History of Economic Thought
History of Economic Thought
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Popular in Economcs
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Economics 107 Midterm Review Lecture 1 Mercantilism 0 People will always chase profitmoney No matter where it is 0 People in government control the wealth and can enrich themselves without much worry 0 Background 0 Decline of manorial system under feudalism I Meant things opened up more wide spread interdependency o Emergence of wageearning class of persons I Putting out svstem given orders to produce and tools and paid for output Subcontracting work 0 Protestant Reformation okay to seek wealth Can make money on own without religious suspect o Copernican revolution Earth not the center of the universe 0 Newton his methods and successes were a model for Smith 0 Enlightenment observations and reason as source of knowledge rather than reliance on religion 0 Rise of nationalism economy used to further the aims of the state 0 An Exaggerated Version oversimplified 0 Use all available raw materials land etc for domestic manufacture because finished goods have higher value I Use all available labor I Encourage exports but not machinery I Discourage imports except if can be used for resale as exports ie raw materials Don t allow for imports that can be supplied domestically I All designed for Nation to accumulate wealth specie gold and silver 0 STOCK OF SPECIENATION S WEALTH 0 Bottom Line 0 Basic mercantilist position considers wealth and power to be vital with the two being mutually dependent and harmonious in the long run I foreign trade produces riches riches power power preserves our trade and religion 0 Implications competition for gold and silver is a zero sum game among nations without gold mines only way to get more is by selling more to foreigners than buying to achieve Favorable Balance of Trade I Want to have a positive trade balance where exports higher than imports 0 Domestic exchange is a wash balance of domestic trade 0 I Felt that wealth of the nation didn t increase because everything stayed within the country 0 Mercantilism is a set of policy prescriptions what to do not a theory 0 1 Means of ensuring maximum employment with cheap labor 0 2 Way to ensure state has ability to fight wars 0 3 Way state regulations can be used to enrich domestic merchants and manufactures involved in international trade 0 Labor and the utility of poverty 0 Supply of labor increases as wages decrease 0 Get below subsistence level and can t survive Want to increase populations encourage early marriage and immigration A large population keeps wages close to subsistence levels reduces cost of producing goods Believed that low wages discourages idleness associated with higher wages refrain from sin Utility of Poverty Productive and Unproductive manufacturers and farmers are productive Merchants most productive in contributing to national wealth o Other occupations less productive or even unproductive including clergy doctors lawyers and entertainers 9 gov t policy should direct labor to productive occupations Money and Price Level MVPT Quantity Theory of Money 0 Says that as money supply M increases price level P increases Later Qtheory view increase in money supply causes prices to rise in ation o Mercantilist thought as M increases output T increases Rather than affecting price level changes in money supply affects output ie trade increase rather than prices 0 More money can keep interest rate low and avoid rise in domestic prices if In ow of gold leads to increase employment and production and also used to finance commodities of re eXport Basically use the money to hire others and increase output rather than letting prices increase 0 One way to increase wealth is through foreign trade sellgtbuy Thomas Mun 15711641 England s Treasure by Foreign Trade director of British East India Company 0 Kingdom can be enriched by gifts received or purchased but these are uncertain and don t contribute much to the economy 0 Therefore have to increase wealth through foreign trade Sell more than buy 0 Sell Money to Make Money Have to increase trade which allows nation to bring in more foreign goods which then can be sent out again to increase nation s wealth Hume specie ow mechanism 0 Mercantilist looking to get as much gold as possible Thought if more money comes in prices won t rise but will just encourage trade 0 Hume contradicts Says money will raise prices and then foreigners won t buy stuff in fact we lose because we buy their cheap goods Dutch Disease There is a ceiling Theory 45 of money gone Won t everything be cheaper Then everyone will buy from us 0 Money disappears but comes back 0 Also vice versa of what happens if money multiplies Lecture 4 Mercantilism Top down control from the top vs bottomup everybody for themselves extreme way to organize an economy Mercantilism with Thomas Munn TD structure Nation organized like a firm Eg General motorsTD approach to organize the society Encourage exports discourage imports Between mercantilism and classical economics 0 Changes 0 Early mercantilists were mostly merchantsbusinessmen I Not professional observers or academics merchants writing about own affairs I focused on trade as primary source of profits 0 Selling price gt buying price I Emphasized that profits were from international trade I No change in gold payments in nation if trade only occurs within a country I Appealed to state to promote a favorable term of X gt M 0 Late mercantilism more disinterested observers I Focused on production as the primary source of wealth I Emphasized domestic production as