History of Economic Thought I
History of Economic Thought I
History of Economic Thought I
1. Introduction
Course objectives
The main objective of this course is to provide students with a general
picture of the development of economics until the emergence of
MARGINALIST thinking.
The course demonstrates the contributions of mainstream thinkers and
deviant thinkers from the orthodoxy of this era in shaping contemporary
economic thought.
The rationale for studying HET
Enhancing ones understanding of contemporary economic thought
Providing perspective and understanding of our past and anticipate changes in the
future as contributed by various schools with no monopoly of the truth by a single
source.
Guarding from irresponsible generalizations.
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Subject matter of Economics
Economics is a social science that examines the
problems of relative scarcity in material requisites of
life that societies face.
Scarcity arises because the desire to consume more
goods and services than are available or because of
unlimited wants and limited resources.
To mitigate the problem of scarcity, it may require
either restricting wants ( by inducing moral restraint
on demand ! Or by forcibly imposing austerity!) or
increasing the supply of resources ( increasing
productivity and output) or both.
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Introduction cont’d
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Introduction cont’d
Modern economic theory focuses largely on market
processes of allocating resources, which have replaced the
others as primary resource allocating mechanism.
This economics is known as mainstream or orthodox
economic thinking.
Although the mainstream modern economics ( orthodox
economic thinking), focuses on the use of markets to cope
with the problems associated with relative scarcity, some
economists are interested in broader philosophical issues,
straddling disciplines within social sciences such as between
economics and political science, between economics and
sociology etc.
This economics is sometimes called heterodox economic
thinking.
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Introduction cont’d
Differences between Orthodox and Heterodox economists
mainly lie in the questions they try to answer.
Orthodox thinking
Assumes specific social, political and economic
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Introduction cont’d
A theory of economic theory
Can we formulate a theory to explain the development of
economic theory? The answers differ among relativist and
absolutists
The relativist approach
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1.2 Introduction to
the Methodology of economics
Positive economics ( The aim of economics is to know how the economy works)
The methodology of positive economics is formal and abstract.
Normative economics (its aim is to know how the economy should work)
relies on ethical judgments on what is best for society
The art of economics( knowing how the economy works and given the normative
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Methodology of economics
Subjectivism
Reality is not independent of our individual or social thinking( reality
absolutist view )
Objective reality may exist but truths describing it are relative to
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Models of scientific explanations:
Inductivism
aims at attaining definite and certain knowledge that can only be obtained
through observations, avoiding unobservable, and use inductive methods to
generalize so that the obtained knowledge have breadth that encompasses
wider areas and objects ( laws )
Hypothesisism
Aims at obtaining knowledge that is not given in observables or knowing the
reality behind what we observe or explaining what we observe in terms of
unobservables. As such it aims at generating hypothesis which are descriptions
of unobservable entities and establish them
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.
Logical positivism
provided the scientific method with stricter philosophical foundations that reject
metaphysics entirely
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Hypothetico-deductive model
.
is the further development in the tradition of
hypothesisists.
This model claims that all truly scientific explanations
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Popper's Falsification and science
A departure from logical positivism
falsification
The criterion of the scientific status of a theory
verification.
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Kuhn’s scientific paradigms
Is based on history of science
Most scientific work is normal science in which researchers try to
solve puzzles posed using the framework of the existing
paradigm.
This work often leads to the discovery of anomalies the paradigm
fails to account for, but the existence of such anomalies is not
sufficient to overthrow the reigning paradigm
only an alternative paradigm better able to deal with the
anomalies can do so.
Ones such a superior paradigm develops a scientific revolution
becomes possible.
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Imre Lakatos’s Scientific Research Programs
Integrates falsificationism of Popper with scientific paradigms
of Kuhn.
Scientists are engaged in the development of competing
research programs, each of which involves analyzing and
attempting to falsify a set of data but also involves
unquestionably accepting a set of hard core logical postulates
Theories have hard core which adherents do not attempt to
falsify .
Hard core is surrounded by protective belt of hypothesis
which may be adjusted to defend the hard core.
Only when sufficient peripheral implications are falsified will
the hard core assumptions be considered.
