A summary of all 12 lectures from Economic Challenges. This is a subject that is given in the first period of the first year of Economics and Business Economics at the VU Amsterdam.
Commodities are services and goods that enter the market system and where the consumer
is someone else than the producer.
Where do economic challenges come from?
The contrast between the wealth of our nation with our helplessness as an economic
individual. Man faces a constant struggle between independence and cooperation.
Adam Smith (18th century) was the first great economist.
Man originally had two ways of ensuring continuity:
Organizing society around tradition and customs → there is no social mobility (Indian
caste system)
Use of authority → USSR
But there is a third way → Pursue personal gain in a decentralized system → the market
system.
There is a difference between markets and the market system. Market is a means to
exchange goods. The market system is a mechanism for sustaining and maintaining an
entire society. In a market system there needs to be a profit motive. This means that
people should be able to see the reason to participate in the market system.
The economic revolution was a gradual process of spontaneous change:
Gradual emergence of national political units
Rules and regulations of guilds were replaced by national laws, common
measurements and standardized currencies.
Material changes that made the market system possible (towns, roads, food
provision)
Rise of scientific curiosity and innovation
The economic revolution includes the French revolution and the industrial revolution.
Economic phenomena can be influenced by numerous factors:
Economists have no labs available, like the natural sciences do. The lab is society
Because of this economists need to make ceteris paribus-assumptions: necessity
to keep certain factors constant to gain a better insight into complex economic
situations.
Lecture 2: From Aristotle to Aquinas
Ancient Greece: economic organization
In ancient Greece there was an overwhelmingly agricultural base of peasant farming. This
way of farming was self-sufficient, so what the families made on the farm was just for
themselves. So in economic terms we can say that the majority of agricultural output never
entered the market.
In ancient Greece wealth was generally the reward for political, military or religious power;
not for economic activity. The general rule:
pre capitalist societies: wealth follows power
in capitalism: power follows wealth.
Greek thinkers were primarily interested in efficient organization and administration. In
ancient Greek there was an Anthropocentric view of the world: the view from a single
individual:
Macro: authoritarian ruler as the basic social unit in rational calculation
Micro: man as leader of women, children and slaves (the man plays a different leader for all
the people he leads (private household management))
Private household management was called Oikonomikos (Xenophon).
,Xenophon (427-355 BC)
Xenophon was a pupil of Socrates. Xenophon’s book Oikonomikos is a Socratic dialogue
about household management and agriculture.
A good manager strives to increase the size of the economic surplus he supervises. This is
accomplished through skill, order and the division of labour.
Xenophon said: “ an increase in both quantity and quality of goods is attributed to the
division of labour; there is a relationship between population concentration and the
development of specialized skills and products. Adam smith said 2000 years later: division of
labour is limited by the size of demand.
Xenophon develops an intriguing concept of wealth: a distinction between use value and
exchange value (The usefulness of a commodity vs the exchange equivalent by which the
commodity is compared to other objects on the market). Xenophon does not judge what is or
isn’t wealth.
Plato (427-347 BC)
Plato analysed the political and economic structure of the city-state. He attributed the
emergence of a city to specialization: Athens: commerce and ocean navigation, sparta:
agriculture and army. Between these specialization cities there can be trade. So in economic
terms the consumption and production is not done by the same city, but there is trade.
Specialization city → mutual interdependence → reciprocal exchange → trade.
However he did not perceive the market as capable of self-regulation, it required
administrative control. The ideal ruler was a philosopher-king according to Plato.
Aristotle
Aristotle was a pupil of Plato and the mentor of Alexander the Great. Aristotle believed that
every object in the natural world had a purpose: Telos.
Aristotle said there are three types of justice:
Distributive justice: goods are distributed in proportion to merit
Corrective justice: previous injustices demand compensation
Reciprocal justice/justice in exchange: if exchange is voluntary, it must be just
Aristotle recognized that just exchange does not determine a unique price: the range
between the lowest price (L) the seller is willing to accept and the highest price (H) the buyer
is prepared to pay. Just price is not an arithmetic or geometric mean, but a harmonic mean
of L and H.
