What is Economics? Lesson 5: Economic Thought Ideas make the World
Jokes of the Day Q: What do you call a 100 year old ant?
Jokes of the Day Q: What do you call a 100 year old ant? A: An antique.
Jokes of the Day Q: What do you call an ant who likes to be alone?
Jokes of the Day Q: What do you call an ant who likes to be alone? A:An independent.
Jokes of the Day Q: What do you call an ant who skips school?
Jokes of the Day Q: What do you call an ant who skips school? A: A truant.
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 • The origin of market values • The reasons why economic production and trade proceeded in a more or less orderly fashion without any overall direct or conscious supervision • The tentative early answers posed to these questions contained gaps and inconsistencies
How do knowledge and understanding progress over the years? • Earliest men • Ideas, knowledge and understanding passed along • Developed and refined • Yet the source of ideas remains a mystery • More we can know of what others have thought and reasoned; the more likely we are to reach correct conclusions
How do knowledge and understanding progress over the years? • A dwarf standing on the shoulders of a giant may see farther than the giant himself. So said Didacus Stella (A.D. 39-65) • Chanakya authored the Arthashastra, the earliest known treatise on economics
How did the study of economics begin? oikos, meaning house nemein, meaning to manage oikonomia
Socrates (c.469-399 BC) Philosophy and his teaching method Socratic method Wisest men of all times, was an original thinker for his time Hemlock
Plato 428/427 BC– 348/347 BC) 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
Plato 428/427 BC– 348/347 BC) 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)
Aristotle (384-322 BC) Criticized Plato's totalitarian communistic ideal state Private property a priori assumptions and logic from which economic principles are derived
Aristotle (384-322 BC) Market values 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
Politics, Book II, Part V 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 Buyers Sellers 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
Scholasticism and St. Thomas of Aquinas (c. 1225-1274) • Summa Theologica • Trade must be equal • just price • “If the price exceeds the value of a thing, or conversely if the value of a thing exceeds the price, justice is violated.”
Scholasticism and St. Thomas of Aquinas (c. 1225-1274) • Usury • Compensation for fraud and cheating • “Whilst human laws might not impose sanctions for unfair dealing, divine law did.”
Duns Scotus (1265-1308) Sententiae (1295) 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
Duns Scotus (1265-1308) 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.
Mercantilism and Nationalism 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.
Mercantilism and Nationalism 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
Jean Baptiste Colbert (1619-1683) Minister of Finance under King Louis XIV of France National guilds to regulate major industries Silk Linen Tapestry Furniture Wine 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) • Opposed to all mercantile policy • Discourses upon Trade (1691) • Assumption of needing a favorable trade balance was wrong • Trade benefits both sides • Promotes specialization • Division of labor • Increases in wealth for everyone • Regulation of trade interfered with these benefits by reducing the flow of wealth
Free Markets? Richard Cantillon (1680-1734) Markets are a law of nature rational self-interest freely adjusting markets mutually compatible prices
Free Markets? 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
Second Treatise on Civil Government (1689) 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
Physiocrats 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.
Physiocrats Pierre Samuel du Pont de Nemours (1739-1817) low tariffs and free trade
François Quesnay (1694-1774) Court physician to King Louis XV of France Tableau économique (1758, Economic Table) Agricultural surpluses Regulation impedes the flow of income Taxes on the productive classes should be reduced
Jacques Turgot (1727-1781) 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)
Jacques Turgot (1727-1781) 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
Classical Economists 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
Wealth of Nations 1776 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
Wealth of Nations 1776 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 Bite-sized pieces One more, or one less unit (margin) Comparisons of subjective values A Serious Problem!!! A=A
Jeremy Bentham (1748-1832) • Theory of utility • The greatest happiness for the greatest number • Society is nothing more than the total of individuals • Social goods • Measuring people's happiness
Jean-Baptiste Say (1767-1832) • A Treatise on Political Economy (1803) • Say's Law of markets • Never be a general deficiency of demand or a general glut of commodities in the whole economy • People produce things to fulfill their own wants • Producers demand goods • Production is demand, so it is impossible for production to outrun demand
Jean-Baptiste Say (1767-1832) • There will be different economic sectors whose demands are not fulfilled • Over time supplies will shift, businesses will retool for different production and the market will correct itself • No general shortage of money in an unhampered market economy because money prices tend to adjust
Thomas Malthus (1766-1834) • Principles of Political Economy (1820) • Economy could stagnate with a lack of effectual demand • Wages if less than the total costs of production cannot purchase the total output of industry • Would cause prices to fall • Price falls cause incentives to invest • Population versus food • Law of Diminishing Returns
David Ricardo (1772-1823) 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) Law of Iron Wages
John Stuart Mill (1806-1873) • The Principles of Political Economy • On Liberty • Middle ground between Adam Smith's view of ever expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population • Supply and demand as a relationship rather than mere quantities of goods on markets • Opportunity cost
Which Happens When? • Even technology comes to an end at some point!!!
Problems with the Classicals • Failure to recognize the importance of subjective (personal) values and consumer sovereignty • Labor Theory of Value • Niggardliness of nature, they considered pretty slim the chances workers had of earning much more in the long run than their basic subsistence • Iron Law of Wages • Paradox of value (use vs exchange)