Transcript Ancients/Mercantilists/Physiocrats

The Dismal Science as We Know It
Overarching Themes in Economic Thought
•Value prices  microeconomics
Distribution  factor prices
•Growth
•Macro-stability…and its discontents
•‘flation
•BOOM and bust
•Economic Organization
»Role of Market
»Role of State
Wisdom of the Ancients
• Oikonomia: run harmonious households&communities
Heraclitus (~535 – 475 bc)
Harmony thru conflict
 Self – regulating market
Pythagorus (~582 – 507 bc)
Harmony thru numbers
 Equilibrium
Democritus (~460 – 370 bc)
• Diminishing marginal utility
• Time preference  present value
Plato (~427 – 347 bc): preserve the status quo
“…the State is the soul writ large.”
First principles:
• Human inequalities  division of labor
{good}
 social stratification
{ scientific breeding}
• Private property  acquisitiveness
{bad}  turbulence
Wealth  corruption
Plato’s Ideal Republic: A stationary state
• The elite: Communal property/communal women
Society parallels the mind
– Philosophers
…the State is the soul writ large
– Soldiers
Thinking
• Shared Austerity
Philosophers
Soldiers
(Response to
scarcity)
Fighting
No incentive to advance
Workers
Merchants
Craving
Aristotle (384 – 322 bc): focus on individual
Human inequality  distributive justice
…according to individual merit
In opposition to Plato:
• Educate, don’t regulate
• Private Property >> Communal Property
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Productivity  Progress
Peace (communal property  quarrels)
Pleasure in ownership
Philanthropy (give your own stuff as you wish)
But …
Acquisitiveness for acquisitiveness sake is wrong
•
Lending at interest is unnatural
– Barren money shouldn’t earn money
Aristotle on Usury
Aristotle on Money
...moneymaking from retail trade
is unnatural, a mode by which
men gain from one another.
The most hated sort is usury,
which makes a gain out of
money itself and not from the
natural use of it. For money
was intended to be used in
exchange, not to increase at
interest. The term usury, which
means the birth of money from
money, is applied to the
breeding of money because the
offspring resembles the parent.
Wherefore of all modes of
making money this is the most
unnatural.
...money is a sort of medium or
mean; for it measures among
other things excess or defect,
e.g., the number of shoes which
are equivalent to a house or a
meal. As a builder is to a
cobbler, so must so many shoes
be to a house; for otherwise
there would be no exchange.
But this is impossible, unless
the shoes and the house are in
some way equalized. Hence
arises the need for a single
universal standard of measurement. This standard is in truth
the demand for mutual services,
which holds society together.
Skipping a millennium or so…
Medieval economics…Scholastics:
• Preserve feudal status quo  fixation on usury
– Escape clauses (per St. Thomas Aquinas)
• “Damage suffered”  reward of waiting
• “Escaped gain”  opportunity cost
– Salamanca school:
• “Just price”  Natural price  Supply – Demand
Renaissance Nation-state
Mercantilism: Build internal market! Policy…theory
 Fixation on gold (according to Smith)
{Money  Credit…Money  Capitalism/Keeping Score}
Favorable balance of trade  Zero-sum view of economic life
Gold outflow  downward pressure on employment
– Colbert (French minister, late 17th century): REGULATE!!!
– Hamilton (American minister, late 18th century):
» Promote manufacturing via tariff
» Export led growth: a theme common to mercantilists
Mercantilists: Zero – Sum Mental Set
Mun
• Director, East India Company
– Defended company against charge it sent gold abroad
 Its trade enriched the nation
• “Prince” must not hoard the inflow of money lest
there be deflation and depression
Thomas Mun
1571 - 1641
– Role of the “war chest.”