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Instrumentalism and Economics (Freidman’s
Essay
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.
Austrian Methodology
The task of the economist is deriving conclusions deductively
from the logic of human action
Conclusions and theories thus derived need not be tested
because truth had already been logically established.
Methodological anarchy
“Any thing will do” approach, as long as there is internal
consistency.
Sociological Approach to Method :
Social and institutional constraints influence the
acceptability of theories.
Rhetorical approach to method :
Emphasis on the persuasiveness of the argument
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1.3 Overview of schools of thought
Classical economics is dated from the publication
of the Adam Smith’s Wealth of Nations in 1776.
The period of Pre classical economics ( the period
before 1776) is divided in to two parts:
an early pre classical period before 1500AD
and
A pre classical era between 1500 and 1776
The first part of the period includes the economic ideas of the
Ancient Greeks, Romans, and the Medieval Economics of the
Scholastics
The second part includes the Mercantilists and the Physiocrats
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The general themes of Pre
classical economic thinkers
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The Classical school
Classical thinking fully developed:
the role of markets
value and distribution theories
the Importance of all economic resources and
activities
as fundamental assumption of self interested
economic behavior as basic to human nature
Statements on various “economic laws”
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The Socialist school
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Marginalist school
Opposed socialism, trade unionism, and
government intervention stating that,
although the value and distribution theories
of the classical economists were inaccurate,
their policy views were correct.
Thus the marginalists defended market
allocation and objected to government
intervention.
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2 Pre classical Economic thought
Hesiod(800 BC)
conditions
Xenophon( 400BC)
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Greeks
Democritus
Division of labor
Private ownership of property – an incentive to greater economic activity.
Plato
The ruling class should not possess private property
The necessity of division of labor based on the best natural ability for
efficiency
Sponsored one of the two fundamental theories of money. He thought of
money as a symbol devised for the purpose of facilitating exchange, the
value of which is on principle independent of the stuff it is made of.
( Cartal theory)
The canons of his monetary policy, i.e., his hostility to the use of gold
and silver and his idea of a domestic currency that would be useless
abroad were logical consequences of this principle.
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Greeks
Aristotle
There should be no regulation to limit private
property.
But also condemned the pursuit of economic gains.
Scarcity can be addressed by reducing consumption,
by changing human attitudes( the basis for utopians
and socialists hopes of eliminating conflicts that are
inherent in scarcity and self interested behavior )
The distinction between peoples needs and desires
The developments that led to exchange of
commodities and the use of money
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Aristotle on money
Aristotle sponsored the second theory of money(Metallist theory)
Money is a medium of exchange( catallactic theory of money)
In order to serve as a medium of exchange in the market of
commodities money must be one of these commodities. Thus the
money commodity goes by weight and quality leading to
metallism or the Metallist theory of money as opposed to Cartal
theory of Plato
He recognized money as Measure of value and implicitly as
a Store of value
Money as a Standard of differed payments was not
suggested by Aristotle
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Aristotle on value
Aristotle on Interest
Condemned interest, as usury, on the ground that money is a
medium of exchange the value of which does not change as it
crosses hands.
He didn’t ask why interest was being paid anyway.
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The Romans
The Roman period was characterized by the absence of
analytic work in spite of expanded economic activities,
markets and administrative concerns
The probable cause could be the structure of
the roman society which might not allow
analytic works by a class of people who could see such
an engagement as their vocation rather than avocation
What is recognized from this period is the importance of
Roman law that recognizes private property and
commerce
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2.2 Scholasticism and
Medieval Economic ideas
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Scholasticism
Historical context of the school
Market was not playing a dominant role in everyday life
Feudal, subsistence agriculture
Society was bound together by tradition custom and authority ( not by market)
Land, labor and capital were not market commodities as they are today.
