Transcript 19th C. Economic Theory

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“it is the greatest happiness of the greatest
number that is the measure of right and
wrong”
◦ monetary expansion as a means of helping to
create full employment
◦ Proposed forced saving
◦ Believed in government intervention or nonintervention as necessary for public good.
◦ Bedrock of liberal economic thought and debate
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A system of economic regulations aimed at
increasing the power of the state.
◦ The State tried to regulate and strengthen the
national economy:
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Favorable Balance of Trade (export more than import)
Encourage Agriculture
Build up a sea presence
Colonize!
◦ Led to many international conflicts:
 War of the Spanish Succession
 War of Austrian Succesion
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Seven Years War (1756-1763)
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Strongly opposed to Mercantilism
Believed in ‘Liberal’ Economic theory
◦ Individual freedom
◦ Economic Individualism
◦ Laissez-faire: opposed gov’t intervention
in social and economic affairs, even if the
need for action seemed great to reformers
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Goods and services are produced for profitable
exchange. This is good!
Anything that sells (including labor) is a commodity.
“Invisible Hand” (competition) regulates the economy
– both commodities AND incomes
Goods & Service
Consumer Spending
Businesses
Households
Wages
Labor & Investments
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Thomas Malthus - “HOW MUCH IS THERE?”
◦ believed human population would outstrip the food
supply resulting in massive famines.
 Population grow geometrically; land usage arithmetically
 Underestimated the explosion in agricultural tech.
 Advocated end of welfare and industry regulation
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David Ricardo - “WHO GETS WHAT?”
◦ “Iron Law of Wages” – wages always remained at
subsistence levels b/c of surplus of labor
◦ Predicted the squeezing of capitalist profits by rising
food and rent costs.
◦ Advocated the end of tariffs on foreign grain (Corn Laws)
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Built upon ‘Socialist’ views that called for a fairer distribution
of resources (‘Utopian’)
Historical Materialism – Reliant on
sociological study of historical societies and
economic data.
Theory of Surplus Value: true value of a
product is labor and, since the worker
receives a small portion of his just labor
price, the difference is surplus value, “stolen”
from him by the capitalist.
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From Smith: Gains from trade were GREAT –
but only for the Capitalist, and only because
he exploited the laborer.
From Malthus: the unplanned nature of the
economy can be disastrous – social planning
is necessary for survival
From Ricardo: Squeezing of capitalists’ profits
will lead to crises:
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Overproduction
Boom and Bubble cycles (recessions and depressions)
Growth of gap between ‘haves’ and ‘have-nots’
Capital ‘flight’ and ‘exportation’ (globalization)
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Freedom as core belief: individuals must be
free to pursue their interests and choices.
Book: Principles of Political Economy
◦ Standard economics textbook until 1920.
◦ Political economy could distinguish the laws
governing economic behavior, enabling
governments to create appropriate institutions.
 Incentives were key: if people felt they had something
to gain, the system would work.
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The Great Depression of the 1930s led to a
rethinking of the relationship between supply and
demand.
Business cycles are a regular part of unregulated
markets, but this was different.
Classical economists held that supply was the most
important.
◦ Say’s Law: in a free market workers would always be willing
to lower their wages to a level where employers could
profitably offer them jobs
◦ Keynes was the first to recognize that was not often the case:
workers retain wage expectations.
 Consumption will drop, savings will become paramount.
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Classical economics said that as consumption
dropped, so would interest rates for borrowing,
which would spur investors to take this ‘cheap’
money and help balance the economy.
Keynes pointed out that this was not how
investment worked: businessmen would not
invest if they predicted lowered long-term
profits.
The Answer: the govt’ spends, which lowers
unemployment, and this creates demand again.
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First and most important of early challenges
to Keynesianism.
◦ Milton Friedman was a student.
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Government planning (any form of socialism)
was doomed to fail
◦ The Economic Calculation Problem
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Friedman would develop his ideas into a
counter-narrative regarding the Depression.
◦ Federal Reserve had contracted the money supply
which resulted in hoarding of cash (saving), that
had caused the recession to turn into a depression.