MICROECONOMICS AND MACROECONOMICS

MICROECONOMICS AND MACROECONOMICS DR. PETROS KOSMAS LECTURER VARNA FREE UNIVERSITY ACADEMIC YEAR 2010 - 2011 LECTURE 10- 11 ECO-1067

History of Economic Thought The History of Economic Thought deals with different thinkers and the theories in the subject that became Political Economy. It encompasses many different disparate Schools of Economic Thought. The great Greek philosopher Aristotle questioned whether property is best left in private or public hands. The “art” of wealth acquisition. ECO-1067

Why Study History of Economic Thought Aids in the understanding of economics. Provides an introduction to part of intellectual history. Helps: Illustrate how ideas develop and change within academic disciplines. Helps create more critical attitudes and abilities. ECO-1067

Why Study History of Economic Thought In post-modern economics, it is normally assumed that people are entirely selfish and must either be coerced or bribed into performing tasks (Bewley, 1995). Because it creates a common moral value judgments which may largely shape policies. For example Kantian economics, show that structuring incentives to appeal to individual morality can motivate improvements in public good funding contexts. ECO-1067

Three General Beliefs • Theory and historical processes are reciprocally interconnected. • Social and economic change are continuous. • Schools of thoughts in economic area are (and always have been), vitally concerned with social, political, historical, practical, and moral issues. ECO-1067

1.Theory and historical processes are reciprocally interconnected because: • Social theories are based upon, grow out of, reflect, and attempt to explain ongoing events and circumstances. • They are the “products” of the social and economic circumstances in which they are conceived. Also social and economic circumstances are the “products” of social theories. • But it is equally true that human being act, create, shape, and change their social and economic circumstances on the basis of ideas and social theories. ECON-220

2. Social and economic change are continuous because: • In numerous respects, today’s Capitalism is substantially different from Capitalism of the late 18th century • In this course there in been a try to illuminate the nature of contemporary controversies in economic theory by examining their historical antecedents. ECON-220

3. Schools of thoughts are vitally concerned with social, political, historical, practical, and moral issues. • Their thoughts have both a cognitive, scientific element and emotive, moral, or ideological element. • There is, in academic circles, a widely held view that science and value judgments are antithetical. • History of economic thought as “value free”: theorists of this persuasion whom they dislike, particularly Marx, are presented as having values in their writings and these values are held to partially vitiate the scientific value of the writings. • All theorists have values that significantly interpenetrate all cognitive endeavors. The discussion of the values and ideological aspects of the various theorists’ writings, there is no intention of conveying the notion that the having of values, per se, is a basis for criticizing a thinker. ECON-220

Main Periods in the History of Economics? • Pre-Classical (up to 1776). • Classical (1776-1870s). • The Marxist conception of Socialism as a precursor to communism (1848-to date). • Marginal Revolution (1870s-1890s). • Neoclassical Economics (1890s-to date). • Keynesian revolution (1936-1960s). • Formalist Economics (1945 to date). ECON-220

The Economic Thought back to Ancient Times • The earliest discussions of economics date back to ancient times. • Economics was not a separate discipline, but part of philosophy. • In Ancient Athens, a slave based society but also one developing an embryonic model of democracy. • The Economic thought back to Ancient Greece, Ancient India, to Ancient China. ECON-220

Ancient Greece: Hesiod (8th cent. B.C.) • The 1st economist lived in the small agricultural community of Ascra-Boetia. • Works and Days (Poem): “men never rest from labor and sorrow by day and from perishing by night”. The fundamental economic problem of the scarcity of resources for the pursuit of all human needs and desires. • Time, labor, and production goods must be efficiently allocated. • He analyzes the importance of labor and capital that puts an end to man’s state of leisure. • He was in favor of the rule of law and the dispensation of justice to provide stability and order within society. • He spoke out against corrupt methods of wealth acquisition and denounced robbery. ECON-220

