I have 5 questions​ I want to be answers , History of Economic Thoughts

timer Asked: Oct 4th, 2018
account_balance_wallet $20

Question description

In the attachment below are the articles.
Question 1:
Explain the economic ideas of the mercantilists (in 150 words).

Question 2:
Explain the economic ideas of the physiocrats (in 150 words).
Question 3
Explain why the goal of a society, production or consumption, has important implications for analysis and policy (about 200 words).
Question 4
Contrast and compare Adam Smith’s and the mercantilists’ views on the nature and causes of the wealth of nations (in 200 – 250 words).
Question 5
Please choose one Nobel economics laureate and describe his or her major contributions (in 150-200 words). You can find more information from Nobel Organization.

ECON 4313 History of Economic Thought 2018 Fall Lecture 6: The Physiocrats Announcements • Homework 1 is posted on blackboard. It is due next Thursday (09/20/2018). Please turn in a paper copy. • Project a’s feedback will be given in class this Thursday. • After 1-page outline of Project b, we will move forward to Project d (the final version with 6-8 pages). It is due on 12/03/2018. So you don’t need to work on your Project c. Physiocracy • Physiocrats was the name given to a number of French economists in the 18th century who were identified as antimercantilists. 1. Physiocracy was developed exclusively in France. 2. The most famous physiocrats were Quesnay, Turgot and Cantillon. 3. Physiocracy was a short-lived movement but had considerable influence on subsequent economic thought. Physiocrats’ major arguments • It was not the trade or volume of precious metals (silver or gold) the wealth of nations. • Productive work was the source of national wealth. • To mercantilists, value in the products of society was created at the point of sale, e.g. by the seller exchanging his products for more money than the products had “previously” been worth. • Physiocrats were the first to see labor as the sole source of value. • However, for the physiocrats, only agricultural labor created this value in the products of society. All "industrial" and nonagricultural labors were "unproductive appendages" to agricultural labor. Historical Background (HL p.35-36) • The Physiocrats were interested in reforming France, which was experiencing economic and social disorder caused primarily from a motley combination of many of the worst features of feudalism and merchant capitalism. Taxation was disorderly, inefficient, oppressive, and unjust. HL p.35-36 Agriculture still used feudal technology, was small-scale and inefficient, and remained a source of feudal power that inhibited the advance of capitalism. The government was responsible for an extraordinarily extensive and complex maze of tariffs, restrictions, subsidies , and privileges in the areas of industry and commerce. The results were the social and economic chaos that culminated in the French Revolution. HL p.35-36 The reforms were destined to be unattainable because the Physiocrats did not question the right of the feudal nobility to receive the rents from their lands , while the nobility perceived, quite correctly, that the Physiocratic schemes would lead to the impoverishment of the land-owning class and a takeover by the capitalist class. Social changes that require the displacement of one ruling class by another cannot be achieved by reforms . They require revolution, and France required the revolution of 1 789 before changes similar to those advocated by the Physiocrats would be possible. The Physiocrats believed that societies were governed by natural law and that France's problems were due to the failure of her rulers to understand this natural law and to order production and commerce accordingly. They advocated political reform: the abolition of guilds and the removal of all existing tariffs , taxes , subsidies , restrictions, and regulations that hindered industry and commerce. They proposed substituting large-scale, capitalist agriculture for the inefficient small-scale farming that prevailed. But the proposed reform for which they are most remembered was the recommendation that all government revenue be raised with a single, nationwide tax on agriculture François Quesnay (1694-1774) • Quesnay was a medical doctor in French King’s court. • Quesnay used analogies between economics and medicine, e.g. the circulation of money as the circulation of blood. • According Quesnay, physocracy means the rule of the nature or the authority of nature. Quesnay’s Tableau économique • Quesnay, in his Tableau économique, first published in 1758, tried to prove that surplus was first created by agriculture, which was then made available to other sectors and social classes. • Although the land was owned by landlords, it was cultivated by tenant farmers, who were the real productive class. • In addition to satisfying their own needs, farmers also provided for the needs of landowners, public servants, artisans, merchants, the church and monarchy. • The tableau attempts to show how agricultural output is shared between different classes in society, which is then repeated each year. • Artisans, merchants and others cannot create any value themselves; they can only transform the value created by agriculture into manufactured goods which are consumed. Thus, it is agriculture alone which creates a surplus. • The tableau ignores the exchange value of the product. • It only differentiates between the use value, which is consumed, and that which is produced. Production Flow Diagram for Quesnay's Tableau Anne Robert Jacques Turgot (1727-1781) • Turgot, was a French economist and statesman (French minister). • Being considered a physiocrat, he is also remembered as an early advocate for economic liberalism. • He is thought to be the first economist to have recognized the law of diminishing marginal returns in agriculture. 1. Turgot, like Quesnay, believed that only agricultural workers could create a surplus. Unlike Quesnay, however, Turgot contended that the exchange value for goods existed. 2. When he became a minister, he introduced anti-mercantilist and anti-feudal reforms. His policy was supported by the King but opposed by the nobility. Eventually, he was forced out of office. 