History of Economic Thought

Smith and Bentham

'I have not, I never have, nor ever shall have, any horror sentimental or anarchial, of the hand of government. I leave it to Adam Smith... to talk of invasions of natural liberty.'

Ricardo in Parliament

'This would be the happiest country in the world, and its progress in prosperity would be beyond the power of imagination to conceive, if we got rid of two great evils- the national debt and the corn laws.'

Marshallian variable costs

'prime'

Marshallian fixed costs

'supplementary'

Thomas Mun

(1571-1641) member of the British East India Company Based on observations of Spain, Portugal, England, Baltics and the Netherlands. Balance-of-trade theorist- theory of growth centred on foreign trade. Justification of the East India Company, he was director, being allowed to export bullion to India, necessary as they could not find suitable goods for export. The buying and selling of goods is fundamental: supply and demand, not the sovereign determined values, including the value of the currency. Money is needed to drive trade, the way to accumulate treasure was to allow it to be used in trade. 'England's Treasure by Forraign Trade' (1664)- the purpose of exporting money is ' to enlarge our trade by enabling us to bring in more forraign wares, which being sent out again will in due time encrease our Treasure... the encrease of commodities... doth... become an exportation unto us of a far greater value.' This was later attacked by Adam Smith as representative of mercantilist thinking

Gerard Malynes

(1586-1641) merchant and government official. claimed that English coin was undervalued because it was exported. argued to restore the Royal Exchange and regulate foreign-exchange transactions in order to restore the exchange rate. --- this view was challenged by merchants who used the doctrine of the balance of trade to argue for greater freedom, they promoted a view of the economy in which the objective growth, fuelled by money brought by a balance-of-trade surplus. coins have intrinsic value, dependent on their gold or silver content. It was the sovereign's prerogative to establish. The Royal Exchange was thus necessary to provide merchants with information on the true value of the coinage, so exchange transactions could reflect this value.

Edward Misselden

(1608-1654) see Mun, mercantilism, and balance of trade doctrine.

The Pin Factory

Adam Smith's explanation of efficiency gains from specialisation and the division of labour increasing dexterity in individual workers concentrating on a single task, reduced time lost in rotating between tasks, the invention of machines which abridge simple tasks. 48,000 pins the extent of these economies depends upon the size of the market. example: 50-100 families to purchase the output of a single shoemaker, so a shoe factory of 100 workers would supply for 5000 to 10,000 families. --- the size of the market depends upon 1) transport facilities 2) economic policies

Invisible Hand Theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources Look at natural price -causes people to produce what other members of society want, even when individuals have no intention to do anything for anyone else.

Marx and classical economics

Explained low wages in terms taken straight from Smith. If demand for a product falls, at least one compnent of price (rent, profits or wages) must fall below its natural rate. He argued that, with division of labour, workers became more specialised and therefore found it harder to move from one occupation to another. The result was that when prices fell it was the workers whose incomes were reduced below the nature rate. Marx developed Ricardo's value theory and defined value as the labour time required to produce a commodity.

Thomas Malthus (1766-1834)

English economist; believed poor families should have fewer children to preserve the food supply. In 1798 he wrote An Essay on the Principle of Population. The transition from the moral philosophy of Hume and Smith to the classical political economy. A clergyman of CofE

Marshall and the business cycle

Evolution also affected his view of firmsm which he saw progressing through a life cycle analogous to that of the individual. They began young and vigorous, but after a period of maturity they became old and were displaced by newer, more efficient firms. An industry, therefore, was like a forest- it might remain the same when seen as a whole, even though every tree in it was changing.

Labour power (Marx)

Exchange value of labour: the real wage= the subsistence of worker. use-value: the exchange value of the commodity produced by the labour power the exchange value is systemically less than the use value.

Marshall's microeconomics

Partial analysis, ceteris paribus, price determination--supply and demand scissors --consumer surplus, elasticity --supply--> fixed and variable costs, supply curves, representative firm, decreasing cost industries--internal/external economies of scale

Produit net

Physiocrats employ an equilibrium system in which the interaction of 3 economic classes: farmers, landowners and artisans, produces the national income. The central idea of this system is the exclusive productivity of the farmer. By applying his labour to the land, he generates a surplus, or net revenue, produit net, in excess of his cost of production. This surplus has two unique characteristics: it continually springs up afresh as a gift of nature that accrues to the farmer directly. The surplus produced by the farmer serves to maintain the rest of society, the mixed and disposable class of landlords that includes the king and the church and the sterile or stipendiary class of artisans, manufacturers and traders.

Key mercentilist policies

Political economy, economic warfare of gain. concerned with foundation of profitable trade. balance of trade should be positive to build up treasure. increase your money and reduce money available to other for war and conflict.

Mercantilism: foreign trade increases wealth and strength of a nation

WHICH SCHOOL OF THOUGHT BELIEVES....? Trade makes gains to taxes and employment Boosts maritime industry is a zero-sum game

Ricardo's context

Wartime Britain, the Napoleonic Wars (1804-15) Influenced by James MIll, with his desire to make political economy as rigorous as Euclidean geometry, in his Principles of Political Economy and Taxation (1817-23)

Utilitarianism

idea that the goal of society should be to bring about the greatest happiness for the greatest number of people. Focus on the collective. -Man desires only pleasure is a Hobbesian approach, not a Bentham approach. -Principle of utility/greatest happiness applies to all people.

Colbertisme

initiated by and retrospectively named for Louis XIV's minister Jean-Baptiste Colbert (1619-1683), this economic doctrine was the French version of mercantilism. The label still applies generally to the prominent role of the French state in directing economic development.

Criticisms of Malthus

model adopts a simplistic view of the world. assumes a closed economy. doesn't consider the role of trade/specialisation. doesn't decipher between factor endowments. didn't predict fertility transition to lower levels as incoems continued to grow. didn't predict a role for institutions to foster technology changes, economic growth etc.

The distribution of national product

three constituent classes of society: landlords, capitalists, and workers. According to Ricardo, there are three major groups in the economy. They are landlords, capitalists and labourers among whom the entire productive land is distributed.

Pierre de Boisguilbert

(1646-1714) French mercantilist Book-- 'Detail de la France' (pub. 1695 but written before). Critic of Louis XIV. --He claimed income had halved under Colbert and paper money could perform the functions of metallic money and had an advantage of costing nothing to produce. Not about value of the coinage about the functions of money as a store of value and medium of exchange --consumption kept money circulating, consumption and income were equivalent. --prosperity requires there to be a balance or equilibrium between different goods and the 'prices are kept in proportion with one another and with the costs necessary for creating goods'. Nature alone, not the state, can maintain order and peace. laissez faire la nature ---- his exception to the rule was the government should intervene to stabilise the price of grain, holding stocks that could be bought and sold.

