1---
 2meta: 
 3  date: false
 4  reading_time: false
 5title: "Knock-on Effect"
 6date: 2023-10-05
 7description: "The idea that one action or event has secondary or indirect consequences in economics."
 8tags: ["Economics", "Systematic Effects", "Equilibrium"]
 9---
10
11## Background
12
13The knock-on effect refers to the concept whereby an initial action results in a series of events or reactions, producing secondary or indirect consequences. In the context of economics, it underscores the interconnectedness of economic agents and how a change in one aspect of the economy can trigger wider repercussions.
14
15## Historical Context
16
17The recognition of interconnected economic activities can be traced back to classical economists like Adam Smith. However, as economies have grown in complexity, the idea of the knock-on effect has become more pertinent in understanding modern economic systems, where policy changes or market events often lead to broad and sometimes unforeseen economic implications. 
18
19## Definitions and Concepts
20
21A knock-on effect is an economic phenomenon where the outcome of one specific action propagates through various sectors or systems, creating a domino effect until the economy stabilizes at a new equilibrium. This term is often used to describe the ripple effect that changes in one part of an economy can have on the broader economic landscape.
22
23## Major Analytical Frameworks
24
25### Classical Economics
26In classical economics, knock-on effects can arise from policies affecting supply and demand, trade, or productivity, translating into broader economic impacts.
27
28### Neoclassical Economics
29Neoclassical economics often examines knock-on effects through the lens of rational expectations and market adjustments to new equilibrium states.
30
31### Keynesian Economics
32Keynesian theory places significant emphasis on knock-on effects, particularly through the multiplier effect, where initial spending boosts aggregate demand leading to further economic activities.
33
34### Marxian Economics
35Within Marxian economics, knock-on effects can be related to changes in capital accumulation and the resulting effects on labor and production structures.
36
37### Institutional Economics
38Institutional economists study knock-on effects considering the role of institutions and social governance, understanding how policies impact broader societal economy systems.
39
40### Behavioral Economics
41Behavioral economists might analyze knock-on effects in the context of how psychological factors and irrational behaviors propagate through economies, affecting decision-making on a large scale.
42
43### Post-Keynesian Economics
44Post-Keynesian economics extends Keynesian ideas further into scenarios where knock-on effects especially arise from investment behaviors and their impacts on overall economic stability.
45
46### Austrian Economics
47Austrian economics discusses knock-on effects in terms of market processes and entrepreneurial discovery, emphasizing the unintended consequences of individual actions in a decentralized economy.
48
49### Development Economics
50Knock-on effects in development economics may be observed in how policy interventions in education, infrastructure, or healthcare create long-term developmental impacts.
51
52### Monetarism
53Monetarists study how monetary policies propagate through the economy, creating knock-on effects on inflation, employment, and economic growth.
54
55## Comparative Analysis
56
57Different economic schools of thought approach the concept of the knock-on effect with various focal points, whether it be through aggregate demand, institutional roles, market processes, or monetary policies.
58
59## Case Studies
60
611. **Financial Crisis of 2008**: Examination of how subprime mortgage defaults led to widespread economic turmoil illustrates a massive knock-on effect.
622. **Brexit**: Observing the consequences on trade, labor markets, and economic confidence following the UK's decision to leave the EU.
63
64## Suggested Books for Further Studies
65
661. *The Wealth of Nations* by Adam Smith
672. *The General Theory of Employment, Interest, and Money* by John Maynard Keynes
683. *Capital: A Critique of Political Economy* by Karl Marx
694. *Thinking, Fast and Slow* by Daniel Kahneman
70
71## Related Terms with Definitions
72
73- **Multiplier Effect**: The proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending.
74- **Equilibrium**: A state where economic forces such as supply and demand are balanced.
75- **Externalities**: Costs or benefits not accounted for in the market price that affect third parties.