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Exam Questions History of Economics
- Instelling
- Radboud Universiteit Nijmegen (RU)
Exam questions History of Economics 2019/2020 Radboud, with answers from the lectures, working groups and the book.
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Exam questionsCompare the value theories and policy prescriptions of mercantilists and
physiocrats.
Value theory: what is the source of wealth or long term price (value)
There is also a distribution theory: 100 dollar potato includes 50 wages, 30 profit and 20 rent
Is determined by the price
Value theory:
Mercantilist: gold and silver (bullion)
o The more gold and silver, the more you can buy and the richer you are as a country
Physiocrats: agriculture (land)
o The only thing that comes new into existents comes from the land (or mining)
o Production only changes the shape but doesn’t come with a new thing
Policy prescription:
Mercantilist
o Structural trade surplus, active/positive balance of trade
Minimize export, maximize exports (taxes)
Strict rules about quality
No internal tolls (export price will rise)
Low prices in home
Export manufactured goods only (more value can be added)
Low wages – means lower prices: better international competition + low wages keep
workers working as long as possible (reduce idleness)
By making people poor, they work harder, and we can export more
Government should actively make people pore
Physiocrats
o Laissez-faire, laissez-passer
Government should not obstruct economic life
No government interaction – no active striving for low wages or low prices, let markets do
their work
o Taxation of land owners (direct taxation)
Sterile manufacturing = trade should not be taxed
Agriculture is the only place were value comes from
Why tax land owners only
Easier, but more important:
Isaac Newton, natural laws – agriculture taxation will obstruct the market the
least
Indirect taxation obstructs market more than one direct taxation
Explain the idea of laissez-faire and why physiocrats supported this idea.
They believed in the natural order (inspired by natural sciences) and thought that in economics the same
principles apply and market will result in equilibrium. The best government is a government that governs the
least. The government should only protect life, property and maintain freedom of contract.
,Laisses-faire, laisses passer, credited to Vincent de Gournay means: let people do as they please without
government interference. Governments should never extend their interference in economic affairs beyond the
minimum absolutely essential to protect life and property and to maintain freedom of contract.
Physiocrats were opposed to almost all feudal, mercantilist and government restrictions – instead favouring
freedom of business enterprise at home and free trade abroad.
They supported this idea after experiencing the problems caused by mercantilist polices.
Describe the major contributions and shortcomings of the physiocratic doctrine.
- Contributions
o First real economic theory
o Right of possession
o Labour seen as source of wealth
- Shortcomings
o Hunger due to speculation
o Focus only on agriculture (not on trade or services)
Lasting contributions:
- Before the industrial revolution, compared to farming – industrial work could easily be seen as sterile and
agriculture gave big surpluses
- Opposing obstacles to capitalist economic development (promoted the French Revolution which swept
away numerous obstacles)
- Emphasized production rather than exchange as a source of wealth
- Argued for capital accumulation through reduced consumption by the wealthy
- Support for direct taxes instead of corrupt indirect taxed at that time
- Examining society as a whole and analysing the laws that governed the circulation of wealth and goods –
founded economics as an social science
o Quesnay’s economic table is the precursor of:
The economic flow diagram
National income accounting
- The law of diminishing returns was stated by Turgot (before Malthus and Ricardo)
- Originated the idea of analysis tax shifting and incidence (see current micro)
- Turned attention to the proper role of government by advocating laissez-faire
What was wrong:
- Trade and industry aren’t sterile
- Led to the next error: belief that only landowners should be taxed because only land could yield a surplus
- Two errors in thinking about the future:
o Industrialists and laborers became the most important figures
o Not big capitalistic farms, but small peasant farmers became the typical in France
Now, a tax on land wouldn’t curb luxury consumption by the nobility but would hurt
small farmers (wrong)
,What were the main elements and intuitions of the classical approach to political
economy?
Key intuitions (lecture):
1. Total annual product as source of wealth
2. Macroeconomics
3. Economic agents pursue their self-interest
4. Social cohesion, consequence of the invisible hand
Division of labour connects people and makes them dependent on each other
Markets offset discrimination, attention for everyone in the market
5. Role of specialization is fostering economic growth
6. Tendency for profits to decrease
Smith: competition in market
Ricardo: diminishing returns (increases rent, decreases profit)
7. Focus on long term fundamental exchange values (instead of market prices)
Cost of production determine the long run price
8. Focus on supply, not demand
Say’s law
o Objectivity (water diamond paradox)
o Supply curve is horizontal/flat – demand doesn’t determine the price
Major tenets (book):
- Best government is the government that governs least
o Government should only provide: property right enforcement, national defence, public
education
- Self-interested behaviour is human nature
- Natural harmony of interest in a market economy
o Exception: Ricardo
- All economic resources and activities are important for classical economists
- Focus on economic laws (explicit economic theories) = universal and immutable
o Law of comparative advantage
o Law of diminishing returns
o Malthusian theory of population
o Law of market (Says law)
o Ricardian theory of rent
o Quantity theory of money
o Labour theory of value
What problems did classical economists want to solve (lecture)?
1. New world of capital: how does the capital system work and develop?
How does capital accumulation work and how can it become a source of economic prosperity?
2. How could technical improvement matter for growth
Today we call it innovations
Smith called it the division of labour/specialization
3. Population growth
Unprecedented population growth was a challenge for understanding economy
See Malthus, but also with other economists (what to do with the population growth? =
challenge)
, 4. Poverty emerged – wasn’t a big issue in the Middle Ages economy (based on agriculture and a natural cycle
of sewing and reaping fruits)
Poverty emerged on a huge scale during the industrial revolution (new)
Together with the riches of the world, the poor emerged
5. Distribution of income among social classes
Unequal distributions could lead to revolution (France, 1798)
A lot of poor’s and hunger – concerns with population growth
6. Trade policy
o The idea of free trade emerged
o Trade could be mutually beneficial = new idea
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 the shortcoming of the division of
labour, according to Smith, and the possible remedy?
What is the division of labour: chopping up different tasks within a firm to increase efficiency
Why does this increase efficiency:
a. Labourer saves time because he becomes better at a job (specialization)
b. The labourer doesn’t have to switch between tasks anymore
c. When you are an export at a single task, you can design a better machine capital gets more
productive (targeted innovation)
To summarize:
- Capital gets more productive
- Workers become more productive
The role of the division of labour in Smiths work, it was one of Smits economic laws. It can explain gains from
international trade, because increasing returns to scale make production cheaper when the market gets bigger.
Also, division of labour makes the introduction of machinery possible. Is also has major consequences for the
workers, there work becomes too simple and Smith proposes public education as remedy.
Shortcoming: man becomes as stupid and ignorant as a human creature can become since there isn’t a
problem he has to think about anymore
- Solution: public education
What, according to Smith, determines exchange value in a primitive and in an
advanced economy?
Exchange value in the primitive state
- Labour is the only scarce resource, capital and land are free goods/non-existent
- Relative value of a good was determined by the amount of labour necessary to produce the good = labour cost
theory of value
- Other way around: ‘labour commanded theory of value’ (value of any commodity to the person who possesses
it, if he wishes to exchange if for other commodities, is equal to the quantity of labour which it enables him to
purchase or command)
- In a primitive society: labour is both the source (labour cost theory) and the measure (labour commanded
theory) of exchange value
Exchange value in the advanced economy (both land and capital had a positive price)
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