'England's Treasure by Forraign Trade'

(1664) Thomas Mun's posthumous book

Richard Cantillon

(1680-1734) Irish merchant who burned down his house and either died or it was arson. books-- ' An Essay on the Nature of Commerce in General' (1730)-- pub. 1755 The birth of the subject of economics... Land is a source of wealth. Labour simply adjusts to demand. Criticises Colbert and argues that it is impossible to raise wealth by training more craftsmen, it is the land that determines wealth and the number of labourers adjusts automatically. 'intrinsic value' of land. The amount of land and labour that enters into the production of a commodity. If labour is valued according to the amount of land needed to maintain the labourers, this reduces to a land theory of value.

Francois Quesnay

(1694-1774) French economist. Was the undisputed leader of the Physiocrats, the first systematic school of economic thought. Among its tenets were the economic and moral righteousness of laissez-faire policies and the notion that land was the ultimate source of all wealth. -- Physician the the Royal Court of Louis XV --divides labour in society into a productive class and a sterile class. Only agriculture is productive, eg food, mining, raw materials. Influenced by Boisguilbert and Cantillon. --circulation of money is like the blood of an economy. Trade was essential. see Tableau economique

Anna Robert Jacques Turgot

(1727-1781) Physiocrat The government should restore liberty to all branches of commerce-removing barriers to trade, simplifying taxes, and giving everyone the right to work. This would excite the greatest competition in the market. ---critic of Law's monetary theory in 1749. 'Reflections on the Formation and Distribution of Wealth (1766)' and 'Value of Money' (1769) --France, replaced the monopolies with state-owned firm... wanted to liberalise corn trade and abolish the guilds that restricted access to the industry.

David Ricardo

(1772-1823)-English economist who formulated the "iron law of wages," according to which wages would always remain at the subsistence level for the workers because of population growth. -- wrote during the industrial revolution. --'Principles of Political Economy and Taxation' (three editions 1817-1823) 3 Pillars of his system: 1) Smithian perspective on the link between capital accumulation and growth, 2) Malthusian theory of population 3) The theory of differential rent (see flashcard)

Was Marx a classical economist?

+ He built upon th economics of Smith and Ricardo + Marx's labour theory of value owes much Ricardo - Though he started with classical economics he transformed it. -For classical economists, the laws of production were laws of nature. For Marx on the other hand, the laws of production were based on the laws and instiutions of capitalism, a specific historical stage in history, Capital could exist only because people had the right to own the produce of other people's labour.

Smith's constraints on growth

-- wages: believed that in a growing economy, the demand for labour would raise wages above subsistence levels and his theory suggests that wages would grow in terms of manufactured goods. -- diminishing returns: recognised that many types of agricultural produce- although not wheat or vegetables- will grow dearer as accumulation proceeds -- poor investment decisions: important that investment generates surpluses rather than losses.

The Theory of Differential Rent

--- 1815-- Malthus, West, Torren and Ricardo independently created this theory. RENT IS THE ORIGINAL INDESTRUCTIBLE POWER OF THE SOIL. THERE IS A FIXED SUPPLY OF LAND SO IT IS A SCARCE RESOURCE AND THUS RENT WILL RISE OVER TIME. FREE TRADE IS NEEDED TO REDUCE THE NEGATIVE IMPACT THIS WOULD HAVE ON LANDOWNERS. THE CORN LAWS MUST BE REPEALED!! --different plots of land were of different fertility, with the result that applying the same labour and capital to them would yield different quantities of corn, and that agricultural land had no alternative use. --- used the example of corn, an increase in rent, constancy of wages, and declining profits, with the farmer's rate of profit controlling the rate of profit elsewhere in the economy. ---Competition would ensure that the least fertile plots of land under cultivation would earn no rent: the corn produced would sell for just enough revenue to cover production costs, with the result that there would be nothing left for the landlord. If there was a surplus, more land would be brought under cultivation; if costs were not covered, the land would not be cultivated. All other plots of land must by definition be more fertile, would be yielded. The landlord would be able to demand this surplus as rent,. The result was that rent emerged as the surplus earned by land that was more fertile than the least fertile land under cultivation.

The labour theory of value and the value of labour power

--- the rate of exploitation/ rate of surplus value (=s/v) This can be expressed either interms of monetary units or in terms of hours of necessary labour --- the 'organic composition of capital' (=c/v) This is a measure of the extent od mechanisation and output in capitalist society. --- the 'rate of profit' (=s/(c+v)) or surplus value/total capital. This is what the capitalist is ultimately interested in. As in Ricardian models, it is the prospective rate of return that helps, which motivates accumulation. A decline in the rate of profit below customary levels mat bring a check to accumulation

Famous Mill works

-System of Logic (1843) - Essay on Some Unsettled Questions of Political Economy (1844) - Utilitarianism (1863)*** -On Liberty (1869) - Principles of Political Economy ( six editions 1848-1873).***

Monopoly from the crown (mercantilism)

-patents of monopoly for a particular product -trade of monopoly with a particular part of the world e.g. the british east india company -prohibition of competitive production and sale of goods in the colonies of the New World

Ricardo's two propositions

1) contrary to what Smith had argued, the interests of the landlords were opposed to the interests of the rest of society 2) the only cause of declining rate of profit was a shortage of cultivatable land.

Introduction to the Principles of Morals

1780 Jeremy Bentham - 'nature has placed mankind under the governance of sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do as to determine what we shall do' - when individuals affect others, decisions should be made to maximise 'the greatest happiness for the greatest number' -only outcomes matter -'felicific calculus' quantifies pleasure and pain: -intensity, duration, certainty, propinquity - various actions can be ranked according to how they score on each of these.

Essay on the Principle of Population

1798, 2nd 1803 Essay in which Malthus states that the food supply can not grow to support the growing population. The only solution he gives is to stop having so many children. Response to the utopian ideas of Godwin and Condorcet, who were attacking the notions of propeert and advocationg for greater equality. Private property was essential, for otherwise self-love would fail to have the beneficial effects that Smith had pointed out. There is a continual tendency for population to outstrip resources. If unchecked, population would grow according to a geometric progression, whereas food supply would grow in an arithmetic progression.

Mercantilism

17th/18th Century: An economic policy under which nations sought to increase their wealth and power by obtaining large amounts of gold and silver and by selling more goods than they bought.

Ricardo's Corn Model *****

1815 Differential Rent Highlighted diminishing returns model by Classical Economist The subsistence level of wage is equal to the marginal level of labour. Rent is everything above and gets larger as more land is cultivated.

An Essay on the Influence of a Low Price of Corn on the Profits from Stock; Showing the Inexpediency of Restrictions on Importation

1815 Ricardian essay about the question of rent ( see theory on differential rent) 1) rent of land is attributabe to the original and indestructible powers of the soil. 2) land can be ranked according to its original fertility 3) farming can always have recourse to a 'margin of cultivation' the least productive land. If this is freely accessible, it can command no rent since no farmer would need oay for it.--- issue of enclosure

Essay to Principles of Political Economy

1815 essay by David Riccardo

Ricardo and the corn laws

1815 pamphlets debated the Corn Laws which at that time effectively imposed a prohibitive tariff on corn imports. After the war, corn prices remained high because of the laws, which prevente a price fall because of tariffs. Unless the Corn Laws were repealed, profits would fall and growth would come to a halt. However, if the CLs were repealed, there would still be problems, as if his theory were correct, growth would involve the progressive expansion of manufacturing relative to agriculture.