origin of wealth Positive economics explain how the economy functions Normative economics recommend policies to change the way the economy should function 0 0 Those who analyze how the economy workshow it should work People 0 Nicholas Barbon 162798 Dudley North 164191 Benard de Mandeville 16701733 William Petty 162387 Richard Cantillon Baron Diswork concerning the caring of 1690 0 Awareness of Bullionist Fallacy wealth is defined as the amount of Bullion gold North Discounts on Trade 1691 0 Beware of selfserving arguments o If you look at the facts from my point of view I will help myself I Very few consider trade in general from true principles but are satisfied to understand other own particular trades and which way to lead themselves into immeasurable gain 0 Difference between private selfinterest and the public 0 Trade is mutually beneficial I That there could be no trade unpro table to the public I No need in this statement for top down approach 0 Wealth does not originate from gold and silver I In a world wo gold and silver you can still be wealthy I Money is just the facilitator of exchange no money but trade 0 Taught a lot in 20th century economics 0 Insight since 1691 0 Mandeville the Fable of the Bees or private vices public benefits 1714 O O O Selfish is a moral vice If properly regulated it can return as a social good I Two opposites that merge and come together I Private vices by the management of a skillful politician might be turned into public benefits I Being selfish means you want to try to sell things to other people I laid back and benevolent depressed economic activities Must therefore rely on selfishness Being selfish is a moral sin I con ict between morality and prosperity can t be good and rich 0 above subsistence get lazy Keep others workingall is good 0 downward sloping supply curve of labor income effect of price change price falls and buying commodities as if income rose Want to buy more of some goods and less of others backward bending s curve I More and more paid for labor less number of hours you ll work I Use time for leisure Only applied to the merchants and rich taken for granted I Poor working class cannot use this model 0 Petty political arithmetic 1676 O 0 Empirical economist wanted facts not just words ie opinions Express in terms of number weight measure empirical support of argument I Eg is increasing min wage empirically going to reduce employment I Land is about to bear more provision and commodities 40 years ago I Increased housing value I Coal production mapping I The natural fall of interest is the effect of the increase in money early mercantilist view I Usually the increase in M9in ation9higher interest rate present view 0 Cantillon Essay on the Nature of commerce in general 1735 0 Published 20 years after he died contributions weren t that recognized until much later Focus on economic interdependence as re ected in system of markets Role of entrepreneurs in responding to need and necessity in adjusting market prices All the exchange and circulation of the slave is carried onto the actions of the entrepreneur Sophisticated recognition of relation between money and the price level Distinction between intrinsic value and market price LR vs SR I Oversupply of wheat prices will fall below the cost of the intrinsic value Market prices and economic decisionmaking I How people will respond and adjust relying on individual decision making Not being directed I People are pretty exible not in fixed positions 0 Eg wheat prices decrease switch to different crops or engage in a different kind of econ activity o Monetary theory I Interest in the price of money Determined by market principles I Loanable funds theory of interest rate Number of buyers who want it and those who want to sell it Prices fixed by altercations of money 0 Cantillion Effect not really recognized I Increase in M depends on who spends it I In ow maybe rent lower interest rates or 9stimulates production D for loans increase interest rate I Abundance of money decrease interest rate 0 Hume on jealousy of trade British jealous of French and vice versa o Putting mercantilism down 0 All trading starts as their rivals impossible for any of them to ourish at other s expense 0 Increase in riches and commerce in any one nation instead of hurting community promotes the riches and commerce of all its neighbors o Knowledge transfer I Transfer of knowledge from trade both countries e g France and England will be better off Knowledge transfer embodied in commodities o The increase of domestic industry lays the foundation of foreign commerce 0 Competitive innovation I Gains from trade I Opposite not zero sume I The emulation among rival nations serves rather to help industry alive in all of them I Winwin want other countries to get richer go along with it Lecture 3 Phvsiocrats 0 People Colbert Quesnay Mirabeau and Turgot 0 Background o Colbert not a Physiocrat Minister of Finance under Louis XIV who was known for extravagance o Colbertism promote production of luxury goods keep prices of agricultural commodities low mimic Britain I Backwardness of French agriculture o Taxes ineffective and unfair I Nobility and church exempt from land taxes I Wealthy given right to become tax collector I Paid government in advance and allowed to keep anything above that 0 Discouraged farmers from improving farming and agriculture 0 Population of France decreased o Topdown and Bottomup I Phvsiocrate rule of nature understanding how world works 0 Uncovered true rule of nature I In uence limited to 17551775 ideas long lasting I Unusual combination of BU and TD 0 Key features 0 Advocated laissez