History of economic thought

1. History of economic thought Presentation 5 Petr Wawrosz

2. Predecessors of classical political economy

3. England

4. Historical background • At the start of the seventeenth century, England and Scotland were separate countries, and were in almost all respects marginal to the European system – prosperous but intellectually rather backward, and politically and militarily negligible on the European stage. Trade was dominated by Dutch ships and merchants, and Britain exported little but wool and woolen textiles. • By the later seventeenth century things were changing on almost every front. England became the center of the new science, with the foundation of the Royal Society (1662) and the publication of Newton’s Principia (1687). New institutions were emerging, such as the Bank of England (1694). London overtook Amsterdam as a trading center, three naval wars with the Dutch opened the way to British control of the seas, and the Navigation Act of 1660 ensured that British ships and merchants were the beneficiaries. • The Dutch could be imitated • The concept of freetrade,howeverthe NavigationAct.

5. Historical background • By the seventeenth century, financial markets were becoming quite well organized but the law still set a maximum to interest rates. Repeated proposals to lower the maximum legal rate to what would certainly have been an unsustainably low level came very close to being passed in the 1690s.Low interest was the “causacausans” of prosperity because it would encouragemerchants and farmers to expand their businesses. • three views about interest rates: • (a) hat they reflected the “plenty or scarcity” of money, providing a possible motive for aiming at a positive trade balance to increase the money stock and allow lower interest rates; • (b) that they depended on supply and demand of loans, and hence on net saving and on profit opportunities open to borrowers; • (c) the naive view that they could be set by legal fiat. • Dudley North (1641–91): Interest rates, he argued, are determined by supply and demand forloans.it was “stock” (capital or wealth) – not the quantity of money – thatdetermined the supply. Low interest rates, as in Holland, are the result, not thecause, of wealth.

6. Richard Cantilion (168? – 1734) • Essay on the Nature of Commerce (1755) he developed a theoretical framework for analysis of economic circulation in the economy (can be seen as a first general equilibrium model describing relation between production and consumption). • Was able to distinguish between short-run and long-run effects of changes in the stock of money (between real and monetary magnitudes in the economy).

7. Bernard de Mandeville (1670 – 1733) • Poem: The Fable of the Bees • The poem suggests many key principles of economic thought, including division of labor and the invisible hand • The poem describes a bee community thriving until the bees are suddenly made honest and virtuous. Without their desire for personal gain their economy collapses and the remaining bees go to live simple lives in a hollow tree, thus implying that without private vices there exists no public benefit.

8. David Hume (1711 – 1776) • A Treatise of Human Nature (1741) • Political Discourses (1752) • Quantitative theory of money: the change of stock of money (if nothing else changes) has no real effect. • Money is the oil that makes the wheels turn more quickly. • Criticized mercantilist and explained consequences of positive balance of payment. • The question: why farmers create the surplus /more production than they nead for their living): they deamnd other goods.

9. France

10. The Physiocrats • The first school of economic thought. They represented a reaction against the policies of Jean Baptiste Colbert who advocated strict regulation of commerce, protective tariffs. • The concept of Laissez faire, laissez-passer. They believed that - a natural system, free from the intrusions of an improper man made law, would result in a harmony and improvement of the human condition.- the ordrepositif(positive order or rule of man) could be made consistent with ordre naturel (the order of nature), the well being of society could be increased. • A key idea was that agriculture (land or extractive industry which included grasslands, pastures, forests, mines and fishing was the productive sector of an economy.

11. Francois Quesnay (1694 – 1774) • Tableau Economique (Economic Table, 1759): the construction showing the flows of commodities and income in the economy. More detailed than Cantilion. He tried to estimate coefficient on the basis of empirical knowledge of French economy.

12. Robert Jacques Turgot (1727-81) • Analysis of investment and production: saving as the resource for capital. Capital accumulation contributes to growth of production. But if man increases a stock of capital goods there will come a decline in the rate of return of new investment = the law of decreasing (diminishing) return. • The use of capital should be increased as long as the marginal productivity is greater than the rate of interest.