Mill's Theory of International Trade

1844 Essays retained Ricardo's theory of comparative advantage. --but how are the terms of the trade determined? --introduced theory of 'reciprocal demand' -- terms of trade would depend on the demands for imports in the two countries--> relative demands depend on 'inclinations and circumstances of the consumers' --> equilibrium price set when 'the quantities required by each country, of the articles which it imports from its neighbour, shall be exactly sufficient to pay for one another' Transport costs- which could offset comparative advantage and prevent trade costs might change with output (non-constant opportunity costs- the concave PPF).

Principles of Political Economy- Mill

1848 Retained the Ricardian framework but at the same time to take into account the many points made by Ricardo's critics. - Little more than updating Wealth of Nations. -Basic theory of value, income distribution and growth: he placed much greater emphasis on demand (as a schedule of prices and quantities) marked a significant change from the Smithian and Ricardian concept. When applied to international trade (in his theory of reciporcal demand), the result was a theory that want far beyond Ricardo... it allowed for the possibility that costs might change with output, and it explained the volume of goods traded. He followed Senior in accepting that profits might be necessary to induce capitalists to save.

Das Kapital

1867 a method of inquiry, some scholars have termed 'systematic' dialectics. Volume 1: starts with the concept of a commodity and the process of capitalist production. It discusses value and the production of surplus value, analyses the antagonism between capital and labour. Volume 2: discusses the circulation of capital and the various forms it can take. Volume 3: investigates competition and the antagonism betwen capitalists.

The General Theory of Employment, Interest and Money

1936 work by John Maynard Keynes, --- a shift from price stabilisayion as the goal of public policy to the stabilisation of income and employment at high levels. - national income equals expenditures for consumption and investment. -a national income at less than full employment indicates that expenditures are deficient. -consumption is more passive and tends to change with income. -changes in income are generated by changes in investment -investment is determined b the relationship between anticipated rates of return from investment and the interest rate. - the rate of interest reflects the public's preference for holding assets in th liquid form of cash. -private investment may be supplemented by public investment. Compensatory spending of public authorities with a resulting compensatory economy, and partial socialisation of investment.

Mill's view of economics

A collection of positive truths rather than a body of normative rules, although such rules are founded on it. It informs us of the laws that regulate the production and distribution of wealth; consumption, according to Mill, is not to be singled out and coordinated with the two other components since its study forms an inseparable part of these.

price elasticity of demand

Alfred Marshall's concept e= dx/dy (y/x) = dx/dy(PM/OM) PT/Pt His development of PED in the form of a double fraction connecting a quantity change with a price change, brought to perfection a long tradition in doctrinal history, which linked his construction with the earlier ones of Tooke, Mill, and Whewell. Marshall's construction proved eminently useful and suggestive, both in econometric work and as a pattern that influenced the derivation of a host of other elasticity concepts, arc elasticity, income elasticity, XED, the elasticity of substitution of factors, and elasticity of expectations. There is doubt whether with his preference for realism, would have approved all these constructions. He himself was even wary about the elasticity of supply and underlined the lack symmetry between demand and supply elasticity, the latter requiring, more than the former, specification of the length of the run for which the curve was drawn.

Principles of Economics (1890-1920 8 editions)

Alfred Marshall's textbook for economics used until the 1950s. Verbal discriptions of theories, much less maths and diagrams, wanted everyone to understand not just economists.

Spiegel book notes: J.S. Mill

Although he overall adhered to Malthus' population doctrine and to Ricardo's theory of distribution, the possibility of human regeneration, always stressed throughout his work, took the sting out of the population dilemma, the subsitence wage, the stationary statte and other wearisome features of classical economics. Mill's work carries the promise of a measured optimism. 'No one whose opinion deserves a moment's consideration... can doubt that most of the great positive evil of the world are in themselves removable, and will, if human affairs continue to improve, be in the end reduced within narrow limits.' Made classical economics compatible with the belief in progress. He confounded those who like Carlyle called classical economists 'the dreary professors of a dismal science.' The spirit of the 19thC was progressive and Mill conformed to it more than Malthus and Ricardo had.

East India Company

An English company formed in 1600 to develop trade with the new British colonies in India and southeastern Asia. Mun was director 1670s- controversy over Indian cottons and silks, imports of which increased dramatically since the freeing of trade in bullion in 1663. English clothiers began to use the balance-of-trade doctrine to criticise the activities of the East India Company in promoting Indian manufacturing and trade. --- this led to new ways of thinking about wealth and economic growth. instead of seeing trade through the eyes of the producers, they looked at it satisfying consumer demands. Consumption rather than production was the aim of economic activity. Self-interest was assumed to rule human affairs. Hobbes assumed that men formed governments solely because of self-interest. Indian manufactures, with which English woollens could not compete, were seen as wrecking businesses, causing unemployment and producing poverty. The solutions offered were to encourage investment and to restrict imports.

Physiocrats

Anti-mercantilists A group of economists who urged the French government to deregulate the grain trade and make the tax system more equitable to encourage agricultural productivity. Claimed guilds should be abolished in order to establish a free market and strongly influenced Adam Smith.

Ricardo's theory of diminshing returns to agriculture

As the population expands, an economy will need to resort to less fertile land.

Marx vs Mill's approach of reform

Believed reform would not work - fundamental relations of production would remain the same - production relations determine distribution relations

John Stuart Mill (1806-1873)

British philosopher who published On Liberty (1859), advocating individual rights against government intrusion, and The Subjection of Women (1869), on the cause of women's rights. Son of James, friend of Ricardo, Jeremy Bentham. Built upon the Ricardian approach to economics. Progressive political philosophy Socially progressive reformist element: human rights, suffrage, labour organisations, North in the American Civil War, pragmatic approach to laissez faire.

Jeremy Bentham (1748-1832)

British theorist and philosopher who proposed utilitarianism, the principle that governments should operate on the basis of utility, or the greatest good for the greatest number. 1) Society's interest is the sum of the interests of the members of society. 2)Every man is the best judge of his own interests. 3)Every man's capacity for happiness is as great as any other's.

capitalist mode of production

Capital is not simply money to function as capital it has to be transformed into means of production and labour powerm then into capital in the production process, then into stocks of commodities and finally once the commodities were sold, into money again. M-C-M' money-commodities-more money. the first stage is simple production in which the economy produced itself on an unchanged scale. The second was 'extended reproduction', where capital was increasing. He agreed with Smith that capital accumulated not because capitalists hoarded money but because they used money to employ labour productively. -- here 'Mr Moneybags' begins with a sum of money/capital which is exchanged for commodities in order to increase the capital, the difference is the 'surplus value'

Marx predictions

Capitalist production would become more mechanised and more centralised. Increased mechanisaton led to what he called a rising 'organic composition of capital'- a rising proportion of capital would take the form of constant capital, and a lower proportion would take the form of variable capital. Because surplus value was produced by variable capital, this meant that surplus value per unit of capital would fall and with it the rate of profit. Capitalists would offset this by increasing exploitation of workers- increasing the working day length, forcing intense work.