faire conforming to laws of nature doesn t require constant regulation 9 BU 0 rely on king as enlightened despot has the power and knowledge to make sure correct laws are in place amp followe 9TD 0 Land is the only source of economic surplus called produitnet God allowed us to enjoy benefits of land to make food gift of nature How to maximize the gift 0 Aagricultural output 0 K capital amp Llabor input 0 AgtKL AfKLN N is nature don t have to do anything Nothing should stand in way of allowing nature to do its work 0 Society divided into three classes 1 Landlords king Church 2 Farmers labor for agriculture 3 Artisans labor for industrial production Classes defined by role in process of production and circulation separate economic functions Hand to make sure working poor had just enough wage otherwise would become lazy if had extra Merchants different Farmers and landlords only classes directly involved in agriculture 0 Those in tradeindustry are sterile occupations Q nonagriculture output K amp L 0 QKL inputsoutputs no surplus 0 QfKL no N hence no surplus Those in trade and finance produce negative surplus Consume gt produce In mercantilism heroes now not so much 0 Quesnay Founder of Physiocracy Physician to Louis XV Not a rebel o Tableau Economique first economic model description of circulation of commodities ows including definition of production Assumptions closed economy intemational trade stationary no growth and no industrial sector Spend 1000 on agriculture production Putting money where nature can help you Spend 1000 on nonag money where nature can t help you Get 2000 from ag Because nature doubles Line from landowners to farmers expenditure gt surplus Landowner to artisan expenditure gt no surplus 0 Was against Colbertism which punished agriculture Says land only place of surplus because gift from God attached to basic principles 0 Mirabeau The Theorie de limpot 1760 o follower of Quesnay Finance minister in monarchy 0 presented way of reforming tax policies 0 presented Physiocrats most famous proposals only single tax on rent 0 abolish all taxes either on farmers and their products to increase profitability in agriculture 0 divided social product capital and surplus o taxing farmers reduces amount of capital employed in agriculture I landowners should be taxed 0 only surplus should be taxed because it doesn t affect reproduction of output I example Tax property on island It doesn t do anything Don t lose income doesn t interfere with gift of nature 0 Bon prix good price ensure box prix for agriculture commodities to raise farming profitability encourages people to farm drawing more from gift of nature 0 Policies of free trade in agriculture commodities to increase production of corn and attack on expenditures on luxury goods I Cut of profit of unproductive merchant middle men Don t do anything want direct contact between farmer and consumer I Encourage high consumption of ag and less of industrial goods 0 Goods and Capital Accumulation 0 Put more in ag nature will help 0 Physiocrats analysis have first classification of different types of capital I Fixed land advances all operations necessary to prepare land for farm I Circulating capital avances annuelles investment in each production cycles because completely consumed during process of production 0 Move from petite to grand culture larger more capital intensive farming to grow 0 Turgot Re ections on the Formation and Distribution of Wealth 1766 0 There is another way of being rich without laboring and without possessing lands I By living on revenue of one s money or through interest from loan given I Trying to answer the question of return on investment 0 Gains from voluntary exchange I Bear the risks I Who needs who the most I Argument about using money against money isn t usury amoral 0 Voluntary Free decision by both parties I Interest rate is a price just like buying bread 0 disadvantage can be estimated and it is the interest is price of it o Bullionist Fallacv I Money considered as a physical substance as mass of metal doesn t produce anything but when invested in certain enterprises it does produce profit 0 Money is a way to facilitate trade 0 Follower of Quesnay I there exists no truly disposable revenue in a state except net produce of land we all live off the land 0 Summary monetary and financial fortunes not true form of wealth Defined surplus and capital distinguished social classes according to their role in production Introduced distinction between productive and sterile activities Lecture 4 Adam Smith 17231790 Bon priX good price for agricultural product Monarchy is necessary for society tax landlords Revised in 1870s classical and neoclassical feed from him Read Hume and Oxford almost kicked out for it because Hume not respectful of religion Taught a lot very serious about it Met Quesnay and Physiocrats in Paris Maj or Works 0 Theory of Moral Sentiments 1759 I Thought his most important revised several times 0 Wealth of Nations 1776 I Interested in everything wrote about astronomy jurisprudence development of law for economic development Scottish Enlightenment 0 Living in Glas glow Scotland the place to be many intellects there 0 Emphasis on spontaneous order bottom up while institutions top down balance combined with proper political economic and social institution 0 Problem with selfinterest and sociability and their relationship 0 Mandeville private vices immoral behaviour has public benefits wealth Behavior bad but that s what leads to wealth Nothing gets done with kindness o Hume we are not entirely egotistic I do value welfare of others but less the more distant they are from us con