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Adam Smith - Part 2
Law of Population:
- Accumulation of capital -> Increases demand for labour
- Large demand for workers -> Wages increase
- Living conditions improve -> Population growth -> More workers
- Large supply of workers -> Wages don't increase
Motivation:
- Self-interest is the largest motivator (Desire to improve one's condition)
- Self-interest -> Producers produce to gain profit
- Demand increases -> Supply increase due to self-interest (NOT Benevolence) -
Adam Smith - Part 1
The Invisible Hand:
- Laissez-faire approach
- Government should leave the economy alone
- An invisible hand guides the economy through supply and demand
Division of Labour:
- Workers should specialize in one task
- Becomes mechanized production process
Law of Accumulation:
- Investing profits into capital goods benefits entire economy
- Production & efficiency are higher -> More profits -> More investing -
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Classical Economics
Adam Smith
Jean-Baptiste Say
David Ricardo
Thomas Robert Malthus -
Thomas Robert Malthus Part 1
Malthusian Dilemma:
- Food = Necessary for human life
- Human Sexual Instinct = Constant
- Population grows in geometrical progression (Sequence that increases by ratios - 2, 4, 8, 16)
- Food grows in arithmetical progression (Sequence that increases by a difference - 1, 2, 3, 4)
- If not changed, population will double every 25 years
- Agriculture = Not able to keep up due to:
- Law of Diminishing Returns
- Worker productivity will decline
- Less-fertile land will be used, meaning less crops -
Thomas Robert Malthus Part 2
Malthusian Dilemma (Continued):
- If wages increased -> Better living standards -> More offspring -> Larger population
Population Control:
- Positive Checks (Increase Death Rate - War, Famine, Disease)
- Preventative Checks (Decrease Birth Rate - Abstinence, Late Marriage)
Why it failed:
- Green Revolution (Technological Advancements in Agriculture)
- Food production increases greatly
- Urbanization (Farm Offspring = Assets / Urban Offspring = Not)
- Family Size Decreases in Urban Countries -
Jean-Baptiste Say
Say's Law of Markets:
- Ability to purchase goods/services -> Comes from previous production efforts
- Consumers can buy b/c they work and earn income
- Money = A Medium for Exchanging Goods & Transferring Value
- Opposite of Mercantilism
- Value from sale -> Money -> Make other sales
- E.g. Trading a cow for a broom -> Cow is traded for money -> Money is traded for broom
- Production Failure of one good -> Reduces demand for another
- Usually sorted out naturally unless government interferes -
David Ricardo
Iron Law of Wages:
- Wages should be determined by free-market conditions
- Changed wages -> Eventually return to normal
- High wages -> Larger families (More Offspring) -> More workers -> Lower wages
- Low wages -> Smaller families (Less offspring) -> Less workers -> Higher wages
- Supply and demand (of workers) will re-adjust wages
Assumptions:
- Rich families -> More offspring
- Poor families -> Less offspring
Why it failed:
- Assumptions = Incorrect
- In reality, the opposite is true -
Karl Marx Part 1
Economic Interpretation of History:
- History = Ongoing series of class conflicts between the exploiters and the exploited
- Unbearable conditions -> Exploited rise up to exploiters
- Capitalist - Based on Self-gratification & Exploitation -> Created own destruction
- Workers -> Eventual overthrowing of ruling class
Labour Theory of Value:
- Item's value = Value of all labour used in production (Labour value)
- Direct Labour (Workers) & Indirect Labour (Machinery) -
Karl Marx Part 2
Labour Theory of Value (Continued):
- Capitalist -> Workers receive only a portion of labour's worth
- Amount not given to workers -> Surplus Value (Profit)
- Capitalist Employment -> Employees produce more for the employer than they are paid in their wages
- Labour is sold for less than its actual worth
Reserve Army of the Unemployed:
- Desperate Unemployed Workers -> Lower wages -
Period: to
Marxian Economics
Karl Marx -
Carl Menger
Considered founder of Austrian School
Goods = Valuable because:
- Have many different uses
- Uses are of different importance
Marginal Utility:
- Consumer satisfaction gained by purchasing a product
- Utility/Benefit to consumer -> Based on quantity already owned
- Price = Partly determined by utility
- E.g. Bread -> After a loaf or two, consumers' satisfaction decreases (Low marginal utility)
- Diamond -> After one or two, consumers' satisfaction has not plateaued (High marginal utility) -
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Austrian Economics
Friedrich August von Hayek
Ludwig von Mises
Carl Menger
Friedrich von Weiser -
Friedrich von Wieser
Opportunity Cost:
- Builds on Carl Menger's theory that a product's price is determined by many factors
- Subjective & Psychological Value of Product
- A sacrifice made to obtain/purchase a product
- The alternative option that was not chosen
- Should be deciding factor of price - Not monetary or labour costs
- E.g. If a consumer purchases a loaf of bread for $5, the opportunity cost is everything else that could have been purchased - Carton of eggs, jug of milk, 2 boxes of crackers, etc. -
Thorstein Veblen
Founder of Institutional School