3. Turgot was essentially a non-interventionist with a capitalist flavor, In a way, he regarded landowners as capitalists who employed the farm labors. Richard Cantillon (1680s-1734) • Cantillon was an Irish-French economist and author of Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General). • He became a successful banker and merchant at an early age. • During the late 1710s and early 1720s, Cantillon speculated in, and later helped fund, John Law's Mississippi Company, from which he acquired great wealth. • He pointed out that as a nation developed a trade surplus, money and other commodities, would eventually be drawn into increasing the purchasing power and availability of money at home but scarce national resources such as land, domestic mines and labor would slowly become dearer. • Land and labor were the only source of wealth, the intrinsic value of commodities would depend on the content of the two primary factors of production. • Cantillon also realized that excess supply would depress the price of commodities below the intrinsic value. The Mississippi Bubble Louis XIV's long reign and wars had nearly bankrupted the French monarchy. Rather than reduce spending, the Regency of Louis XV of France endorsed the monetary theories of Scottish financier John Law. In 1716, Law was given a charter for the Banque Royale under which the national debt was assigned to the bank in return for extraordinary privileges. The key to the Banque Royale agreement was that the national debt would be paid from revenues derived from opening the Mississippi Valley. The Bank was tied to other ventures of Law—the Company of the West and the Companies of the Indies. All were known as the Mississippi Company. The Mississippi Bubble The Mississippi Company had a monopoly on trade and mineral wealth. The Company boomed on paper. Law was given the title Duc d'Arkansas. Bernard de la Harpe and his party left New Orleans in 1719 to explore the Red River. In 1721, he explored the Arkansas River. At the Yazoo settlements in Mississippi he was joined by Jean Benjamin who became the scientist for the expedition. The Mississippi Bubble Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. The scheme promised success for the Mississippi Company by combining investor fervor and the wealth of its Louisiana prospects into a sustainable, joint-stock, trading company. The popularity of company shares were such that they sparked a need for more paper bank notes, and when shares generated profits the investors were paid out in paper bank notes. The Mississippi Bubble The "bubble" burst at the end of 1720, when opponents of the financier attempted to convert their notes into specie en masse, forcing the bank to stop payment on its paper notes. By the end of 1720 Philippe d'Orléans had dismissed Law from his positions. Physiocratic Economic Policy
ECON 4313 History of Economic Thought 2018 Fall Lecture 7: Adam Smith 1 Outline • Historical Context of Smith's Ideas (HL) • An Introduction of Adam Smith’s Ideas (RA) • Moral Philosophy and Market (LC+RA) • Wealth of the Nations (LC) • Value Theory (LC) • International Trade (LC) HL: Hunt and Lautzenheiser (text); LC: Landreth and Colander (book) RA: The Real Adam Smith: Ideas That Changed The World https://www.youtube.com/watch?v=8ruiUOQERnw The Real Adam Smith: Ideas That Changed The World Funny how adding years to your life can also add perspective to your years. A Child says at: 4 years: My daddy can do anything. 7 years: My dad knows a lot, a whole lot. 8 years: My father doesn't know quite everything. 12 years: Oh, well, naturally Father doesn't know that, either. 14 years: Father? Hopelessly old-fashioned. 21 years: Oh, that man is out-of-date. What did you expect? 25 years: He knows a little bit about it, but not much. 30 years: Maybe we ought to find out what Dad thinks. 35 years: A little patience. Let's get Dad's assessment before we do anything. 50 years: I wonder what Dad would have thought about that. He was pretty smart. 60 years: My dad knew absolutely everything! 65 years: "I'd give anything if Dad were here so I could talk this over with him. I really miss that man." Adam Smith: Father of Economics Adam Smith @ Griffin He was a Scotsman named Adam Smith: a moral philosopher, a bold voice of the Scottish Enlightenment and the world's first economist. He recorded his revolutionary ideas in two remarkable books: The Theory of Moral Sentiments and The Wealth of Nations. His great gift was observation, and his study of human nature as it appeared in different types of society at different periods of history is absolutely awesome. He had eloquently argued the power of free markets and the division of labor, to enable people at all strata of society to become more prosperous. V1-10m Smith was particularly concerned about the well-being of the least well-off, and thought that markets, especially the type of commercial society he wished to defend, would be of immense benefit to precisely those people. He was the man that gave us modern economics with concepts like gross national product, and productivity, and supply and demand, and labor, and capital, and all of these things we just take for granted today. He posed a question that every single government since has had to address. Should governments intervene in the management of economies? Should they leave it to market forces? Could market forces- on their own- alleviate poverty? Smith actually believed that they could. He had lived to see that his revolutionary ideas worked, to see life for the average Scotsman actually improve. A Short Bio of Smith Adam Smith ( 1723-1790) was born in Scotland, where he lived most of his life . He attended Glasgow and Oxford Universities ( 1737-1746) and was a professor at Glasgow from 1751 to 1764. In 1759 he published one of his two major works , The Theory of the Moral Sentiments, a treatise on social and moral philosophy. He spent two years in France, from 1764 to 1766, where he interacted with many of the leading French intellectuals, including the Physiocrats Quesnay and Turgot. In 1776 he published his most important work, An Inquiry into the Nature and Causes of the Wealth of Nations (generally referred to as The Wealth of Nations). Adam Smith was born in 1723, in the small seaside town of Kirkcaldy, Scotland, where he learned about morality and economics at the local merchants’ market. He studied at Glasgow University, became its top administrator and then a pillar of the unlikely intellectual revolution called the Scottish Enlightenment. He lived, lectured and socialized in Scotland’s capital city of Edinburgh. People call him an economist; he was really a social psychologist. He wrote about ethics, he wrote about law, he wrote about politics and obviously, he wrote about economics. “Smith gives us a way of thinking about markets and morality together. For Smith, these are not two things that can easily