Main themes of the school
Scholastic writing represented a gradual acceptance of
certain aspects of economic activity as compatible with
religious doctrine,
This acceptance was achieved by subtle modifications of
that doctrine to fit the economic conditions
Fusion of religious teaching with writings of Aristotle
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Development of Value theory under
scholasticism
Albertus Magnus :planted in western thought the notion that value
in exchange must comply with cost of production (labor and
expenses)
Thomas Aquinas( Albert’s Pupil) introduced need, human wants, in to
value theory marking the earliest root of an analytical demand theory of
value. The notion roughly meant amount desired in relation to what is
available( demand in relation to scarcity)
Henry of Friemar introduced aggregation and scarcity notion of value
where value is determined by the common need of something scarce
(roughly sketching market demand for scarce thing as the determinant of
value of the thing)
Jean Buridan took the scholastic notion of human want to a concept much
closer to the modern concept of effective demand
All through the middle ages value theory continued to pose the two
competing concepts of labor and demand theory as explanations of value.
The school initiated the debate, which took more than half a millennium
period to solve, on cost of production theory of value and utility based
theory of value which ended with Alfred Marshall’s Synthesis about the
beginning of the 20th century.
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Value theory and
the scholastics cont’d
The concept of the Just price of scholastics taken from
Aristotle has left behind differences in interpretation
Just price equivalent to labor cost?
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Examples of Scholasticism
St. Thomas Aquinas and later Medieval thought.
In an attempt to reconcile religious doctrine with the
institution of private property and with economic activity he
argued against those teachings and beliefs condemning
private property, wealth and the pursuit of economic gain.
In his argument, although Communal property accorded
with natural law as exemplified by Jesus and his disciples,
he maintained that private property is an addition not a
contradiction to natural law..
But advocated poverty and communal living for those
committed to religious living as ideal.
Aquinas and others focused on the ethical aspect of prices
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The historical background cont’d
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Major tenets of Mercantilism
Gold and silver as the most desirable form of wealth
Emphasis on export, duty-free importation of raw
materials and protection of internal manufactures
Opposition of internal tolls, taxes and restrictions on
internal movement of goods
Nationalism and Beggar-thy- neighbor- policy
Colonization and monopolization of colonial trade
Strong Central government
Emphasis on large, hardworking population
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Major Tenets cont’d
Gold and silver as the most desirable form of wealth
Mercantilists tended to equate the wealth of a nation with
the amount of gold and silver bullion that it possessed. All of
them valued bullion as the ways to achieve power and
riches.
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Major Tenets of the school
Opposed to internal tolls and taxes and other restrictions on the internal
movement of goods,
They recognized that tolls and taxes could
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Major Tenets of the school
Nationalism
Mercantilists believed that there was a fixed
quantity of economic resources in the world; one
country could increase its resources only at the
expense of another.
Therefore one’s own country should promote its
exports and accumulate wealth at the expense of
its neighbors.
Only a powerful nation could compete successfully
in international trade, dominate trade routes, win
wars against rivals, capture and hold colonies.
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Major Tenets of the school
Colonization and monopolization of colonial trade
keeping colonies eternally dependant upon and
subservient to the colonizer to maintain cheap raw
material sources and importers of manufactured goods.
colonies were not allowed to import from places other
than the colonizer;
colonies were curbed or outlawed or not allowed to
manufacture their own
exports from colonies had to first visit colonizers port
before they move to the final destination.
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Major Tenets of the school
Strong Central Government
Mercantilists promoted a strong central government as it
was a means to achieve mercantilist goals of
colonization,
securing privileges of monopoly in foreign trade,
restriction of new entry to businesses at home,
regulation of methods of production and the quality of export
goods to maintain reputation,
removal of excessive tolls and taxes in internal trade goods,
Restriction of imports and promotion of export etc.
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Major Tenets of
the school
Sizable industrious Population
Mercantilism promoted a sizable industrious
population that
provide an abundance of soldiers and sailors ready to
fight for the glory and wealth of the nation
and also to keep labor supply high and wages low.(
Idleness , begging, theft were punishable by maim and
death)
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Whom did Mercantilists
Benefit
The doctrine benefited the merchant
capitalist, the Kings, and the government officials
Some historians of economic thought suggest that
mercantilism can best be understood as an extreme example
of rent seeking behavior
Here Rent seeking activities simply mean attempts by
private parties to increase their profits by securing
favorable laws and regulations from governments
The laws took the form of
Prohibition of imports
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Whom did Mercantilists Benefit
Examples
In England and In France importing printed cotton called Calicoes
was prohibited to maintain the interest of wool producers.
