Transcript ECON-220 HISTORY OF ECONOMIC THOUGHT

MICROECONOMICS AND
MACROECONOMICS
DR. PETROS KOSMAS
LECTURER
VARNA FREE UNIVERSITY
ACADEMIC YEAR 2010 - 2011
LECTURE 10- 11
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History of Economic Thought
The History of Economic Thought deals with different thinkers
and the theories in the subject that became Political Economy.
It encompasses many different disparate Schools of Economic
Thought.
The great Greek philosopher Aristotle questioned whether
property is best left in private or public hands.
The “art” of wealth acquisition.
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Why Study
History of Economic Thought
Aids in the understanding of economics.
Provides an introduction to part of intellectual history.
Helps:
Illustrate how ideas develop and change within academic
disciplines.
Helps create more critical attitudes and abilities.
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Why Study
History of Economic Thought
In post-modern economics, it is normally assumed that people
are entirely selfish and must either be coerced or bribed into
performing tasks (Bewley, 1995).
Because it creates a common moral value judgments which may
largely shape policies.
For example Kantian economics, show that structuring
incentives to appeal to individual morality can motivate
improvements in public good funding contexts.
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Three General Beliefs
1. Theory and historical processes are reciprocally
interconnected.
2. Social and economic change are continuous.
3. Schools of thoughts in economic area are (and always
have been), vitally concerned with social, political,
historical, practical, and moral issues.
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1.Theory and historical processes
are reciprocally interconnected because:
 Social theories are based upon, grow out of, reflect, and
attempt to explain ongoing events and circumstances.
 They are the “products” of the social and economic
circumstances in which they are conceived. Also social and
economic circumstances are the “products” of social
theories.
 But it is equally true that human being act, create, shape,
and change their social and economic circumstances on the
basis of ideas and social theories.
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2. Social and economic change are continuous
because:
 In numerous respects, today’s Capitalism is
substantially different from Capitalism of the late
18th century
 In this course there in been a try to illuminate
the nature of contemporary controversies in
economic theory by examining their historical
antecedents.
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3. Schools of thoughts are vitally concerned with social,
political, historical, practical, and moral issues.
 Their thoughts have both a cognitive, scientific element and emotive, moral, or
ideological element.
 There is, in academic circles, a widely held view that science and value
judgments are antithetical.
 History of economic thought as “value free”: theorists of this persuasion whom
they dislike, particularly Marx, are presented as having values in their writings
and these values are held to partially vitiate the scientific value of the writings.
 All theorists have values that significantly interpenetrate all cognitive
endeavors. The discussion of the values and ideological aspects of the various
theorists’ writings, there is no intention of conveying the notion that the
having of values, per se, is a basis for criticizing a thinker.
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Main Periods in the History of Economics?
 Pre-Classical (up to 1776).
 Classical (1776-1870s).
 The Marxist conception of Socialism as a precursor to communism
(1848-to date).
 Marginal Revolution (1870s-1890s).
 Neoclassical Economics (1890s-to date).
 Keynesian revolution (1936-1960s).
 Formalist Economics (1945 to date).
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The Economic Thought back to Ancient Times
 The earliest discussions of economics date back to ancient times.
 Economics was not a separate discipline, but part of philosophy.
 In Ancient Athens, a slave based society but also one developing an
embryonic model of democracy.
 The Economic thought back to Ancient Greece, Ancient India, to
Ancient China.
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Ancient Greece: Hesiod (8
th
cent. B.C.)
 The 1st economist lived in the small agricultural community of Ascra-Boetia.
 Works and Days (Poem): “men never rest from labor and sorrow by day and from
perishing by night”.
The fundamental economic problem of the scarcity of
resources for the pursuit of all human needs and desires.
 Time, labor, and production goods must be efficiently allocated.
 He analyzes the importance of labor and capital that puts an end to man’s state of
leisure.
 He was in favor of the rule of law and the dispensation of justice to provide stability
and order within society.
 He spoke out against corrupt methods of wealth acquisition and denounced robbery.
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Ancient Greece: Xenofon
 He developed a utility theory of value
“property is that
which is useful for supplying a livelihood, and useful things
turned out to be all those things that one knows how to use.”
