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Economic Challenges summary
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This is a summary of an Economic Challenges course. Includes theory about the history of economics and economic philosophers. Everything you need to pass the exam.
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Lecture 1Commodities = products that are bought and sold on markets
Scarce factors of production = land, labor, capital, human capital (new)
Market system
Don’t confuse markets with market system
Market = means to exchange goods
Market system = mechanism for sustaining and maintaining an entire society
Profit motive is relatively new (industrial revolution)
Land, labour and capital
Until 17th century, the factors of production were not allocated by the market system
Land, not saleable, but a rent-producing good
Labour market, in rural areas the peasent worked on the lord’s estate
Capital market (stocks), there was hardly any investment or risk taking
Economic revolution
Includes the French revolution and the Industrial revolution
A gradual process of spontaneous change
Economist
The strongest link between economics and the real world had always been politics
Confrontations between economists and politicians and on the other hand between
economists about the economic policy.
Studying the behavior of humans is hard, no lab like natural sciences
Ceteris paribus-assumption = necessity to keep certain factors constant to gain a better
insight into complex economic situations
Lecture 2
Ancient Greece
Limited capacity to sustain non-farming population
Athens was a center of consumption, but not production
Reliance on unpaid slave labour
Wealth was for political, military or religious power, not economic activity
Wealth follows power
Capitalism: powers follows wealth
Anthropocentric view of the world
o Macro: authoritarian ruler as the basic social unit in rational calculations
o Micro: man as leader of women, children and slaves
Oikonomikos = private household management, word economics comes from this
Socrates Xenophon, Plato Aristotle Alexander
Xenophon
, Book Oikonomikos is dialogue about household management and agriculture
A good manager strives to increase the size of economic surplus through skill, order and the
division of labour (specialization)
An increase in both quantity and quality of goods is attributed to specialization: there is a
relationship between population concentration and the development of specialized skills
and products: the more people, the more specialization.
Distinction between use value and exchange value
o Use value = value can be different for different people ( water for thirsty or non
thirsty people)
o Exchange value = value is the same for everyone (product in the supermarket)
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
Analysed political and economic structure of city-state
He attributed the emergence of a city to specialization
Specialization mutal interdependence exchange trade
He is not an economist, because he does not see the spontaneous working of the market
there needs to be a central authority, administrative controller, because the market isn’t
capable of self-regulation
The ideal state was ruled by a philosopher-king, no private possession, because that would
cause self-interest, a leader has to be interested in the people not in himself
Aristotle
The purpose of things (telos); strife for happiness (eudaimonia)
The telos of money is to facilitate trade
For eudaimonia maximize welfare = sum of utilities
Three types of justice
o Distributive justice = a faire division of goods, proportionally to your effort/merit
o Corrective justice = previous injustices demand compensation
o Reciprocal justice/justice in exchange = if exchange is voluntary, it must be a just
price, a faire exchange
Aristotle recognizes that just exchange does not determine a unique price: range between
the lowest price (L) the seller is willing to accept and the highest price (H) the buyer is
prepared to pay.
o Seller from 5 euros, buyer until 10 euros Harmonic mean = 5 * 10 / (1/5 +1/10) =
6,66 euros
o Not arithmetic = 5 + 10 /2, or geomatric = wortel of 5*10
o Harmonic mean same percentage less or more than L and H (33%)
Over time we lost the ethical question about the price, economists only question where the
prices come from, not if the prices are just (example football players)?
2 types of economic activity: oeconomia (housekeeping) versus chrematistiké (profit making)
o Oeconomia = natural, chrematistiké = unnatural
The essence of economic activity is enabling good life in the polis
The telos of money is the simplification of trade, not to multiply itself
Demanding interest (usury) is highly unjust
, The roman empire
Many economic challenges (trade, finance, colonization and slavery), but hardly any analytic
work on these
Development of law
Islam
Islamic conquests created an empire from Spain to China and India
Arab scholars replaced the Roman numerals with the contemporary Arab numerals
Reintroduction of the writing of Aristotle
Works of Ibn Khaldun: history of civilization political, sociological and economic analysis of
cycles in dynasties: discusses effect of division of labor on productivity, influence of tastes on
demand, choice between consumption and capital accumulation (spend money now or
later), impact of taxes on production.
The middle ages: feudalism
Manorial System
o Local lords were centre of political, military and social power
o Land was divided amongst vassals, in exchange for personal loyalty, military aid and
taxes
o Vassals in turn employ peasants and serfs
Static economic system, low productivity, aimed at self-sufficiency
Division of surpluses by predetermined quotas instead of the market mechanism
Different dynamic between growing cities: townspeople free themselves from freudal
obligations merchants start regulating commercial activity within town walls
Large traveling fairs: combination of intense economic activity, social holiday and religious
festival
Importance of guilds (vakbonden)
o They want to monopolize their specialization
o Impose general rules on production methods, prices and wages
o Discourage competition and preserve order in the industry
Medieval economic thoughts: the Scholastics
Studied Latin and Greek classics
Struggled with questions about justice and morality in the market
Reconcile religious doctrine with economic reality
Refined church’s view on usury taking into account: risk, opportunity costs, changes in
prices
Thomas Aquinas
Ethical aspects of prices: doctrine of the just price
Just price is the current price, which depends on location, time and risk of transportation
Indigentia: price varies with need influence of demand on price
But if the market price doesn’t cover production costs, production will stop influence of
supply on price
However Scholastics fail to clearly distinguish the influence of demand and supply on prices
Changes needed for medieval society to market society
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