Ancient Greece: Xenofon • He developed a utility theory of value “property is that which is useful for supplying a livelihood, and useful things turned out to be all those things that one knows how to use.” • He also discussed wealth as a resource for man to use “Wealth is that from which a man can derive profit”. • He anticipates Adam Smith in realizing that the extent of the division of labor is impacted by the scale of the market for product. ECON-220

Xenofon’s Oeconomicus • Additionally, Xenophon explained the influence of supply and demand on value. He observed that an increase in the supply of commodity causes a fall in prices. • He proposed a tendency toward equilibrium in the economy where supply and demand shift and react accordingly. • He discussed the fact that when there are too many coppersmiths, copper becomes cheap and the smiths go out of business and turn to other activities. ECON-220

Ancient Greece: Plato • The Republic  Is one of a seiries of dialogues Plato transcribed, hiw students (including Plato himself). • A ruling class of “philosopher-kings” but he also recognized the importance of the division of labor. • Plato has Socrates remark in The Republic that specialization occurs because “we are not all alike; there are many diversities of natures among us which are adapted to different occupations ECON-220

Plato’s Republic (380 B.C.) and the Division of Labor • The economic principles in action. • Plato addresses the essence of human nature an the role of knowledge throw education. • He encourages us to generalize our thinking about the division of labor. • A complete characterization of the human endeavor requires a more general theory. ECON-220

Ancient Greece: Aristotle (384-322 B.C.) In the Topics: • He provides his philosophical analysis of human ends and means. • The more useful or desirable a good is, the higher the value of the means of production is. • The purpose of economic action is to use things that are necessary for life (i.e., survival) and for the good life (i.e., flourishing). The Good Life is the moral life of virtue through which human beings attain happiness. The primary meaning of economics. ECON-220

Aristotle (384-322 B.C.) In the Politics: • Aristotle views labor as a commodity that has value but does not give value, rejecting labor as the source of wealth. • He did not formulate the labor theory of value but instead held a theory of the value of labor. • The basic requirement of value utility regarding a person’s desires. Value is the ability to satisfy wants. • According to him, exchange value is derived from use as communicated through market demand. He created the concept of value in use. • In the Book I of the Politics he points out that natural pressures of diminishing utility for goods direct remaining human energy toward self-improvement. • His objective was to answer the question: How can goods of different quality which are exchanged because of these qualitative differences be compared with each other and be equalized? ECON-220

Aristotle (384-322 B.C.) • “Wealth – getting” is “necessary and honourable”. The “art of acquisition” or “wealth – getting” • Economic dealings are subject to the rules of particular justice. • Aristotle’s economic criticism are directed at wealth-getting in the sense of money-making. • He disregards the fact that men were able to search for unlimited wealth even before money came into existence. • For him true wealth is the available stock of useful things. . ECON-220

Aristotle (384-322 B.C.) • Aristotle emphasizes the importance of natural limits in a system of natural relationships.  production is the natural process of obtaining things for life’s needs. • There is a limit to the amount of property. • Aristotle teaches that eudaimonia involves the total spectrum of moral and intellectual excellences. • Aristotle’s economic writings continue to attract the interest of contemporary thinkers. ECON-220

Aristotle (384-322 B.C.) Whether property is best left in private or public hands? • Aristotle denounced the communism of the ruling elite advocated by Plato because he support: • Private property is more productive and leads to progress. • Conflict is inherent in communal property management. • Private property is intrinsic to man’s nature. The love of self, money, and property is tied to natural love of exclusive ownership. • Private property has existed always and everywhere. • Only private property allows for opportunity for moral action; to practice virtues of benevolence and philanthropy. • BUT, he says that the right to property is limited to what is sufficient to sustain the house hold and the polis life of the city. ECON-220

Ancient India: Chanakya’s Arthashastra (c. 350B.C.-275 B.C.) • Arthashastra “Science of Material Gain or Science of Political Economy”. • Discussions on the management of an efficient and solid economy.  many of the topics are still prevalent in modern economics. • He focuses on issues of welfare (the redistribution of wealth during a famine) and the collective ethics that hold society together. • He argues for an autocracy managing an efficient and solid economy. The qualities described is in effect that of a command economy. • It discusses the ethics of economics and the duties and obligations of a king, which can be considered a precursor to Machiavelli’s “The Prince”. ECON-220

