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Economic challengesLecture 1 – CH 1 and 2
What is economics?
Economics is the science of choice.
Economics studies how people use scarce factors of production (land, labour, capital) to
produce various commodities (good or service that enters the market, the person who
makes it is not the person who uses it) and how these commodities are distributed amongst
the members of society for consumption.
Economics analyses trends in the business cycle, inflation, economic growth and
unemployment.
Economics is the study of wealth, poverty and inequality.
Economics studies the effectiveness of government policy (both fiscal and monetary policy).
Where do economic challenges come from?
Contrast the wealth of our nation with our helplessness as an economic individual.
A society will undoubtedly be confronted with the following economic challenges:
- Organize a system to ensure the production of goods and services, sufficient for
subsistence.
- At the same time distribute the production’s revenue amongst the different
members of society.
Where are the economists?
Adam Smith (1723-1790) = The first great economist
Question: The economic problem is around from before the time of the Pharaohs. Since then
mankind produced philosophers, scientists, political thinkers, historians, artists and
statesmen. Why, no economists?
Tradition and authority (how to organize society)
- Man faces a constant struggle between independence and cooperation (we rely on
the market to keep everything in control)
- In a primitive society, there is tangible pressure of the natural environment (eg.
Eskimos, they need the help of each other) or social environment (norms, values,
kinship, reciprocity; eg. African Bushmen)) this way things are organized
- But an advanced, anonymous society faces a continuous possibility of failure your
baker does not know your name and does not have sympathy for you
- Man originally had 2 ways of ensuring continuity:
o Organizing society around tradition and customs: no social mobility (eg.
Indian Caste system).
o And use of authority: eg. Ancient Egypt, USSR.
- But there is a third way: pursue personal gain in a decentralized system: the market
system
The market system
In the market system the profit motive, not tradition or authority, is most present. How can
self-interest serve the common good? Who will do the unappreciated jobs if tradition and
,authority do not reign anymore? Where does a society end up if it is not ruled anymore by
the dictates of authority? Thought experiment: the Pharaoh and his economic advisor
(spontaneous order; nobody owns the market).
It were/are economists that study the market system:
tradition: anthropologists and sociologists
authority: political scientists
Markets versus the market system
Market = exchange goods; a way of organizing trading goods. Markets have always existed:
in 1400 B.C., Pharaohs and Levantine kings traded gold and war chariots for slaves and
horses. But the traveling fairs of the Middle Ages were no market system. Market system =
mechanism for sustaining and maintaining an entire society; a way of organizing society.
The profit motive
The profit motive (needs to be present for everyone) is only as old as modern man. Hostility
and social sanctions towards profit, mainly by the Church (when you make huge profit, you
go to hell).
Difference between the wealth of a few (Phoenician sailors, speculators of Rome, trading
Venetians, the Hanseatic League, the great Portuguese and Spanish voyagers) versus the
general struggle for wealth diffused throughout society.
Land, labour and capital
Until the 17th century, the factors of production were not allocated by the market system.
Ownership of land resulted in prestige and status, and formed the basis for the military,
judicial and administrative organization of society. However, land was not a saleable, rent-
producing good. There was no labour market where a network of job-seeking individuals sell
their services to the highest bidder. Capital existed as private wealth, but there was hardly
any investment or risk taking; innovation was discouraged.
The Economic Revolution
The Economic Revolution was a gradual process of spontaneous change: Gradual emergence
of national political units: isolated feudalism gave way to centralized monarchies; nations
started to form and trade with each other.
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) → shift of power from nobility to merchants. Rise of scientific curiosity
and innovation. The Economic Revolution includes the French Revolution and the Industrial
Revolution.
Being an economist is not easy!
Politics= The strongest link between economics and the real world.
Before 1890s, economics was called political economy. Economists are always in
debate with politicians.
In the history of economic thought we can witness many confrontations between on the one
hand economists and politicians and on the other hand economists among themselves about
the desirability and feasibility of the economic policy. The first lesson of economics is
,scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of
politics is to disregard the first lesson of economics. - Thomas Sowell, American economist
Economic phenomena can be influenced by numerous factors: Economists have no labs
available, like the natural sciences do. Ceteris paribus-assumption: necessity to keep certain
factors constant to gain a better insight into complex economic situations. Economists speak
the language of formal models maths
We study the present in the light of the past for the purpose of the future
New ideas of dead economists?
We are all influenced by the economic decisions of companies, banks and governments and
this knowledge of economics is necessary to be an informed voter or newspaper reader.
Many of today’s debates (foreign trade policies, inflation policies, the role of the
government, poverty alleviation, the quest for economic growth) can be understood better if
someone is familiar with the ideas of past economists.
Lecture 2: From Aristotle to Aquinas
Ancient Greece: economic organization
Overwhelmingly agricultural base of peasant farming
- Very limited capacity to sustain non-farming population no extra production for
extra people
- Majority of agricultural output never entered the market → almost cashless world;
hardly any trade.
- Peasant of antiquity did not own his land nor did he innovate (no incentive to).
Flourishing market economy in the city, but two great differences with contemporary
market society:
- Parasitic role of the city as solely importer of predominantly luxury goods for its
upper class → centre of consumption, not of production.
- Reliance on unpaid slave labor.
Wealth was generally the reward for political, military or religious power, not for economic
activity. General rule: Pre-capitalist societies: wealth follows power. Capitalism: power
follows wealth.
The cradle of western civilization
Political and economic life was dominated by warfare (lot of wars):
- Greek thinkers were primarily interested in efficient organization and administration.
, Anthropocentric view of the world:
- Macro: authoritarian ruler (who was empowered to make administrative decisions
(rational) on behalf of the interests of society) as the basic social unit in rational
calculations.
- Micro: man as leader of women, children and slaves (hierarchy in families).
Private household management was called Oikonomikos = economics
Xenophon
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 economic surplus he supervises:
- This is accomplished through skill, order and the division of labour (= recognize the
skill of people and give them the proper task, in an efficient order, using
specialization in the workfield).
Xenophon: division of labour (specialization) An increase in both quantity and quality of
goods; there is a relationship between population concentration and the development of
specialized skills and products. Division of labour produces the wealth of the nation.
Adam Smith (2000 years later): Division of labour is limited by the size of demand (you
should not produce too much).
- Xenophon develops an intriguing concept of wealth.
- Distinction between use value (water has a high use value if you are thirsty but not
if you are not thirsty) and exchange value (the value with which the good
exchanges on the market for other goods, you can sell your water but cannot
purchase a lot with that value). (see powerpoint for examples)
- Xenophon uses the use value to calculate wealth (instead of exchange value like we
use right now)
- According to Xenophon wealth is gained when the individual experiences subjective
use value in consumption; is consumption harmful then it cannot be wealth.
- Xenophon does not judge what is or isn’t wealth.
Plato and the Republic
Plato analysed the political and economic structure of the city-state.
He attributed the emergence of a city to specialization (within cities, not divsion of labour):
Athens: commerce and ocean navigation, Sparta: agriculture and army.
Start of a theory of exchange: specialization → mutual interdependence → reciprocal
exchange → trade.
However, he did not perceive the market as capable of self-regulation, it required
administrative control the market system does not organize the trade says Plato; so Plato
is not an economist (he misses the key-idea of economics).
The ideal state was ruled by a philosopher-king (you give up all your private possessions
because they do not serve the common good and rule over the state; we rely on each
other for needs).
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