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Summary History of Economics, lectures work groups
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Notes of the course History of Economics, of both lectures working groups.
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History of economic, summary of the book chapters
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Lectures – History of EconomicsHistory of thought -> History as important for its own sake. Historical contexts,
schools/individuals
History of analysis -> Why history important only as anticipating today’s knowledge,
logic. History is just full of mistakes, now we try to get better. Concepts/ problems
First school. Mercantilism (1500-1800) Not just the first, but we started then, comes
from the word merchant.
Context;
-Growth of trade
-Increasing importance of the nation states and struggles between them
What is the source of wealth for the state? (theory) -> Gold and silver
What should the state do to become wealthier and stronger? (policy) -> -imposing taxes on
import, supporting exports, preference for exporting manufactured goods over raw
materials, promoting hard working population -> active/positive balance of trade.
Contributions of mercantilism
-Importance of money for growing economy
-Importance of trade
-Reconsidering the social status of merchants
-Economics as part of a political project
-But from the beginning contested as economic theory
-Still alive and well in many protectionist (protecting yourself from others, seeing the
world as all struggles and not as negotiating nations) policies
Mercantilism is a national economic policy to maximize the exports and minimize the
imports of a nation. Aimed at accumulating monetary reserves through a positive
balance of trade. Sometimes led to war as well.
Knowledge clip – The invisible hand (Adam Smith)
The invisible hand is explaining the social order and how to have this in an optimal
position (all about supply and demand)
A starting point are self-interest individuals, are interacting on the free hand
-Individuals are led by the invisible hand, however there are unintended consequences
which will lead to social harmony (without any governmental intervention!)
Invisible hand matters because it shows the social optimality of self-seeking and that
there is no regulation needed in order to have a greater benefit for society.
Doubts are maybe that there could get monopolies, huge inequalities, the precise
mechanism is still unclear.
Working group 1
1. Difference mercantilists and physiocrats -> source of wealth mercantilists was
trade which brings you money or gold and physiocrats it is agriculture.
Physiocracy means the power of nature. (you just put the seed in the ground, and then
the nature will give you the surplus)
1
,Difference in theory / policy; physiocrats are against government intervention, because it
intervenes with the natural way, natural law will govern. (laissez faire) Mercantilists are
in favour or government regulation.
2. Lassez faire; Let it do. (laat op z’n beloop) Government not intervening, let it go the
natural way. No external interference. Physiocratcs because; natural order and laws of
nature. They should follow this and let the nature decide how it will go, so no
governmental intervenes and just follow nature, thereby supporting Laissez faire.
3. Shortcomings and contributions of physiocratic doctrine?;
shortcomings only that people from agriculture should be taxed, but everything else that
creates value should be taxed. Industry and trade are sterile, the more industry and
trade developed in France, the more inaccurate the physiocratic analysis became. This
led to the error that only landowners should be taxed because only land could yield a
surplus. Also, wrong that agriculture was the most important in economy, but that
became industry.
Contribution; lassez faire and natural law?
After a time nature has became important again, also nowadays this contribution of
physiocracy is important again, because we now realize that nature is not endlessly etc.
4. What were David Humes arguments against mercantilist theory and policy? -> (He said
that trade could be mutually beneficial for both countries, and not just 1.) Humes
argument against mercantilists was that mercantilism and achieving a surplus which
they strived for, would lead to inflation and that is bad for the country because it will
become less competitive and finally export decreases.
Done with pre classical economics
5. Adam Smith; what is the general theme of Theory of Moral sentiments? How does it
relate to the Wealth of Nations (1776)? -> Theme was about the way humans identified
themselves, theory of moral sentiments. It is a theory of morality, what is good and bad
in human interaction, and a theory of sentiments / feelings. Major feeling was sympathy,
meaning in that case empathy, literally imagine yourself to be that person, both positive
and negative.
Relation both books of self interest -> The morality book is more realistic about human
behaviour, people care for each other and also self interest. Second book, we are talking
now about economy and see if we say if people only care with self-interest and see what
happens then. So both about people’s behaviour and self interest (this will then lead to
the invisible hand; if everybody is acting in their own self interest it will lead to the
best outcome for everybody.) Invisible hand works due to market competition (VR en
AB)
6. Explain the idea and the advantages of the division of labour. What is the role of this
concept in Smith’s work? What could be a shortcoming and the possible remedy?->
Division of labour / specialization increases efficiency, because you don’t have to switch
between tasks, you can invent machines and you get more skilled at the task. Works best
in manufacturing and less in agriculture because it is very dependent on seasons etc. so
specialization not possible. (very dependent on climate, vulnerable)
2
,Role of this concept in Smith’s work; wealth of nations is about the concept of economic
growth, growth according to smith is rooted in the increasing division of labour.