Spiegel book notes: Marshall

Centred as it did around particular equilibria, was pervaded by the ceteris paribus assumption, which made it possible to single out for attention ine segment if the economy while neglecting the links that connected it with others. Such a neglect of mutual interdependence did not oppose reality so long as adjustments within the segment under study were of an order of importance too small to affect by repercussions stemming from the outside. Even under these circumstances, however, Marshall's approach opened up questions some of which long defied conclusive resolutions.

Adam Smith

Classical Economist Scottish economist who wrote the 'Wealth of Nations' (1776) a precursor to modern Capitalism. developed the idea of laissez-faire beyond the physiocrats to make a general statement about the invisible hand. 'Theory of Moral Sentiments' (1759) 1778 appointed Commissioner of Custom for Scotland -- indebted to physiocrats which attributed a key role to an agricultural surplus, because of his theory of value Smith regarded agricultural surpluses as especially important. -- he provided some important building blocks for a theory of economic growth -- new directions to the concept of the division of labour... the importance of internal economies: the pin factory and size of the market... a more general definition of productive vs unproductive labour... could be regarded as a generalisation of the physiocratic position

Say's Law (Jean Baptiste Say 1767-1832)

Classical political economy: Theory that supply creates its own demand. His work propagated Smith's thought. Known as the writer who developed the law of markets, a law named after him which to this day figures prominently in the discussion of economic theory. 'It is production which opens a demand for products... a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value.' He denies the possibility of general overproduction, if there is overproduction of specific commodities, this is a result either of misdirected production or of a decline in the production of other commodities where-with to buy commodity of which there is overproduction. Endorsed by Ricardo and his followers but attacked by Malthus, Sismondi and others. To this day the meaning of Say's law has remained controversial, interest in the controversy has been heightened by the importance given to Say's law by Keynes, who employed it as a target in his attack against classics.

Mercantilism in France

Colbert Charged with improving the royal revenues under Louis XIV (1642-1715) -pro exporting and manufacturing policy -import of manufactures is forbidden, export subsidies -bans on export of food and primary products -detailed regulation of industry -new branches created: emphasis on luxury products

Points made in essay to principles of political economy

David Ricardo (1815) Principles of Political Economy and Taxation expanded on 1815 version. Avoided the problem of value because everything is measured in quantities of corn. This assumption meant that the rate of profit was a purely physical phenomenon, and the 'rate of profit in agriculture regulates that of all other trades.' In Principles he avoided the problem of value because in reality, the wage consists of not just corn, but other agricultural and manufactured goods. In no line of production does 'output' consist of the same physical commodity as the wage. He introduced the labour theory of value in which prices were determined by the labour required in their production. He thought of wage as consisting of definite quantities of various 'necessaries' entering the 'wage bundle'. Since food still formed a large element of these necessaries, he still believed that the rising labour cost of producing these necessaries would lead to rising rents and falling rate of profit. -- wrote about the gains of trade as comparative advantage.

Consumer surplus

Definition: 'how far the price which is actually paid for a thing represents the benefit that arises from its possession.' -'the excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. --- marginal utility of money MUm- Marshall correctly identified the equilibrium condition for choice of x to be pxMUm=MUx. If px falls, the consumer must buy more x to restore equilibrium- if MUm is constant. But fall in px may increase or decrease MUm depending on the PED. There may be an income effect and this means that consumer surplus cannot be properly measured- indeed, demand may slope upwards. ---The movement along the demand curve will, as a rule, require outlays that differ in amount. BY affecting the amount of money at the disposal of prospective purchaser, such a movement is bound to affect the marginal utility of money, which will vary rather than stay constant. Marshall attempted to resolve this difficulty with the help of the assumption that the purchases read off along the demand curve would absorb only a small fraction of prospective buyers' total consumption expenditure so that the marginal utility of money could for all practical purposes be considered a constant. Marshall was aware of this problem and sometimes argued that CS was only appropriate for small changes in the price of low expenditure goods. Market level: market demand is aggregate of individual demand curves (as Marshall makes clear). But market CS requires interpersonal comparisons of utility. PED: PT/Pt --the first attempt to give operational force to the concept of demand responsiveness. His notion of consumer surplus had been anticipated in the writings of Jules Dupuit, a French civil engineer, during the mid-19thC. The underlying idea stemmed from the observation that the demand curve of individual slopes downward and that many of the demand prices identified by such a curve will typically lie above the market price, Marshall employed as an example an individual's demand for tea. At a high demand price only a small quantity would be demanded, which would increase with falling prices. On all units of tea preceding the last unit purchased, whose demand price coincided with the market price, the consumer would have earned a surplus equal to the difference between the respective demand prices and the market demand curve and the horizontal price line.

John Maynard Keynes (1883-1946)

English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation

Alfred Marshall (1842-1924)

English economist. his magnum opus, 1890's Principles of Economics, introduced the notions of consumer surplus, quasi-rent, demand curves, and elasticity, all fundamental concepts in introductory macro- and microeconomics. Mathematician Main works: - The Economics of Industry (1879) - The Pure Theory of Foreign Trade (1879) - Principles of Economics: An Introductory Text (1890) -Elements of the Economics of Industry (1892) -Industry and Trade (1919) -Money, Credit and Commerce (1923) -Translating Mill's doctrines into mathematics.

Marx and capitalist exploitation

Exploitation is at the heart of the capitalist system: it was not an accidental feature that could be removed without affecting the entire structure of the sytem.

The Scottish Enlightenment 18th Century

Flourishing of intellectual activity in what was a very backward part of Europe. Hume, Smith, Bacon, Newton. Adam Smith sort to explain how human societies changed. They sought to provide an account of the history of civil society.

Marshallian demand schedules

Following Jevons, he justifies downward-sloping demand on the basis of diminishing marginal utility. 'There is hen one general law of demand: -the geater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or... the amount demanded increases with a fall in price, and diminshes with a rise in price'-Principles

Tableau Economique

Francois Quesnay Shows the relationship between the 3 classes: proprietors, farmers and artisans. An early model of circular flow of the 'national income' and of its annual reproduction. 2 assumptions: Farmers' net revenue is supposed to be equal to the amount of their expenditure or income. The expenditure of any one of the three classes, which is always divided evenly among farm products and manufactures, will spend another dollar for farm products; whereas members of the two sterile classes will spend another dollar for the products of the other class.

Tableau Economique v. detailed about produit net and oxen etc.