In England the law required the dead to be buried in woolen shrouds
even though religious traditions required linens.
Rules published in France in 1666 to 1730 on textiles alone required
seven huge volumes on quality specifications and manuals on dyeing.
These regulations prevented inferior methods from being used, but
they also seriously impeded experimentation and the development of
new techniques by producers who could have competed with existing
firms.
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How Valid , Useful and correct
was the school in its time ?
The arguments for bullion , although exaggerated,
made sense in that transition period from middle ages to money and
credit economy of modern times.
Before the development of international finance and multilateral trade
bullion was of major significance in making international payments.
Mercantilists were also aware that the influx of precious metals made tax
collection easier.
They knew that prices would rise or at least would not fall if the
quantity of money increased as trade expanded.
Not only was the volume of output expanding , but also the self sufficient
household was being drawn in to the market economy and therefore more
money was needed to buy and sell same volume of output.
Some Mercantilist were also aware that increase in the amount of
gold and silver in circulation reduced interest rates and promoted
business.
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Which contribution of the school
were lasting contributions?
Direct contribution
Emphasis on international trade and laying the basis for the notion of
the balance of payments
The macro economic concept that actual output could be lower than
Potential output as a result of imports and domestic demand
deficiency might have served as the intellectual root for Keynesian
economics
Indirect contribution to economics and economic development
They permanently influenced the attitude toward the merchant
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Thomas Mun
A chapter in an exposition of the mercantilist doctrine by Mun
that was written around 1630 and published posthumously in
1664, entitled “ the means to enrich the Kingdom, and
increase our treasure” states
that the means lay neither in production nor in the accumulation of
capital goods,but rather in a surplus of exports.
Although England was rich, it could be still richer if it used waste land
to grow hemp, flax, lumber, tobacco and other things which now we
fetch from strangers to our great impoverishing.
Exports should be carried in English ships to gain insurance and freight
charges.
Argued for multilateral trade than bilateral trade and analyzed
England’s overall balance of trade rather than its separate account with
each foreign country.
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Thomas Mun
His emphasis on importing treasure led to the strange conclusion that trade
at home could not enrich a country.
“ we may exchange either amongst ourselves or with strangers; if amongst
ourselves the Commonwealth cannot be enriched thereby; for the gain of one
subject is a loss for another. And if we exchange with strangers, then our profits is
the gain of the Common wealth.”
Mun listed the invisible items that should be included in an overall balance if it
were to show whether ‘ We prosper or decline in this great wealthy business”.
He included in the balance of payments;
The freight charges for shipping goods
Ships lost at sea
Insurance
Money paid up in supporting foreign wars
International payment of bribes and funds for espionage
Expense of travelers
Gifts for foreigners and ambassadors
Interest on money
Smuggling to evade tariffs
Contributions to religious orders that secretly sent the money abroad
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Mercantilists
Jean Baptiste Colbert( French mercantilist)
Gerard Malynes ( Belgian born from English family )
Charles Duvenant( British)
Bernand Mandeville (British)
Emphasis on agriculture
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Major tenets of the school
Emphasis on taxation of the land owner
Because only agriculture produced surplus, which the land owner
received in the form of rent, only the land owner should be taxed.
Although all taxes imposed on others would be passed on to the
landowner anyway ( indirect taxes), directly taxing the land owner
(direct tax) was preferable to indirect taxes as they were increasing
when they were passed along to others.
The economy was believed to be interdependent and the
circular flow of goods and money was analyzed. “Tableau
economique” of Quesnay was a table that traces spending,
revenue received, by farmers, landlords, manufacturers and
merchants.
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Whom did the school benefit or seek
to benefit
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Lasting contribution of the school
Physiocrats laid a foundation for economics to be a social
science by examining society as a whole and analyzing the laws
that governed the circulation of goods and wealth, which were
the precursor of the flow and national accounts concepts of the
modern time.
The law of diminishing returns actually originated from the
physiocrats( particularly Turgot)
Physiocrats originated the idea of tax shifting and incidence
Through the idea of laissez faire, they directed attention to the
analysis of the proper role of governments in the economy.
