Pre Classical Economics PDF

Pre Classical Economics Saturday, October 29, 2022 1:43 PM Pre Classical Economics 1. Evolving economic ideas that are related to microeconomics a. Ancient Greek b. Medieval Period 2. Evolving economic ideas...

Pre Classical Economics Saturday, October 29, 2022 1:43 PM Pre Classical Economics 1. Evolving economic ideas that are related to microeconomics a. Ancient Greek b. Medieval Period 2. Evolving economic ideas that are related to macroeconomics (Introduction of International Trade) a. Mercantilism b. Physiocrats Econ 109 (History of Economic Principle) Page 1 Ancient Greeks Saturday, October 29, 2022 1:43 PM Ancient Greeks  Economics  Came from the Greek words → "oikos" means household → "nomos" means management  There is a connection between household and economy (on how to manage the household is the same in managing the economy)  Current Time Events  Management ○ Art of administration not a science of economics → Book of Xenophon (how a man is training his wife to manage the household → Concept of economics came from the most basic unit of the society which is the household. → Democracy and Absolute Authority (Macro and Micro Economy)  Anthropocentric → Man is the center of all things, → Focus is on leadership of a person in a certain household  Agricultural → The society is very agricultural  Modern Economics originated  Efficiency  Resource Allocation  Subjective Value  Hedonic Calculus  Diminishing Marginal Utility → We will see how this 5 basic economic concepts evolve into modern economic concepts.  Major Contributors  Xenophon ○ Student of Socrates ○ Author of the book Oeconomicus → He tackles household management → Interview of Socrates to a male (on how male household train his wife in managing the household) → Focus on leadership of a certain household (human is the center of all things) → It is the people who will lead the organization and society ○ ECONOMIC SURPLUS → Increase in economic surplus can only be achieved through organization, skill (of leader) and division of labor (specialization) □ According to Adam Smith, pin factory: to be highly productive, the work must be fully divided and specialized. □ Every stage of the process, there must be a highly specialization to be more productive. ○ Diminishing Marginal Utility → "the greater the number of superfluous dishes set before a man, the sooner a feeling of repletion comes over him Plato Econ 109 (History of Economic Principle) Page 2  Plato ○ An absolutist ○ Ends are more important than the means ○ Division of Labor → Origin of cities and exchange to establish efficiency and productivity ○ Marketplace and money as a medium of exchange  Protagoras ○ A relativist ○ Means are important than the ends ○ Anticipated two of the most basic elements of modern economic theory → Market maximizes utility through its functions of allocating resources → The use of hedonic measurement in the evaluation of choice  Aristotle ○ EQUITY AND FAIRNESS ○ A student of Plato ○ Subjective Marginal Utility ○ Exchange (surpluses) makes both parties better off -- EQUITY → Isolated Exchange □ Two parties exchanging goods based on their subjective preferences without considering other market opportunities They don’t consider other opportunities or choices ,it is important they just need to trade with each other. □ "price" (since isolated market) is set by a judge of arbitrator to ensure EQUITY In modern economics (Monopolist, they cannot set the price higher than the suggested price; the prices is being monitored by the government) → Market Exchange □ Two parties exchanging goods considering other market opportunities Free market, there are many opportunities available (many suppliers and sellers) Perfectly competitive market (each of the party considering all the opportunities available) □ "price reflects the interest of many buyers and sellers -- equity Pricing in a perfectly competitive market. (Market Price) Interaction of demand and supply in a perfectly competitive market ○ Private property promotes economic efficiency → Supported by Aristotle → Promote private property to achieve economic efficiency ○ Equilibrium equating subjective utilities or interest (demand and supply) → Somehow there is a concept of market equilibrium → Ensure fairness in a society (between the buyer and the seller) ○ Scarcity and use value → Water and Diamond Paradox □ Diamond is scarce thus it is more preferred □ Water is less preferred because it is abundant ○ Properties of money → Further explored money by Plato 1. Durability 2. Divisibility 3. Convenience 4. Uniformity 5. Intrinsic value ○ Condemned Interest → For his, it is unnatural and not ethical to give interest of money, because of the idea that money is just a medium of exchange. → It is not to earn profit, because it is against the natural order. Econ 109 (History of Economic Principle) Page 3 Mercantilism Saturday, October 29, 2022 1:43 PM Mercantilism  Definition  Is applied to the doctrine or policy that the economic interest of the nation as a whole are more important than those of individuals or parts of the nation → Very different in modern economics (we all know that the ultimate measure of living is GDP per capita and not the GDP.  