ned generosity doesn t lead to justice I less I know them will be less just towards them I justice must be administered from above Theory of Moral Sentiments TMS 0 People can t live independently of each other Units of economic analysis are relations among other individuals Need to study how society functions to get econ relationships Society held together by sympathy not ruleslaws Impartial spectator hypothetical disinterested judgment used to tell right from wrong I Our conscience 0 Part of our nature seeks approval from others I Sympathy no matter how selfish some interest in the fortunes of others though get no benefit for himself 0 only takes us so far If you suffer I see and imagine but don t really know the Adam Smith problem 0 prob inconsistency between TMS and WoN O O O O 1 TMS focuses on sympathy moral feeling and social relationships 0 Ability to make moral judgments moral market 2 WoN economic motives selfinterest and market activity 0 Econ activity guided by self interest commercial market Resolution moral market underpins the commercial market it is the foundation Ex From Prudence to Saving 0 Save be frugal It s a virture Admirable TMS version of the Invisible Hand market Works automatically justifies lack of interference 0 Wealthy don t have large enough stomachs to eat all wheat to eat so share with poor Have to trade with others so they can eat as Well WoN version of Invisible Hand 0 Attack on mercantilism and tariffs on imports 0 Export as much as possible Discourage imports 0 Smith wrong Do opposite Let people produce for domestic market if Want to let imports in more competitive 0 Try to make highest profit in the end helps society 0 WEALTH OF NATIONS 0 Book about what determines a nation s wealth 0 Don t measure by trade balance mercantilism theory instead per capita output 0 Wealth specie or agricultural surplus critique of Physiocrats o Specialization and division of labor SDL Best Way to be productive pin factory example one person laboring on entire process Make 10 Divide up task With 10 people doing only one parttask of the 18 can make thousands in a day Specialization promoted with and goes hand in hand With use of machinery can help with particular task if specific Example of SDL 0 Woolen coat need variety of labor Take advantage of SDL poor man can afford What African king without specialization cannot take advantagefor granted What We have Origins of SDL 0 Econ activity is opposite of a zero sum game production goes up for all benefits all 0 Everyone can contribute to increase in average productivity 0 Greater the market the greater the opportunities to exploit SDL ie SDL are limited by the extent of the market 0 Egalitarian view of society Complement each other Without hierarchical view Bom with same capacities I specialize in 1 thing you specialize in something else I get better you get better One not better than other 0 Gain through trade All contribute 0 Differences arise from habit custom and education Wealthy not necessarily any different o Classes in society and value I Similar to Cantillon and Physiocrats Smith the three great original constituent orders of civilized society I 1 Owners of labor landlords laborers capitalists 2 Capital stock 3 Land Value of commoditycost of inputs required to produce it 0 Labor I Hunter pastures agricultural commercial industry and production I If just labor no capital or land 0 If one animal easy to catch other twice as hard the difficult one costs twice as much 0 Profits of stock I Profit and labor different Wages different I If you supply with resources to build barn Give wood can make big or small Resources not different but amount of resources devoted is 10x more for big I If rate of capital is 10 what 10x as much to build big barn than smaller one 0 Labor input no different but the other resources needed 0 Rent when land became private property Landowners reap what they never sowed Collect rent from land though not doing anything paying you for productivity of the land 0 Smith s theory of value 0 Cost of production theory of value price of good can be decomposed into returns to costs of inputs required to produce it o Problem of rent is land rent price determining or price determined I E g are com prices high because rents high or rents high because corn prices high 0 Diamond Water Paradox origins of marginal revolution 0 Value 1 Utility of some particular object o 2 Power of purchasing other goods which possession allows value in use vs value in exchange 0 Nothing more useful than water but can t purchase anything diamond has no value in use but so many goods can be had in exchange for it live without but worth so much Lecture 5 Adam Smith II 0 Smith interested in how people thinkbehave as foundation of society 0 Key idea behind market economy specialization and division of labor Increase average standard of living o Different from physiocrats who said only surplus is land 0 Smith accepted division of society in terms of classes 0 Determinants of price price of commodityreWardsinputs Labor capital and land o Ideas repeated by capitalists and Marx champion critic of capitalism 0 Real and Nominal Price o Nominal price money prices I Exchange values expressed in nominal terms I Variation in money prices may not re ect changes in real prices I Value of money bay vary not invariable measure o Real price defined by labor toil and trouble in acquiring it I Value of money gold and silver varies but not the value of labor which produces it 0 Labor Embodied o In a commodity represents only part of its value which also includes payments for rent and profits 0 Ex Ferrari costs as much as I have to