Francois Quesnay 2 tables zig-zag flow, Physiocratic 'production function' -- unassisted labour-- oxen-drawn plough, oxen work slower than horses, 36% rate of return on capital investment, horse-drawn plough 100% rate of return. -- shows how the produit net and the expenditure circulates between the 3 classes, how the produit net is reproduced each year, only agriculture is productive, 'agriculture is the course of all wealth of the state and the wealth of all the citizens' --- assumptions, the entire revenue enters into circulation, taxes are not destructive or disproportionate to the total of the nation's revenue, farmers have sufficient capital to achieve net revenue, each person is free to cultivate the fields. PROBLEMS: the constraint on achieving la grande culture was the necessary supply of capital, which took the form of rich entrepreneurs. There were no capital markets. Diffusion of new technologies was quite slow. Physiocrats believed it would be fast, but that was not true, even in Britain it was slow

Les Economistes

French Physiocrats Journal called ' Ephemerides' between 1767 and 1772. La Philosophie rurale 1763 followers: Du Pont de Nemours, Mercier de la Riviere, Turgot.

Malthus on the Poor Laws

Giving money to the poor would not improve their condition unless someone else was prepared to consume less, for it would have no effect on the quantity of resources available. Any extension of poor relief would increase the dependence of the poor on the state. Under the Poor Laws, the poor were 'subjected to a st of grating, inconvenient, tyrannical laws, totally inconsistent with the genuine spirit of the constitution... utterly contradictory to all ideas of freedom... adding to the difficulty of those struggling to support themselves without assistance.'

Malthus, context

Growth of population, high grain prices, increasing popular unrest. French revolution (1789) and revolutionary ideas of Godwin and Condorcet. Suspension of sterling convertibility and rising prices in early 1800s. Operating within the sphere of 18thC moral philosophy. He disagreed with Godwin and Concordcet but did believe in reason and applying Newtonian principles to the art of politics. 'Malthusian' came to be used as a term of abuse, referring to the materialistic, spiritually impoverished outlook of the 'modern political economy'. Thomas Carlyle called it a 'dismal science'. Economist was used to denote someone with an idenitfiable approach to politics and a congenitally hard heart.

A Contribution to the Critique of Political Economy

In correspondence with Engels, he outlined a project dealing with capital, landed property, wage labour, the state, international trade, and the world market.

Smith's beliefs of the role of government

He advocated for a system of 'natural liberty' to be contrasted with the other two systems of political economy: the mercantile system and physiocratic. The main characteristic being freedom of any individual to bring his capital into competition with that of any other man. --- he opposed monopoly, which in his day was normally the result of privileges granted by the government--'Monopoly... is a great enemy of good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defence.' ---free competition would result in resources being moved into those activities where they were most needed. The individual would be 'led by an invisible hand to promote an end which was no part of his intention'. +++Has mostly laissez-faire beliefs but believes the state is needed for the role of justice. Although it is unproductive, it is essential to have the system work. +++ law and order is the first duty of the sovereign +++Supported the Navigation Acts as they contribute to the strength of the Royal Navy. +++ 'erecting and maintaining those public institutions and those public works...' he pretty much references the idea of the free-rider problem and how some goods needed to be provided by the government. +++ Transport and primary education. -Tolls and fees should be used wherever possible. Wanted users to pay as much as possible, and wanted employees to have an incentive to do work properly. --- The cost of education might 'without injustice' be met out of public funds, he declared that it would be better for it to be paid by those who benefited from schooling. His view was that privately provided education was, in his day, better than public education. Critical of universities (the irony). ---- there is no role in government maintaining the level of employment. Mercantilist policies did this. If there was perfect liberty, men would move into an occupation where there was a demand for services.

Mill and Says Law

He denies the possibility of chronic stagnation inherent in Malthus' argument and instead develops an incipient theory of the business cycle in which the state of confidence holds a strategic position. His interpretation of Say's law freed it of its paradoxical character and prepared the ground for the modern view that represents the relationship between demand and supply as one of equality rather than of identity. In fact the argument drawn from barter, which Mill was the first to develop, has continued to play an important role in contemporary discussion.

Mill and socialism

He explicitly rejected revolution as too costly in social and human terms, and he remained attached to competition as a principle of economic organisation if freed of abuses.

J.S. Mill and Bentham

His theory of ultilitarianis upheld Bentham's general position but modified it. He agreeed that actions are right in the proportion that they tend to promote happines and wrong as they tend to produce the reverse happiness. But he also believed the quality of the pleasure was important.

The economy during 17th/18th century

Household industry and factory industry. Trade is a means to enrich the kingdom. A positive export balance leads to wealth accumulation.

J.S. Mill on dumb people

In his 'Considerations on Representative Government' (1861) he proposed to give extra votes to individuals possessed of 'mental superiority' and who in his 'Utilitarianism' made it clear that 'it is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, is of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.'

Marx's background

In the early 1840s he worked as a journalist in the Rhineland, he had to tackle economic issues such as free trade and legislation on the theft of wood. The theoretical framework that underlies his later work was absent- he considered the notion of surplus value an 'economic fantasy'. In 1844, however, Friedrich Engels introduced him to English classical economics.

Smith vs Malthus

Increased population would increase the scope for the division of labour and specialisation of population. Markets for output, this would be self reinforcing, would controbute to sustain productivity gains. Increased population--> increased market size--> increased specialisation--> increased growth--> increased income--> increased demand for food satisfied as income has risen.

Colbert

Jean Baptiste ____, was king Louis controller-general of finances. (1619-83) Primary aim was not to raise welfare but to increase the power of the King. -- sort to increase exports and reduce imports, achieving national self-sufficiency and accumulating treasure which would drive trade. --immigration of skilled workers was encouraged through subsidies, and he tried to stop emigration. Not an economist failed to revive the royal finances France suffered from other financial issues- including experiments in the early 18th century which nearly bankrupted it -- hunger -- price-fixing, prohibiting speculation in grain, direct coercion of producers. But it did not remove the taxes and barriers to internal movement of food, which were the issue. -- military expenditures by the king and his successors led to the state continually being on verge of bankruptcy. French state borrowed at higher interest rates than the private sector for most of the 18th century failures of tax collection and forced labour extended in 1738, called 'corvee'

Balance of trade doctrine

MERCANTILISM Flows of goods governed the exchange rate and flows of bullion, not the other way round. To stem the outflow of treasure it was necessary to increase the balance of trade- to reduce imports, especially of unnecessary items, and to increase exports. This required a low exchange rate. Money is the soul of commerce and England's losses of money abroad had to be stopped. Saw money not as wealth to be accumulated, but as working capital. In the 1620s this was used as an argument against traditional regulation of the economy, in the 1690s it came to be used to defend manufacturing and landed interests against the threat presented by free trade and commercial expansion.

Preventitive Checks

Malthus Lower the birth rate

positive checks on population

Malthus raise the death rate: War, famine, disease - ie the deaths of people who are alive now

Misery

Malthus war famine checks

Vice

Malthus war, infanticide, prostitution, contraception checks.