Ancient China: Fan Li • He was probably the earliest economist (politician and strategist) in human history. • He believed that one who understood money and wealth would be willing to abandon it if it became a burden. • He discover seasonality’s effect on the market demand and supply and their implications on prices. This motivated him to stock up during times of low demand supplies at heavy discount on prices and sell at times of high demand at a premium. • He reduced the social cost of drought and famine. ECON-220

Medieval Islamic world: Abu Yusuf (731-798) • He wrote the Book of Taxation (Kitab al-Kharaj) • His book outlined Abu Yusufs’s ideas on taxation, public finance and agricultural production. • He discussed proportional tax on produce instead of fixed taxes on property as being superior as incentive to bring more land into cultivation. • He also advocated forgiving tax policies which favor the producer and a centralized tax administration to reduce corruption. • Abu Yusuf favored the use of tax revenues for socioeconomic infrastructure • He included discussion of various types of taxes, including sales tax and import tariffs.

Medieval Islamic world: Al-Ghazali (1058-1111) • Classified economics as one of the sciences connected with religion, along with metaphysics, ethics, and psychology. • The praise of economic activity and even self-interested accumulation of wealth. • “The creditor desires the well-being of the debtor in order to get his money back rather that because of his love for him. The debtor, on the other hand, does not take great interest in the creditor…” ECON-220

Early Pre-Classical Economic Thought in theMiddle Age: Thomas Aquinas (1225-1274) • Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotle’s theory. • Two of his questions concern economic issues, mainly relate to what a just price is, and to the fairness of a seller dispensing faulty goods. • He argued against any form of cheating and recommended compensation always be paid in lieu of good service. • In his opinion human laws might not impose sanctions for unfair dealing, divine law did, in his opinion. ECON-220

Feudalism • Aim: How did feudalism restructure the society, government, and economy of European countries? • Do Now: What is feudalism? What was life like for the peasants? The socioeconomic system that preceded Capitalism in Western Europe. Development of Feudalism • From 800-1000 Vikings invaded Western Europe constantly which meant they would loot, steal, and kill if necessary. ECON-220

CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES IN THE PERIOD OF FEUDALISM ECON-220

CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES IN THE PERIOD OF FEUDALISM SERFS AND FREEMEN 90% of the population ECON-220

CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES IN THE PERIOD OF FEUDALISM LESSER NOBLES (KNIGHTS) LABOR PROTECTION SERFS AND FREEMEN 90% of the population ECON-220

CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES IN THE PERIOD OF FEUDALISM POWERFUL NOBLES OR LORDS LAND AND PROTECTION LOYALTY AND MILITARY SERVICE LESSER NOBLES (KNIGHTS) LABOR PROTECTION SERFS AND FREEMEN 90% of the population ECON-220

CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES IN THE PERIOD OF FEUDALISM KING LOYALTY AND SERVICE LAND POWERFUL NOBLES LAND AND PROTECTION LOYALTY AND MILITARY SERVICE LESSER NOBLES (KNIGHTS) LABOR PROTECTION SERFS AND FREEMEN 90% of the population ECON-220

Feudalism: An exchange system • Political, social, and economic system that worked on the basis of exchange between kings, nobles, knights, and peasants. • Kings gave land to nobles in exchange for money and nobles allowed peasants to work this land in exchange for protection. • Kings give land, nobles give protection, peasants give labor. ECON-220

Feudal Exchanges • The Lord’s estate or the land he was given by the King, was known as a Manor. • Peasants worked / farmed all day long from sun up until sun down without breaks in order to pay taxes and survive. • Serfs were taxed for everything! Taxes were used to protect the peasants… (Church Tax, Marriage Tax, Crops). ECON-220

