Overarching Themes in Economic Thought

1. Overarching Themes in Economic Thought Value prices Distribution  factor prices Growth Stability Inflation Output Economic Organization Role of Market Role of State

2. Dominant Thoughts and Thinkers

3. Wisdom of the Ancients • Heraclitus (~535 – 475 bc) Harmony thru conflict  Self – regulating market • Pythagorus (~582 – 507 bc) Harmony thru numbers  Equilibrium • Democritus (~460 – 370 bc) • Diminishing marginal utility • Time preference  present value

4. Plato (~427 – 347 bc): preserve the status quo“…the State is the soul writ large.” First principles: • Human inequalities  division of labor  social stratification { scientific breeding} • Private property  acquisitiveness  turbulence Wealth  corruption

5. Plato’s Ideal Republic: A stationary state Society parallels the mind …the State is the soul writ large • The elite: Communal property/communal women • Philosophers • Soldiers • Shared Austerity Thinking Philosophers Soldiers (Response to scarcity) Fighting No incentive to advance Workers Craving Merchants

6. Aristotle (384 – 322 bc): focus on individual Human inequality  distributive justice …according to individualmerit In opposition to Plato: • Educate, don’t regulate • Private Property > Communal Property • Productivity  Progress • Peace (communal property  quarrels) • Pleasure in ownership • Philanthropy (give your own stuff as you wish) • But … Acquisitiveness for acquisitiveness sake is wrong • Lending at interest is unnatural • Barren money shouldn’t earn money

7. Skipping a millennium or so… Medieval economics: preserve feudal status quo  Fixation on usury (finance promotes change) • Escape clauses (per St. Thomas Aquinas) • “Damage suffered”  reward of waiting • “Escaped gain”  opportunity cost Rise of nation-state Mercantilism  Fixation on gold (according to Smith) • Favorable balance of trade • Zero-sum view of economic life • Colbert (French minister, late 17th century): • REGULATION !!! • Hamilton (American minister, late 18th century) • Promote manufacturing via tariff

8. Transition from Mercantilism to Smith • John Law (1671 – 1729) Money  Power … and paper money employs more people • Innovated paper money backed by value of land (Note the circularity) Mississippi Company, 1717 (“owned” half of lower 48 states) • A pyramid scheme that collapsed • Lesson learned: monetary expansion  INFLATION • David Hume (1711 – 1776) • Price inertia  Short-run non-neutrality of money Spread of impacts from few merchants to economy in general • Long-run neutrality of money • Specie flow mechanism Trade surplus self-destructs

9. Transition to Smith • Richard Cantillon (1680? – 1734)…Essai, 1755 • Land theory of value … labor equated to land needed to maintain subsistence • Circular flow model of economic activity • Landowners – ENTREPRENEURS – Workers • Balance achieved by free market or by central planner • “Market price” vs. “intrinsic price” – cost of production • Monetary theory: anticipates Quantity Theory of Money • Concept of velocity • Dynamic effects of monetary injection: • Prosperity first  Stagflation later

10. Transition to Smith: The Physiocrats Fixation on agriculture • Manufacturing & commerce sterile Champions of laissez – faire • François Quesnay (1694 – 1774) • Physician to Mme. de Pompadour • What would you do as king? … Nothing! • Leader of group: disciples and associates including Mirabeau, Dupont, Turgot, … and Smith • TurgotFranklin He snatched lightning from the sky and the scepter from tyrants. • Franklin, the entrepreneur: philosophy of self interest and service • Tableau Economique an Input-Output table • Zig – zag to balance flows • Agriculture  increased wealth (counter to Colbert’s favoring mfg) • Taxes ultimately borne by landlords  tax land rents directly • Hoarding (of money) threatens economic stability • Free trade/free competition most profitable for the nation

11. Benjamin Franklin: Entrepreneur/Capitalist/Statesman North American Information Czar Content: Poor Richard’s Almanac, Pennsylvania Gazette Hardware: Print shop – colonial franchise Network: Postmaster Government helped: Printer of PA Assembly and NJ Currency; Postmaster appointment Legacies University of Pennsylvania First library, first volunteer fire company American Philosophical Association Lightning rod  gift to world Positive and negative electrical charge Bifocal glasses/Franklin stove/Principle of refrigeration Statesman Albany Congress/Pennsylvania militia Agent to London for Pennsylvania, New Jersey, Georgia, Massachusetts Ambassador to France Pennsylvania Abolition Society