Boserup vs. Malthus

Malthus suggests there is a point where the Earth's resources will not be able to support the ever growing population. Her theory suggests that improvement in agriculture is not random or exogenous. Population growth actually acts as an incentive for improvements in agriculture because increased population creates increased necessity to become more productive. Population itself is a resource. Humans have the means and knowledge to overcome the lack of resources by inventing new ways of resources extraction and production. In support of this view are new ways of food production; fertilisers, food technology, GM etc. This increases the Earth's carrying capacity. Growing population creased increased necessity to become more productive.

Moral restraint

Malthus' solution for decreasing population is______. Postponement of marriage not accompanies by 'irregular gratification' . This third category allowed him to reconcile his theory with evidence he had collected, between 1798 and 1803. Opened up the possibility of progress. Did not believe in the goodness of human nature, believed men required moral guidance,.

Labour is absolute value

Marx: as capitalism has developed, attention has shifted to relative surplus value, and raising the rate of exploitation through: increased productivity in wage goods, cheaper imports of wage goods, intensification of work/Fordism

Capitalism contained the forces that would lead to its downfall

Marx: concentration of capitalistic production- 'One capitalist always kills many' 'Along with the ... diminshing number of magnates of capital, who usurp and monopolise... growws the mass of misery, oppression, slavery, degradations, exploitation; but with this too grows the revolt of the working class, ... always growing in numbers'

The role of the industrial reserve army

Marx: relative surplus population: population growth increaseses the supply of labour, active competition on the labour market from the reserve army looking for work keeps wages at their customary level. The industrial reserve army constantly being replenished by the introduction of labour saving machinery bby capitwlists trying to reduce their wage bill (earlier noted by Ricardo)

Navigation Acts

Mercantilist, English laws in the 17th - 18th centuries that required the use of English or colonial ships to carry English trade. To only trade within the empire. The laws were designed to encourage English shipbuilding and restrict trade competition from England's commercial rivals, especially the Dutch. The acts of the 18th century gradually restricted trade by the American colonies and contributed to growing colonial resentment with the imposition of additional duties on sugar, tobacco, and molasses.

The Mercantilists

Mun Colbert Boisguilbert

Population and checks- Malthus

Population would grow geometrically, whilst food grew arithmetically. The law of diminishing returns to agriculture. Population was held down by two types of check: preventitive checks, which served to lower the birth rate, and positive checks, which raised the death rate. the 1750s prove Malthus was wrong. Population explosion after 1751 is a result of the Industrial Revolution -- economic growth increased wages -> higher wages led to increased fertility and reduced mortality. -- increased fertility and reduced mortality created a significant increase in the population.

Surplus value converted into profit and rent

Prices would be higher than values in industries that employed a high proportion of fixed capital, and lower in industries where little fixed capital was used. Prices, therefore, would not be proportional to labour values. For Marx, this arose as the transformation problem- how values were transformed into prices. As he defined values in terms of labour tie, this problem did not undermine his labour theory of value as it did Ricardo's.

Characteristics of the physiocratic era:

Pro-France: -- traditional agricultural -- subsistence farming -- feudal relations -- richest people: landowners England: -- agricultural reforms- modern -- non-feudal relations between the classes - richest people: merchants

Debasement of coinage

Putting less precious metal in each coin and adding more metal of less worth without changing the coin's face value. 1690s recoinage crisis--- if the silver content was restored, there would be fewer coins in circulation and the result would be deflation. men who emphasised the importance of demand wanted the recoinage to reflect the decline in the shilling's silver. The govt recoined at the full value, causing deflation, but the govt agreed to accept old shillings at their face value for the first 6 months. --- Gresham's Law, 'bad money drives out good'. Good coins were hoarded and bad circulated. Old shillings went to the Mint and the new full-weight coins were largely melted down and exported. Value of silver coins in circulation may have fallen from £12m Dec 1695 to £4.2m June 1696. SHARP DEFLATION

Marshall's perfect competition

Recognised there were different types of competition Industries not assumed to be perfectly competitive- he recognised that different firms served particular groups of consumers. But his analysis assumed competition between firms. Industries are comprised of firms at different stages of development and profitably-- firms go through a life-cycle. The representative firm- the average firm in the industry- used for analysis how industry might respond to changes. Decreasing cost industries: observed that firms and industry outputs were growing and prices were falling: this impied that monopoly was the inevitable outcome: inconsistent with his competitive model, inconsistent with his notions of 'economic freedom'.-- he introduced external/internal economies of scale

Mill's Theory of Value

Rejected Ricardo's labour theory of value and the idea that land has a zero opportunity cost. --'that a thing may have any value in exchangee, two conditions are necessary. It must be of some use; that is..., it must conduce to some purpose, satisf some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them. But, secondly, the thing must not only have some utility, there must also be some difficulty in its attainment.' --Thus, for Mill, price is determined by 'difficulty of attainment'(D) and 'intrinsic utility'(U). D is decisive in a competitive market with constant costs. U is decisive when supply is perfectly inelastic 'strict and absolute monopoly' -- since the latter is rare for Mill, his theory amounts to a cost of production theory, where 'costs' are more complex than Ricardo's

Theory of Rent

Ricardo 1) 'Rent of land' is attainable to ' the original and indestructible' powers of the soil. Land can be improved but are returns of capital investment. 2) Land can be ranked, mostly by fertility. 3)Farming can always have a resource to a 'margin of cultivation', the least productive land. If this is freely accessible, it can command no rent since no farmer would need to pay it.

comparative advantage

Ricardo The ability of a country to produce a good at a lower cost than another country can.

Gains from trade

Ricardo/comparative advantage: Specialising the type of production which uses resources most efficiently, and using the income generated from that production to buy the goods and services that countries desire.

Marx and the business cycle

Saw capitalsm as undergoing successive periods of depression, medium activity, rapid expansion, and crisis. There would be a cycle , the period of which depended on the turnover rate or life cycle of capital goods. He assumed that this had increased, and that by the time he was writing it was around 10 years in the 'essential branches of modern industry'

John Law

Scottish financier who set up an official trading company for North America and a state bank that issued paper money and stock (both crashed and burned) book-- 'Money and Trade Considered: A Proposal for Supplying the Nation with Money'(1705) the value of goods depended not on the quantity of money but on the ratio of tit to the demand, the role of money was to facilitate trade. increase in the quantity of money would therefore increase employment, cause more land to be cultivated, and increase output and trade. -- unemployed resources will be employed when economic activity increased. 1720- Law was appointed Controller-General of Finances in France and planned to demonetise gold and silver. But the financial system needed to be brought under control, proposed to gradually reduce the price of shares, which were unstable, outraging the public. But the shares collapsed and the overissue of banknotes has reduced the value substantially. This had destroyed the public's financial wealth.