Goals  Exports over imports (favorable balance of trade policy) → An economy should export as much as possible and it should discourage imports to accumulate bullion, which is their medium of exchange in their times. → As much as possible, they discourage imports, however, imports are allowed if it is low value goods that will be used as raw materials to produce high value goods that could be exported to other countries. → We can relate if to Spanish Colonization in the Philippines in the 16th century when Magellan came to the country. He started the expedition of trade routes for spices.  Accumulation of bullion  Dutch Puzzle  Influence of this perspective → In the times of England and France where curious about how Netherlands became rich. → In terms of resources, Netherlands is not that rich. Thus international trade make it rich → International trade that is of the Zero-Sum Game  Contributions  International trade -- zero-sum game → The country should export as much as possible, and discourage imports to reap all the benefits, otherwise they will lose if they imports goods, especially if it is high value goods. ○ Difference from the modern economics on international trade → Mercantilists did not recognize the mutual benefits gained from trade □ David Ricardo (proponent of Comparative Advantage) Mercantilist did not recognize that importation is not bad at all, as long as you import goods that would be cheaper for the economy to consume than to have produce and consumed at a higher price domestically. → They did not see the price effect of increase in money supply in the domestic economy. □ Mercantilist did not recognize the Principle number #9, the more money in circulation, the general prices will increase. □ They did not consider the effect of accumulation of wealth into the domestic economy Econ 109 (History of Economic Principle) Page 4   Prosperity in the sense of increased in per-capita income was secondary to the concentration of economic power in the hands of the state → The core of Mercantilism (what is more important to the mercantilist is the economic interest of the nation as a whole not the interest of the individuals comprising the nation) ○ Difference form modern economics → GDP per capita is the ultimate measure of standard living of a country. □ Living right now is the standard of living of Filipino have improved or worsened  Establishment of legal monopolies through franchises and patents → Mercantilist are mostly Merchants, so they were asking for government protection against competition.as much as possible, they want to produce their goods alone without competition as self-interested individuals. → In line with the government's goals of encouraging exports. In which, if the government will protect this merchants to monopolize a certain good, then they will be able to export to other countries.  Assembling and keeping statistics on real-world quantities → The legacy of the Mercantilist, start of the current day national income accounts (e.g. accounting and recording statistics) → → Mercantilism is just a lose system of economic ideas, Mercantilist did not belong to a certain group of intellectuals. They are individualistic nature (e.g. Self-interested merchants), thus they are not unified or systematic.  Philipp Wilhelm von Hornick's Nine Principal Rules of National Economy are: → He collected all the mercantilist ideas about the National Economy 1. That every inch of a country's soil be utilized for agriculture, mining, or manufacturing 2. That all raw materials found in a country be used in domestic manufacture, since finished goods have higher value than raw materials. 3. That a large, working population be encouraged 4. That all export of gold and silver be prohibited and all domestic money be kept in circulation 5. That all imports of foreign goods be discouraged as much as possible 6. That where certain that imports are indispensable they be obtained at first-hand, in exchange for other domestic goods instead of gold and silver 7. That as much as possible, imports be confined to raw materials that can be finished at home 8. That opportunities be constantly sought for selling a country's surplus manufactures for foreigners, so far as necessary, for gold and silver. 