History of Economics

History of Economics PowerPoint PPT Presentation


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Portugal is relatively better at producing wine than wheat: so Portugal is said ... If both countries now specialise, Portugal producing only wine and England ...

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History of Economics

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Slide 1:History of Economics

(Safe) History of the economy (Dangerous) History of thinking about the economy Keyne’s scribblers

Slide 2:John Maynard Keynes

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil…"

Slide 3:Nasty, brutish and short

How does our present world economy come about? Why are things the way they are? Leviathan: The basic building blocks of a non-Hobbesian world: Industry Finance Freedom from brigandism, force, and fraud Limited liability: corporations, partnerships and sole proprietorships Government and taxation, laws and regulation Employment Unions and other pressure groups

Slide 4:History of the Economy

Gathering and hunting Farming - in caves, in villages, in towns, and then the advent of cities From barter to money, the key to trade From brigands to feudal lords Entrepreneurship - the farm becomes the firrrrm Mercantilism From family enterprises to group enterprises to corporations The firm, the market and the law (anti-trust and regulation) Government economies (capitalism vs. socialism) Welfare (Fabianism and social democracy)

Slide 5:History of Economics, Part 1

A list of dead white men (deal with it!): the classicalists: (this is a partial list) Aristotle Smith Malthus Rickardo Bentham and Mill (Marx and Engels)

Slide 6:The 19th Century

Previously: reformation, Civil War, reforms of various kinds, leads to the rise of a manufacturing class and the factory system is a result Adam Smith provides rationale for laissez faire industrialization and trade in The Wealth of Nations, 1776 Rise of merchant empires leads to trade in agriculture, leads to protectionist laws Industrialists need cheap food, so class struggle between industrialists and landed gentry continues through debate over Corn Laws, Free Trade Industrialists win, Britain becomes first industrial merchant empire America waits in the wings, grows stronger through freer industrial development

Slide 7:Reverend Thomas Malthus

1766-1834

Thomas Malthus, village parson, political economist Essay on the Principle of Population, 1798 (Contains the theory of carrying capacity)

Slide 9:From Malthus’s Essay, Chapter 1

“I think I may fairly make two postulata. First, That food is necessary to the existence of man. Secondly, That the passion between the sexes is necessary and will remain nearly in its present state…. Assuming then my postulata as granted, I say, that the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will shew the immensity of the first power in comparison of the second.”

Slide 10:Do the math…

y = ax Vs. y = mx + b

Slide 11:Do the math…

Agricultural capacity increases by 20 units a year (20 is 2% of its initial value) Population increases by 2 per cent of itself each year

Slide 13:Malthus vs. Smith and the Corn Laws

…Let us suppose, for instance, an increase in the demand and the price of corn, occasioned by an unusually prosperous state of our manufactures and foreign commerce; a fact which has frequently come within our own experience. According to the principles of supply and demand, and the general principles of the Wealth of nations, such an increase in the price of corn would give a decided stimulus to agriculture; and a more than usual quantity of capital would be laid out upon the land, as appears obviously to have been the case in this country during the last twenty years. According to the peculiar argument of Dr Smith, however, no such stimulus could have been given to agriculture. The rise in the price of corn would have been immediately followed by a proportionate rise in the price of labour and of all other commodities; and, though the farmer and landlord might have obtained, on an average, seventy five shillings a quarter for their corn, instead of sixty, yet the farmer would not have been enabled to cultivate better, nor the landlord to live better. And thus it would appear, that agriculture is beyond the operation of that principle, which distributes the capital of a nation according to the varying profits of stock in different employments; and that no increase of price can, at any time or in any country, materially accelerate the growth of corn, or determine a greater quantity of capital to agriculture.

Slide 14:Malthus today…

Bruntland and Daly Some forms of “natural capital” are in intrinsically short supply Substitutions of other factors for natural capital don’t necessarily

Slide 15:From an interview with Herman Daly, 1995, Environmental Review

“In the past, when the human population was small relative to the total world, it was reasonable to say that man-made capital was the limiting factor. The fish catch was limited by the number of fishing boats, not by the number of fish in the sea. You could always get more by adding more boats, and you would not deplete the fish. Now we have an excess capacity of fishing boats; adding more fishing boats is not going to increase the catch, it will just increase the idle time the boats sit there. To increase the fish catch, you need to increase the limiting factor, which is now the population of remaining fish and their ability to reproduce.”