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Physiocrats
François Quesnay
Hoped to transform the king to enlightened despot
Expressed that small farms were incapable of the most productive
method, and favored large farms managed by entrepreneurs.
Analogous to the natural organism and conforming to the natural
order, the circulation of wealth and goods in the economy was like
the circulation of blood in the body.
Laws made by people should be in harmony with natural laws.
Constructed Tableau Economique, which was the first systematic
analysis of the flow of wealth. A.Smith. K. Marxs and M. keynes, who
later on also described the economy in terms of large aggregates,
paid tributes to Quesnay.
Quesnay’s Tableau Economique foreshadowed national income
analysis and the modern circular flow of wealth and goods. It was
also the predecessor of the input- output analysis of Leontief.
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Francios Quesnay cont’d
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Historical Back ground of the School cont’d
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Major Tenets cont’d
Importance of all economic resources and activities.
Land, labor capital and entrepreneurship as resources
and agriculture, commerce, production and exchange as
economic activities contribute to a nation’s wealth.
Recognition of economic laws:
Focused on explicit economic theories or “laws”.
Examples
The law of diminishing returns
The theory of population ( Malthusian)
The law of markets
Recardian theory of rent
The quantity theory of money
The labor theory of value
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Classical school cont’d
Whom did the school benefit
Classical ideas helped to promote the political , social and economic
climate that encouraged industry, trade and profit.
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4.5. Precursors of Classical Economic thought
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Sir William Petty cont’d
Importance of capital
Argued that the use of tools is much productive than simple labor
Labor theory of value
The value of a bushel of corn will be equal to that of an ounce of
silver if the labor necessary to produce each is the same.
Refer books for more discussions
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Sir Dudley North as a precursor of the classical
school
Trade is not for one side benefit
Trade’s object is not to accumulate specie
gains
Not complete harmony in interests( this makes him different from
most classical thinkers)
Disagreed that war and conquest enrich a country( in opposition to
mercantilist) and undermined service and emphasized on goods
production( Not akin to a classical)
Saw Industry as less important ( Not akin to a classical)
Refer books for more discussions
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Richard cantillon as a precursor of the
classical school
productivity.
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Important works of Adam Smith
The Harmony of interests
“It is not from the benevolence of the butcher , the brewer, or the
baker that we expect our dinner but from their regard to their own
interest…. By pursuing his own interest each individual frequently
promotes that of society more effectually than when he really intends
it.’
The action of each producer or merchant who is attempting to gain
profit is restrained by the other producers or merchants who are
likewise attempting to make money. Competition drives down prices
and reduces profit. The pursuit of self interest restrained by
competition thus tends to produce Smiths social good- maximum
output and economic growth: Social good arising from the harmony
of interests
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Important works of Adam Smith cont’d
Limited government and laissez faire
As long as there exists harmony of interests government
intrusion is unneeded and undesirable.
According to Smith governments are wasteful, corrupt inefficient and
the granters of monopoly privileges to the detriment of the society as
a whole. Laissez faire was promoted by Smith.
However Smith saw a significant but limited role for government
involvement.
To protect society
To administer justice
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Important works of Adam Smith cont’d
To finance these government activities Smiths
recommended Taxation. Taxes should be
Proportional to the revenue enjoyed under protection
than we can make it, better buy it of them with some part of
the produce of our own industry, employed in a way which we
have some advantage.”
The law of absolute advantage in international trade
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Important works of Adam Smith cont’d
The market laws of competitive economy
Value (there are two kinds of value)
Value in use ( the utility of some commodity)
Value in exchange( the power of purchasing other goods)
Smith didn’t solve the paradox of value ( why objects
having high value in use may possess little value in
exchange(like water) and why objects having little value
in use may possess high value in exchange(like diamond)
He focused on exchange value and the source or
determinant of exchange value for him was the cost of
production
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Important works of Adam Smith cont’d
Smith examined exchange value under two circumstances
“An early and rude state” where labor is the only scarce
resource(capital and land are either non existent or free goods)
Advanced economy where capital had accumulated and land
commanded a positive price.