 He also discussed wealth as a resource for man to use
“Wealth is that from which a man can derive profit”.
 He anticipates Adam Smith in realizing that the extent of the
division of labor is impacted by the scale of the market for
product.
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Xenofon’s Oeconomicus
 Additionally, Xenophon explained the influence of supply
and demand on value. He observed that an increase in the
supply of commodity causes a fall in prices.
 He proposed a tendency toward equilibrium in the
economy where supply and demand shift and react
accordingly.
 He discussed the fact that when there are too many
coppersmiths, copper becomes cheap and the smiths go out
of business and turn to other activities.
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Ancient Greece: Plato
 The Republic  Is one of a seiries of dialogues Plato
transcribed, hiw students (including Plato himself).
 A ruling class of “philosopher-kings” but he also recognized
the importance of the division of labor.
 Plato has Socrates remark in The Republic that specialization
occurs because “we are not all alike; there are many
diversities of natures among us which are adapted to
different occupations
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Plato’s Republic (380 B.C.) and the Division of Labor
 The economic principles in action.
 Plato addresses the essence of human nature an the role of
knowledge throw education.
 He encourages us to generalize our thinking about the division of
labor.
 A complete characterization of the human endeavor requires a more
general theory.
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Ancient Greece: Aristotle (384-322 B.C.)
In the Topics:
 He provides his philosophical analysis of human ends and means.
 The more useful or desirable a good is, the higher the value of the
means of production is.
 The purpose of economic action is to use things that are necessary
for life (i.e., survival) and for the good life (i.e., flourishing). The
Good Life is the moral life of virtue through which human beings
attain happiness.
The primary meaning of economics.
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Aristotle (384-322 B.C.)
In the Politics:
 Aristotle views labor as a commodity that has value but does not give value,
rejecting labor as the source of wealth.
 He did not formulate the labor theory of value but instead held a theory of
the value of labor.
 The basic requirement of value utility regarding a person’s desires. Value is
the ability to satisfy wants.
 According to him, exchange value is derived from use as communicated
through market demand. He created the concept of value in use.
 In the Book I of the Politics he points out that natural pressures of
diminishing utility for goods direct remaining human energy toward selfimprovement.
 His objective was to answer the question: How can goods of different
quality which are exchanged because of these qualitative differences be
compared with each other and be equalized?
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Aristotle (384-322 B.C.)
 “Wealth – getting” is “necessary and honourable”. The “art of
acquisition” or “wealth – getting”
 Economic dealings are subject to the rules of particular justice.
 Aristotle’s economic criticism are directed at wealth-getting in the
sense of money-making.
 He disregards the fact that men were able to search for unlimited
wealth even before money came into existence.
 For him true wealth is the available stock of useful things.
.
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Aristotle (384-322 B.C.)
 Aristotle emphasizes the importance of natural limits in a
system of natural relationships.  production is the natural
process of obtaining things for life’s needs.
 There is a limit to the amount of property.
 Aristotle teaches that eudaimonia involves the total
spectrum of moral and intellectual excellences.
 Aristotle’s economic writings continue to attract the interest
of contemporary thinkers.
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Aristotle (384-322 B.C.)
Whether property is best left in private or public hands?
 Aristotle denounced the communism of the ruling elite
advocated by Plato because he support:
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Private property is more productive and leads to progress.
Conflict is inherent in communal property management.
Private property is intrinsic to man’s nature. The love of self, money, and
property is tied to natural love of exclusive ownership.
Private property has existed always and everywhere.
Only private property allows for opportunity for moral action; to practice
virtues of benevolence and philanthropy.
 BUT, he says that the right to property is limited to what is
sufficient to sustain the house hold and the polis life of the city.
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Ancient India: Chanakya’s Arthashastra
(c. 350B.C.-275 B.C.)
 Arthashastra  “Science of Material Gain or Science of Political
Economy”.
 Discussions on the management of an efficient and solid economy. 
many of the topics are still prevalent in modern economics.
 He focuses on issues of welfare (the redistribution of wealth during a
famine) and the collective ethics that hold society together.
 He argues for an autocracy managing an efficient and solid economy. The
qualities described is in effect that of a command economy.