9. That no importation be allowed if such goods are sufficiently and suitably supplied at home.  Lead to the Fall of Mercantilism Economic Liberalism → It is campaigning for freer trade and market. → During this time, economic liberalism really started its momentum, until we have Physiocrats and Classical Economics by Adam Smith. → Mercantilism is focuses mainly on grants of franchises and patents and protection domestic industry to produce exports and discourage freer international trade through wars. Econ 109 (History of Economic Principle) Page 5 Econ 109 (History of Economic Principle) Page 6 Medieval Period Saturday, October 29, 2022 1:43 PM Medieval (475-1500 AD)  Happenings  Religious doctrines and market mechanism influenced the economic thought during the period → Foundation of economics by clergyman is all about religion  However, the focus was on justice or morality and not on exchange → Christianity: the "right" to use material things" ○ Having the accumulation of material things is not wrong as long as you have to use this materials gist in the right way. → Islam: Economics as means to an end which is salvation ○ Is not bad to engage in economic activities as long as this activities will lead you to salvation in the end.  Justice and morality of a person is on religion, so there has been a neglect to exchange  More on the reaffirmation of what the Ancient Greeks have already contributed in the pool of economic ideas → Economic Ideas mostly focuses on what is JUST AND FAIR in a society → Founding influence of the economic ideas was RELIGION  Major Contributors  St. Augustine → Most prominent scholar during Medieval period ○ Subjective Theory of Value → There is a subjective value, every person have different value on things.  Abu Hamid al-Ghazali ○ Market Evolve as part of the natural order of things- morality → What is natural is moral ○ Trade → Adds value to goods by making them available at a convenient time and place ○ People are self-interested individuals → People maximizes its satisfaction every time he or she decides to certain things. □ Modern Economics: Adam Smith said that buyers and sellers are self- interested individuals. □ They interact with each other and meet at the point where they agree at the certain price level and output level which is a win-win situation for both parties. □ They maximize producer and consumer surplus ○ Output resolves itself into primary production (agriculture), secondary production (manufacturing) and tertiary production (services) ○ Division of labor → specialization ○ Condemned interest (or Usury)  Ibn Khaldun ○ Labor theory of value → He believed that one cannot produce certain something without labor, thus labor is the center of all value. → There is not yet significant role of technology in production, thus it is more labor intensive. Albertus Magnus Econ 109 (History of Economic Principle) Page 7  Albertus Magnus ○ "If the market price does not cover cost of production, production will eventually cease" → Supportive that labor is the source of value (but there is an additional expenses) should be reflected to market to cover the total cost of production  Thomas Aquinas ○ Repeated the concept of EXCHANGE and USE VALUE by Aristotle → Reaffirm the concept of use and exchange value ○ Demand theory of value → Human usefulness of goods □ Subjective value Econ 109 (History of Economic Principle) Page 8 Physiocrats Saturday, October 29, 2022 1:43 PM Physiocrats  Physiocrats  Claimed themselves as "economists" ○ Advocate for Economic Liberalism, freer trade (would reflect to their believe of the Natural Law) → If the government intervene, then it would be against the natural law ○ And they believe in the "rule of Nature" which is Physiocracy ○ They have become more systematic and their approach is more of their observation and contribution and their economic ideas has become more scientific.  Physiocracy  Means "rule of nature"  Scientific Method → Started economic analysis through Scientific Approach → Embodied in the Tableau Economique by Francois Quesnay  Methodical observation  Arranged and collated facts according to their causes  Tried to form an analytical system based on theoretical model  Contributions  Francois Quesnay ○ Tableau Economique → → Shows that the flow of income and expenditure in an economy such that policies that would enlarge the circular flow was consistent with economic growth □ Policies that would shrink the circular flow would have of course be against economic growth It is actually the Circular Flow diagram of an economy (simple model of how the economy works as a whole) but on different perspective → Economic growth was brought by productivity in agriculture □ Physiocrats believe that economic growth was by agriculture Focus on Agricultural Development where it can lead to higher productivity and then economic growth ◊ Slight different in modern circular model in the perspective that if focuses more on agriculture (farmers will produce goods that will be used by the artisan and proprietors which in return, they will exchange it with money in return to this goods) ◊ Physiocrats believe that economic growth came from Econ 109 (History of Economic Principle) Page 9  ◊ Physiocrats believe that economic growth came from agriculture because they were the start of the production.  