Shortcoming; you could get bored by doing the same tasks over and over again. Remedy
is for the government to educate people in order for people to have options to choose
from.
Smith was against mercantilism and made it look out-dated
7. In what respects might Smith be called an advocate of laissez faire? On what basis might
one challenge this label? -> Smith supported laissez faire, because he argued that it
would result in the just and efficient allocation of scarce resources (invisible hand)
One can challenge this because he said that government can intervene in 2 cases, when
at war, (1) because due to war the whole country / economy could be destroyed, and (2)
when there is a tariff with a partner country the government will equalize the prices.
8. What according to Smith determines exchange value in a primitive and in an advanced
economy? Smith labour theory of value. Main source of value in a primate economy is
labour. The value of labour is the amount of labour that is invested in to the good. You
have two aspects of value; (1) exchange value (natural price) and (2) value in use (more
like emotional value?) Exchange value more interesting for Smith! Because it has to do
with trade.
Relative price is how much another product would cost in amount of labour.
Primitive economy; anything else than labour is freely available.
Advanced economy; the real value of commodities can no longer be measured by the
labour contained in them. The cost of production – wages, rent and profits are the only
determinants of value in the long run.
Wage is the reward / price of labour
Capital; machinery, buildings etc.
Wages (labour) + profits (capital) + rent (landowners)= value / natural price (in
advanced economy = where capital is present) (GDP, value of total product)
9. What is the meaning of the invisible hand doctrine? -> Supply and demand everything
coming in to an equilibrium again, due to more competition, less demand etcccc.
Analytical is how it works economically. Normative is about first accepting evil, but
hoping for improvement.
10. Is Smith’s natural price determined by demand, supply or both? How does it differ from
the market price? Difference market price and natural price; market price is determined
by supply and demand and it fluctuates a lot due to this, short term price. Natural price
is however a stable, long-term price determined by the costs of production, this one
most important for Smith.
11. How did Smith define and explain wage, profit and rent?
12. What are the factors of economic development, according to Smith?
Capital accumulation and division of labour
3
, Workgroup 2
1. Summarize Malthus' theory of population and relate it to his position on the poor
laws. Malthus’ theory of population was that he believed that population growth
occurs exponentially, so it increases according to birth rate. With that, he wrote
that if left unchecked, populations can outgrow resources. So he would want
better laws to regulate the birth rate in order to have everything grow normally
and not too much?
Population, when unchecked increases geometrically, subsistence’s increases at best
only arithmetically. So left unchecked, populations can outgrow resources.
Smith and Malthus both believed that there is economic growth. Economy of smith is a
growing economy and he is optimistic about that. Malthus is not in favor of economic
growth. Preventative checks in order to constrain the birth rate; poor people should not
have children because they can’t support them. So moral constraint, don’t marry and
don’t get children. Another example is birth control, but Malthus did not accept this
because he believed that once you were married you should have children, therefore not
marry. Positive checks; are natural holds on population such as disasters or deceases.
Policy; Malthus was against government intervention of helping the poor (poor laws);
because he wanted to save unborn children from living in a world where parents are not
able to support them, and in this way the families will see that they don’t have enough
money to survive, so also don’t
2. Compare and contrast the implication for wages of the theory of population
presented by Thomas Malthus with the wage theory provided by Adam Smith.
Malthus wrote that when the population of labourers grows faster than the
production of food, real wages fall because the growing population causes the
cost of living to go up. Difficulties of raising a family eventually reduce the rate of
population growth, until the falling population again leads to higher real wages.
So it would work out itself, by extremes balancing each other out every time. On
the other hand, Adam Smith believed in the wage fund theory; this theory was
based on the basic assumption that workers are paid wages out of a pre-
determined fund of wealth. This fund, he called, wages fund created as a result of
savings. According to Adam Smith, the demand for labour and rate of wages
depend on the size of the wages fund. Accordingly, if the wages fund is large,
wages would be high and vice versa. So Malthus wages about size of population
and cost of living, Smith about funds and wages.
Smith thought that wages should be higher in order for the employees to be healthy and
then get more effective. Malthus thought that wages should just be enough to cover basic
needs. Wage = wage fund / N (population) (see wage fund theory explained above).
Malthus said that the fund may rise, but the wage rate does not, so after all there would
be a shortage. The more the wage fund is, the higher the population and vice versa due
to if you don’t have enough wage you can’t support children so more deaths, less
population etc. -> The wage level will be subsistence. (Iron law of wages)
Malthus; wage should be subsistence, real wages will work itself out with for example
growing population, real wages fall because cost of living go up, difficulties with raising a
4
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