• Advocate of export led growth
•Surveyed … and divided up … Ireland among Cromwell’s soldiers
•Physician/Social Scientist in Bacon’s empirical tradition
•Secretary to Hobbes
•Collected statistics/advised on Irish economic development
•Founder of Royal Society
William Petty
1623 – 1687
Fitzmaurice
Landsdowne
Petty’s analytical economics
•Promoted consumption tax
•tax incidence, however, falls on land
•Value from land and labor, with equivalence based on land
required for subsistence
 Anticipation of labor theory of value
•Build pyramids to keep people employed (when all else fails)
 Government as employer of last resort
 Anticipation of Keynes
•Early quantity theory of money
•“Too little” money constrains trade
•Increased velocity helps offset scarcity of gold and silver
•Don’t debase the currency: Quantulumcunque
concerning money (1682) … see questions and answers
•Anticipated discount rate equating annual rents to land price
•Division of labor  efficiency
•Advocate of laissez-faire: physician do no harm
Transition from Mercantilism to Smith
• John Law (1671 – 1729)
Money  Power … and paper money employs more people
• Innovated paper money backed by value of land
(Note the circularity)
Mississippi Company, 1717 (owned half of lower ‘48)
• A pyramid scheme that collapsed
• Lesson learned: Monetary expansion  INFLATIO
N
• David Hume (1711 – 1776)
• Price inertia  Short-run non-neutrality of money
Spread of impacts from few merchants to economy in general
Inflation  capitalist profits first  expansion  progress
• Long-run neutrality of money
» Specie flow mechanism
Trade surplus self-destructs
Richard Cantillon(1680? – 1734?): Patron saint of Austrian Econ
Irish banker in Paris … rode the Mississippi bubble
…Essai, 1755/Rediscovered by Jevons,1880:
“The cradle of political economy” (Jevons)
– Land theory of value … labor equated to land needed to
maintain subsistence: market price reverts to value
Circular flow model of economic activity
• Landowners – ENTREPRENEURS – Workers
• Balance achieved by free market … or by central planner
Estimates of flows
 precursor of NI accounts
Monetary theory: anticipation of Quantity Theory of Money
• Concept of velocity
• Dynamic effects of monetary injection (gold mining):
Income effect  Increase spending  Increased price
Prosperity first  Stagflation later … Austrian flavor
Themes in Monroe’s Selections from Cantillon’s Essai
• Circular flow … automatic, iterative adjustment of supply to demand
and of demand to earnings from supply
• Cost-of-production theory of value  Intrinsic price
– Labor and land inputs are costs
• Labor cost translated to amount of land needed for subsistence and
reproduction  Land theory of value
– Market price fluctuates with Supply and Demand but reverts to “value”
• Price fluctuations  risk for entrepreneur
– Interactive adjustments … Austrian flavor – Human Action
• Interdependencies among stages of production with risk at each stage
• Interdependencies between products: prices of substitutes (meat and bread)
move together
• Kinked consumption function: Consumption rises more with increased
income than it falls with decreased income
• Money Spending  Prices
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Velocity of circulation matters  no strict relation between M and P
Prices up  imports rise  “resource curse”
“Proprietors” of money earn interest (likened to rent)
Interest rate depends on risk to lender and return to entrepreneur
Cantillon: Recognition of Spatial Costs
• Costs of transport enter into values and prices
• Transport costs  Hierarchy of Places
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Villages
Market Towns
Extent of the market
Cities
 the division of labor
Capital City
(but he doesn’t elaborate on productivity)
• Money flows from villages to market towns …to capital
Prices are higher where money is more plentiful
• Paper money depends on credibility/confidence
– Lesson from Mississippi bubble
Cantillon’s Allusion to John Law & Mississippi Bubble
…a Bank with the complicity of a Minister is able to raise
and support the price of public stock and to lower the
rate of interest when the steps are taken discretely, and
thus pay off the State debt. But these refinements which
open the door to making large fortunes are rarely undertaken for the sole advantage of the State…The excess
of banknotes do not upset the circulation, because being
used for the buying and selling of stock they do not
serve for household expenses…
But if some panic or unforeseen crisis drove the holders
to demand silver from the Bank, the bomb would burst
and it would be seen that these are dangerous
operations.
Transition to Smith: The Physiocrats
Fixation on agriculture – Manufacturing & commerce sterile
Champions of laissez – faire
What would you do if you were king?
• François Quesnay (1694 – 1774) … “nothing”
– Physician to Mme. de Pompadour
– Leader of group: disciples and associates including Mirabeau, Dupont,
Turgot, … and Smith
– Tableau Economique  self-reproducing Input-Output table
Initially: Landlord has cash; farmer has grain; artisan has stock of goods
Landlord buys and food and manufactures
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Zig – zag to balance flows  An input-output table
Agriculture  increased wealth (counter to Colbert’s favoring mfg)
Taxes ultimately borne by landlords  tax land rents directly
Hoarding (of money) threatens economic stability { Keynes}
Free trade/free competition most profitable for the nation
– Turgot, 1774: Attempted “revolution from above” but failed (land tax)
The tableau: http://homepage.newschool.edu/~het/essays/youth/tableausum.htm
Physiocrats on Interest
Quesnay: finance “knows neither king nor nation”
 Control interest
Turgot:
• Interest depends on opportunity cost of not employing loanable
funds agriculture
• Capital would be withdrawn if interest were controlled
 Interest viewed as cost of production
 Smith’s costs-of-production theory of value
Turgot on Instability in Tableau Economique (business cycle)
“Disorder in distribution and expenditure”
• Lower classes must have wherewithal to consume enough to
reproduce … anticipates Malthus and Keynes
• Otherwise, the Circular Flow breaks down
… Marxian Disproportion Crisis