 It discusses the ethics of economics and the duties and obligations of a
king, which can be considered a precursor to Machiavelli’s “The Prince”.
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Ancient China: Fan Li
 He was probably the earliest economist (politician and strategist)
in human history.
 He believed that one who understood money and wealth would be
willing to abandon it if it became a burden.
 He discover seasonality’s effect on the market demand and supply
and their implications on prices. This motivated him to stock up
during times of low demand supplies at heavy discount on prices
and sell at times of high demand at a premium.
 He reduced the social cost of drought and famine.
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Medieval Islamic world: Abu Yusuf (731-798)
 He wrote the Book of Taxation (Kitab al-Kharaj)
 His book outlined Abu Yusufs’s ideas on taxation, public finance and
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agricultural production.
He discussed proportional tax on produce instead of fixed taxes on
property as being superior as incentive to bring more land into
cultivation.
He also advocated forgiving tax policies which favor the producer
and a centralized tax administration to reduce corruption.
Abu Yusuf favored the use of tax revenues for socioeconomic
infrastructure
He included discussion of various types of taxes, including sales tax
and import tariffs.
Medieval Islamic world: Al-Ghazali (1058-1111)
 Classified economics as one of the sciences connected with
religion, along with metaphysics, ethics, and psychology.
 The praise of economic activity and even self-interested
accumulation of wealth.
 “The creditor desires the well-being of the debtor in order to
get his money back rather that because of his love for him.
The debtor, on the other hand, does not take great interest in
the creditor…”
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Early Pre-Classical Economic Thought in the
Middle Age: Thomas Aquinas (1225-1274)
 Aquinas discusses a number of topics in the format of questions
and replies, substantial tracts dealing with Aristotle’s theory.
 Two of his questions concern economic issues, mainly relate to
what a just price is, and to the fairness of a seller dispensing
faulty goods.
 He argued against any form of cheating and recommended
compensation always be paid in lieu of good service.
 In his opinion human laws might not impose sanctions for unfair
dealing, divine law did, in his opinion.
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Feudalism
 Aim: How did feudalism restructure the society, government,
and economy of European countries?
 Do Now: What is feudalism? What was life like for the
peasants?
The socioeconomic system that preceded Capitalism in Western
Europe.
Development of Feudalism
 From 800-1000 Vikings invaded Western Europe constantly
which meant they would loot, steal, and kill if necessary.
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CONSTRUCTING THE PYRAMID OF THE SOCIAL
CLASSES IN THE PERIOD OF FEUDALISM
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CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES
IN THE PERIOD OF FEUDALISM
SERFS AND FREEMEN
90% of the population
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CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES
IN THE PERIOD OF FEUDALISM
LESSER NOBLES
(KNIGHTS)
LABOR
PROTECTION
SERFS AND FREEMEN
90% of the population
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CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES
IN THE PERIOD OF FEUDALISM
POWERFUL
NOBLES OR LORDS
LAND AND
PROTECTION
LOYALTY AND
MILITARY SERVICE
LESSER NOBLES
(KNIGHTS)
LABOR
PROTECTION
SERFS AND FREEMEN
90% of the population
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CONSTRUCTING THE PYRAMID OF THE SOCIAL CLASSES
IN THE PERIOD OF FEUDALISM
KING
LOYALTY AND
SERVICE
LAND
POWERFUL
NOBLES
LAND AND
PROTECTION
LOYALTY AND
MILITARY SERVICE
LESSER NOBLES
(KNIGHTS)
LABOR
PROTECTION
SERFS AND FREEMEN
90% of the population
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Feudalism: An exchange system
 Political, social, and economic system that worked on the
basis of exchange between kings, nobles, knights, and
peasants.
 Kings gave land to nobles in exchange for money and nobles
allowed peasants to work this land in exchange for protection.
 Kings give land, nobles give protection, peasants give labor.
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Feudal Exchanges
 The Lord’s estate or the land he was given by the
King, was known as a Manor.
 Peasants worked / farmed all day long from sun up
until sun down without breaks in order to pay taxes
and survive.
 Serfs were taxed for everything! Taxes were used to
protect the peasants… (Church Tax, Marriage Tax,
Crops).