be extricated from each other, as if one can simply talk about rational, economic men on one hand and then moral men in a different sphere on another.” “Smith understood that you're going to be better at business if you can understand your customers and generally sympathize with them, as well as understanding and sympathizing with your employees. I think that most of our guests when they walk in the door know that there's something different.” John Mackey CEO of Whole Foods Market 1. Historical Background • The capitalist mode of production reached its height and most clearly displayed its inherent socioeconomic features in the industrial revolution, which occurred first in England and Scotland roughly in the last three decades of the eighteenth century and in the early nineteenth century. • Between 1700 and 1770, the foreign markets for English goods grew much faster than England's domestic markets. • England had an economy with a well-developed market, in which the traditional anti-capitalist market bias in attitudes and ideology had been greatly weakened. • The textile industry was most important in the early industrial revolution. • The iron industry was also very important in the early drive to mechanized factory production. • Entrepreneurs in many other industries saw the possibilities for larger profits if they could increase output and lower costs . A woman operates a spinning jenny, a machine for spinning cotton or wool, in a factory during the Industrial Revolution. Adam Smith’s Contribution Three aspects of economics: the art of economics, the science of economics, and normative economics. i. The science of economics deals with positive, matter-offact relationships between economic variables— often expressed as “what is.” ii. Normative economics involves questions of what should be—often expressed as “what ought to be.” iii. The art of economics is policy-oriented. It takes our knowledge of how things are (the science of economics) and our goals (normative economics), and it makes recommendations on the best ways to achieve our goals given our understanding of the science of economics and our comprehension of how policies are put into operation through government actions. What aspect was Adam Smith good at? Adam Smith’s particular proclivities were not those of an abstract theorist. Instead, he was a policy formulator par excellence. His broad knowledge of history and of how people behave in practice, if not in theory, made him a master of the art of economics. Contextual economic policy, then, is just another way of expressing the idea of the art of economics. The Father of Economics From Landreth and Colander, Chapter 4. P80 • Smith has often been called the father of economics. Although each of the precursors of classical economics saw bits and pieces of the puzzle, none had been able to integrate into a single volume an overall vision of the forces determining the wealth of nations, the appropriate policies to foster economic growth and development, and the way in which millions of economic decisions are effectively coordinated by market forces. Adam Smith was typical of early economic writers in that he was not exclusively an economist. He was an academic, and this allowed him a degree of detachment and objectivity that was lacking in the mercantilist writers, who were generally businessmen. As a professor in Glasgow giving a series of courses that encompassed what we now call the social sciences and humanities, he was basically interested in moral philosophy, which colored a good part of his economics. He had read extensively in the previous literature of the social sciences and humanities and was able to synthesize it into a single work. Smith’s theoretical contribution Smith’s conception of the scope of economics followed that of the English mercantilists. He was interested in explaining the nature and causes of the wealth of nations. Modern economists would describe Smith as a macro theorist interested in the forces determining economic growth. He gave some attention to the determination of relative prices — included today in microeconomic theory—but his main interest was in economic development and policies to promote economic growth. Smith envisioned international trade would have on prosperity. He believed that wealth is not just the things you own- like gold in the bank- but also your labor, and the things you can get in exchange. The more others create and the more you trade with them, the better off you are. But the forces that Smith examined were broader than those studied in modern economics, and he filled in his economic model with political, sociological, and historical material. People call him an economist; he was really a social psychologist. He wrote about ethics, he wrote about law, he wrote about politics and obviously, he wrote about economics. Smith’s books • Smith’s major book is titled “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776). • Two other important sources of his ideas are his earlier book, “The Theory of Moral Sentiments” (1759), and the lectures he gave at the University of Glasgow. • Unfortunately, Smith’s own copies of his lectures were destroyed, and it was not until 1895 that a manuscript was discovered containing a copy of notes taken in 1763 by one of his students. These have been published as “Lectures on Justice, Police, Revenue, and Arms”. Smith’s Methodology Smith’s methodology, which combined deductive theory with historical description, is also worth noting. His theoretical models lack elegance and rigor, but his description of the interrelationships within and the workings of the economy, and his ability to weave historical examples into his analysis, are unparalleled. A modern mathematical economist could condense the fundamental propositions contained in the nine hundred pages of Wealth of Nations into a short pamphlet. In fact, Ricardo, who possessed some theoretical skill but did not use mathematical notation, was able to cover more theoretical ground in a book less than half the length of Smith’s. Smith’s great strength as an economist lay in his vision of • the interdependence of the segments of the economy • of the policies to be followed to promote the wealth of a nation. He was not an economist in the narrow sense of the word, but rather a philosopher who pointed the way toward economic development and affluence. Smith’s advocacy of laissez faire is rooted in a methodological approach that asks this question: Does experience show that government intervention will produce better results than will the unimpeded workings of markets? Adam Smith’s argument for laissez faire is, of course, based in part upon a theoretical model of how markets produce certain results. But, significantly, his arguments are more than just theoretical; they are contextual—that is, they are based on his observations of the existing historical and institutional circumstances. Natural Order, Harmony, and Laissez Faire Market may be not perfect, but government intervention could be worse. Smith’s Visions "The natural effort of every individual to better his own condition... is so powerful, that it is, alone... capable of carrying on the society to wealth and prosperity.