Labor cost theory of value in primitive society:
In a society where labor is the only resource the relative value of a
good ( exchange value) would be determined by the amount of labor
necessary to produce it. This is the labor cost theory of value (
remember William Petty)
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Important works of Adam Smith cont’d
The long run price below which entrepreneurs will not sell their
the natural price depending on the short run supply and demand.
When it happens to be above the natural price more goods come in
to the market depressing prices and when lower some productive
factors will be withdrawn, the quantity supplied falling and market
price rising to the natural rate.
Short run demand and supply are not fundamental determinants of
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Important works of Adam Smith cont’d
The structure of wages
With the underlying assumption of a society with perfect liberty to
wage differential theory actual wage rates for different jobs, the
actual wage structure, would vary according to the five factors:
Agreeableness of occupation
Economic development
The division of labor spurs capital accumulation
and increase labor productivity; capital
accumulation and high wages also increase labor
productivity
High wages arise from high wage fund which in
turn increases with capital accumulation
Increased productivity increases national output
and increased wealth of a nation.
by Yohannes K.M 95
Thomas Malthus
Influences on Malthus’s thinking
The negative impacts of the Industrial Revolution and
growing urbanization were beginning to appear
Controversies on growing poverty and what to do about it
The legislation in 1795 of the latest of the series of “poor
laws” that stipulated the minimum income for the poor
families, and the following heated debate.
The corn laws that placed tariff on imported grain and
the controversy
The growing population and the pressure on food supply
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Thomas Malthus
The rising necessity to import food to England while the
Napoleonic wars kept the imports of food low and the
extreme prices of grains and land rent, which was
favorable to English Landlords
The growing concern, after the defeat of Napoleon, of
English land lords on the surge of imported grain that
would depress grain prices
the urge by the landlords to lift up the floor prices of
imported grains, which stood against the business
interest that spoke against high tariffs
The arguments that followed to repeal Corn Laws
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Thomas Malthus
The Intellectual Setting that influenced Malthus
William Godwin
science”
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Thomas Malthus
Malthus’s theory of market gluts
Malthus developed the theory of the potential insufficiency of effective
demand
Workers’ wages < value of the production by the amount of profit
Capitalists buy some of the extra output in the form of capital goods there by
increasing production but not in the habit of consuming all their profit
Investment is undertaken in the final analysis only to provide for
consumption, but if the final product cannot be sold no further investment
will be forthcoming
Spending by land lords and their retinue is essential to avoid the
glut(overproduction ) of the market.(the need for Un productive
consumption)
Rent is surplus over the cost of production and its expenditure would add to
effective demand without adding to the cost of production.
The policy implications was the Retention of the corn laws, which were
important to enrich the landlords and foster unproductive consumption
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Thomas Malthus
Malthus’s theory of diminishing returns in agriculture
Improvements made to a fixed amount of land would provide
increasingly smaller rises in yields
Appreciation of demand and supply, rather than cost of production
alone, as determinants of price
Assessment of Malthus
Over rated the significance of rent
His distinction between productive and unproductive consumption is inaccurate
Over rated the significance of population growth relative to that of subsistence
He underestimated the possibility of enlarging agricultural produce
Wages have been rising rather than being driven by biological subsistence
He was moralizing than analyzing the means to limit population growth
How ever his theory of population is still relevant to developing world
differences)
Wages, profit rates and rent among producers
Two capitalists may employ the same quantity of labor in the production
of their goods and yet the goods they produce differ in value because of
the different quantities of fixed capital used by each. A commodity will
sell at more than its labor time value if more than average capital is
invested in its production.
Ricardo recognized that not all labor is of equal quality. We can simply
think of the an hour of labor of a skilled labor as being double or triple
of the labor time of less skilled labor
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David Ricardo
Exchange value does not depend on wages, profits , what matters
for exchange value is labor time required to produce the good.
Rents does not figure in to the exchange value of a commodity.
Prices determine rent.
Wages and profits vary inversely
Labor does not have to receive the whole product simply because
labor is the source and measure of value.
Ricardo makes a distinction between market prices and value(
natural price).
Market prices deviate from the natural price due to accidental or
temporary fluctuations of demand and supply.