Work to get it What is value of Ferrari Amount of labor to make it No either capital land or labor 0 Labor Commanded 0 Universal and accurate measure o How much labor to purchase a commodity Whose value is based on payments for profit 0 Natural price 0 Covers Wages in long run profit and rent at their ordinary or natural rents o What covers rent of land Wages and capital and all production 0 Market price o Depends on demand and supply and may differ from natural price in short run o Lots of noise with it o Market price9 natural price long run 0 Supply and Demand 0 Supply given in short market period but infinitely elastic at natural price in long run I In long run gives return to L K land o Supply that is elastic is horizontal I Natural price in short run is vertical Can t change price 0 Demand at natural price is effectual demand I If effective demand gt market price market price increases I Some or all factors will earn more than natural returns Attract more resources into market market price increases until at natural price and supplveffectual demand 0 Equilibrium achieved by selfinterest of consumers and producers 0 Wages Fund o Agricultural model of production Takes a year I Demand for labor depends on size of Wage fund I Wage fund fixed at beginning of production period supports labor 0 Stocks of food and other Wage goods Circulating capital I Unit elastic demand for labor Wage fund 0 Wage rate labor force fixed 0 Subsistence Wage O O 0 minimum necessary for survival To keep population Short run supply of labor is fixed by given population In long run population will grow if wages increase above subsistence minimum and fall if wages below Population works through infant mortality 0 Long run supply of labor 0 0 Will be the subsistence wage Smith agrees with exception of capital accumulation which if happens labor not doomed to subsistence wage 0 Wage differentials O OOOO Smith says price of labor not single value Subsistence wage for unskilled labor different People different and rewarded differently Competition doesn t reduce labor by same value Reasons why some paid more than others I Probability or improbability of success if venture less likely to succeed ie more risky wage will be higher in order to attract people I Learning a skill education I Amount of trust Ex work for jeweler paid more for same effort as a farmer because established that you are trustworthy 0 Circulating capital 0 2 types of capital I 1 Circulating tumed over year after year Constantly replenished I 2 J capital accumulation Ex Build barn that lasts 50 years but still need circulating capital for maintenance I Capital accumulation source of wealth 0 Real wages rise when capital accumulates more rapidly than population 0 It isn t quantity of capital and wealth but the continual increase which leads to rise in wages of labor 0 Not rich countries but the most thriving or those which grow rich the fastest Wages of labor the highest 0 Productive vs Unproductive Labor 0 O Smith though production labor had to produce tangible or storable output I Rather than land Smith said wealth re ected by tangible commodities Unproductive labor produces services which immediately consumed can t accumulate wealth I ex Smith saw wages for servers as not useful It is unproductive labor Adds to value of nothing I ex Manufacturer grows richer by employing manufacturers but grows poorer by employing menial servants main determinant of economic growth is capital accumulation I capital has to accumulate before division of labor can take place production labor used in agriculture manufacturing or trade produces a return and replaces a capital I unproductive labor like servants musicians soldiers teachers are unpaid doesn t produce return and consumes a capital 0 Growth and Class Interests o When there is capital accumulation I real wages rise good for labor I rents rise land more valuable is inelastic supply I Profits fall natural effect of prosperity or of greater stock being used 0 Trade policy 0 Order of productivity as a description of natural order of investment 0 Order of productivity in terms of quantity of productive employed by given capital I 1 Agriculture I 2 Manufacturing domestic trade I 3 Foreign trade mercantilist here and suppressed l amp 2 I Mercantilist and physiocrats distorted order 0 Division between market and govemment o Market natural liberty established on own accord I Bottom natural approach I Authority is discharged self interest operates 0 Government 3 duties I 1 Protect society national defense I 2 Duty of protecting every member from other members administers justice law and order How pay lawyers judge I 3 Erecting and maintaining certain public works institutions I Pro t can t repay expense to individual though may frequently do more than repay it to great society 0 Role of government shouldn t attempt to interfere with private business I Role is to protect persons and property to promote capital accumulation and provide public goods ex national defense justice system public works roads education 0 Education as public good I Vocational vs general I Hume says vocational education not governments responsibility to pay for but general education literacy more educated and informed citizens is govemment s responsibility I Distinction because with vocational education student gets all the benefits private good I General education real problem for poorer families where better for kids to work than pay for their education Benefits all Public good 0 Smith Legacy 0 Sets agenda for classical economics Malthus Ricardo and Mill all read Smith o And modern economics Lecture 6 Malthus 0 Biography