Tripartite division of society

Smith those who make their living through being paid a wage, earned a profit from capital, and earned rent. The adding up theory of natural price

Value Theory

Smith 1) the distintion between the real and nominal prices of commodities. In an exchange economy it is more convenient to use money than enage in barter and, as a result, prices are measured in terms of moey (the nominal price)... the real price of the commodity is the 'toil and trouble of acquiring it'.. the quantity of labour, not quantity of money. 2)breaking down of the pirces of commodities into their componen parts- wages, profits and rents, the returns to labour, capital and land. 3) the distinction between the market prive and the natural price of commodities.

Smith and Ricardo capital accumulation

Smith had taught that as capital accumulatesmcompetition causes the rate of profit to decline. Ricardo, on the other hand, related profits to wages and thereby ultimately to the cost of producing the labourer's subsistence. High costs of producing food would make for high wafes and low profits; reduced costs would have the opposite effect. 'A rise in the price of raw produce may be occasioned by a gradual accumulation of capital which by creating new demands for labour may give a stimulus to population and consequently promote the cultivation or improvement of inferior lands,- but this will not cause profits to rise but to fall, because not only will the rate of wages rise,but more labourers will be employed without affording a proportional return of raw produce.'

Natural Price

Smith's concept, similar to accommodation of supply and demand. Measuring production in terms of the labour it could command, a so-called 'labour commanded' measure of value. If, with a certain wage, the output of a farm in a year can buy the labour of 4 men for a year, this is a measure of the value of production. --- the natural price is what we would call the 'long run' equilibrium price consistent with a competitive market. --- the price at which labour, capital and land are all receiving their natural prices... 'the central price, to which the prices of all commodities are continually gravitating'

Productive labour

Smith: adds to the value of the subject which it is bestowed. It fixes itself in a permanent subject or vendible commodity that is there when the labour is finished, and which can then be sold to obtain more labour. Thus the labour of a manufacturer who adds to the value of the materials with which he works, or of the farmer who produces a tangible output at the end of the year is productive.

capital accumulation

Smith: the growth of capital resources, including human capital. A precondition for the division of labour is the accumulation of stock. Tools workmen need and the provisions that they need while they are working. If growth is to occur, stock has to be increased, and to achive this it is necessary to employ labour productively. Depends on the proportion of labour employed productively. If the whole labour force were employed unproductively, there would be no produce at all the following year. If labour were all employed productively, produce must be higher. Link between saving and economic growth ... ' Capitals are increased by parsimoney, and diminished by prodigality and misconduct.' There is no need for luxury spending to maintain demand, for savings are spent just as much as is expenditure on consumption goods. --> meaning that if a landowner saves, the capital profits will be spent on consumption by labourers and manufacturers.. what he immediately spends is consumed by idle guests and menial servants. --- Saving is employing productive labour, and consuming is employing unproductive labour. see productive and unproductive labour

Unproductive labour

Smith: does not add to the value of anything. The labour of the menial servant or even the sovereign or judges or army is unproductive.

Mill's view on government

Sought institutions that gave individuals control over their own lives- e.g. education can help overcome Malthusian population model, self-improvement can help overcome zero growth. In favour of laissez-fair but believed in government intervention when individuals were not the best judges and when a wider benefit may arise (such as poor relief) Anything that had to be done by joint-stock organisations, where delegated management was required, would often be done as well, if not better, by the state. Even more radically, Mill argued that there might be circumstances in which it became desirable for the state to undertake almost any activity: 'In the particular circumstances of a given age or nation, there is scarcely anything, really important to the general interest, which it may not be desirable, or necessary, that the government should take upon itself, not because private individuals cannot effectually perform it, but because they will not'. Having made the case for laissez-faire, Mill thus qualified it so heavily as to leave open the possibility of a level of state activity that many would regard socialist.

Physiocrats and government policy

Taxes on agriculture should be moderate, promiote large scale farming, free trade for agriculture, good price for corn. small local influence, but major influence on economics in the long run.

TE CLASSES

The "Proprietary" class consisted of only landowners. The "Productive" class consisted of all agricultural laborers. The "Sterile" class is made up of artisans and merchants. The flow of production and/or cash between the three classes started with the Proprietary class because they own the land and they buy from both of the other classes. Quesnay believed that trade and industry were not sources of wealth, and instead in his 1758 manuscript Tableau économique (Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages, and purchases were the real economic movers.

Marshall-Lerner condition

The demand for exports plus the demand for imports is greater than 1; Under this condition, depreciation of a currency will decrease a trade deficit; For export elasticity, the worst case is completely inelastic demand because the decrease in foreign currency has no effect on the quantity demanded; For import elasticity, the worst case is perfectly inelastic demand because the quantity demanded remains the same as price changes; Overall, currency depreciation will improve the trade deficit when either import or export demand is elastic; Only considers trade flows and not capital flows

Physiocracy

The doctrine that land and its products are the only true wealth. Profound respect for the sanctity of private property. intellectual basis is French Science- circular flows, need to balance trade. Philosophical basis: natural law, rule of nature, physio(nature) +crat(ruler), private property freedom of trade -- laissez faire, laissez passer... they postulated a perfect harmony of individual interests as well as of interests of the king and of his subjects. This maxim has to this day, served as an affirmation of economic individualism. Referred to a man's property as the measure of the freedom that he enjoyed. The protection of property rights was to them the foremost function of the positive order. Liberty and equality are incompatible. Endorsed inequality of possessions.

Hegelian Dialectic

The idea, according to G. W. F. Hegel (1770-1831), a German philosopher, that social change results from the conflict of opposite ideas. The thesis is confronted by the antithesis, resulting in a synthesis, which then becomes a new thesis. The process is evolutionary. Marx turned Hegel "upside down" and made class conflict, not ideas, the force driving history forward.

example of natural price level

The rate of profit in producing hats is higher than the natural rate of profits, and if capitalists are free to move their capital from one industry to another, they will move into hat-making. This will increase the supply of hats and bring the price of hats down to this level.

Marshall's realism and work

The role of the economists was not to propound truths about the economy but to develop an agreed body of economic principles that could be used to tackle economic problems. In Principles of Economics, he presented his results verbally in the text. Diagrams were relegated to the footnotes subject could be made accessible to businessmen as well as to professional economists. He was a trained mathematician but he remained sceptical about the use of mathematics in economics. He wanted economics to be realistic but the use of mathematics made it very easy to derive results that had no foundation in reality. He wanted to describe equations verbally.

Mill and trade

The stronger the demand for a commodity, the more favourable are the terms of trade of the country producing it, and vice versa. He understands demand as a schedule or function and that he was aware of the significance of the varying reactions of prospective buyers to changes in price, that is, of the elasticity of demand. He developed the theory that demand elasticity for international trade theory by giving special attention to the 'extreme case' where 'of some given commodity a certain quantity is all that is wanted at any price'(inelastic demand)... he developed what would become the Marshall-Lerner condition. Reciprocal demand and offer curves

Capitalist sum of money

The surplus value created by extracting unpaid labour from workers and fixing it in commodities

Marx: Exploitation as basis of capitalism

The value of an individual's labour power was, like the value of anything else, its costs of production. Example: if it took 6 hours labour to produce the goods a workr needed to subsist and reproduce, the value of his labour power was 6 hours. However, it might be possible to force the worker to work 10 hours labour. The worker produced goods to the value of his labour power. The result would be the creation of surplus value equal to 4 hours' labour. This surplus value was the source of profit. Capitalists could exploit labour because they own the means of production.

