The golden rule of business economics: the formula. What is the golden rule of economics?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The golden rule is a moral maxim that has to do with the need for reciprocity in bilateral relationships. Its essence is extremely simple: you need to treat people the way you want them to behave towards you. The golden rule of economics is the fundamental principles underlying consumption. Current expenses should be covered by taxes, and loans should only be an investment in a better future. Let's apply this principle to everyday life. You need to think several times before taking a new smartphone on credit next time. In order not to make such mistakes, let's understand what is called the golden rule of economics.

Original philosophical meaning

Before we move on to what is called the golden rule of economics, consider the concept in its broadest sense. The golden rule, or ethics of reciprocity, is a moral maxim or principle that manifests itself in the form of a positive or negative aspect:

• Everyone should behave the way they want to be treated. This principle can be expressedin a positive or directive form.
• Everyone shouldn't behave the way they don't want others to treat them. Expressed in a negative or prohibitive way.

It's easy to see that following the positive version of the prescription is much more difficult in everyday life. The golden rule in this vein encourages people not only not to ignore the needs of others, but also to share their blessings with them, and also to support them.

In religion

The concept, which is called the golden rule of economics, underlies Christianity, Islam, Hinduism and Buddhism. The concept appeared in ancient Egypt. It was called "Maat" and is first mentioned in the story of the eloquent peasant (2040-1650 BC). In it we first encounter the positive prescription that would later become part of the golden rule. In the late period of ancient Egypt (664-323 BC), the second negative part of the moral principle we are considering today was written on papyrus.

Modern explanation

The term "golden rule" began to be widely used in early 17th century Britain, such as in the work of Charles Gibbon. Today it is found in almost every religion and ethical tradition. The golden rule can be explained in terms of philosophy, psychology, sociology and economics. Basically, it all comes down to the ability to empathize and awareness of the personality of those around you. Richard Swift said that if the golden rule of economics is not followed, then this indicatesabout the decline of the state (society). And now let's look specifically at what this concept is.

Golden rule of business economics

The state is a big organization. In fact, the central apparatus of power and local self-government is its management. What is considered the golden rule of economics manifests itself in every transaction in the business world. This is the basis of so-called fair dealing. Any enterprise must use its own funds to pay off its current expenses. Of course, you can always borrow. But this will only bring a short-term effect. Therefore, loans are allowed only as investments in infrastructure, research and other projects. Only such loans will benefit future generations. The golden rule of economics, the formula of which has just been considered, is the basis of plans to balance the budget in the United States. Some experts even state that it should be used during downturns as well. The government should cut the range of social services it provides. But isn't it at this point in the business cycle that ordinary citizens need them most?

Features of an effective fiscal policy

The golden rule of enterprise economics should be a guideline for developing not only the strategy of an individual organization. This principle is also important in the fiscal policy of any state. He says that loans should be used by the government solely forinvestment rather than to finance current consumption. Therefore, the golden rule is the basis of a balanced budget. The stability of the state depends on the ratio of the size of the public sector to national income. The explanation of the golden rule of fiscal policy is contained in macroeconomic theory. An increase in government borrowing leads to an increase in the real interest rate, which reduces the amount of investment in the economy.

Ideal savings rate

The basis of the economy is gradual development. The golden rule says that the right level of savings is the one that maximizes the constant level of consumption or ensures the growth of the latter. For example, it is used in the Solow model. The concept can also be found in the work of John von Neumann and Alle Maurice. However, the term "golden savings rate rule" was first used by Edmund Phelps in 1961.

Applying the rule in different countries

In 1997, the then Chancellor of the Exchequer of the United Kingdom, Gordon Brown, announced the basis for a new budget. So the "golden rule" with the light hand of the Labor Party for a long time entered into the everyday life of British politicians. In 2009, the golden rule in the UK was replaced by the principle of sustainable investing. Government borrowing in each individual year should not exceed 40% of the gross domestic product earned in that year.

In Germany, in 2009, on the contrary, they made an amendment to the constitution to balance the budget. It is designed to "slow down" the growth of debt. The reform should start in 2016. In France, the lower house of parliament voted to balance the budget in 2011. However, it has not yet entered into force, as the procedure for amending the constitution has not been completed. The Spanish Senate voted in favor of imposing restrictions on the structural deficit. This constitutional amendment will enter into force in 2020. Italy has had a balanced budget commitment since 2014.

Thus, we can say with confidence that the golden rule of the economy is not just a theoretical concept, but also a quite successful practical principle, which is now being implemented in many developed countries.