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Manorialism
 Manors had churches, mills, farms, and homes for
the peasants who were bound to the manor.
 The economic system or style of economy that
existed on the manors of Europe. It stressed selfsufficiency.
 The serfs/peasants on a manor rely on one another.
The manor becomes self-sufficient: able to function
without outsider help.
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Workers on the Manor
 There were two groups of peasant workers on the
manor:
 Freemen- skilled workers who paid rent and could
leave the manor whenever they wished. (They
usually had a skill needed by others on the manor.)
 Serfs – workers bound to the land by contract with
the nobles. (They had no freedom - they where the
noble’s property.)
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What is a Knight?
 Almost all nobles were knights.
 Training began at age 7, as a page, under the guidance
of the lady of the manor.
 Became squires at age 15 and were trained by other
knights.
 Those deemed worthy were “dubbed” knights.
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Relationship Between Lords and Vassals
 The relationship between lords and vassals made up
a big part of the political and social structure of the
feudal system.

 Vassals had certain duties to perform for the lord.
 All nobles were ultimately vassals of the king.
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Feudal Contract
LORDS
GIVE SERVICE TO
GIVE PROTECTION TO
VASSALS
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The growth of feudalism in Europe during the
Middle Ages was primarily caused by the
1. rivalry between the colonial empires.
2. suppression of internationalism.
3. decline of the Roman Catholic Church.
4. collapse of a strong central government.
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Knowledge Check…
 Why did the Kings give land to the Nobles?
 What did the Nobles do for the Peasants?
 How did the Peasants repay the Nobles?
 How does Feudalism work?
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REVIEW
1)
Everyone owed loyalty to the ________
2)
_______ were really the most powerful. They got _______
from the king.
3)
Lesser nobles (knights) gave _________ _________ in return
for land
4)
_______ were bound to the land. They worked in return for
____________.
5)
__________ were skilled workers. They paid rent to the
______ and were free to move if they wanted to.
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REVIEW
1)
Everyone owed loyalty to the king.
2)
Nobles were really the most powerful. They got land from the
king.
3)
Lesser nobles (knights) gave military service in return for land.
4)
Serfs were bound to the land. They worked in return for
protection.
5)
Freemen were skilled workers. They paid rent to the nobles
and were free to move if they wanted to.
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Feudalism influenced Europe by:
 providing social stability.
 fostering the growth of religion.
 eliminating warfare.
 encouraging formal education
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The traditional villages of India
 peasants were seldom able to change their social status.
 women dominated the political decisions of the local
councils.
 people could choose from a number of different
occupations.
 monarchs exerted absolute power over local governments.
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Feudalism in Japan
 Japan’s social hierarchy was similar but they did not
have knights, they had Samurai.
 The Way of the Warrior: Strict code of Samurai
conduct and loyalty until death.
 Bushido  The Way of the Warrior: Strict code of
Samurai conduct and loyalty until death.
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Conceptual definition of Mercantilism
 Mercantilism developed at a time when the European
economy was in transition. (Isolated feudal estates were
being replaced by centralized nation-states as the focus of
power).
 Technological changes in shipping and the growth of urban
centers led to a rapid increase in international trade.
 Mercantilism is an economic theory, thought to be a form
of economic nationalism, that holds that the prosperity of a
nation is dependent upon its supply of capital, and that the
global volume of international trade is "unchangeable".
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Conceptual definition of Mercantilism
 Mercantilism developed at a time when the European
economy was in transition. (Isolated feudal estates were
being replaced by centralized nation-states as the focus of
power).
 Technological changes in shipping and the growth of urban
centers led to a rapid increase in international trade.
 Mercantilism is an economic theory, thought to be a form
of economic nationalism, that holds that the prosperity of a
nation is dependent upon its supply of capital, and that the
global volume of international trade is "unchangeable".
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Mercantilist Policy
 Mercantilist ideas were the dominant economic ideology of all of Europe
in the early modern period.
 Mercantilism was centered in England and France, and it was in these
states that mercantilist polices were most often enacted.
 Protectionist policies were enacted that limited imports and favored
exports.
 Industries were organized into guilds and monopolies.