Labour theory of value (Marx)

The value of an output product in his system is comprised of 3 elements corresponding to familiar accounting categories: c + v + s c-exchange valueof capital, value of raw materials and machienry used up in production (intermediate consumption + depreciation) v- exchange value of labour, value of labour power which 'reproduces itself' and which produces a surplus (the wage bill) s- surplus value, the excess of total exchange over the value of capital expended.

The Communist Manifesto

This is the 1848 book written by Karl Marx and Friedrich Engels which urges an uprising by workers to seize control of the factors of production from the upper and middle classes.

Marshall supply and demand

Time is defined in terms of what is free to change withing each period. The shortest possible period is defined as the market period. There is a certain quantity of goods available, as there is no time to produce more. If the commodity is perishable it will be sold for whatever it can fetch. Price will be determined by demand, but if the commodity can be stored without great expense, price will be governed primarily by the pricce the sellers expect to prevail in the future: sellers will be reluctant to accept the lower price, even if demand is low. The result is that demand will determine sales, not price. The short run is sufficiently long to allow variations in the level of production to take place. In the short run, firms are able to alter the quantity of unskilled labour they employ, but not the amount of skilled labour and machinery, or their production methods. Output can be increased but only at the increasing unit cost. S and D determine price. If demand increases price will rise, because of rising production costs caused by limited stock of skilled labour and machinery. In the long run, firms have time to change the skilled labour and machinery they use and to organise in different ways. Expansion of output will result in falling costs. An increase in demand will therefore result in output increasing and price falling. In the very long period, 'there are gradual or secular movements of normal price, caused by the gradual growth of knowledge, or population, or capital, and of the changing conditions of demand and supply from one generation to another.'

Impact of Bentham

Utilitarianism offers a logical, interpersonal calculus to guide rational decision making. -- changed the face of 19thC England and made it a cold, logical force: - large variety of programmes covered from parliamentary to prison reform. - impartial civil service based on statistical fact finding. - Criticised Smith and Ricardo's views on interest limits and value.

Policy making and utilitarianism

Utility had several dimensions (intensity, duration, certainty, and nearness), and it was necessary to balance these against each other. Because individuals are selfish in order to achieve collective utility maximisation, we need government to produce 'artificial harmony' through legislation. - Opposed to Adam Smith's view society will achieve natural collective harmony.

Marshall's Supply

Very interested in business and industry -thought about the evolution of industry rather than its equilibrium -introduced some familiar concepts--market period, short period, long period. -fixed 'supplementary' costs; variable 'prime' costs. The supply curve Internal, external economies of scale

Mill's place in history

Views vary: The last classical economist or the first Neo-classical economist? ---bridged the gap between Smith/Ricardo/Malthus and Jevons/Walrus/Marshall. --Ultimately Mill synthesised and developed economic thought of his day, combining it with a brand of political philsophy that made it useful and, socially progressive.

J.S. Mill and Ricardo

With a social outlook that verged on socialism through introducing, at the start of Principles, a distinction between the laws of productions and the laws of distribution. He adopted a more enlightened view of laissez-faire policy (following Bentham rather than anti-Corn Law prescriptions) --> he also extended the theory of taxation, introduced an element of social policy and used a more inductive method. Retains the Ricardian framework-- three-sector economy with diminishing returns and accumulated profit driving growth and Malthusian population model. The production of wealth depended on factors beyond human control: --' the production of wealth... is evidently not an arbitrary thing. It has its necessary conditions. Of these, some are physical, depending on the properties of matter, and on the amount of knowledge of those properties possessed at the particular place and time... combinign these facts of ouward nature with truths relating to human nature it (political economy) attempts to trace the secondary or derivative laws, by which the production of wealth is determined.'

industrial reserve army

a disadvantaged section of labour that can be supplied cheaply when there is a sudden extra demand (the unemployed)

Laissez-faire

a policy or attitude of letting things take their own course, without interfering. no government intervention

Classical economics

a school of thought based on the idea that free markets regulate themselves

Marx and crises

capitalists are forever striving to accumulate capital. Capital would accumulate so rapidly that they would be unable o sell all the output that they were producing, causing a crises in which they fail to make profit. capital would be liquidated as some firms failed, eventually the rate of pordit would rise to the point where new investments were started and the system would move from depression to expansion

Karl Marx (1818-1883)

coined the term "class" in which people are organized in social ranks. built upon Ricardo's economics. He sought to provide a radical critique of orthodox 'bourgeois' political economy.

Historical Dialectical Materialism (Marx)

economic conditions determine thought and behaviour -history can be understood in terms of a progressive development of the 'forces of production'. - this development can be described in terms of definite stages or 'modes of production' -each mode of production based upon specific 'social relations of production'

Laissez fair la nature

nature alone, not the state, can maintain order and peace

Marxist rate of profit

r= s/(c+v) or, s/v / 1+c/v----- meaning that the changes in the rate of profit are outcomes of the rate of exploitation and the organic composition of capital. His law of the falling rate of profit is based upoin the idea that if the rate of exploitation is constant, a rising c/v will reduce the rate of profit. This tendency constituted an 'internal barrier' to the continuing expansion of the capitalist mode of production. PROBLEM: In the counteracting influence of s/v, Marx argued would tend to rise through time as the labour necessary to produce working class consumption fell. ---Marx was aware of the problems of the law and instead called it a tendency. ----The counteracting tendencies: a cheapening of constant capital due to productivity growth in the production of capital goods (this prevents c/v rising in a way which fully reflects the physical composition of capital) -- increasing intensity of labour, reserve army of labour, foreign trade.

the impact of expansion of trade 17th C

see East India Company, balance of trade doctrine. As trade expanded and commercial relations increasingly dominated economic life, clothiers and landowners found their incomes rising less rapidly than those of merchants,. They also faced the burden of the rising taxes needed to support those without any means of supporting themselves. Indian manufactures, with which English woollens could not compete, were seen as wrecking businesses, causing unemployment and producing poverty. The solutions offered were to encourage investment and to restrict imports. BALANCE OF TRADE DOCTRINE--- In the 1620s this was used as an argument against traditional regulation of the economy, in the 1690s it came to be used to defend manufacturing and landed interests against the threat presented by free trade and commercial expansion.

The 3 social classes of the Tableau economique/ produit net

social structures: 3 classes -proprietors (sterile), -farmers (productive), -artisans, merchants etc.. (sterile) Sterile class: receive a salary from the produce of the land. Productive class: the working and nondisposable class, have an income depressed to the subsistence level by the process of competitive bargaining. The productive character of labour of the farmer produces not only his own wage but also the surplus that maintains the rest of society, unlike the artisans.