ECO 3132 History of Economic Thought

Main Question of Mercantilism

"The politico economic challenge became: How best to promote the power and wealth of the nation?"

Background of Physiocrats

- France was behind England in regards to industrialisation but had much more land - physiocrats were not merchants therefore no conflict of interest - interested in shaping government policy - interested in macroeconomics - interested in wealth creation

Physiocrats: Central Premises

- SELF REGULATING NATURAL LAWS GOVERN THE OPERATION OF THE ECONOMY - these natural laws cannot be identified but they can be discovered - ORIGIN OF WEALTH LIES IN AGRICULTURE AND PRIMARY INDUSTRIES - NATURE OF WEALTH CONSISTED OF SUPPLYING THE NECESSARY AND CONVENIENT THINGS TO SATISFY DIVERSE WANTS - only in this primary sector of the economy is net value or surplus generated

The Mercantilist

- best known mercantilist was Thomas Mun - very policy oriented - they were mostly merchants themselves - therefore there was an inherent conflict of interest in them being policy advisers

Mercantilism: Basic Premises

- domestic trade viewed as circulating stocks of money (WRONG) - wealth stems from the process of exchange looked abroad to foreign trade flows - international trade was ideal and the sole vehicle for increasing wealth and power of the nation. - balance of trade was the score of how one country was doing economically - total wealth of the world was fixed, which implied that international trade was a zero sum game (WRONG) -BOTH THE STATE AND THE MERCHANT BENEFIT FROM ECONOMIC NATIONALISM - therefore very symbolic relationship between central governments and merchants - all the action takes place at the macroeconomic level - FUNDAMENTAL CONFLICT BETWEEN THE PRIVATE INTERESTS OF MOS INDIVIDUALS (MINUS MERCHANTS) AND PUBLIC WELFARE

Adam Smith Basic Premises

- economic and social behaviour governed by natural law to be revealed through scientific investigation - economic man driven by greed and selfishness - we behave rationally inorder to advance our goals - instinct to truck barter and exchange

Mercantilism Policy Goals

- encourage production activities - discourage consumption activities - frugality was a virtue at large - favoured low wages - full range of protectionist instruments to ensure a trade surplus - under price competitors in foreign markets - utilise English shipping services

Physiocrat Policies

- lassiez faire and free trade - export french crops - consistent with notion of natural law - promoted competition - burden of tax should be on landowners - reorganise agriculture in order to attain economies of scale in production

Adam Smith Context

- mercantilism was waning in popularity - early stages of industrial revolution - entrepreneurs gaining economic and social status - discipline mixing - scientific analysis could be applied to the social sciences

Evolving Political Structure

- out with feudal fiefdoms - less power and influence of the catholic church - nation states and colonies were popularised

Adam Smith Relevance

- paradigm of classical economic liberalism - PRIVATE PROPERTY AND FREE ENTERPRISE WORKING THROUGH THE MARKET SYSTEM GENERALLY YIELD FAVOURABLE RESULTS - promote both social and private benefit -laissez faire

Scientific Revolution

- planetary motion governed by natural laws - methods of observation, experimentation and application of mathematics - less moral analysis in favour of more logical analysis

Mercantilism: Central Tenets

- the accumulation of specie seen as an end - accumulation of specie implies a 'store of value' function of money - goal of economic activity was to run a trade surplus

Adam Smith Central Tenets

- the nature and causes of the wealth of nations most interested in development wanted all socio-economic classes to benefit - analysis and functions of markets - markets are all interconnected and interrelated - focused on consumption levels as well as on production levels - production is the means to the end of consumption upon which living standards depend - labour and capital accumulation rather than land were sources of wealth

Adam Smith Methodology

- very qualitative and literary analysis - descriptive, persuasive, detailed reasoning

Five Topics from Natural Law

1. Division of Labour 2. Development of Money 3. Growth of Savings/ Investment in Capital 4. Development of Foreign Trade 5. Supply Adjusted for Demand in the Long Run.

Functional Distribution of Income

1. landlords receive profits 2. Capitalists receive profits & interest 3. labourers receive subsistence wages

Three Primary Sectors

1. landowners 2. farmers 3. artisans - shows the interrealtionships between these three sectors - both money flows and physical flows - very systematic perspective of how the wealth creating process regenerates itself - created national accounting

Quantity Theory of Money

A hypothesis that relates changes in P, the general price level, to changes in M, the quantity of money, assuming that V velocity and T, transactions are given magnitudes in the short run.