 France's industrial output and economy grew considerably during this
period.
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Mercantilist Policy
 In England, tariffs were placed on imports and bounties given for exports,
and the export of some raw materials was banned completely.
 The nation aggressively sought colonies and once under British control,
regulations were imposed that allowed the colony to only produce raw
materials and to only trade with Britain.
 This mercantilist policies were one of the major causes of the American
Revolution.
 The mercantilist policies had an important effect on Britain helping turn
it into the world's dominant trader, and an international superpower.
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Mercantilist Policy
 Mercantilists felt that to maximize a nation's power all land and resources
had to be used to their utmost.
 Mercantilism helped create trade patterns such as the triangural trade in
the North Atlantic, in which raw materials were imported to the
metropolis and then processed and redistributed to other colonies.
 The Netherlands, which had become the financial center of Europe by
being its most efficient trader, had little interest in seeing trade restricted
and adopted few mercantilist policies.
 Since the level of world trade was viewed as fixed, it followed that the only
way to increase a nation's trade was to take it from another.
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Mercantilist Policy
 A number of wars, most can be linked directly to mercantilist theories.
 The unending warfare of this period also reinforced mercantilism as it
was seen as an essential component to military success.
 During the mercantilist period, European power spread around the globe.
 As with the domestic economy this expansion was often conducted under
the aegis of companies with government-guaranteed monopolies in a
certain part of the world.
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Mercantilist Policy
 One notion mercantilists widely agreed upon was the need
for economic oppression of the working population.
 Laborers and farmers were to live at the "margins
of subsistence“.
 The goal was to maximize production, with no concern
for consumption.
 Extra money, free time, or education for the “lower classes" was
seen to inevitably lead to vice and laziness, and would result in
harm to the economy.
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Colonial Mercantilism
 With the acquisition of colonies came the recognition that their purpose
was to satisfy the needs of the mother country.
 In the 1500s, Spain and Portugal exerted strict control over their colonial
inhabitants. However, the British were more lax in governing their
colonies.
 As the colonies grew and became more prosperous, the English realized
that the colonies could provide increased trade, if competition could be
eliminated.
 From 1650 on, England instituted a series of laws of trade and navigation
known as the Navigation Acts. If colonists intended to trade with any
other nations, all goods had first to be shipped to England, giving her an
opportunity to handle them and collect revenue from taxation.
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Colonial Mercantilism
 From 1650 on, England instituted a series of laws of trade and
navigation known as the Navigation Acts. If colonists intended to trade
with any other nations, all goods had first to be shipped to England,
giving her an opportunity to handle them and collect revenue from
taxation.
 In addition, there were certain products that could be traded only with
Britain, such as tobacco, sugar and cotton.
 England encouraged the colonists to specialize in the production of raw
materials.
 English factories converted raw goods to products which were then
shipped back to the colonies.
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Colonial Mercantilism
 With the culmination of the French and Indian War in 1763,
the British were victors in the world struggle for commercial
supremacy and their policies of mercantilism changed.
 The British began to enforce their mercantilist policies, which
led to intensified animosity between the English and their
colonies.
 The mercantillists argued that a large population was a form
of wealth, making it possible to create bigger markets and
armies.
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Background Questions:
 State and explain some of the general characteristics
of mercantilism.
 How did these policies affect the colonies?
 To what extent do nations today practice
mercantilism?
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The Wealth of Nations
Liberalism
Laissez Faire
 Term is French in origin— “let people do as
they please”.
 Economic policy stemmed from the French
economic philosophers of the Enlightenment.
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The Wealth of Nations
Liberalism
Some Enlightened Philosophers argued:
against government intervention in the economy and the
use of placing heavy tariffs on foreign goods.
that government regulations only interfered with
production and wealth.
if government allowed free trade, the economy would
prosper.
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The Wealth of Nations
Liberalism
Laissez Faire:
 A system of natural liberty: a nation’s wealth is increased
by whatever industry is most profitable, i.e. whatever
industry produces the greatest surplus, available to support
further division of labour.
 “Every man, as long as he does not violate the laws of
justice, is left perfectly free to pursue his own interest his
own way…”
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The Wealth of Nations
Liberalism
Laissez Faire:
Therefore, the government should not try to
direct industry into export industry, or into
agriculture, or in any particular direction.
