Presentation Transcript

1. What is Economics?

   Lesson 3: Economic Thought Ideas make the World
2. 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
3. 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
4. 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
5. How did the study of economics begin? oikos, meaning house nemein, meaning to manage oikonomia
6. 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
7. 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
8. 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)
9. Aristotle (384-322 BC) Criticized Plato's totalitarian communistic ideal state Private property a priori assumptions and logic from which economic principles are derived
10. 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
11. 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.
12. 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
13. 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.”
14. 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.”
15. Medieval Scholastic Thought The Salamanca School Divine Law, Natural Law and human reason Ethics and jurisprudence Discovery of social regularities Big influence on Carl Menger
16. Diego Covarrubias [T]he value of an article does not depend on its essentialnature, but on the subjective estimation of men, even if thatestimation is foolish.
17. [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.
18. [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 Francisco Garcia
19. 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
20. 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.
21. 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.
22. 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
23. 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.
24. 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
25. Free Markets? 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 rational self-interest freely adjusting markets mutually compatible prices Entrepreneur as uncertainty-bearer (and an equilibrating force)
26. 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
27. 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
28. 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.
29. Physiocrats Pierre Samuel du Pont de Nemours (1739-1817) low tariffs and free trade
30. 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
31. 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)
32. 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
33. 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
34. 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
35. 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