“ – The Theory of Moral Sentiments by Adam Smith Many of the institutions that we (human being) have, language, markets, you name it, these are indeed the results of human action, but they're not the results of human design. We never planned these things; they just evolve naturally. You don't need a central planning authority to run your society well. V1-26.40m This helps to illustrate Adam Smith's principle that top down command structures aren't always the best. Things organize themselves better from the bottom up. By “morality” Smith meant fairness and a level playing field for all. But what happens when some are able to tilt the market to their advantage? Adam Smith asked the very same question 250 years ago. V1-33.00m Please don't feed business “Please do not feed the animals.” Because if you feed the wild animals they lose their ability to gather food in the wilderness and as a result, they tend to be less resilient and their survival is at risk. “Please don't feed business,” precisely because I love business I don't want business to become fat and unable to compete in the global marketplace. Luigi Zingales, Professor at the Booth School of Business at the University of Chicago v1 Smith was very suspicious of partnerships between government and business. That's effectively what we call cronyism today. The wealthiest counties in the United States are in the suburbs of Washington, D.C. The top two richest counties in the United States, and 6 of the top ten, are suburbs of Washington, D.C.. v1 “To widen the market and to narrow the competition is always the interest of the dealers... Any new law or regulation of commerce... ought always to be listened to with great precaution.” Smith thought that any institution- government included- could become corrupted if it was too big and made too many decisions centrally. Adam Smith understands that in order for competition to work its magic you need to have rules in place because otherwise rather than competition, you have the law of the jungle. This is Adam Smith's key insight; competition is not a way of giving power to companies. It's a way of giving us power over them. Smith conceded that markets often fail to produce ideal social results, but current reality convinced him that the results of government intervention were less acceptable than those flowing from free markets. Hence Smith advocated laissez faire not because he believed markets to be perfect but because, in the context of history and the institutional structure of the England of his time, markets usually produced better results than did government intervention. The economics of Adam Smith and the mercantilists share certain basic elements. Influenced by developments in the physical sciences, the mercantilists and Smith believed that it was possible to discover the laws of the economy by means of hard analysis. • One difference between Smith’s system and that of most mercantilists was his assumption that, for the most part, competitive markets exist, and that within these markets the factors of production move freely to advance their economic advantage. • A second difference was the assumption that a natural process at work in the economy can resolve conflicts more effectively than any arrangements devised by human beings. Self-interest motivation Smith showed that capitalists are driven not by altruistic motives but by a desire to make profits—it is not as a result of the benevolence of the baker that we get our bread. The capitalist views the market in terms of final goods and, in order to increase revenues, produces the commodities that people desire. Competition Competition among capitalists will result in these goods’ being produced at a cost of production that will return to the producer an amount just sufficient to pay the opportunity costs of the various factors. If profits above a normal rate of return exist in any sector of the economy, other firms will enter these industries and force down prices to a cost of production at which no excess profits exist. Consumers direct the economy by their dollar votes in the market; changes in their desires are shown in rising and falling prices—and, consequently, rising and falling profits. Smith concluded that it is wonderful how the market, without planning or governmental direction, leads to the satisfaction of consumer desires at the lowest possible social cost. In the terminology of modern economics, he concluded that an optimum allocation of resources occurs in competitive markets without government intervention. The Working of Competitive Markets • Smith’s most significant contribution to economic theory was his analysis of the workings of competitive markets. • He was able to specify with greater accuracy than the mechanism whereby the price resulting from competition would, in the long run, equal the cost of production. • Here Smith made more accurate price definitions. In his analysis of price formation and resource allocation, he called short-run prices “market prices” and long-run prices “natural prices.” Long run price determination. His primary concern was with the formation of long-run natural prices. He saw competition as fundamentally requiring a large number of sellers; a group of resource owners who were knowledgeable about profits, wages, and rents in the economy; and freedom of movement for resources among industries. Given these conditions, the self-interest of resource owners would lead to long-run natural prices that would equalize the rates of profits, wages, and rents among the various sectors of the economy. If, for example, the price of a final good is higher than its longrun natural price, then either profits, wages, or rent in this sector of the economy must be higher than its natural level, and adjustments will take place via the movement of resources until the natural price prevails. With competitive markets and an absence of government regulation, the resulting natural prices bring about an optimum