Chapter 1: History of Economics as a Profession PDF

CHAPTER 1: The History of Economics as a Profession and its Development as a Field of Study - Increase in economic activity. - Feudalism, with its economically, socially, politically self sufficient manor, was giving way to increasing trade, growth of cities and the nation states. -...

CHAPTER 1: The History of Economics as a Profession and its Development as a Field of Study - Increase in economic activity. - Feudalism, with its economically, socially, politically self sufficient manor, was giving way to increasing trade, growth of cities and the nation states. - Individual activity was less controlled by the custom and tradition of the feudal society and by authority of the church. - Production of goods for the market became more important - Land, labor and capital began to be bought and sold in markets. - Economic literature of mercantilism were produced and written by merchant businessmen ( economic literature of scholasticism were written by monks ) which were connected to questions of economic policy. - From 1650 to 1750, economic literature of the mercantilists scattered, on which Adam Smith based his " Wealth of Nations". Note: During the period of the decline of the manor and the rise of the nation state, the mercantilists tried to determine the best policies to promote the wealth of nations. Assumption: Total wealth of the world was fixed. Application: For the **scholastics**, when trade took place between individuals, the gain of one was necessarily the loss of another. For the **mercantilists**, any increase in the wealth and economic power of one nation was necessarily at the expense of others. Emphasis: a. International trade as a means of increasing the wealth and power of a nation. b\. Balance of trade between nations. Goal of economic activity: production and not consumption. Wealth of nation defined: - It is not in terms of the sum of individual wealth, but based on the poverty of the many. a. The country should encourage exports and discourage imports by tariffs, quotas, subsidies, taxes and like means. To achieve balance of trade. b. Production should be stimulated by governmental interference in the domestic economy and by the regulation of foreign trade. c. Protective duties should be placed on manufactured goods from abroad. d. Importation of cheap raw materials to be used in manufacturing goods for export should be encouraged. Many historians disagreed on this doctrine. - The wealth of the nation is not in terms of its production or consumption of goods, but rather in terms of its holdings of precious metals argued for a favorable balance of trade because it would produce a flow of precious metals into the domestic economy to settle the trade balance. - This led to their concern on money and its role in the economy. - Jean Bodin recognized the relationship between the quantity of money and the general level of prices. One of the reasons is: a. increase in the quantity of gold and silver resulting from the discovery of the new world. - John Locke discovered the role of money that the level of economic activity depends upon the quantity of money and its velocity. - David Hume presented the interrelationships among a country's balance of trade, quantity of money and the general level of prices. In international trade, theory, this has become known as the price specie-flow mechanism. - Hume pointed out that it would be impossible for an economy to continuously maintain a favorable balance of trade. Analysis of Hume: a. A favorable balance of trade would lead to an increase in the quantity of gold and silver within an economy. b. An increase in the quantity of money would lead to arise in the level of prices in the economy with the favorable balance of trade. c. If one country has a favorable balance of trade and the other do not have such, the latter may have a loss of gold or silver and a fall in the general level of prices. d. Exports will decrease and imports will increase. e. This process will ultimately lead to self-correction of the trade balances. J.M. Keynes " Notes on Mercantilism" - He credited the mercantilists with their insight on acceptable policy to stimulate economic development. - He declared as sound the belief of the mercantilists that increases in the quantity of money would increase output. - He held on the belief of the mercantilists that a favorable balance of trade would increase investment spending and thus raise the level of income and employment. Theoretical contributions of the mercantilists: 1. Explicit recognition of the possibility of analyzing the economy. 2. Legislation if wisely enacted could positively influence the course of economic events. 3. Economic analysis would indicate what forms of government intervention would effect a given end. 4. Government intervention must not be haphazard 5. Specie is not a measure of the wealth of nation. 6. All nations could not have a favorable balance of trade. 7. Trade could be mutually beneficial to nations. Physiocrats: - The correct formulation of economic policy presupposed a correct understanding of the economy. Economic theory therefore, is a pre-requisite of economic policy. - Natural laws governed the operation of the economy and that, although these laws were independent of human will, humans could objectively discover them as they could the laws of natural sciences. - Wished to discover the nature and causes of wealth of nations and the policies that would best promote economic growth. - Their economy produced more goods than were needed to pay their real costs to society of producing these goods. This meant that a surplus was generated. - Had the idea of " net product" - - They were focused on physical productivity rather than value productivity. - Based their theories on Quesnay's Economic Table. - They believe on the interdependence of these sectors Physiocratic Economic Policy - Basic motivation for economic activities of human beings was the desire to maximize gain. - Free competition would lead to the best price and that society would benefit if individuals follow their self-interest. - The only source of a net product was agriculture. The burden of taxes would ultimately rest on land. A tax on labor would be shifted to land since competition had already assured that the wage of labor was at a subsistence level. - The proper role of the government was to follow a policy of laissez faire- to let things alone. - Adopted the seeds of concepts of the scholastics, mercantilists and physiocrats. Three major writers; 1. Adam Smith 2. David Ricardo 3. John Stuart Mill A. Scholastics- the church to adjudicate morality of economic activities. B. Mercantilists-advocated government intervention. C. Physiocrats- " market provide harmonious solutions to the conflicts , hence, the policy of laissez faire, " to let things alone". 1. Free, unregulated markets and maximum individual freedom. This might provide means by which economy might function most efficiently. - Individual and businesses should be free to trade without government interference. 2. Discover forces that determine the rate of economic growth. ( cultural, political, sociological and historical factors ). 3. Study of markets and price system as an allocator of resources giving an impact to economic growth. 4. Departure from mercantilists' thinking. - Ability to uncover laws governing operation of economy. - After uncovering these laws, they remedy defects - They remedy defects by changing the institutional structure or allow government intervention - It depends upon the division of labor or specialization. - Example is a measured output per worker in factory producing straight pins. When each man performs every operation required to produce a pin, output per worker is very low, but if the production process is divided into number of separate operations, each worker specializing in one of these operations, a large increase in output per worker occurs. - One disadvantage is that workers are given repetitious tasks that soon become monotonous. Human beings become machines and are dehumanized by the simple, repetitive, boring tasks they perform. - The division of labor depends upon the "extent of the market", and upon the accumulation of wealth. The larger the market, the greater the volume that can be sold, and the greater the opportunity for division of labor. - A limited market permits only limited division of labor. - The division of labor is limited by the accumulation of capital because the production process is time-consuming. There is a time lag between the beginning of production and the final sale of the finished product. a. **Productive and unproductive labor** - The accumulation of capital, also determines the ratio between the number of laborers who are productively employed and those who are not so employed. - Labor that produces vendible commodity is productive labor, whereas, labor producing a service is unproductive. - The activities of the capitalists, each resulted in an increased output of real goods, were beneficial to economic growth and development while the expenditures of the landowners for servants and other intangible goods were wasteful. - " A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude of menial servants". lesson 1 guide questions 1\. Make a figure or paradigm to show the history/ stages of development of Political Economy as a field of study. 2\. In your own words, differentiate needs to wants ( one sentence each ) and give one example each. 3\. Give one most significant insight which you learned form each of the three writers of  political economy. 4\. Compare ideas of Plato to Aristotle in terms of private property ownership 5\. What to you is \" just price \"? One sentence only.