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The Wealth of Nations
Liberalism
Laissez Faire:
The idea that the government should not interfere with or
regulate industries and business.
An economic policy of letting owners and business set
working condition without interference.
This policy favors a free market unregulated by the
government.
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The Wealth of Nations
Liberalism
Laissez Faire:
What are the advantages / disadvantages
of a laissez-faire economy?
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Adam Smith’s
arguments
His arguments rested on what he called the
Three Natural Laws of Economics:
1. Law of self interest —> People work for their own
good.
2. Law of competition —> Competition forces people to
make a better product.
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Adam Smith’s
arguments
Three Natural Laws of Economics:
3. Law of supply & demand —> Enough goods would
be produced at the lowest possible price to meet the
demand in a market economy
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Adam Smith’s
arguments
Three Natural Laws of Economics:
3. Law of supply & demand —> Enough goods would
be produced at the lowest possible price to meet the
demand in a market economy
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Development
of Macroeconomic Theory
The term "macroeconomics" stems from the term
"macrosystem", coined by the Norwegian economist Ragner
Frisch in 1933.It is the culmination of a long-standing effort
to comprehend many of the broad elements of the field.
Macroeconomic theory fused, and extended, the earlier study
of business fluctuations and monetary economics.
Mark Blaug, a notable historian of economic thought,
proclaimed in his "Great Economists before Keynes: 1986"
that Swedish economist Knut Wicksell “more or less founded
modern macroeconomics”.
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Macroeconomic Questions
 Which governmental policy affects output, growth,
unemployment, and inflation?
 How do changes in the amount of money in the
economy affect output, growth, unemployment and
inflation?
 How do domestic economic activities affect other
counties and our trade?
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Macroeconomic Goals
Full Employment
Price Stability
Economic Growth
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Macroeconomic Schools of Thought
The traditional distinction is between two different
approaches to economics:
Keynesian economics, focusing on demand,
and
neoclassical, based on rational expertations and efficient
markets.
Keynesian Tradition
This period focused on aggregate demand
to explain levels of unemployment and
the business cycle. That is, business
cycle fluctuations should be reduced
through fiscal policy (the government
spends more or less depending on the
situation) and monetary policy.
 Early Keynesian macroeconomics was
"activist," calling for regular use of
policy to stabilize the capitalist
economy, while some Keynesians called
for the use of income policies.
John Maynard Keynes
(5 June 1883 – 21 April 1946)
Keynesian Tradition
 Neo-Keynesians combined Keynes thought with some
neoclassical elements in the neo-classical synthesis. NeoKeynesianism waned and was replaced by a new generation of
models that made up New Keynesian economics, which
developed partly in response to new classical economics. New
Keynesianism strives to provide microeconomic foundations to
Keynesian economics by showing how imperfect markets can
justify demand management.
 Post-Keynesian economics represents a dissent from
mainstream Keynesian economics, emphasizing the importance
of demand in the long run as well as the short, and the role of
uncertainty, liquidity preference (also known as Hydraulic
Macroeconomics) and the historical process in macroeconomics.
Neoclassical Tradition
 The main policy difference in this second stage of macroeconomics
is an increased focus on monetary policy, such as interest rates and
money supply. New classical macroeconomics based on rational
expectations, which means that choices are made optimally
considering time and uncertainty, and all markets are clearing. New
classical macroeconomics is generally based on real business cycle
models.
 Monetarism, led by Milton Friedman, holds that inflation is always
and everywhere a monetary phenomenon. It rejects fiscal policy
because it leads to “crowding out" of the private sector. Further, it
does not wish to combat inflation or deflation by means of active
demand management as in Keynesian economics, but by means of
monetary policy rules, such as keeping the rate of growth of the
money supply constant over time.
Macroeconomic Policies
To try to avoid major economic shocks, such as The Great
Depression, governments make adjustments through policy
changes they hope will stabilize the economy. Governments
believe the success of these adjustments is necessary to
maintain stability and continue growth. This economic
management is achieved through two types of
governmental strategies:
Fiscal Policy
Monetary Policy