allocation of resources in that consumers receive the goods they want at the lowest possible cost and maximum rates of growth are ensured. Non-competitive markets He recognized the desire of businessmen to monopolize trade by joining forces, and although he was not able to specify what the monopoly price would be, he recognized that monopolists would extract a higher price by restricting output. Note that Smith’s advocacy of laissez faire assumes the existence of competitive markets. v2 • He saw how many businessmen were drawn to create monopolies and deceive the "To widen the market and to narrow the competition public interest for their own benefit and that is precisely why he argued for free competition and free trade. • Greedy businessmen who try to rob consumers by raising prices or lowering quality would be ruined if the consumers were allowed to turn to another competitor. And that is why Smith thought that the government shouldn't be probusiness; it should be "pro-market." The Invisible Hand and Wealth of the Nations
ECON 4313 History of Economic Thought 2018 Fall Lecture 8: Adam Smith 2 Outline • Historical Context of Smith's Ideas (HL) • An Introduction of Adam Smith’s Ideas (RA) • Moral Philosophy and Market (LC+RA) • Wealth of the Nations (LC) • Value Theory (LC) • International Trade (LC) HL: Hunt and Lautzenheiser (text); LC: Landreth and Colander (book) RA: The Real Adam Smith: Ideas That Changed The World https://www.youtube.com/watch?v=8ruiUOQERnw The Real Adam Smith: Ideas That Changed The World In Section 1, we have done … • A short biography of Adam Smith • An overview of Smith’s theoretical contribution: including economic growth, value theory, international trade … • Smith’s publications: three books. • Natural Order, Laissez Faire and Competition: 1. 2. 3. The invisible hand could make the optimal allocation of resources in competitive markets. Competition is not a way of giving power to companies. It's a way of giving us power over them. We should be careful the relationship between government and business. • Price formation: short-run prices “market prices” and longrun prices “natural prices.” In Section 2, we will discuss • Smith’s Contextual Analysis • The book of the Wealth of Nations • How Smith distinguished from prior thinkers • Labor productivity and labor division • Capital and capital accumulation • International trade theory Review: Adam Smith and His Contextual Analysis Unlike abstract methodologists, Adam Smith’s methodological approach shaped both his analysis of the economy and his determinations concerning government policy. For example, Smith’s advocacy of laissez faire policy was based on the question, Does experience show that government intervention will produce better results than will the unimpeded workings of markets? Smith conceded that markets often fail to produce ideal social results, but current reality convinced him that the results of government intervention were less acceptable than those flowing from free markets. Hence Smith advocated laissez faire not because he believed markets to be perfect but because, in the context of history and the institutional structure of the England of his time, markets usually produced better results than did government intervention. The Invisible Hand and Wealth of the Nations The economic concept of an “invisible hand” describes what happens when we act in our own “self interest”. In the first sentence of Wealth of Nations, Adam Smith explained his conception of the nature of the wealth of nations. In so doing, he separated his views from those of the mercantilists and physiocrats. The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour, or in what is purchased with that produce from other nations. How Smith was different from pre-classical thinkers? 1. Smith believed that most mercantilists were confused by the accumulation of bullion and identification of bullion with the wealth of a nation. For him, wealth was an annual flow of goods and services, not an accumulated fund of precious metals. 2. He also revealed an understanding of a link between exports and imports, perceiving that a fundamental role of exports is to pay for imports. In the international market, we look at each other as potential partner. You are my opportunity, not my enemy. Adam Smith’s insights: He saw international trade could extend frontier of every one. 3. Furthermore, in his opening sentence he implied that the end purpose of economic activity is consumption, while mercantilists believe production should be the end purpose. And in the system of mercantilists, “the interest of the consumer is almost constantly sacrificed to that of the producer.” 4. Finally, in emphasizing labor as the source of the wealth of a nation. In this part, he also differed from the physiocrats, who stressed only land was the source of productivity. What is in the book? • Book I deals with value theory, the division of labor, and the distribution of income; • Book II with capital as a cause of the wealth of nations; • Book III studies the economic history of several nations in order to illustrate the theories presented earlier. • Book IV is a history of economic thought and practice that examines mercantilism and physiocracy. • Book V covers what today would be called public finance. Publishing History of Wealth of the Nations • Five editions of The Wealth of Nations were published during Smith's lifetime: in 1776, 1778,1784, 1786 and 1789. • Numerous editions appeared after Smith's death in 1790. • To better understand the evolution of the work under Smith's hand, a team led by Edwin Cannan collated the first five editions. The differences were published along with an edited sixth edition in 1904. • They found minor but numerous differences (including the addition of many footnotes) between the first and the second editions, both of which were published in two volumes. • The differences between the second and third editions, however, are major. In 1784, Smith annexed these first two editions with the publication of Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, and he also had published the three-volume third edition of the Wealth of Nations, which incorporated Additions and Corrections and, for the first time, an index. What’s new in the Third Edition Among other things, the Additions and Corrections included entirely new sections, particularly to Bk 4 Chapters 4 & 5, and Bk 5 Chapter 1, as well as an additional Chapter (8), ‘Conclusion of the Mercantile System’, in Bk 4 • The fourth edition, published in 1786, had only slight differences from the