The golden rule is a moral maxim, which is associated with the need for reciprocity in bilateral relations. 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. Ongoing expenses should be covered by taxes, and loans should only be investments in a better future. We apply this principle in everyday life. You need to think a few times before next time taking a new smartphone on credit. In order not to make such mistakes, let's look at what is called the golden rule of the economy.
Original philosophical meaning
Before we move on to what is called the golden rule of economics, consider the concept in its broad sense. The golden rule, or the ethics of reciprocity, is a moral maxim or principle, which manifests itself in the form of a positive or negative aspect:
- Everyone should behave as he wants to be treated. This principle can be expressed in a positive or prescriptive form.
- Everyone should not behave as he does not want others to treat him. It is expressed in a negative or prohibitive form.
It is easy to note that the implementation of 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 benefits with them, as well as 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 "Ma'at" and was first mentioned in the story of the eloquent peasants (2040-1650 BC). In it, for the first time we come across a positive prescription, which will 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 that we are considering today was recorded on papyrus.
Modern explanation
The term "golden rule" began to be widely used at the beginning of the 17th century in Britain, for example, it is found 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 the awareness of the personality of the people around them. Richard Swift said that if the golden rule of the economy is not fulfilled, then this indicates a decline in the state (society). And now let's look specifically at what this concept is.
The Golden Rule of Enterprise Economics
The state is a large organization. In fact, the central apparatus of power and local government is its management. What is considered the golden rule of the economy is manifested in every transaction in the business world. This is the basis of the so-called fair business. Any company should use its own funds to pay off its current expenses. Of course, you can always take. But this will bring only 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 the economy, the formula of which has just been considered, is the basis of plans to balance the budget in the United States. Some experts even say that it must be used during recessions. The government should cut back on its social services. But aren't ordinary citizens most needed during this period of the business cycle?
Features of effective fiscal policy
The golden rule of the economy of an enterprise should serve as a guideline for developing not only the strategies 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 for investment, and not for financing current consumption. Therefore, the golden rule is the basis of a balanced budget. State stability depends on the ratio of the size of the public sector to national income. The golden rule of fiscal policy is explained 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 one is the level of savings that maximizes a 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 works of John von Neumann and Alla Maurice. However, for the first time the term “golden rule of the level of savings” was used by Edmund Phelps in 1961.
Application of the rule in different countries
In 1997, the then Chancellor of the Exchequer of the United Kingdom, Gordon Brown, proclaimed the foundations of 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 investment. Government borrowing in each individual year should not exceed 40% of the gross domestic product earned in it.
In Germany, in 2009, on the contrary, they introduced a balancing budget amendment to the constitution. It is designed to "slow down" the growth of debt. Reform should begin in 2016. In France, the lower house of parliament voted in 2011 to balance the budget. However, it has not yet entered into force, since the procedure for amending the constitution has not been completed. The Spanish Senate voted to set structural deficit restrictions. This constitutional amendment will enter into force in 2020. In Italy, a balanced budget obligation has been in effect since 2014.
Thus, we can confidently say that the golden rule of the economy is not just a theoretical concept, but also a quite successful practical principle that is now being implemented in many developed countries.