Higher market prices lead to higher profits and attract capital , if
market prices fall below the natural price capital flows out of the
industry. These actions tend to equalize the rate of profit and tend to
keep market prices proportional to values.
Short run prices depend on demand and supply while long run values
depend on real cost of production.
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David Ricardo
The long run trend for the profit rate and the share of profit from
the national income would fall because of the increasing difficulty
of growing food for expanding population
As population increases the increased demand for food raises it
prices and poorer land goes in to cultivation and better land will be
more intensively cultivated. This will raise rents, and nominal
wages to maintain subsistence wage.
Falling rates of profit would curb accumulation and investment of
capital and would ultimately produce a stationary state.
The stationary state would be reached when new investment
ceases, population no more expands, as the limit of food
production has been reached, and every available surplus goes as
rent.
Ricardo saw conflict of interest between workers and capitalists and
even deeper conflict between landlords and the rest of society.
Evaluation of Ricardo
Lasting Contributions to economic analysis
The use of abstract thinking
Weaknesses
Overemphasis on the law of diminishing returns in agriculture and
Principles of population
The exchange value of goods depends on supply and demand underlying the
concept demand is the concept of diminishing utility of goods(a concept that was
later developed by Marginalists ).Supply depends on the subjective cost of
production,i.e., the sum of sacrifices required to produce goods. That were the
labor of workers and the abstinence of the capitalists ( abstinence is anew
term in economics lexicon contributed by Senior)
by Yohannes K.M 119
Other important classical thinkers
Senior disagreed with the distinction of productive and
unproductive labor of Smith who thought producers of
service were unproductive workers.
To senior the proper distinction is between productive
and unproductive consumption. In the class of
Unproductive consumption were the use of jewelry,
tobacco, beer etc which diminish the power to produce.
Falling out from his own prescription on what an
economist should do ( should not give any advice apart
from telling the truth alone) he had policy positions on
the :
poor laws
trade unions
Factory acts by Yohannes K.M 120
Other important classical thinkers
John Stuart Mill(The last great Economist of the Classical school)
Production( the productive factors, labor , capital and land)
He defined wealth as all useful things that possess exchange value. Only
material are included
Productive labor is the exertion that produces( directly and indirectly) utilities
embodied in the material objects.
Unproductive labor is that which does not terminate in the production of
material wealth.
Capital is the accumulated stock of the produce of labor.
Increase in capita depends on surplus and the disposition to save.
Every increase of capital is capable of giving additional employment to labor.
If the capitalist spend less on luxury consumption and more on investment,
the wage fund and the demand for labor would rise.
If population rises the increased demand for necessities by wage earners
offsets the decreased demand for luxuries by capitalists
If population rises in less proportion to capital accumulation wages would
rise and luxury consumption of the workers would supplement that of
employers
Many of the tenets of socialism have not stood the test of time. The reorganization
of society along socialist lines has not brought about the hoped for:
freedom,
More over the predictions that the working class will be more impoverished
under capitalism has not occurred
However socialist have left behind lasting economic ideas of:
the socialist economic thought of state planning and the ownership of the means
of production
policy recommendations now institutionalized in capitalist countries, such as
social security, workers compensation, unemployment compensation, minimum
wage, overtime pay rules, etc
the analysis of the growth of monopoly power, problems of income distribution,
and the reality of the business cycle
He developed his socialist ideas before the working class movement took
shape in France and hence didn’t appeal to the workers to rise against
their employers
Made a religion of work
Suggested an industrial parliament consisting of three chambers,
invention( composed of artistes and engineers), reviewing( composed of
scientists), execution ( composed of leaders of industry)
This was one of the earliest proposals for central planning
The prosperity of France can only exist through the effects of the
progress of the sciences, fine arts, and professions. The Princes, the great
household officials , the Bishops, marshals, the idle landowners contribute
nothing directly to the progress of the sciences, fine arts and the
professions, rather they hinder their progress by depriving them of what
they should have been entitled.
He has enthusiasm for large scale industry
P=S/(C+V)
Rate of surplus value ( S’)
S’=S/V
From these relationships it follows that
Class conflict