third edition, and Smith himself says in the Advertisement at the beginning of the book, “I have made no alterations of any kind.” • Finally, Cannan notes only trivial differences between the fourth and fifth editions—a set of misprints being removed from the fourth and a different set of misprints being introduced. Causes of the Wealth of Nations Smith held that the wealth of a nation, what we today call the income of a nation, depends upon (1) the productivity of labor and (2) the proportion of laborers who are usefully or productively employed. Although the opening sentence of Smith’s book suggests that the “annual labour of every nation” might be the cause of its wealth, a closer look at his reasoning reveals that it is the accumulation of capital. • The immediate determinants of the wealth of a nation are the productivity of labor and the proportion of labor that is productive. • These two immediate causes of wealth are shown in the Figure to depend ultimately upon the accumulation of capital—the entire bottom line in the figure. Productivity of labor: it depends upon the division of labor (specialization). The division of labor, in turn, depends upon what Smith called the extent of the market and the accumulation of capital. The larger the market, the greater the volume that can be sold and the greater the opportunity for division of labor. • In a simple economy in which each household produces all of its own consumption needs and the division of labor is slight, very little capital is required to maintain (feed, clothe, house) the laborers during the production process. • As the division of labor is increased, laborers no longer produce goods for their own consumption, and a stock of consumer goods must exist to maintain the laborers during the time-consuming production process. What was Adam Smith’s definition of “Capital”? This stock of goods comes from saving and is, in this context, what Smith called Capital. A major function of the capitalist is to provide the means for bridging the gap between the time when production begins and the time when the final product is sold. Thus, the extent to which production processes requiring division of labor may be used is limited by the amount of capital accumulation available. Productive and unproductive labor. The accumulation of capital, according to Smith, also determines the ratio between the number of laborers who are productively employed and those who are not so employed. Smith’s attempt to distinguish between productive and unproductive labor became confused and reflected normative or value judgments on his part. However, it manifests an awareness of the problem of economic growth. For example, Labor employed in producing a vendible commodity is productive labor, Smith held, whereas labor employed in producing a service is unproductive. “A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants.” According to Smith, what is true of the individual is true for the nation; thus, for the economy as a whole, the larger the share of the labor force involved in producing tangible real goods, the greater the wealth of the nation. Capital is required to support the productive labor force; therefore, the greater the capital accumulation, the larger the proportion of the total labor force involved in productive labor. The tertiary sector or service sector is the third of the three economic sectors of the three-sector theory. The others are the secondary sector (approximately the same as manufacturing), and the primary sector (raw materials). Nominal GDP sector composition 2005 2017 No. Country/Economy Agri% Indus% Serv% Agri% Indus% Serv% – World 3.3% 27.4% 63.9% 5.9% 30.5% 63.6% 1 United States 1.0% 20.1% 76.0% 1.1% 19.1% 79.7% 2 China 7.3% 49.2% 42.8% 6.9% 40.1% 52.9% 3 Japan 1.2% 28.2% 69.8% 1.2% 27.5% 71.4% 4 Germany 0.5% 27.0% 62.7% 0.8% 28.1% 71.1% The Theory of Moral Sentiments Adam Smith not only has one book called, Wealth of Nations, he also has another great book, called The Theory of Moral Sentiments, and in that book he really lays out what kind of morality standards should the people have when they have the market kind of exchange. Smith and International Trade • One of the major aims of Smith’s Wealth of Nations was to demonstrate the falsity of Mercantilism. • About 25 percent of his book is devoted to an examination of mercantilist doctrine and practice. • Mercantilists argued for government regulation of foreign trade and favorable balance of trade— exports greater than imports. • Smith, on the contrary, argued for unregulated foreign trade. For example, if England can produce a good, e.g., wool, at lower costs than France, and if France can produce another good, e.g., wine, at lower costs than England, then it is beneficial to both parties to exchange these goods, with each trading the good it produces at lower costs for the good it produces at higher costs. • As labor becomes more divided and specialized, he pointed out, its productivity increases dramatically. • Part of Smith’s argument for the advantages of foreign trade was broadly based on this dynamic notion of increasing returns. • In the language of modern economics, there are increasing returns (decreasing costs) as labor becomes more and more specialized. If, however, two individuals become more proficient by labor specialization, the costs of producing both their products decrease and both benefit by specializing and trading. Overtime, any nation might achieve absolute cost advantages in the production of certain goods through specialization and division of labor, and that all nations could gain from the resulting international trade. Some misunderstanding toward international trade, may be due to extra attention to the term of “international”. The proper governmental policy toward international trade, Smith held, should be the same as that toward domestic trade—one of letting voluntary exchanges take place in free-unregulated markets. A policy of laissez faire, he believed, would lead to ever higher levels of well-being in all countries. Modern economics, in assessing the dominant ideas of this period, has discovered another difference between the classicals and the mercantilists that significantly influenced their views concerning the relative importance of free markets versus government regulation. This insight of Smith and other classical writers that, contrary to the beliefs of many mercantilists, all parties might gain from trading provided a tremendously powerful argument for voluntary exchanges, whether between individuals within a country or between different countries.