Slide 16:David Ricardo

1772-1823

David Ricardo, bond trader, country gent, economist Principles of Political Economy and Taxation, 1817 (Contains the theory of comparative advantage)

Slide 18:Ricardo: theory of comparative advantage, 1815

two nations (Portugal and England) two commodities (wine and wheat) trade beneficial even if one country held an absolute cost advantage over England in both commodities.  gains from trade if each nation specializes in the production of the good in which it has a "comparative" cost advantage and then trades for the other good effect: income rise in both nations.  Presention follows, adapted from the Internet, AC Mulligan, Rod Hay at McMaster University (Canada), Tony Brewer at University of Bristol (Britain), and others.

Comparative Advantage: Before Trade Country Wheat Wine (Cost per unit goods in labor hours) England 15 30 Portugal 10 15 Each unit of wine in England costs the same as 2 units of wheat. Production of an extra unit of wine means foregoing production of 2 units of wheat (ie the opportunity cost of a unit of wine is 2 units of wheat). In Portugal, a unit of wine costs 1.5 units of wheat to produce (ie the opportunity cost of a unit of wine is 1.5 units of wheat in Portugal). Because relative or comparative costs differ, it will still be mutually advantageous for both countries to trade even though Portugal has an absolute advantage in both commodities. Portugal is relatively better at producing wine than wheat: so Portugal is said to have a COMPARATIVE ADVANTAGE in the production of wine. England is relatively better at producing wheat than wine: so England is said to have a comparative advantage in the production of wheat. Adapted from Internet documents,authors: AC Mulligan, Rod Hay at McMaster University (Canada), Tony Brewer at University of Bristol (Britain), and others. Table 2: Comparative Advantage: After Trade C o u n t r y Production Before Trade After Trade Wheat Wine Wheat Wine E n g l a n d (270 hrs) 8 5 18 0 P o r t u g a l (180 hrs) 9 6 0 12 T o t a l 17 11 18 12 Table 2 shows how trade might be advantageous. Costs of production are as set out in Table 1. England is assumed to have 270 man hours available for production. Before trade takes place it produces and consumes 8 units of wheat and 5 units of wine. Portugal has fewer labour resources with 180 man hours of labour available for production. Before trade takes place it produces and consumes 9 units of wheat and 6 units of wine. Total production between the two economies is 17 units of wheat and 11 units of wine. If both countries now specialise, Portugal producing only wine and England producing only wheat, total production is 18 units of wheat and 12 units of wine. Specialisation has enabled the world economy to increase production by 1 unit of wheat and 1 unit of wine. Adapted from Internet documents,authors: AC Mulligan, Rod Hay at McMaster University (Canada), Tony Brewer at University of Bristol (Britain), and others.

Slide 21:Ricardo: theory of comparative advantage, 1815

two nations (Portugal and England) two commodities (wine and wheat) trade beneficial even if one country held an absolute cost advantage over England in both commodities.  gains from trade if each nation specializes in the production of the good in which it has a "comparative" cost advantage and then trades for the other good effect: income rise in both nations.  Consequences Liberal economics argument for free trade and against protectionism, 19th century Neoliberal economic argument for free trade and against protectionism, 20th century NAFTA, GATT, WTO

Slide 22:Ricardo: theory of comparative advantage, 1815

There are no transport costs. Costs are constant and there are no economies of scale. There are only two economies producing two goods. The theory assumes that traded goods are homogeneous (ie identical). Factors of production are assumed to be perfectly mobile. There are no tariffs or other trade barriers. There is perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally. And (from Daly) it is implicitly assumed that capital is immobile except within individual nations. An English gentlemen wouldn’t invest in Portuguese agriculture or vice-versa.

Table 2: Comparative Advantage: After Trade C o u n t r y Production Before Trade After Trade Wheat Wine Wheat Wine E n g l a n d (270 hrs) 8 5 18 0 P o r t u g a l (180 hrs) 9 6 0 12 T o t a l 17 11 18 12 Table 2 shows how trade might be advantageous. Costs of production are as set out in Table 1. England is assumed to have 270 man hours available for production. Before trade takes place it produces and consumes 8 units of wheat and 5 units of wine. Portugal has fewer labour resources with 180 man hours of labour available for production. Before trade takes place it produces and consumes 9 units of wheat and 6 units of wine. Total production between the two economies is 17 units of wheat and 11 units of wine. If both countries now specialise, Portugal producing only wine and England producing only wheat, total production is 18 units of wheat and 12 units of wine. Specialisation has enabled the world economy to increase production by 1 unit of wheat and 1 unit of wine. Adapted from Internet documents,authors: AC Mulligan, Rod Hay at McMaster University (Canada), Tony Brewer at University of Bristol (Britain), and others.
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