Manorialism • Manors had churches, mills, farms, and homes for the peasants who were bound to the manor. • The economic system or style of economy that existed on the manors of Europe. It stressed self-sufficiency. • The serfs/peasants on a manor rely on one another. The manor becomes self-sufficient: able to function without outsider help. ECON-220

Workers on the Manor • There were two groups of peasant workers on the manor: • Freemen- skilled workers who paid rent and could leave the manor whenever they wished. (They usually had a skill needed by others on the manor.) • Serfs – workers bound to the land by contract with the nobles. (They had no freedom - they where the noble’s property.) ECON-220

What is a Knight? • Almost all nobles were knights. • Training began at age 7, as a page, under the guidance of the lady of the manor. • Became squires at age 15 and were trained by other knights. • Those deemed worthy were “dubbed” knights. ECON-220

Relationship Between Lords and Vassals • The relationship between lords and vassals made up a big part of the political and social structure of the feudal system. • Vassals had certain duties to perform for the lord. • All nobles were ultimately vassals of the king. ECON-220

Feudal Contract LORDS GIVE SERVICE TO GIVE PROTECTION TO VASSALS ECON-220

The growth of feudalism in Europe during the Middle Ages was primarily caused by the • rivalry between the colonial empires. • suppression of internationalism. • decline of the Roman Catholic Church. • collapse of a strong central government. ECON-220

Knowledge Check… • Why did the Kings give land to the Nobles? • What did the Nobles do for the Peasants? • How did the Peasants repay the Nobles? • How does Feudalism work? ECON-220

REVIEW • Everyone owed loyalty to the ________ • _______ were really the most powerful. They got _______ from the king. • Lesser nobles (knights) gave _________ _________ in return for land • _______ were bound to the land. They worked in return for ____________. • __________ were skilled workers. They paid rent to the ______ and were free to move if they wanted to. ECON-220

REVIEW • Everyone owed loyalty to the king. • Nobles were really the most powerful. They got land from the king. • Lesser nobles (knights) gave military servicein return for land. • Serfs were bound to the land. They worked in return for protection. • Freemen were skilled workers. They paid rent to the nobles and were free to move if they wanted to. ECON-220

Feudalism influenced Europe by: • providing social stability. • fostering the growth of religion. • eliminating warfare. • encouraging formal education ECON-220

The traditional villages of India • peasants were seldom able to change their social status. • women dominated the political decisions of the local councils. • people could choose from a number of different occupations. • monarchs exerted absolute power over local governments. ECON-220

Feudalism in Japan • Japan’s social hierarchy was similar but they did not have knights, they had Samurai. • The Way of the Warrior: Strict code of Samurai conduct and loyalty until death. • Bushido  The Way of the Warrior: Strict code of Samurai conduct and loyalty until death. ECON-220

Conceptual definition of Mercantilism • Mercantilism developed at a time when the European economy was in transition. (Isolated feudal estates were being replaced by centralized nation-states as the focus of power). • Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. • Mercantilism is an economic theory, thought to be a form of economic nationalism, that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable". ECON-220

Mercantilist Policy • Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period. • Mercantilism was centered in England and France, and it was in these states that mercantilist polices were most often enacted. • Protectionist policies were enacted that limited imports and favored exports. • Industries were organized into guilds and monopolies. • France's industrial output and economy grew considerably during this period. ECON-220

Mercantilist Policy • In England, tariffs were placed on imports and bounties given for exports, and the export of some raw materials was banned completely. • The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials and to only trade with Britain. • This mercantilist policies were one of the major causes of the American Revolution. • The mercantilist policies had an important effect on Britain helping turn it into the world's dominant trader, and an international superpower. ECON-220

Mercantilist Policy • Mercantilists felt that to maximize a nation's power all land and resources had to be used to their utmost. • Mercantilism helped create trade patterns such as the triangural trade in the North Atlantic, in which raw materials were imported to the metropolis and then processed and redistributed to other colonies. • The Netherlands, which had become the financial center of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few mercantilist policies. • Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another. ECON-220

MICROECONOMICS AND MACROECONOMICS