Net products (surplus) which is the measure of economic growth came from the agricultural sector. – They focuses more on the development in the agricultural sector (agricultural capitalism to achieve economic growth) Econ 109 (History of Economic Principle) Page 10 Classical Economics Saturday, October 29, 2022 1:43 PM Classical Economics → His period extends roughly from the appearance of Adam Smith's The Wealth of the Nations in 1776 to the death of John Stuart Mill in 1873. 1. Adam Smith 2. Thomas Malthus 3. David Ricardo 4. Jeremy Bentham 5. Nassau Senior 6. Jean-Baptiste Say 7. John Stuart Mill Econ 109 (History of Economic Principle) Page 11 Adam Smith Saturday, October 29, 2022 1:43 PM Adam Smith  Biography  Born in Kircaldy, Scotland in 1723  Died in 1790  Father of Economics → Well known in his book "Wealth of the Nations"  Major Contributions  Man as a creature of self interest → Every man decides according to his/her self-interest and create decision that will maximize his/her own satisfaction.  Invisible Hand → Interest of the society is promoted by pursuing individual interest → Promoting the interest of the society as a whole is not pursued naturally, individuals just decide based on their interest, then it will just achieved the goal of the society as a whole.  How can we achieve the goal of the society, if each individual is self-interested?  We achieve the interest of the society as a whole through COMPETITION  Competition → Effective regulatory force → Natural mechanism that drives producers and consumers into equilibrium ○ Market where there are self-interested buyers and sellers will meet at one point which is the market equilibrium that is being driven by competition. ○ At market equilibrium, consumer and producers surplus are both maximized -- Social Welfare are being maximized at market equilibrium.  Monopoly → Antithesis of competition that destroys economic welfare of the society  Against Mercantilist idea of Monopoly (which is the accumulation of bullion; Exports over imports; where the mercantilist are vying for government protection) ○ Adam Smith is against this idea because it will remove the order of competition. ○ Against on the government intervention, thus he is more on the side of Laissez Faire -- Let Alone Policy (the market alone do its business and that would just bring maximum social welfare)  Grounded by the doctrine of natural law in the context of competitive market → Consistent with the Physiocrats but not all (but the grounding principle are the same -- Natural Law) ○ Physiocracy follows the Natural Law (Liberalism -- let the market do its own because that is what is natural, and any government intervention is unnatural. ○ The same grounding principle in Medieval Period, where the clergyman follows the natural law, (clergy uses natural law to claim justice and morality)  The chief political and economic problems that smith sought to define and resolve were the relation of the individual to the state and the proper functions of the state in relation to its members. → This does not mean disregarding the government in the bigger picture. Government is important in terms of administration, providing national defense and managing public goods for the interest of the public. Econ 109 (History of Economic Principle) Page 12  Adam Smith vs Physiocracy → They both follow Natural Law (more liberal towards economics) ○ Disagreements of Adam Smith to the Physiocrats 1. Narrow focus on agriculture as the source of wealth → Physiocrats -- economic growth is brought by productivity in the agricultural sector  The tableau Economique → Adam Smith -- national wealth should not be focused on agriculture, (however in this times, there is now the advancement of society in terms of capital accumulation, technology, tools and producing goods and services -- and labor is not the source of value 2. Growth in national wealth vs Growth of net product → Physiocrats -- Growth of the Net Product (Surplus) → Adam Smith -- Growth in National Wealth is should be the focus (based on the productivity level of a country)  In Modern Economics, this term is the same as the Gross Domestic Product (looking at the productivity level of a certain