o 17661834 bom to a wealthy family OOOO Cambridge 17841788 Math 1791 ordained Minister Church of England Saw poverty first hand Wanted to serve but also combative 1805 taught at East India College Prof of History and Political Economy Course based on Wealth of Nations 0 18101823 spoke with Ricardo had serious debates often on opposite ends Maj or works 0 1798 An essay on Principle of Population as it Effects the Future Improvement of Society First edition anonymous and very controversial 26th edition 1826 had his name on it Travelled though different countries and saw how dealt with population 0 1820 Principles of Political Economy Policy Debates on Legislation Poor Laws 0 Poor laws food stamps aid to the poor from gov t payments to those below poverty line 174850 to 1803 expenditures doubles included elderly infirm those who couldn t work Real wages of laborers in agriculture decreased by 19 176770 to 1795 One reason for increase in relief spending due to politically dominant farmers took advantage of poor relief system to shift labor costs to other tax payers Act of 1834 amendment to poor laws to make it harder to qualify No ablebodied person can receive helpmoney 0 Corn laws protect cereal producers against foreign competition imports 18151846 Made imports expensive through dutiestariffs Allowed domestic cereal to remain artificially high monopoly So imports from France can t undercut British production Godwin on Human Nature and Society 0 Inspiration for Malthus was this book and disagreeing with it o Godwin like a hippie Man is rational and voluntary being education will suffice to make him Enlightened generous and free Should contribute to general good Gov t and laws unnecessary evils and instead should decentralize and simplify into autonomous communities Instead of capitalist system there will be voluntary sharing rather than barterexchange 0 Improvement in tech will help through education Malthus s Basic Postulates o 1 Food necessary for existence 0 2 Passion between sexes needed and will remain in present state 0 12population will grow until constrained by food scarcity Power of population to growgtpower of earth to provide food Fundamental cause of poverty and difficult to correct Future not going like Godwin thinks Future will be like past Malthus On Population If unchecked will double every 25 years or increase in geometrical ratio but food can t be increased as greatly can t be obtained due to limited territory Idea of diminishing returns to land and agriculture Physiocrats focus on production of land No attention to diminishing retum to God s land Malthus productivity of land will diminish Bottom line population increases at geometric ratio while food supply increases at arthimetic ratio Even if earth s capacity unlimited food can t keep up with people Need positive and preventative checks to population Positive comes from death rates War poverty starvation famines Come from laws of nature Preventative based on moral restraints delaying grati cation waiting for marriage until can support family though doesn t approve of birth control If food lt population both checks naturally operate 0 Malthusian Equilibrium Subsistence Wage Where birth rate and population intersect Death rise as real Wages fall positive check Fertility falls as real Wages fall preventative check Greater Work does not equal greater productivity 0 O O 0 Avg productivity doesn t necessarily increase with more workers Specialization good in large market Everyone better off Smith 0 Malthus s Recommendation 0 What should We do about this given basic laws of nature 1 Cut off all aid to the poor Shouldn t give people income greater than they can earn because then will marry earlier 0 Poor laws actually hurting people not helping them Poverty and misery are natural punishment for failure to exercise moral restraint Relief for poor early marriage and increase in population growth rate makes things Worse Views re ected in harsh Poor Law Amendment of 1834 Abolished all relief Political science is dismal science 0 2 Education the only hope No direct payments to poor just Work on issue of moral restraint comes from education Says can do better job in educating poor Education only Way out counter productive to feed poor Today min wage food stamp say payments lead to culture of dependency don t really help poor 0 Malthus vs Smith on rent 0 Smith not clearcorrect views on rent In theory of price says there is equality I Pricevalue of commoditycost of labor profit to capitalist rent to landlord I Rent of land is a monopoly o Malthus more correct amount farmers pay for land determined by price of the crop cornagricultural commodities I Owner tries to get best price he can off land I Price of land doesn t help determine price of corn goes the other way since land only used to get com 0 Differential Fertility of Land I Parcels of land all different fertility 0 Apply same capital and labor but each place produces less than the one before If own land E get zero because no much profit off the land If own land A farmers will want to work for you Breaking point is parcel E Shows rent of land determined by demand for cornmore fertile has higher rent because produces more to meet demand I Differential fertility source of diminishing returns 0 Diminishing because move from fertile to less fertile land as you spread out 0 Malthus on Possibility of J oversupply can t sell all too much 0 Concem that there could be gluts o Sgy s Law production not problem hwo do we know we can sell what we produce I Supply creates its own demand Whatever is produced its presence shows there is a demand Don t worry about gluts 0 