36. 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

37. 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
38. 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
39. Self-Interest
40. 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
41. 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
42. 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
43. 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
44. 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
45. 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
46. 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) Iron Law of Wages
47. 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
48. Which Happens When? Even technology comes to an end at some point!!!
49. 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)
50. Karl Marx (1818-1883)
51. Labor Theory Much more explicit than Smith's or Ricardo's Labor was the sole source of a product's market value Savings or profits on investments was exploiting the workers Accepted three basic factors of production—land, labor and capital Communist Manifesto Das Kapital Labor theory of value on its head
52. Labor Theory Socially necessary labor time for the production of labor (i.e. working people) itself Bare minimum for people to subsist and to reproduce with skills necessary in the economy. Alienation and oppression Smaller firms are being gobbled by larger ones in every business cycle, as power is concentrated in the hands of the few and away from the many
53. Stages Reserve army of the unemployed would grow and grow Downward pressure on wages as desperate people accept work for less Produce a deficit of demand Glut in unsold products Production would be cut back Profits decline until capital accumulation halts in an economic depression
54. Stages Economy again starts to boom before the next cyclical bust begins Every boom and bust, tension and conflict between the classes of capitalists and workers heightens. Communist party and a classless society
55. Bolsheviks under Lenin Violence, dictatorship of the proletariat Rosa Luxembourg Parliamentary Yosef Stalin World revolution first Ideas matter
56. Beatrice Webb Education 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 Mao Zedong Revolution can skip steps and begin earlier in agriculture Ideas matter
57. 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.. Ideas matter
58. The Bridges Nicholas Barbon (c. 1640-1698) The value of all Wares arise from their Use; Things of no Use, have no Value, as the English phrase it, They are good for nothing. Richard Cantillon(1680-1734) Abbe E. B. de Condillac(1715-1780) A thing does not have value because of its cost, as some suppose; but it costs because it has value.
59. Frederic Bastiat (1801-1850) A strong free trader, an ardent anti-socialist and a prolific pamphleteer Tariffs on imported goods were his special target—(The Candlemakers’ Petition) Economic activities proceed in an orderly fashion in a market economy without the need of general supervision or central planning
60. The Marginal Revolution Theory of Marginal Utility Frenchman, Austrian, Englishman Value is the usefulness (utility) of the last purchase (before the margin at which people find things useful no longer) An equilibrium of people's preferences determined prices, including the price of labor, so there was no question of exploitation People get what they had paid, or worked for
61. The Marginal Revolution Origin of market values Reasons why economic production and trade proceed in a more or less orderly fashion without any overall direct or conscious supervision
62. WOW!!! The Truth Revealed Economic values rest on the ideas of individuals concerning the importance they attach to specific units of particular goods or services. More urgently a person wants something, the more he values it, the more he will be willing to offer for it in trade The market is a composite of countless such acting individuals
63. WOW!!! The Truth Revealed The more limited the quantity of anything and the greater the relative demand Producers try to satisfy the most urgent demands of consumers for various goods and services Rivalrous competition Significance of individual ideas and values in determining market prices
64. The Marginalists: English William Stanley Jevons (1835-1882) The Theory of Political Economy also appeared in 1871 He emphasized that at the margin, the satisfaction of goods and services decreases. An example of the theory of diminishing returns is that for every orange one eats, the less pleasure one gets from the last orange (until one stops eating)
65. The Marginalists: French Leon Walras (1834-1910) Theory of Exchange (1874) Small changes in people's preferences, for instance shifting from beef to mushrooms, would lead to a mushroom price rise, and beef price fall This stimulates producers to shift production, increasing mushrooming investment, which would increase market supply leading to a new lower mushroom price and new price equilibrium between the products If one assumes markets are competitive, people choose on self interest and no cost in shifting production
66. The Marginalists: Austrian Carl Menger (1840-1921) Principles of Economics (1871) Consumers act rationally by seeking to maximize satisfaction of all their preferences People allocate their spending so that the last unit of a commodity bought creates no more than a last unit bought of something else
67. Eugen Ritter von Böhm-Bawerk (1851–1914) Carl Menger's Principles of Economics Stages of production and time Scales of value Friedrich von Wieser Capital and Interest Gold standard and a balanced budget “Not-one-heller-more-policies” Critic of Karl Marx Students included Joseph Schumpeter and Ludwig von Mises
68. The Margin: an example 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.
69. Friedrich Freiherr von Wieser (1851–1926) Succeeded Carl Menger Ludwig von Mises, Friedrich Hayek and Joseph Schumpeter Natural Value (1889) Alternative-cost doctrine and the theory of imputation Social Economics (1914) Economic calculation debate Importance of the entrepreneur to economic change “…the heroic intervention of individual men who appear as leaders toward new economic shores”
70. Ludwig Heinrich von Mises (1881–1973) Classical liberalism Human Action Praxeology Methodological individualism Monetary economics vs. inflation Government-controlled economies vs. free trade Money is demanded for its usefulness in purchasing other goods Unsound credit expansion causes business cycles Socialism must fail economically because of the economic calculation problem
71. Mises 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.
72. Mises In Interventionism, An Economic Analysis (1940) The usual terminology of political language is stupid. What is 'left' and what is 'right'? Why should Hitler be 'right' and Stalin, his temporary friend, be 'left'? Who is 'reactionary' and who is 'progressive'? Reaction against an unwise policy is not to be condemned. And progress towards chaos is not to be commended. Nothing should find acceptance just because it is new, radical, and fashionable. 'Orthodoxy' is not an evil if the doctrine on which the 'orthodox' stand is sound. Who is anti-labor, those who want to lower labor to the Russian level, or those who want for labor the capitalistic standard of the United States? Who is 'nationalist,' those who want to bring their nation under the heel of the Nazis, or those who want to preserve its independence?
73. Truth hurts? “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
74. Joseph Schumpeter (1883-1950) Capitalism, Socialism and Democracy Capitalism will collapse and will be replaced by socialism “Creative destruction” Corporatism Entrepreneurship will be strangled in advanced capitalism Social democratic Welfare state will burden and destroy the capitalist structure The intellectual class Production of goods and services to meet the authentic needs of people
75. MaTh: a statistic meS$ Alfred Marshall (1842-1924) Classical economics, marginal utility with mathematics and differential equations Neo-classical School of Economics Wesley Clair Mitchell (1874-1948) National Bureau of Economic Research (BLS) Accumulating statistics To explain economic phenomena and to forecast business fluctuations.
76. MaTh: a statistic meS$ John Maynard Keynes (1883-1946) The General Theory of Employment, Interest and Money (1936) Government interferes to manipulate the quantity of money and stimulate consumer spending Frank H. Knight (1885-1972) Chicago School of Economics have favored government intervention to compensate for what they see as injustices and inequities arising out of the free market system Expand the quantity of money at a steady rate per year to maintain stable prices as production increases Enact a negative income tax to replace the existing hodgepodge of welfare programs Regulate some economic activities to produce certain desired results which they maintain may be statistically determined with some assurance in advance. Y=C+G+I+X
77. PieroSraffa (1898-1983) 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
78. Thorstein Veblen (1857-1929) 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 Veblen Goods
79. John Kenneth Galbraith(1908-2006) 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
80. Paul Samuelson (b. 1915) Mathematical methods could represent a core of testable economic theory Foundations of Economic Analysis 1947 People and firms will act to maximize their self interested goals Markets tend towards equilibrium of prices, where demand matches supply Equilibrating behavior of economic systems, including that of the then new macroeconomic theory of John Maynard Keynes Phillips curve Nobel Prize 1970
81. Milton Friedman (1912-2006) MV=PQ A Monetary History of the United States (1963) Quantity theory of money, that general prices are determined by money Capitalism and Freedom (1967) “Money matters” Nobel Prize 1976
82. Friedrich von Hayek (1899-1992) 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
83. Ronald Coase (b. 1910) The Nature of the Firm (1937) Transaction costs Corporations produce things more cost-effectively The Problem of Social Cost (1960) Without transaction costs, people would bargain with one another to create the same allocation of resources Sturges v. Bridgman Guided by the most efficient solution Law and regulations Nobel Prize 1991
84. The Austrians
85. Economics is not about things and tangible material objects; it is about men, their meanings and actions.
86. What to remember??? There are many, conflicting schools of economic thought. Classical Economics Austrians Keynesians Monetarists Huh?????????
87. Readings and Assignments “The Broken Window” Read to 1.21 “Property Rights and Human Rights” by Paul L. Poirot Chapter 4, 11 “For the Good of Others” Chapter 8, 29 Lessons for the Young Economist, 4-7
88. 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.