economy)  Theory of Value  Value in use → Expresses the utility of some particular object  What is the utility of the person in using a good, then that would be the value in use  Value in Exchange → Power of purchasing other goods which the possession of that object conveys  Adam Smith focuses more in value in exchange, labor as a source of value (the value is exchangeable)  Relate to money as a value of exchange "good which have higher value in use have less value in exchange; the more utility you have in using a good, the lesser a person want to exchange that good. (vice versa)  Labor as a Measure of Value  Labor → Is the real measure of the exchangeable value of all commodities'  In Medieval Period, Labor is the source of value by Ibn Khaldun  Reaffirmed by Adam Smith, labor is the real measure of exchangeable value of all commodities.  A product cannot be produced if there is no labor, thus the cost of labor is also the cost of the exchangeable value of product. → "but later in realized that it is valid only for primitive societies where labor represents the main (if not the only) factor of production.  Then Adam Smith reject his affirmation after there is the concept of advance societies, when there is a capital accumulation (thus, labor is not the main factor of production) Econ 109 (History of Economic Principle) Page 13  Prices  Nominal Price → Affected by changes on the purchasing power of money  Real Price → Unaffected by the changes on the purchasing power of money (or Inflation)  Real GDP excludes the influence of inflation, so we can just compare the productivity level of an economy between a two periods of time.  In the more advanced societies → Wages, profit and rent are the three original sources of all revenue as well as all exchangeable value  There have been changes from Labor as the source of exchangeable value (he developed the idea of prices, there are three sources of exchangeable value -- Wages (Labor), Profit, and Rent (Capital))  Wages  The natural wage is a subsistence one  Subsistence wage is that the worker is willing to accept before the worker is willing to have his/her family  Wages-fund concept → A theory of wages (reflects the cost of labor) and a theory of capital (reflects the cost of capital accumulation) ◊ Recognized that labor is not the only source of value, that it should consider the factor of capital. → The capitalist would provide tools, capital to workers that would be utilized to work -- in return the workers will receive wage-goods such as food, clothing and shelter -- then there is production, profit --and this profit should be invested to more capital, machines or tools for the production -- that will lead to higher hiring for workers, more income for workers -- increase wages -- increase the number of people at work -- more capital has been introduced to production process -- increase aggregate demand for the economy (also means the productivity of the economy) -- National Wealth (the same concept as the GDP) ◊ If there is profit -- save or invested in new capital (against the idea of hoarding of money) -- to increase output -- increase productivity -- increase in National Wealth  Money is viewed as a medium of exchange only, not as a store of value and that savings should be invested and not hoarded  Inequalities of wages and profits arise from the nature of employment → There are differences and inequalities in wages, and the sources of those inequalities would be in the nature of the employment. (employees should be trustworthy, skillful, higher level of education -- then this requirements required higher level of wages)  Profit and interest  Profit → Revenue derived from capital by the person who manages or employs it → Capital is included to all the ideas of Smith ◊ The sum of two payments  A return on capital advanced  A compensation for bearing risk – Risk is being accounted in the profit (from employing the capital) Interest Econ 109 (History of Economic Principle) Page 14   Interest → Revenue derived from capital by the person who does not employ it himself, but lends it to another ◊ It is return from lending the capital  Rent  The price paid for the use of land  Naturally a monopoly price → Because it depends on the type of land (land suitable for vineyard -- the owner could monopolize the production of the grapes --because they have the only source for that specific land)  Residual payment after all other costs of production, including ordinary profit are realized → Rent is price determined instead of price determining ◊ Example: cost of production -- Wages, Profit -- Total Revenue -- Rent ◊ In Modern economics -- Profit is the residual payment after all factors of production is realized.  