Produce something now have demand to buy something else 0 Keynes in studying Malthus emphasized harmful effects on deficiencies of aggregate demand 0 Paradox of thrift thrift good but not always 0 Malthus disagreed with Smith that thrift good 0 Too much saving leads to lack of effective demand for goods 0 Need unproductive consumers people who don t createproduce just spend Need them to keep up demand ex landlords I if corn laws repealed then landlords role in agriculture would diminish and there would be glut o Ricardo single role is to argue that com laws should be repealed o Malthus good reason why we should keep them to maintain sufficient aggregate demand Leture 7 Ricardo 0 Biography 0 Classical economist to follow Smith 0 17721823 Wealthy Father a stockbroker 0 Worked for father at age 14 disowned so worked on own at 21 retired at 25 0 At 27 1799 read wealth of nations before didn t do much econ o Advised by James Mill father of J S Mill 0 Extensive correspondence with Malthus 0 Member of Parliament Maj or Works 0 Principles of Political Economy and Taxation Contributions 0 1 Methodology I Model builder emphasized deductive reason by making strong assumptions leading to sharp conclusions words not numbers I very systematic o 2 Emphasized distribution among labor capitalists and landowners and its evolution as key issue 0 3 Looked for invariable measure of value as determinant of price comprehensive version of labor theory of value I Happy with capitalism about economics of private property and free trade I Wanted markets to work as freely as possible 0 4 Provided theory of land rent known as Ricardian Rent based on diminishing returns to land 0 5 Called attention to possible problematic effects on labor of improvement in machinery o 6 Formulated theory of comparative advange Ricardo s objective in Principles 0 O Differs from some of Smith s writing Thinks is wrong but acknowledges that overall on board with Smith Invariable measure of value 0 O O Smith associated with payments to labor landowners and capital Ricardo disagrees I Value determined by quantity of labor required for production not remuneration of that labor I Only two causes 0 1 The quantity of labor required 0 2 The amount of labor in a machine indirectly to make the machine Durability of capital Probability of different laborcapital ratios I Capital inputs treated as indirect labor inputs I What if laborcapital ratios of commodities differ 0 Ex Good A direct labor Good B labor and capital A 1000 wages profit 10 on total capital pricel 100 B 500 wages 500 capital profit 10 so price1100 PaPb11 If wage rate rises Pa will rise relative to B to maintain equality in profit rates 0 Ricardo assumes gold can act as invariable measure because produces with average capitallabor ratio 0 In text says doesn t like use of paper money Rent price of land and income to landlords o Land supply inelastic Only used for one thing agriculture Used only as input in production of com 0 You are laborer capitalist or landlord not all three 0 Ricardo gets rid of rent as element of cost I by getting rid of rent distribution between the capitalist and the laborer becomes a much more simple consideration 0 Bottom line rent cannot determine price I com is not high because a rent is paid but rent high because com high 0 Constant fertility implies no rent I all advantages would in first instance be enjoyed by laborers capitalists and consumers But with progress of population they would be gradually transferred to properties of the soil I Constant fertility assume all land of equal fertility 0 Don t get rent No income Same as everyone else 0 No alternative use to land 0 Trying to undercut each other I Diminishing fertility implies rent 0 The more fertile the higher the rent Diminishing fertility Profit of farmer is same regardless of fertility of land Retum is to the fertility Land goes to what is scarce 0 Competition amongst farmer drives rent up 0 Ricardo vs Malthus on Com Laws 0 Ricardo want importation of corn free Get rid of Com Laws 0 Malthus favored duties on com Keep price high 0 Wages in Ricardo s de nitionsubsistence wage is long run natural price of labor 0 Ricardo s corn model of the economy I Manufactured goods produced under conditions of constant returns double labor and capital double output I Least fertile land will be applied for production More labor and capital needed Landowners get richer pro ts squeezed labor s wages move towards subsistence I Agriculture is not produced under CRS 0 Diminishing retums since land becomes less fertile so need more and more L amp K I Extensive margin increase output by using inferior land I Intensive margin how much K amp L in given parcel 0 Labor is effectively a produced good there is some wage rate and price corn at which working population just reproduces itself the natural wage 0 Value and price only changes when there is some technological change I ie some change in what inputs are needed to produce an output I labor theory of value 0 opposing class interest I over time capital accumulates bidding up wages and therefore population because of diminishing returns in agriculture I machinery effects of technological progress 0 intro of machinery beneficial to everyone 0 capitalists only interested in net income not gross income 0 people criticizing machinery for its effect on labor 0 ex a capitalist has 20000 of which 7000 is fixed capital assumed infinitely durable and 13000 is circulating capital employs labor 0 profit rate is 10 0 output cover cost plus profit 15 000l3000 l20000 0 new machine less cost cost to capitalist 7500 0 tech progress may not benefit labor 0 comparative