Monetary Analysis

A monetary analysis is one in which money is not viewed as passive but exercises an independent influence over the economic magnitudes

Real Analysis

A real analysis is one in which money has no influence on the relative factor and commodity prices or the level of economic activity.

Le Tableau Economique

An economic model first described by French economist François Quesnay in 1758, which laid the foundation of the Physiocratic school of economics. Quesnay believed that trade and industry were not sources of wealth, and instead in his 1758 manuscript Tableau économique argued that agricultural surpluses, by flowing through the economy in the form of rent, wages, and purchases were the real economic movers. - first explicit model of economic activity - this model isolates a number of key variables and depicts the structure of the macroeconomy

Physiocrats 1750-1780

An economic theory developed by a group of 18th-century Enlightenment French economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development" and that agricultural products should be highly priced.

Commodity Gluts

An insufficiency of aggregate effective demand that results in unsold goods.

Division of Labour

Concentration of labour effort on particular tasks in order to improve skill, save time, and promote better use of capital.

Say's Identity

Equality between aggregate demand and supply in money terms. It is predicated on the assumption that the demand for cash balances is zero. Say's equality assumes that the money serves only as a medium of exchange and not as a store of value

Downfalls of Physiocrats

Fixated so much on physical concrete productivity that they totally missed the importance of value productivity *value added

Wages Fund

Food and other items constituting the subsistence requirements of labour or their monetary equivalent.

Diminishing Returns

In a given state of the arts productive capacity of land increases at a decreasing rate beyond a certain point. Malthus inferred from this principle that the food supply could only be increased at an arithmetical rate.

Economies of Scale

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale.

Value in Exchange

It is the amount of goods and services which we may obtain in the market in exchange of a particular thing. In other words it is the price of a particular good which can be sold and bought in the market.

Value in Use

It is the want satisfying power of a commodity. The satisfaction which one obtains from the use of a commodity is known as the value in use.

Mercantilism 1500 to 1750

Mercantilism is an economic theory that holds there is a fixed amount of wealth in the world and that a nation's prosperity depends on its success in accumulating wealth by exporting more than it imports, thereby earning profits from its exports.

Adam Smith

Smith laid the foundations of classical free market economic theory. The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, he developed the concept of division of labour and expounded upon how rational self-interest and competition can lead to economic prosperity.

Poor Laws

The English Poor Laws were a system of poor relief which existed in England and Wales that developed out of late-medieval and Tudor-era laws being codified in 1587-98.

Use Value

The ability of a good to yield satisfaction

Circular Flow

The circulation of goods and money incomes throughout the economic system resulting from economic interdependency

Full Employment

The condition in which virtually all who are able and willing to work are employed

Tableau Economique

The economic table that depicts the circulation of the net product among the three classes of society and the return of the net product to the farmer that supports investment in agriculture

Invisible Hand

The harmonizing of individual profit maximizing actions for the social good, as well as for individual benefit, through the operation of competitive market forces

Labour Theory of Value

The hypothesis that the rate at which a commodity will exchange for another is equal to the time, hardship and quantity of the labour effort required to produce it

Principle of Population

The hypothesis that, in the absence of restraints, population will tend to increase geometrical rate as long as there is a food supply

The Invisible Hand

The invisible hand is a term used by Adam Smith to describe the unintended social benefits of an individual's self-interested actions. - abstract natural force - transforms private vice into public virtue - the invisible hand is the vehicle through which this abstract notion works in the real word is the concrete market system

Marginal Productivity Theory

The marginal revenue productivity theory of wages is a theory in neoclassical economics stating that wages are paid at a level equal to the marginal revenue product of labor, MRP, which is the increment to revenues caused by the increment to output produced by the last laborer employed.

Perfect Competition

The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.

Net Product

The surplus produced by workers employed in the primary industries in excess of their own subsistence requirements

Principle of Comparative Advantage

Under conditions of free trade, a region will tend to specialize in the production of those goods in which it has the greatest comparative advantage in terms of cost, or the least comparative disadvantage.

Context of Mercantilism

feudalism gave way to increasing specialisation of labour production which in turn necessitated trade.

Corn Laws

intended to stabilize grain prices through a system of import duties and bounties that were linked to changes in their domestic supply

Market Development

markets developed out of self contained feudal manor. Between interconnected towns.