Transcript History of Economics

History of Economic
Thought
Why Study past economic
thinkers?
– This helps us to explain and teach the ideas
of economics
– The thoughts of brilliant people are always
worth studying – even their mistakes are
insightful.
– We will understand our own thoughts better
by observing the development of thought
Why did economics as a field of
study show up in the middle
Ages and not before?
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national political units
individuality
Commerce
material wealth
thought and invention
Mercantilists
• Tenants and thoughts include emphasis on
building national power, building exports
and accumulation of money
• Josiah Child was 17th century mercantilist.
• Jean-Baptiste Colbert was French Minister
of finance from 1661 to 1683.
• Bernard Mandeville, a social satirist, wrote
“The Fable of the Bees”
• David Hume questioned the mercantilist
assumptions of his day.
Physiocracy
• The Physiocrats rose in reaction to Cobert
• The “Tableau Economique” highlighted key
thoughts
• Held a “laissez-faire” attitude
• Important social impact
Adam Smith
• Smith published The Wealth of Nations in
1776
• The starting point of wealth is a division of
labor which allows people specialize
• The propensity to trade is the second
building block
• Smith thought the “invisible hand” would
guide people who act in their own self
interest to provide benefits for each other
and for society
Thomas Malthus
• Malthus studied at Cambridge, became a
minister in the church of England and a
professor of history and political economy
• Malthus wrote and discussed mainly his
principles on population
• Malthus began with two postulates
– First, that food is necessary
– Second, that the affection between the sexes
would continue
Thomas Malthus
• Malthus leave the population and the food
supply would grow with different rates
– Population would grow geometrically
– The food supply would grow arithmetically
– Therefore population would out strip the food
supply, and mass starvation would result
David Ricardo
• Ricardo’s economic career focused on
inflation in the distribution of income
• He believed that increasing the money
supply during the bullion controversy
caused inflation
• Malthus and Ricardo had differing views of
economics and debated till Ricardo died.
John Stuart Mill
• James Mill raised John Stewart as a child prodigy
who would carry the flag for a new type of
economics
• Mill wrestled with Jeremy Bentham’s utilitarianism
• Mill wrote on economic and non economic topics
• Mill laid out the foundations of supply and demand
• He raised the problems of economies of scale and
market break down
John Stuart Mill
• He clarified that really ideas regarding
international trade
• He was open to government intervention
under certain circumstances
• He developed the idea of “Homo
Economicus” or economic man
• Mill influenced both utilitarianism and
utopianism
Karl Marx and Socialism
• The industrial revolution disrupted the
conventional thought.
• Marx criticized capitalism and the new and
often dreadful working conditions that it
produced
• He believed capitalism was doomed for
scientific reasons
Was Marx responsible for Soviet
totalitarianism?
• Some have tried to hold Marx responsible
for Stalin
• Although he may have been wrong an
unpleasant, he cannot be held responsible
for the many uses to which his ideas have
been put
Marginalist Thought
• Marginalism applied the concepts of
physics to economics
• The Marginalists theorized about how
people valued and demanded goods and
services
Alfred Marshall
• Marginal thinking led to the formation of the
demand curve
• Marginal costs of production led to the
formulation of the supply curve
• Marshall’s writings ended the dispute over
value
• Marshall developed economic diagrams still
in use today
The Socialist Calculation Debate
• Socialists had to come up with a different
basis for their thought since Marshall
destroyed the foundation of Marx’s theory.
• Enrico Barone replaced the invisible hand
with the ministry of planning.
• He proposed the establishment of a
planned society in which markets would
operate.
Austrian economics
• The Austrian’s responded to the concept of
market socialism
• They saw the market as the best mechanism for
calculating , coordinating and making choices.
• The Austrians saw markets and competition as a
method for discovering information
• In the Austrian view, prices were an information
signal in the market.
• They thought the competition led to desirable
decentralized social planning.
• They also proposed that the business cycle was
created based upon expansions and
contractions of the money supply.
Socialist Responce
• The market socialists proposed an
involved version of pure socialism in which
the free markets would determine both
buying and selling prices. But the means
of production would be socially controlled.
• Oscar Lange epitomize this new market
socialism.
Who won?
• We must take various factors into account and
trying to decide which side won in this debate
– Each side thought it had prevailed over the other
– The feelings about winners and losers were based on
timing
– At the time of the debate it was commonly felt that the
socialists had won
– Current thought is that the Austrians have scored the
victory.
– However one must define what socialism really is. To
the economists from the nineteen thirties, our present
economic system would be considered socialism.
Joseph Schumpeter and
Entrepreneurialism
• Schumpeter believed that entrepreneurs
were central to the business cycle
• He believed that “creative destruction” of
entrepreneurs drove an economic growth.
• He thought entrepreneurs should think up
new things and devise new ways of doing
things.
• He believed people acted as
entrepreneurs only occasionally, not
continually.
Joseph Schumpeter and
Entrepreneurialism
• Wrote book on the Business Cycle
– On the upside, innovation led to new
investment opportunities
– the investment climate would lead people to
overbuild and borrow thinking that the good
times would continue indefinitely
– believed there were different types of waves
Joseph Schumpeter and Socialism
• He argued that with pure productive power, capitalism
would continue
• He believe that over time, large firms would make
entrepreneurs obsolete
• He thought that the political weakness of entrepreneurs
would undermine efforts of capitalism
• He believed that intellectual complainers would become
disgruntled and that they would undermine the moral
stability of capitalism
• He claimed that socialism could work and that it was
possible to plan the economy. He was not for socialism
but he believed that central planning was inevitable.
John Maynard Keynes and
Keynesian Economics
• He believed that in long run economic
progress
• He concluded that, barring wars, the
economic problem would be solved within
100 years
Keynesian Economics
• He tried to give reasons for the Great
Depression
– He distinguished between the decision to save and
the decision to invest
– He criticizes stock market investors in the disease of
speculation.
– Keynes claimed that a lack of effective demand
caused economic problems. He believed that when
savings increased and investment was discouraged,
buying power, and in turn production, would
decrease, causing a vicious circle to develop.
Keynesian Economics
• He felt the businesses had two choices
when demand fell. They could respond to
the lack of demand by cutting wages or
laying off workers.
• He defended the government’s ability to
pump up demand. He wanted the
government to inject money into the
economy.
Milton Friedman and the Chicago
School
• Friedman began his career as a statistician.
• Friedman worked on the permanent income
hypothesis
– He found that current consumption also
depended on expectations of future income
– Friedman believes that people would spend
extra income on an investment, such as a car or
a major appliance
the Chicago School
• Friedman found that as income rose over
time, 90% of income went to consumption.
In cross section analysis, Freidman found
that poor families spent a larger
percentage (100%) of their incomes than
rich people did (50-60%).
• The study had harsh implications for
Keynesian thought.
Milton Friedman
• Friedman brought market oriented thinking and
economic freedom into public discourse
– He believed that the system of fixed exchange rates
would not work. And twenty years later it collapsed.
– In 1952 he argued for an all volunteer army, which
was later adopted.
– He argued for school vouchers in 1962
– He proposed both replacing welfare with cash
payments and instituting a negative income tax
– He supports the flat rate income tax
– He proposed that government should cease printing
money and let private enterprise handle it.
– He opposed Social Security because he thought
people took it for granted