ECON 4313 History of Economic Thought 2018 Fall Lecture 10: Mid-term Review Announcement • October 2nd : A mid-term review. • October 4th: No class meeting. Homework 2 will be assigned as a take-home mid-term exam. • No presentation in this week. We will begin a new round of presentations from October 9th. Group 5 will present on October 9th, and Group 6 will be on October 11th. What we have done since August 22nd. We start our class from terminology and classifications. • History of Economics: can be quite ideas-based. You can do research by reading and reviewing previous literature to create new ideas. • Economic History: recent studies are quite quantitative. It could be even harder than doing contemporary economics research. Why? Because you need to spend considerable time to find data from the past. Different Economic Schools Mainstream Economic Ideas 1. Classical economics: the beginning of modern economics 2. Neo-classical: “Marginal Revolution” 3. Keynesian economics: macroeconomics 4. Modern macroeconomics: post-Keynesian various competing schools 5. Modern microeconomics: with a new behavioral focus and applied into different fields. Non-mainstream Economic Ideas 1. German Historical School: British and American Historical School. 2. Institutional Economics: started in early 1900s. 3. Austrian School of economics: 1870s-present. 4. Marxian and Socialist economics: 5. Others: Evolutionary Economics; Ecological Economics; Green Economics. Nobel Prize facts • On 27 November 1895, Alfred Nobel signed his last will and testament, giving the largest share of his fortune to a series of prizes in Physics, Chemistry, Physiology or Medicine, Literature and Peace – the Nobel Prizes. • In 1968, Sveriges Riksbank (Sweden’s central bank) established The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The 2018 Prize in Economic Sciences has not been awarded yet. It will be announced on Monday 8 October, 11:45 a.m. at the earliest. Financial Economics & Markets • James Tobin 1981: financial markets and their relations to expenditure decisions, employment, production and prices. • Franco Modigliani 1985: pioneering analyses of saving and of financial markets. • Harry M. Markowitz, Merton M. Miller and William F. Sharpe 1990: in the theory of financial economics. • Robert C. Merton and Myron S. Scholes 1997: a new method to determine the value of derivatives. • Eugene F. Fama, Lars Peter Hansen, and Robert J. Shiller 2013: for their empirical analysis of asset prices. • One question in Homework 2 ask you to choose one Nobel economics laureate and describe his or her major contributions in 150-200 words. • You can find some useful information from the link below https://www.nobelprize.org/prizes/economics/ Part I: Pre-classical Economics Although economic activity has been a characteristic of human culture since the dawn of civilization, there was little formal analysis of that activity until merchant capitalism developed in Western Europe during the fifteenth century. • The economic studies of this time were not systematic: economic theory evolved piecemeal from individual intellectual responses to contemporary problems. • No grand analytical systems appeared. It was not until the mid-eighteenth century, with the emergence of “classical economics” under Adam Smith, that economics made significant movement toward the status of a full-blown social science. A fundamental tenet of modern orthodox theory is that more goods are better than fewer goods, and prevailing patterns of activity in modern societies lend strong confirmation to this tenet. Early religious, Creek, and scholastic thinkers did not begin with this premise, and the questions they raised about economic versus noneconomic goals of the individual and society are eternal. Mercantilists During the 1500s – the 1700s, what might be called a school of economic thought, mercantilism, developed. The mercantilists achieved the first tentative insights into the role of money in determining the general level of prices and into the effects of foreign trade balances on domestic economic activity. The most significant contribution of the physiocrats was their concept of the interrelatedness of the various sectors of an economy. • The total wealth of the world is fixed and constant. • The mercantilists and the scholastics perceived a fundamental conflict in the economy, viewing exchange as a process in which one party gains at the expense of another. • Therefore, both advocated intervention in the economy by either government or church. • They insisted on low wages on labors to give the economy competitive advantage in international trade. • The goal of economic activity is production. Physiocrats • Around the middle of the 1700s, however, economic thinking began to change. • Liberalism was in its infancy, and the seeds of both political and economic revolution were beginning to sprout. • An important group of French writers who have become known as the physiocrats flourished during this period. • The most important of these was Francois Quesney (16941774), a physician to Louis XV, who developed an analytical system that regarded the economy as a circular flow in which natural law, rather than the government, controlled the economy. • It was the physiocrats who developed the concept of laissez faire, laissez passer (“let it be, let it go”). • Physiocrats called not for intervention in the economy but for laissez faire, and thus were an important influence on Adam Smith and the subsequent development of economic policy. Precursor of classical economics • Some