Aristotle makes a distinction between two types of economic activity: (1) Oeconomia
(natural activity: housekeeping) and (2) Chrematistike (profit making) → economic life from
a moral perspective: Oeconima=natural; Chrematistike=unnatural.
The telos of money is the simplification of trade. Money does not exist to multiply itself.
According to Aristotle, demanding interest (usury) is highly unjust because money is not
meant to multiply, because it doesn’t multiply off itself.
Roman Empire
Many economic challenges in trade, finance, warfare, colonistaion and slavery, but hardly
andy analytic work on these. In the Roman empire there was a big development of law →
Jurisprudence. The roman empire contributed greatly to property and contract law.
Islam
From 700 to 1200 Islamic conquests created an empire from Spain to China. The Arab
scholars replaced the Roman numerals with the contemporary Arab numerals. The Islam
contributed to the current Economic world by reintroducing the writings of Aristotle.
Ibn Khaldun was a famous Islamic thinker that had influence on political, sociological and
economic ways of thinking in the Islamic world.
The middle ages: Feudalism
, Medieval economic life emerged from catastrophic disorganization that followed the collapse
of the Roman Empire. The manorial system:
- local lords were the centre of political, military and social power.
- Land was divided amongst vassals, in exchange for personal loyalty, military aid and
taxes.
Different dynamics within growing cities: townspeople free themselves from feudal
obligations → merchants start regulating commercial activity within town walls.
During this time guilds became important. Guilds were general rules on production
methods, prices and wages. This was used to discourage competition and preserve order in
the industry.
During Feudalism the scholastics were the big thinkers. Their contribution was an insight
that trade was not without account risk, opportunity costs, changes in prices, etc. So the
scholastics were the first to not see trade as just trade, but that it was more complicated than
was previously thought. The most famous scholastic was Thomas Aquinas.
Thomas Aquinas said that there are ethical aspects of prices → doctrine of the (just)price
price. The just price is the current price, which depends on location, time and risk of
transportation. This was the introduction of indigentia: price varies with need → influence of
demand on price. However the scholastics fail to clearly distinguish the influence of demand
and supply on prices.
In summary
Three important changes will be needed to convert a medieval society to a market society:
General acceptance of profit-making being legitimate
Economic life needs to be monetized → every task must have a monetary reward
The laws of demand and supply have to take over the role of lords and guilds,
guiding economic activity.
Lecture 3: Mercantilists, Physiocrats and Adam Smith
From the middle ages tot the age of enlightenment:
During this time there were powerful changes in European feudalism (urbanization, rise of
commerce between nation-states, age of exploration, change of religious climate). These
changes had a few important consequences: (1) Separation of economic from social life, (2)
Land, labour and capital become factors of production, (3) Formation of different social
classes (labourers, capitalists, landowners)
Mercantilism: the birth of capitalism
Mercantilism refers to the period between feudalism and liberalism. Mercantilists were
advisors to European monarchs in the 16th til the 18th centuries. These people were mostly
lawyers and merchants. The consequence of this is that (1) countries consolidate their
borders and fight for overseas colonies and (2) money and wealth depends on the amounts
of silver and gold (bullionism)
Famous mercantilists:
Thomas Mun (Eng): director of the British Engeland Company
Jean-baptiste Colbert (FR): minister of finance
Mercantilism caused a clear shift in economic thinking from justice to materialism. A
consistent positive trade balance causes an inflow of gold and silver → international trade as
a zero-sum game (one country benefits and the other not).
Economic policy prescriptions under Mercantilism were (1) positive trade balance (exports >
imports), (2) imports should be restricted to raw material (no luxury goods), (3) extract
precious metals and raw material from colonies.
During this time there were also a few important critics on Mercantilism:
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