Interested in relationship between economics and history, psychology, sociology, and culture
Conspicuous Consumption:
- The purchase of goods for the purpose of demonstrating wealth and status
- Consumerism stems from this
Veblen Good:
- Demand increases as price increases -> Becomes more exclusive status symbol
- Demand decreases as price falls -> Becomes more affordable
Pecuniary Emulation:
- Attempting to reach and/or exceed another person's financial status -
Ludwig von Mises Part 2
Business Cycle Theory (Continued):
- These industries require availability of money to complete long-term projects
- Without constant investment -> Liquidation -> Temporary Unemployment -> Recession -
Ludwig von Mises Part 1
No Government Intervention - Free Market
Praxeology:
- Using logic & deduction > collection & mathematical analysis of data
Economic Cycle: Fluctuation Between Growth and Recession
Business Cycle: Rising and Falling of Production Output of Products
Business Cycle Theory:
- Finds causes of recurring economic and business cycles
- With distribution of fiduciary media (money not backed by physical units - gold, cash) -> More investment in sensitive industry -
Period: to
Institutionalist
John Kenneth Galbriath
Thorstein Veblen -
Period: to
Keynesian Economics
Joan Robinson
John Maynard Keynes -
Joan Robinson Part 1
Perfect Competition:
- Sellers sell identical products at identical prices
- All have same knowledge
- Market share is irrelevant
- Firms can enter/exit without consequences
Imperfect Competition:
- When any factor of perfect competition is missing
- Very common
- Between perfect competition and monopoly (1 firm controls all)
Monopsony:
- Reverse of monopoly (1 firm controls all)
- Market has many sellers & 1 buyer
- E.g. Military/Labour
- Employees = Sellers (of labour)
- Employers = Buyers -
Joan Robinson Part 2
Monopsony (Continued):
- Employers = Large influence on wages
- 1 Buyer -> Can pay whatever they want -> Always supply (of labour)
- Solutions = Unions, Minimum Wage
- Explains gender wage gap
Golden Age:
- Proposed long-term growth of income & capital
- Extension of Keynesian thinking -> Long term economic prosperity
- Explained in her (some believe) greatest work, "The Accumulation of Capital" -
John Maynard Keynes Part 1
War Involvement (Post-WWI):
- Criticized Treaty of Versailles -> Forced Germany to pay more than it could afford
- Predicted Germany's ruin and WWII
Deferred Savings (WWII):
- Portion of workers' incomes -> Invested in war bonds
- Financed War + Controlled Consumer Spending
- Post-war -> Bonds could be cashed in -> Consumer spending increase ->
- Stimulate Investment
- Allow Increased Production (Consumer Goods)
- Maintain Employment Levels
Post-WWII:
- Proposed helping defeated -> Lasting Peace -
John Maynard Keynes Part 2
Great Depression:
- Governments = Largely Responsible for High Unemployment
- Government Intervention Needed
- Sponsor Public Works Projects -> Create jobs
- Controlling Interest Rates & Increasing Public Spending -> Increase product demand -> Increase employment (Keep up with demand)
- Newly employed -> Spend wages -> More demand -> More employment
- Consumers are limited by income size -> Not cause
- Investors & Governments -> Sources of Cycles
- Great Depression -> Problem of Low Investment -
Friedrich August von Hayek
Advocated for free markets
Criticized Socialism
Trade Cycle Theory:
- Natural Interest Rate = Price that coordinates savers' and investors' decisions
- When market rate of interest changes from Natural Interest Rate -> Cycle begins
- Capital Stock = Distorted
- Savers' and Investors' Desires = Not Reflected
- Policy Implication - In recession or period of high unemployment, adjusting money supply would distort capital stock even more
- Solution - Let the recession play out = End in equilibrium -
John Kenneth Galbriath
Corporate Managers -> Held Economic Decision Power
Government Involvement = Improve Society
Theory of Social Balance:
- Post WWII -> US emphasis on private-sector production
- Created Wealthy Private Sector & Public Squalor
- Consumer Goods (Cars, TVs, Radios) -> Produced in Large Amounts
- Public Goods (Parks, Schools, Hospitals) -> Neglected
- Society = Needs More Investment in Public Goods
- Not all consumer wants should be satisfied
- Urgent, original, and not contrived by others -> Satisfy -
Milton Friedman Part 1
Leading Member of Monetarist School
Laissez-Faire Capitalism:
- Free Markets = Largely Resolve Themselves More Effectively (Than with government intervention)
- Self-Sufficiency & Work Ethic = Important Pillars of Productivity & Economic Growth
- Advocated for Guaranteed Income & Abolition of Minimum Wage
- Apply free-market idea to education - Parents receive vouchers equivalent to education cost and can send their children to any school -
Milton Friedman Part 2
Laissez-Faire Capitalism (Continued):
- Good schools would have many students, while schools without enough students would close
Money Supply:
- Government should regulate money supply in circulation
- Business Cycles -> Determined by Money Supply & Interest Rate
- Government should raise money supply yearly by a fixed amount
- Likely between 3-5% (Long-term growth rate of economy)
- Too much money -> Inflation
- Too little money -> Low Investment & Employment -
Period: to
Monetarism Economics
Milton Friedman