English writers of this period do not fit neatly into either the mercantilist or the classical camp. It was they who rejected the cruder mercantilist ideas of inherent conflict in exchange, who disproved the necessity of always maintaining a favorable balance of trade, and who saw how markets work to coordinate individual economic activities. • These liberal mercantilists and the physiocrats gave Adam Smith the tools with which to build the house of political economy. Key Terms balance of trade downward-sloping labor supply curve laissez faire liberal mercantilists mercantilism monetary factors natural law net product physiocracy quantity theory of money real factors tableau economique Part 2: Classical Economics What is generally called the classical period of economics covers more than one hundred years of economic thought and was almost exclusively British in its orientation and major contributors. Some major treatises of the classical period were • Inquiry into the Nature and Causes of the Wealth of Nations (1776) by Adam Smith (1723- 1790), • On the Principles of Political Economy and Taxation (1817) by David Ricardo (1772-1823) • An Essay on the Principle of Population (1798) of Thomas Malthus (1766-1834) A Summary of Adam Smith • Smith’s contribution to and influence on economic thought was tremendous. • Smith saw the central ideas and forces that govern a market economy. • However, his work is not without problems. • Smith was primarily interested in questions of economic policy affecting economic growth and development, specifically in determining policies that would best promote the wealth of the nation. His major recommendation was that the government follow a policy of laissez faire; this, he claimed, would effect a maximum rate of growth of per capita income in the economy. His analysis of the workings of markets (the microeconomic aspects of the economy) must be viewed within the framework of his concern for economic development. His belief that laissez faire was the most effective policy available was based not primarily on its efficiency in allocating resources but on its beneficial effects on economic growth. His policy positions, for both laissez faire and government intervention, were always contextual. They were based on theoretical arguments combined with his observations of households, firms, politicians, and institutions. Smith also took into consideration political, historical, and institutional factors. This stance extended, moreover, from his analysis to his policy. Although Smith was concerned chiefly with questions of economic development, it was in his investigation of the workings of competitive markets that he contributed most significantly to economic theory. Smith was not a pure theorist. Rather, he was a political economist who was able to supplement a grand vision of the interrelatedness of the sectors of a market economy with descriptive and historical material and to influence economic policy. The pure theorist Ricardo was followed by J. S. Mill, and Mill by Alfred Marshall; both tried to return economics to Adam Smith’s contextual analysis and policy. With few exceptions, the methodological position of orthodox economists since Marshall was one of almost exclusive focus on pure abstract theory, with little attention to historical and institutional material. Generally speaking, the history of economic analysis and policy discloses three major developments since Smith: (1) Microeconomic theorists have tried to fill in the details of Smith’s grand vision of how markets work. Part of this activity has been technical, aimed at giving greater precision to Smith’s vision, part has attempted to develop areas, such as the demand side of price analysis, the formulation of a theory of the economic forces determining the distribution of income, and the analysis of resource allocation in other than perfectly competitive markets. (2) After Smith, macroeconomic analysis received little attention from orthodox theorists until the 1930s, when Keynes returned to one of the mercantilists’ concerns and attempted to explain the forces determining the level of income and employment. (3) Smithian economic policy remained virtually intact, despite the grumblings of the non-orthodox camp, until the twentieth century, when theoretical developments (welfare economics and some parts of Keynesian theory) and events in the real world (revolutions that replaced some private property economies and severe depressions that shook the remaining ones) led to either rejection or reexamination of Smithian policy.
ECON 43133 History of Economic Thoughts – 2018 Fall Homework 2 (Take-home Mid-term Exam) Due Date: 10/11/2018 Question 1: Explain the economic ideas of the mercantilists (in 150 words). Question 2: Explain the economic ideas of the physiocrats (in 150 words). Question 3 Explain why the goal of a society, production or consumption, has important implications for analysis and policy (about 200 words). 1 Question 4 Contrast and compare Adam Smith’s and the mercantilists’ views on the nature and causes of the wealth of nations (in 200 – 250 words). Question 5 Please choose one Nobel economics laureate and describe his or her major contributions (in 150-200 words). You can find more information from Nobel Organization. https://www.nobelprize.org/prizes/economics/ . 2

Tutor Answer

School: University of Virginia

Hello, review the attached document and contact...

flag Report DMCA

Excellent job

Similar Questions
Hot Questions
Related Tags

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors