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Summary History of Economics (Part I)
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This document is a summary of the course 'History of Economics'. It contains all the information from the lectures, workgroups and the readings from the book.
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History of economics; Part I, core conceptsLecture one: History of economics: Introduction and plan; Adam Smith
and classical economics
Chapter one (Dupont, 2017) and Brue Grant pages 51-53, 69 and 72-88
Chapter one: An overview of the history of economic ideas
A brief summary of 2000 years of economic ideas
1. The ancient world: starts with the Greeks, also called the cradle of civilization
- Greek culture: elevated the community over the individual (this is not the case in modern economy)
- Most economics from this period come from the classical period (Greece):
- Hesiod: looks at explaining the existence of an obligation to work and deals with economic
concepts of scarcity, choice and resource allocation
- Xenophon: gave one of the best treatments of division of labor in ancient writings
- Plato: saw society itself as having been organized around exchange and mutually beneficial
trades, also division of labor
- Aristotle: his concept of justice lead to a deeper analysis of economic exchange than in Plato’s
work, introduced commutative justice
- Romans: did not make any progress in economics, they did not have interest in pursuing Greek ideas
2. The medieval Theologians: after the fall of the Roman empire, the political system of feudalism
(feodalisme) and the economic system of manorialism (Heerlijkheid) emerged
- Feudal society: involved a set of exchange relationships between peasants and landlords
- Roman Catholic church was important here: it would be the beginning from which
philosophy, theology and economic ideas emerged
- Scholastics: medieval Christian scholars who focused primarily on questions of theology,
morality and ethics (this overlapped with economic ideas)
- Saint Thomas Aquinas: most important scholastic, most known for writing a compendium of
theology which includes some discussion of economic ideas
- The Protestant reformers: Luthor and Calvin, split from the Roman church but maintained
some of its traditional economic doctrines
- The school of Salamanca (Spain): 16th century, these scholars sought to reconnect Aquinas’
teachings with the new and rapidly changing world of post-Reformation Europe
3. Mercantilism and the rise of the nation-state: replacement for feudal states
- This was the age of exploration, colonization and national conflict (first wave of globalization)
- Mercantilists: had a narrower and more materialistic concern (profit), were merchants
- Mercantilism should be viewed as a set of economic principles designed to support the
nationalist drive for wealth and national power
4. Physiocrats; a bridge to the Enlightenment: physiocrats were natural law philosophers who argued that
relatively unhindered markets characterized by laissez-faire policies were optimal
- Physiocratic economic table: an early version of the circular flow model of the macroeconomy, still
used to describe the interrelationship among various sectors in the economy
5. Adam Smith and the birth of classical economics: Adam Smith represents beginning of classical economics
- He argued that social harmony could emerge without central direction (just like physiocrats and Cantillon)
- Order would emerge as people sought ways to live alongside each other
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, - Smith saw human motivations as motivated by by a complex interaction of factors:
self-interest and sympathy
- Wealth of nations: ‘Why are some countries so rich while others are so poor?’
- Answer: growth starts with division of labor (self-interest) → increasing productivity → higher
wages and rising consumption → using savings people become self-sustaining
6. The maturing of classical economic thought: Malthus and Ricardo
- This is where classical economics matured
7. Karl Marx: critic of industrial capitalism, saw capitalism as only one stage of evolution on the path from
primitive to pure communism and thought it would collapse under the weight of its own internal contraindications
- During mature stages of capitalism: big area’s of humanity would be stripped of property and become
impoverished
- According to Marx: the interests of the individual were fundamentally at odds with the interest of
society, this would lead to changes in the nature of material production
7. The marginalist revolution: William Stanley Jevons, Carl Menger and Léon Walras
- These three scholars identified marginal utility as a source of value
- Marginal utility: determines exchange value
- Classical labor theory of value: the relative price between two goods was equivalent to the
relative unit labor requirement for those two goods
- Unit labor requirement: the amount of labor required to produce 1 unit of a good
- Jevons drew from utilitarianism (bentham): we seek pleasure while we try to avoid pain
- Menger: did not rely on utilitarianism but classified goods into higher/lower orders, value is subjective
- Lower-order goods are fit for consumption, directly satisfy human needs and higher-order
goods are used in the production of the consumption of goods, means of production
- Lower-order goods: fundamental, they generate demand for higher-order goods
- Walras: connected marginal utility to value, the Walrasian model relied on a gathering of buyers and
sellers who would call out the prices they were willing to pay and sell for
- He derived demand from marginal utility
- Tâtonnement process: here, an initial price is called out and the participants in the market
thereafter follow a pricing rule in which the price is increased with excess demand and
decreased with excess supply
8. Alfred Marshall’s synthesis: build an important bridge between marginal utility theory and classical theory
9. Emergence of the theory of imperfect competition: instead of using a perfect model of competition like
Marshall did, an imperfect one came into existence (Chamberlain and Robinson important)
10. The Keynesian revolution: creation of modern macroeconomic theory by John Keynes
- Before this: macroeconomics had developed along two independent tracks; monetary theory and
business cycle theory
- Keynes brought these two together in his general theory of employment, interest and money theory
11. The monetarist counterrevolution: Milton Friedman would be successful in countering Keynes
- Friedman: people are long-term oriented and they decide on consumption levels by using expectations
about their average income over a few years (= permanent income theory of spending)
- Tradeoff between unemployment and inflation only valid in short-run
- The quantity theory of money: there is a direct and positive relationship between money supply and
overall price level in an economy
- In classical theory: money had no effect on the real economy
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,12. New classicals: this school began with the work of Robert Lucas, Edward Prescott and Thoams Sargent
- The new classical school: began with effort to provide a microeconomic foundation to Keynesian
economic theory in the labor market
- They argued that recessions resulted from large and unexpected shocks to aggregate
demand or supply
- New classical scholars argued that people rationally form their expectations with the
objective of maximizing utility
- Keynesian labor market: reductions in aggregate demand and subsequent reductions in
production levels generated involuntary unemployment as firms did not reduce wages
- According to the new classical school: this is consistent with rational profit-seeking
behaviour by individual firms
13. New Keynesians: developed a response to the new classical critics of orthodox keynesianism
- They focussed primarily on the speed with which prices and wages adjust to various shocks
- They believe that changes in the money supply do have real effects on the economy and they emphasize
the role of market imperfection in understanding economic fluctuations
14. Recent developments: experimental economics, Edward Chamberlain (1940-1948)
- Behavioral economists: focus on understanding peculiarities of individual behaviour and choices to
better understand how markets work
- Has some roots in Adam Smith’s ‘The theory of moral sentiments’
- Behavioral and experimental economists: learned us about how market participants react to changes
in institutional settings and possible irrational decisions about asset price bubbles
The classical school (Brue Grant pages 51-53, 69 and 72-88)
Major tenets of the classical school
The major features of this body of thought can be summarized as follows:
- Minimal government involvement: the best government governs the least
- The economy was held to be self-adjusting and tending toward full employment without
government intervention
- Government activity should be confined to enforcing property rights, providing for the
national defense and providing public education
- Self-interested economic behavior: is basic to human nature
- Harmony of interests: the classicists emphasized the natural harmony of interest in a market economy
- By pursuing their own individual interests, people served the best interests of society
- Importance of all economic resources and activities: all economic resources as well as all economic
activities contribute to a nation's wealth
- The mercantilists had said that wealth was derived from commerce and the physiocrats had
viewed land and agriculture as the source of all wealth
- Economic laws: classical school made tremendous contributions to economics by focusing analysis
upon explicit economic theories or laws
- Classicists believed that the laws of economics are universal and immutable
Whom the classical school benefited or wanted to benefit
- Classical economics served all of society: the application of it theories promoted capital accumulation
and economic growth
- Not all people shared equally from classicism: there were costs along with the benefits of
industrialization (workers especially)
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, Validity, usefulness and correctness of the classical school
- Classical economics rationalized the practices being engaged by enterprising people
- It removed remnants of the feudal system and in doing so, promoted business enterprise
- Classical economics enlarged the market by achieving freer international trade and by promoting an
urban labor force
Tenets of the classical school that became lasting contributions
- Classical economists laid the foundation of modern economics as a social science, generations who
followed built upon their insights and achievements
Several of the classical laws are now taught as principles of economics in standard economics textbooks;
tenets that became lasting contributions include, but are not limited to, the following:
1. The law of diminishing returns
2. The law of comparative advantage
3. The notion of consumer sovereignty
4. The importance of capital accumulation to economic growth
5. The market as a mechanism for reconciling the interests of individuals with those of society
Weaknesses of classical economics
- Overemphasis on laissez-faire: laissez-faire was inadequate as a public policy to deal with economic
depressions, monopolies and provisions of goods whose benefits were indivisible
- Classical economics was ambiguous, deficient or wrong in several areas of economic analysis
The theory of moral sentiments (came before wealth of nations)
Moral sentiments: discusses moral forces that restrain selfishness and bind people together in a workable society
- Wealth of nations: assumed existence of a just society and showed how the individual is guided and
limited by economic forces
Wealth of nations
The division of labor; increases the quantity of output produced for three reasons:
1. Each worker develops increased abilities in performing one single task repeatedly
2. Time is saved if the worker does not need to go from one kind of work to another
3. Machinery can be invented to increase productivity once tasks have been simplified and made routine
through the division of labor
Harmony of interests and limited government
- Participants in the economy tend to pursue their own personal interests
- The pursuit of self interest, restrained by competition, tends to produce Smith’s social good
(maximum output and economics growth)
- According to Smith, governments are wasteful corrupt and the grantors of monopoly privileges to the
detriment of the society as a whole , government should not interfere in international trade
- This trade can promote greater division of labor by overcoming narrowness of the home market
Smith saw three major roles for the state:
1. To protect society from foreign attacks
2. To establish the administration of justice
3. To erect and maintain public works and institutions that private entrepreneurs cannot undertake profitably
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