What is Economics?. Lesson 3: Economic Thought Ideas make the World. In the beginning…. What basic economic questions have challenged thinkers throughout the ages? Ever since men began to notice some regularity and order in interpersonal arrangements, they have sought to explain
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What is Economics?
Lesson 3: Economic Thought
Ideas make the World
oikos, meaning house
nemein, meaning to manage
Philosophy and his teaching method
Wisest men of all times, was an original thinker for his time
Field of human action
Division of labor
State's role to protect the community
Different people specialize in different activities
More plentifully and easily, and of a better quality
Didn't realize, however, that producers and traders in a free society do not need to be ordered to produce and trade.
The Republic, his ideal state, a planned community in which each person would be assigned a particular role.
Philosopher King (dictator)
Criticized Plato's totalitarian communistic ideal state
a priori assumptions and logic from which economic principles are derived
transaction must be equal in some respects
neither more nor less
if one person profits from a trade, it must be at the expense of another
Nicomachean Ethics (c.a. 350 BC): use of money as a medium of exchange
Property should be in a certain sense common, but, as a general rule, private; for, when everyone has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business... And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state.
The Problem of Just Price
A monk travelling back to Germany from a pilgrimage to Rome joined a band of merchants. He showed them a silver chalice he had purchased for his cathedral at home and told them what he paid for it. They laughed with astonishment and congratulated him, because he had made a killer of a bargain and they mused that an unworldly monk was able to drive an even better deal than any of them. The monk so was horrified at their reaction that he left immediately, and went back to Rome to pay more to the chalice maker for what should have been the just price.
The Parable of the Monk
[T]he value of an article does not depend on its essentialnature, but on the subjective estimation of men, even if thatestimation is foolish.
[T]he just price arises from the abundance or scarcity ofgoods, merchants, and money, as has been said, and notfrom costs, labor, and risk. If we had to consider labor andrisk in order to assess the just price, no merchant wouldever suffer loss, nor would abundance or scarcity of goodsand money enter into the question.—1554
LuísSaravia de la Calle
Those who measure the just price by the labour, costs, and risk incurred by the person who deals in the merchandise or produces it, or by the cost of transport or the expense of traveling...or by what he has to pay the factors for their industry, risk, and labour, are greatly in error.... Why should a bale of linen brought overland from Brittany at great expense be worth more than one which is transported cheaply by sea?... Why should a book written out by hand be worth more than one which is printed, when the latter is better though it costs less to produce?... The just price is found not by counting the cost but by the common estimation.
[B]read is more valuable than meat because it is morenecessary for the preservation of human life. But there maycome a time when bread is so abundant and meat so scarcethat bread is cheaper than meat. —1583
More precise a just price, emphasizing the costs of labor and expenses
Buyer and seller usually have different ideas of what a just price comprises, he thought an agreed price usually contains a “gift” element on either side
Idea of trade being a win-win situation.
If people did not benefit from a transaction they would not trade
Defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public.
Economic activity as a good to be taxed to raise revenues for the nobility and the church
Economic exchanges were regulated by feudal rights
Niccolò Machiavelli The Prince
Princes and republics should limit their expenditures
Prevent either the wealthy or the populace from despoiling the other
State seen as generous, not a heavy burden on its citizens.
Economic theory that advocated the use of the state's military power to ensure local markets and supply sources were protected
Tariffs could be used to encourage exports (meaning more money comes into the country) and discourage imports (sending wealth abroad)
Colonies and empires
Gold and silver seen as wealth
Didn't realize that the purpose of production and trade was consumption
Advocated regulating industry and trade
Minister of Finance under King Louis XIV of France
National guilds to regulate major industries
It is simply, and solely, the abundance of money within a state [which] makes the difference in its grandeur and power.
Dudley North (1641-1691)
Richard Cantillon (1680-1734)
Founder of Modern Economics!
Essai sur la nature du commerce en général (1730?, pub. 1755) first systematic treatise on economics as a separate discipline
Markets are a law of nature
freely adjusting markets
mutually compatible prices
Entrepreneur as uncertainty-bearer (and an equilibrating force)
John Locke (1632-1704)
Critic of Thomas Hobbes' defense of absolutism
Believed that people contracted into society to protect their rights of property
Property included lives and liberties, as well as wealth
People combined their labor with their surroundings, then that created property rights
Government cease interference with people's property (or their lives, liberties and estates)
Government should positively work to ensure their protection
God hath given the world to men in common... Yet every man has a property in his own person. The labor of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labor with, and joined to it something that is his own, and thereby makes it his property
Nature, the natural and natural law were good
To live close to nature, to till the soil and to engage in agriculture were more noble pursuits than manufacturing.
Favored government aid to agriculture
Otherwise the government should not interfere, economic activities should be allowed to develop naturally.
Agriculture and land was wealth.
