ECONOMICS 12

ADAM SMITH

• Father of Economics

• Wrote The Wealth of Nations book

about European financial development

• Supporter of laissez-faire economics –

the idea that markets will regulate

themselves through competition,

supply and demand, and self-interest.

• Created the idea of GDP

HUME

• https://www.youtube.com/watch?v=HS52H_CqZLE

ECONOMIC THOUGHTS BEFORE ADAM SMITH

• Hume

• 100 pages of essays in his Political Discourses (1752)

• price-specie-flow mechanism

• Extended Jon Locke’s view of property rights

• Quantity theory of money

• International theory of the balance of trade

• Locke

• Dudley North

ECONOMIC THOUGHTS BEFORE ADAM SMITH

• John Locke

• father of liberalism

• You control your own destiny

• Property is a natural right derived from labor

• Locke believed reason and tolerance is what guides people’s actions

• “All wealth is the product of labour”

• Does not support free trade

• Supported mercantilist (vs free trade)

• Mercantalist : wealth in the world is static (via accumulation of gold and silver)

JOHN LOCKE

• https://www.youtube.com/watch?v=i-a4ueSsa3Y

• https://www.youtube.com/watch?v=bZiWZJgJT7I

ECONOMIC THOUGHTS BEFORE ADAM SMITH

• Dudley North

• Wealth exists independently of gold or

money, and instead, its source is human

labour

• The export of money in the course of

traffic increases the national wealth

instead of diminishing it

• North supports free trade: he argues no

trade is unprofitable to the public

• Prices must determine themselves and

cannot be fixed by regulations

CLASSICAL THEORY OF VALUE, GROWTH, AND DISTRIBUTION

• Theory of value, or price, to investigate economic dynamics.

• Origins and the differing objectives of the Classical Economy

• Value usually refers to the value of exchange, which is separate from the price.

• Market prices are jostled by many transient influences that are difficult to theorize about at

any abstract level.

• Differences in the major comparative approaches to theories of growth, value and distribution

• Analogies between the great classical economic problems and current worries about

globalization, population pressures and economic crises

CLASSICAL ECONOMICS THOUGHT ON MONEY, BANKING, AND POLICY

• Classical economic theory supports the free, self-regulating market (less govt. policy)

• British classical economists in the 19th century had a well-developed controversy

• Debates between proponents of the theory of endogenous money

• Inflation is caused by banks issuing an excessive supply of money

• The supply of money automatically adjusts to the demand, and banks can only control the

terms

• All value is derived from labour. Natural prices were the sum of natural rates of wages, profits

(including interest on capital and wages of superintendence) and rent.

MARXIST ECONOMICS

• Includes different theories which are sometimes opposed to each other

• Marxian analysis is used to complement or supplement other economic approaches.

• analysis of crisis in capitalism, the role and distribution of the surplus product and surplus value in

various types of economic systems

• Criticizes Adam Smith economics

• the nature and origin of economic value, the impact of class and class struggle on economic and political

processes, and the process of economic evolution.

• Specialization of the labor force, coupled with a growing population, pushes wages down and that the

value placed on goods and services does not accurately account for the true cost of labor.

MARXIST ECONOMICS PT. 2

• The capitalist class enriches itself by exploiting the working class (proletariat), so the

economic interests of the two classes are opposed and therefore incompatible.

• The cost of labor power is determined by the cost of the goods and services (food, clothing,

shelter, etc.) necessary to maintain and reproduce workers.

• Capitalists do not pay workers for the value they create: they extract surplus value, the difference

between the value created by a worker and the cost of their labor power (their wages) from the

working class. Marx termed this exploitation

• Socialism would be a step towards the disappearance of the state, and communism would bea

society where goods and services would be distributed "to each according to his need, from

each according to his ability."

NEOCLASSICAL ECONOMICS AND THE ROLE OF MARKET

• Developed in the 19th century

• Dominates microeconomics

• Based on books by William Stanley Jevons, Carl Menger and Léon Walras

• An approach to economics that relates supply and demand to an individual's rationality and

his ability to maximize utility or profit

• Focuses on the determination of goods, outputs, and income distributions in markets through

supply and demand.

• Uses mathematical equations to study various aspects of the economy.

NEOCLASSICAL ECONOMICS THEORIES

• Neoclassical econ has 3 central

assumptions proposed by E. Roy

Weintraub:

• People have rational preferences

between outcomes that can be

identified and associated with values.

• Individuals maximize utility and firms

maximize profits.

• People act independently on the basis

of full and relevant information.

KEYNESIAN THEORY OF MONEY, INVESTMENT, AND CYCLES

• Macroeconomic theories about the influence of aggregate demand on economic output

in recessions.

• Aggregate demand does not necessarily equal the productive capacity of the economy

• Aggregate demand is influenced by a host of factors and sometimes behaves erratically,

affecting production, employment, and inflation

• Can be mitigated by economic policy responses, which can help stabilize output over the

business cycle.

NEOCLASSICAL SYNTHESIS

• absorbing the macroeconomic thought of John Maynard Keynes into neoclassical

economics

• represents incentives and costs as playing a pervasive role in shaping decision making

• This theory suggests that in the short term, markets are not self-regulating but in the

long term, they are, making free markets best for distributing resources

• KEY IDEAS:

• Full employment is possible

• Fiscal policy can be used to manage demand and the rate of economic growth

NEOCLASSICAL SYNTHESIS PHILLIPS CURVE

There is a trade-off between

inflation and unemployment

and the government must

decide which to prioritize.

CONTEMPORARY ECONOMIC THOUGHT

• The financial collapse of 2007/08 and the subsequent deep recession and sluggish

recovery have left huge scars on the global economy

• Crisis for the real economy and for economic policymakers is also a crisis for the

economics profession and for economic theory

• Fail to predict the collapse and recession

• Put neoclassical economic thinking in the dock

• Dispersed interaction

• The absence of a global controller

CONTEMPORARY ECONOMICS IN RESPONSE TO 2008 FINANCIAL CRISIS

• Resurgence of Keynesian economics

supporting government intervention

in the economy

• Austerity was another response.

Austerity is reducing government

deficits and includes spending cuts,

tax increases, or a mixture of bot

BEHAVIORAL ECONOMICS

• Bounds of rationality of economic agents

• Behavioral models typically integrate insights from psychology, neuroscience, and

microeconomic theory

• Studies the effects of psychological, cognitive, emotional, cultural and social factors on the

economic decisions of individuals and institutions and the consequences for market

prices, returns, and resource allocation,

• Includes how market decisions are made and the mechanisms that drive public choice