advantage I pro t can t be increased without fall in labor 0 however extension of foreign trade will help 0 same rule which regulates relative value of commodities exchanged between two or more countries 0 Portugal more productive than England for cloth and wine because takes less labor absolute advantage I But doesn t work because immobilitv of resources lack of trust in abroad I Comparative costs are the source of gains of trade Lecture 8 J S Mill and others 0 Biography of Mills 0 18061873 0 Eldest of 6 Home schooled by father James Mill super intense education led to breakdown at age 20 0 Follower of Bentham and Ricardo 0 Member of Parliament 0 Maj or Works 0 Bentham an intro to principles of morals and legislation 0 Mill Principles of Political Economy with some of their applications to social philosophy I On liberty society has not warrant to protect the individual from himself its legitimate function is only protection of others I Mills was an early and staunch advocate for women s suffrage 0 Senior outline of science of political economy 0 Jeremy Bentham and Utilitarianism o Utilitarianism individuals seek to maximize pleasure and minimize pain 0 Believed nature placed people under control of pain and pleasure 0 Action conforms to principle of utility when tendency is to augment the happiness of the community is greater than any it has to diminish it 0 Happiness is the only morally worthy goal utilitarianism as principle of ethics I Bentham doing right thing is maximizing own pleasure I Apply this to law if costs dominate punishment is warranted murder 0 Nassau Senior Wealth measure of happiness but has diminishing marginal utilitv Implication to rich person extra money worth less than to poor therefore wealth should be distributed to maximize total utility However bentham argued against egalitarian policies to wealth distribution 0 Because wealthy would feel insecure People would lose incentive to work overall pie would diminish o Believer in deductive method for uncovering principles of economics 0 Normative econ make decisions about policies 0 Positive econ I 4 propostions I 1 Wish to max wealth I 2 Population limited by moral and evil I 3 Theory I4 0 Abstinence source of profits I Reason why capitalists are entitled to their retum 0 Mill Reward for deferring gratification Willing to postpone consumption today for more tomorrow Inc productivity of roundabout production requires more waiting Build barn with wood instead of straw even though takes longer Willingness to abstain depends on rate of return the higher it is the more willing to wait 0 Followed ricardo on principles of economics OOO Believer in utilitarianism Result was softer version of Malthus and Ricardo Production vs Distribution I Mill distinguishes between laws of production as laid down by MalthusRicardo and possibilities for distribution by Bentham I Distribution of wealth depends on laws and scoeities Diff from Malthus and Ricardo I Mill argued for distinction between right of private ownership and right to bequeath and inherit lnheritance estate tax Won t interfere with composition of economy Property rights don t necessarily imply your parents can give to you Exception laissez faire duties of sovereign defense education administration of justice and public works roads and canals 0 Public works for Mill includes hospitals schools printing press colleges 0 Reciprocal Demand I Ricardo s principle of comparative advantage determines which country will export which commodity Sets limits to price of commodities at which countries can gain by exporting Within those limits prices are indeterminate Mill formulated a model of supply and demand for each country to explain principles of determination Can t tell terms of trade for exchange though can name commodities I Equation of Intemational Demand Produce of a country exchanges for produce of other countries at such values as required in order that Whole of exports may exactly pay for Whole of her imports Extension of Equation of Supply and Demand Resources immobile but do move around England vs Germany cloth vs linen When specializing England produces as much cloth as can then Germany takes over Kdfj Shapes of curve determine Where interest 0 Principlesconcepts of Classical Economics I Value Smith value in use vs value in exchange o Value in exchangecost of productionpayments of labor capital landlords Ricardo o Valuecost of productionunits of laborlabor required to produce capital goodsprofit to capitalists Wages short run Wage WWages fundlabor o Long run natural pricesubsistence Wage Population Malthusian View that procreation continues if Wagegtsubsistence Rent for Smith cost of production 0 Ricardo gets rid of rent as cost I Rent comes from competition by farmers who bid up price of more fertile land until prices make famers indifferent about which land to farm 0 Comparative advantagereciprocal demand 0 Quantity Theory of money I Price level in country is determined by MVPT I Assumes change in M money stock will result in corresponding changes in P price level Based on view that money is medium of facilitating exchange not final objective 0 Laws of Markets I Say s Law is supply creates its own demand so possibility of gluts goods supplied for which there is no demand at most a temporary phenomenon o Captial Accumulation and growth 39 Capital accumulation causes Wages to rise population to grow rents to increase until wages fall to subsistence and profits are driven to rate at which capital no longer accumulates the stationarv state 0 Labor moves abovebelow 0 Profit squeezed by rent
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