Pierre Samuel du Pont de Nemours (1739-1817)
low tariffs and free trade
Court physician to King Louis XV of France
Tableau économique (1758, Economic Table)
Regulation impedes the flow of income
Taxes on the productive classes should be reduced
Réflexionssur la formation et la distribution des richesses(1766, Reflections on the Formation and Distribution of Wealth)
Land is the only source of wealth
Society in terms of three classes
Productive agricultural class
Salaried artisan class (classestipendice)
Landowning class (classedisponible)
Turgot on Knowledge
There is no need to prove that each individual is the only competent judge of the most advantageous use of his lands and of his labor. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it which is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want.— “Elegy to Gournay,” 1759
Only the net product of land should be taxed and advocated the complete freedom of commerce and industry
No bankruptcy, no tax increases, no borrowing
Ultimate wish was to have a single tax on land and abolish all other indirect taxes
Cost, Value, and Exchange
To obtain the satisfaction of these wants, man has only an even more limited quantity of strength and resources. Each particular object of enjoyment costs him trouble, hardship, labor and at the very least, time. It is this use of his resources applied to the quest for each object which provides the offset to his enjoyment and forms as it were the cost of the thing.
This superiority of the esteem value attributed by the acquirer to the thing he acquires over the thing he gives up is essential to the exchange for it is the sole motive for it. Each would remain as he was, if he did not find an interest, a personal profit, in exchange; if, in his own mind, he did not consider what he receives worth more than what he gives.
— “Value and Money,” 1769
Anders Chydenius (1729–1803)
The National Gain (1765)
Freedom of trade and industry and explores the relationship between economy and society and lays out the principles of liberalism
Democracy, equality and a respect for human rights
David Hume (1711-1776)
Father of Political Economy
Nature of the individual, the role of government ethics and moral principles
Denounced mercantile assumptions
Undesirable to strive for a favorable balance of trade, it is in any case impossible
David Hume (1711-1776)
Any surplus of exports that might be achieved would be paid for by imports of gold and silver
Would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored
Friend and student of Hume's philosophy, Adam Smith (1723-1790)
The first economist??
Explained fairly satisfactorily one of the two basic economic enigmas
Production and trade proceed in a more or less orderly fashion without the need for an overall dictator or planner
The businessman is led as if by an invisible hand to promote an end which was no part of his intention
No Philosopher King or dictator had to tell them what to do
Businessmen were fairly flexible; it was in their personal interest to shift and juggle their production plans continually and adapt to changing market conditions and market prices
Market toward equilibrium between the supply of goods available and the demand for them by consumers.
Advocated laissez faire
The other economic enigma—the reason for market prices
Paradox of value
Categories, aggregates, rather than units
One more, or one less unit (margin)
Comparisons of subjective values
Principles of Political Economy and Taxation
critic of barriers to international trade
relationship between the three factors of production - land, labor and capital
Even though there is really only labor that converts land
Law of Comparative Advantage
Law of Association (Mises)
Iron Law of Wages
John Stuart Mill (1806-1873)
Which Happens When?
Bolsheviks under Lenin
Violence, dictatorship of the proletariat
World revolution first
John A. Hobson
Better social legislation, in terms of wider powers for trade unions, health and safety standards and a more egalitarian distribution of wealth
Revolution can skip steps and begin earlier in agriculture
Richard H. Tawney
Critical of the haphazard method of wealth allocation in the modern world
“It is foolish to maintain property rights for which no service is performed... for payment without service is waste.”
Pooling of surplus resources by means of taxation, and the use of the funds thus obtained to make accessible to all, irrespective of their income, occupation or social position, the conditions of civilization..
A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses—as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses, in other words they were on the margin.
The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism.
“It turns out, of course, that Mises was right” about the impossibility of socialism. “Capitalism has been as unmistakable a success as socialism has been a failure. Here is the part that's hard to swallow. It has been the Friedmans, Hayeks, and von Miseses who have maintained that capitalism would flourish and that socialism would develop incurable ailments.”Robert Heilbroner
Production of Commodities by Means of Commodities (1960)
Technological relationships are the basis for production of goods and services
Prices result from wage-profit tradeoffs, collective bargaining, labor and management conflict and the intervention of government planning
Major force for price setting in the economy was not necessarily market adjustments
The Theory of the Leisure Class (1899)
Criticized materialistic culture and wealthy people who conspicuously consumed their riches as a way of demonstrating success
The Theory of Business Enterprise (1904)
Production for people to use things and production for pure profit, arguing that the former is often hindered because businesses pursue the latter
The Affluent Society (1958)
The New Industrial State (1967)
Economics and the Public Purpose (1973)
New socialism: nationalizing military production and public services such as health care, introducing disciplined salary and price controls to reduce inequality
A Monetary History of the United States (1963)
Quantity theory of money, that general prices are determined by money
Capitalism and Freedom (1967)
Nobel Prize 1976
Student of Mises
Major critic of John Maynard Keynes
Changing prices communicate signals which enable individuals to coordinate their plans (the business cycle)
Also contributed to jurisprudence, neuroscience, philosophy and the history of ideas
Nobel Prize 1974
Do you ever feel like you're experiencing a powerful and terrifying shift in your fundamental consciousness? Do you ever have thoughts that horrify you? Oh, dear God, was that me who just thought that evil thought? Do you ever open your eyes in the morning and wonder if you're the same person who went to sleep the night before? Do you ever think, "Aw, screw it. Why do I even try? What's the point? Everything always goes to hell anyway." Do you ever wonder if the guy bringing you your soup hates your guts because he has to wait on you and pretend to be pleasant all the while knowing in his heart that he's a better man than you and his current servile status is final proof of an unjust universe? Do you ever think, "People are only nice to me because they want something?" Do you ever think, "I'm only being nice to this person because I want something?" Well, the reason I bring all this up is to reassure you that I don't. Just thought you'd like to know... although I can't help but feel that you're not particularly happy for me.