formed a coalition with liberal Democrats. Liberal Democrats, I know we haven't covered the parties and party system yet. In British politics, we have three, well, two and a half major parties. One is the traditional conservative party. The other is traditional labor party, which has always been there for more than 100 years for both cases. And the third party is this half party called liberal Democrats. Liberal Democrats, as we shall be talking about, were part of the labor party. They in a way seceded from the labor party. They got separated from the labor party and other factions joined them. So this is a more left of labor party. So liberal Democrats are on the political spectrum, on the left-hand side, even on the more left-hand side of the labor party. For the first time, there was a coalition of right and left-wing parties coming together. The coalition was in a way a blend of the conservative commitment to dynamism of free markets. The classic ideas of laissez-faire. Conservative ideals of laissez-faire. Let them do, let them make, let them pass, let the free market do its job. Leave it to the markets, and things will be better. Through the workings of the invisible hand, markets will clear. So much less state intervention into the economy, as we shall be talking about in the next minutes, few minutes. We have a government, or we have a political ideology, which sees a political party with an ideology that sees state intervention to be relegated to the realm of justice and basic infrastructure. And main institutions. So conservative commitment to free markets blended with a liberal Democratic commitment, Lib Dems, liberal Democratic Party's commitment to decentralization, which meant that there emerged a new program, a coalition program, in which there were radical ideas of what they called big society. And this big society, or under this big society, the coalition by Cameron and Clegg emphasized empowering of citizens. This meant, from their eyes, a move or transfer of power away from the state towards communities, as well as individuals, families, individuals, so collectivities and communities. So the state would intervene less increasingly, less in not only the economy, but how the society should be run. So even police officers or post offices, all of these, in the governance of these services, citizens would have, according to the big society program, citizens would have an increased say. So that was in a way, in the eyes of many, a quid pro quo for all the cuts that were to follow. Cutbacks on the British welfare state in social services. In the sense that citizens, this was for citizens, the government saw this as an appeasement, a tool for appeasement to keep citizens happy in the wake or after the Great Recession. So, mind you, this was a time, the government had the power right after a massive economic shock. That really shook not only Britain, but much of advanced naturalized world. So the Great Recession, which translated into the Eurozone crisis right next door on the continent, really shook British politics in that respect. There were bank bailouts, there were increases in massive, or massive increases in unemployment, inequality and all that. So Cameron came to power as the prime minister, his finance minister, which is in the British context, called the Chancellor of the Exchequer, George Osborne. They formed a team and Daniel Clegg, representing the Liberal Democrats, joined them. And they tried to carve some space from the establishment, carve out some space from the establishment of British politics, and they wanted to appeal to a broader clientele. So they wanted to emerge more like a catch-all party, like the way Blairite New Labour tried. So they wanted to have a broader appeal, not just business and labour, but all other sectors or segments in society, a more non-ideological appeal to British politics and to citizens. And of course, recently, 2016, 2015 elections, 2016 July, the referendum decision on Brexit. So I think this is where we are in terms of state tradition and what we make of the state tradition for contemporary politics. Now let me turn to political economy of economic and social policies. And here, I know we've discussed parts of this, but let me emphasise here the role of the state and the economy. We know that the British have always opted for the laissez-faire approach. But there were some fluctuations. There were some ebbs and flows in their understanding or how governments interpreted the British tradition of laissez-faire. Intervention can only be limited to macroeconomic policies. What do we mean by macroeconomic policies? Macroeconomic policies, what are, what were macroeconomic policies? Any ideas, ladies and gentlemen? Good morning, everyone. Macroeconomic policies. Price floors and price ceilings are microeconomic policies. Wait, let me come back to price ceilings and price floors. These are microeconomic policies in the sense that they are directed to one single market, such as the housing market or markets for oranges. So they are microeconomic policies. When we refer to macroeconomic policies, monetary and fiscal policies. Who is in charge of fiscal policy? Okay, let me begin. Who is in charge of monetary policy? Who makes, who designs and implements monetary policy? Central bank. Okay, central bank. In an increasingly higher number of cases, we have central banks, which are more or less independent of the executive, i.e. the government. Okay? So more enhanced political autonomy from the government. So we have an increasing independence worldwide, a trend towards independence of central banks. Bank of England, for more than a century, has been independent, politically independent of the government. So, but in general we have central banks who design and implement monetary policies. Who designs and implements fiscal policies? Governments. So, how does a central bank design, how do they play, what are their instruments? Let me put it this way. What do they, or how do they stabilize the economy? Okay, open market operations, discount windows. So they basically play with the interest rate. And the interest rate, they play with the interest rate through the workings of the money supply. So they expand monetary base, where they withdraw from the market. So they suck up some money from the market so that the total stock of money decreases in the economy. If total stock of total supply of anything decreases, what happens to its price? Increases. So if the central bank sucks up money, liquidity from the system, its price is the interest rate. What would happen to the interest rate? If central bank takes away, sweeps into its coffers all the money that's available in the economy, in markets, what happens to its price? I.e. the interest rate. Increases. Okay, so there's scarce money in the system, therefore interest rate increases. If interest rate increases, I'm trying to remind you what you've learned a while ago, if interest rate increases, you as consumers, would you like to buy more of other goods or less of other goods? Or can you buy more of other goods with your credit cards and stuff, with the possibilities of borrowing, or would you like to buy less of goods? Okay, think of yourselves, put yourselves in the shoes of an investor. Would you expand your investment, or would you reduce your investment? If that makes sense, huh? Because the cost of borrowing is higher. You won't be able to borrow money in case you need money. Okay, so investment also decreases, consumption decreases. If you want to, I mean, for imported items, would you be able to buy more of imports or less of imports? Less of imports. So all these accumulate, and if the interest rate increases as a result of the operations of the central bank, all demand will decrease. As producers, as firms, because you'll be investing less, will you be employing more workers or less number of workers? Okay, so people, there may be unemployment, or there will be lower levels of employment. Okay, this means that people will have less in their pockets, workers will have less in their pockets, and this means that they will be able to purchase less of the goods that are available on the market. So this is one way how the transmission mechanism works through the workings of the central bank through using its monetary levers. So the central bank plays with the monetary base, which is called high-powered money. You may remember that too. So money, like monetary base, money supply, the central bank plays with money supply, increases money supply through expansionary policies or decreases money supply through restrictions or a recessionary monetary policy or a tight monetary policy. And in that case, the central bank tries to control the economy, stabilize what's called the business cycle. And the government also plays with what levers in or while designing fiscal policies. What are the instruments here, policy instruments? How does the government design and implement fiscal policies through taxation and spending? So if the government expands spending, purchases goods and services in the markets, builds roads, builds housing, engages in construction projects, purchases all kinds of goods. So firms will make more money, employment will increase, output is likely to increase. Or the government decides to implement tighter fiscal policy. That is to say, they want to increase taxes, which includes corporate taxes. Corporate taxes are taxes on firms, corporate units. If taxes on firms, imagine yourselves as a firm. If you know that taxes are increasing, corporate income taxes, whatever you make, whatever you sell, this is your gross income of the firm, some of it you pay to the government as corporate taxes. If you know that the government is increasing taxes, would you be willing to produce more or willing to produce more?