Is reflected as the Alternative Cost → Opportunity cost if using the land  Market Price vs Natural Price  Natural (Equilibrium) Price → Determined by long-run costs of production  Market (actual) Price → Determined by the interaction of supply and demand in the short run  Effectual demand → Suggests the existence of a downward-sloping demand curve  Demand curve is downward sloping, as price increases, the lesser the quantity demanded → Quantity Supplied < Quantity Demanded, then there is a shortage; then it would lead to increase in prices -- the new price is the actual price (market price); it is the deviation from Natural or Equilibrium Price. → Quantity Supplied > Quantity Demanded , then there is a surplus; in order to sell all the goods -- decrease in price -- the new the new price is the actual price (market price); it is the deviation from Natural or Equilibrium Price. "but even Smith recognized that the real markets often deviate from the ideal market During his time, the British government even have policies that in accordance to Mercantilist ideas such as granting of Monopolies, thus the economy is not totally liberalized -- we can still see the influence of Mercantilist -- thus Adam Smith recognized that there is ideal, however there is still happening in the reality.  The Critical Role of the Entrepreneur → Did Adam Smith really discussed the critical role of entrepreneur in a capital market  According to Schumpeter → Smith's focus was on the concept that the merchant or master accumulates capital and hires industrious people to work  To use the capital to work and produce -- earn profit in order to save and invest.  Idea of Smith that can relate to the entrepreneurs (entrepreneurs just accumulate Capital) According Enzo Pesciarelli Econ 109 (History of Economic Principle) Page 15   According Enzo Pesciarelli → (have to be careful in understanding Smith's idea of entrepreneur) → Smith have three types of Entrepreneur in capitalist market -- the adventurer, projector and undertaker) → According to Enzo, Adam Smith's undertaker is like an entrepreneur that is critical in a certain market → Enzo sees that these are the critical role of entrepreneur according to Smith  Smith's undertaker faces risk and uncertainty  Smith's undertaker formulates plans and projects in an effort to earn profit  Smith's undertaker seeks out the necessary capital for implementation of his planned undertaking  Smith's undertaker combines and organizes the productive factors  Smith's undertaker inspects and directs production  Smith's Macroeconomics, Blueprint for Economic Development 1. Division of Labor ○ Three advantages of division of labor, each leading to greater economic wealth ○ An increase in skill and dexterity of every worker ○ The savings of time ○ Invention of machinery → Because there is now a focus on the role (specialized role) → Smith considers that innovation is part of the machinery (the society where he was in was starting to advanced) 2. Wealth, Income and Productive and Unproductive Labor ○ National Wealth → Measured by the exchangeable value of the annual physical produce of the land and labor of the country → Productivity level of the certain country (National Wealth) -- Take note that it is only considering the PHYSICAL PRODUCE. ○ Productive Labor → If the good is physically produce -- productive labor → Produce a tangible good of some market value ○ Unproductive labor → Production of intangibles and were not regarded as activities furthering economic growth → Services of the academe, other intangible services (military) ○ "Main difference to Modern Economics which we account for GDP are those intangible services (marketed services) ○ They are not disregarded, it is just they are not accounted for the National Wealth 3. Role of Capital ○ Adam Smith recognize that Capital belongs to the factor of production, and it is not just labor ○ Capital accumulation keeps growth going Econ 109 (History of Economic Principle) Page 16  i. ▪ It will start from the division of labor -- then specialization -- efficiency -- however what the growth keeps growing is the Capital Accumulation. → So the goal is to increase productivity ▪ Higher level of consumption means more aggregate demand -- more productivity -- more output --more national wealth  Why do we consider his as the Father of Economics  His The Wealth of Nations caused a change in people's attitude toward trade and commerce ○ His book is very revolutionary, which causes change. ▪ Mercantilism -- monopoly is the powerful market structure (trade is very restricted) ▪ Physiocrats -- there is a start of dawn of capitalism ▪ Adam Smith -- publish the book that introduces the Laissez Faire and about free trade (very revolutionary -- shift of economic idea)  The perception of a natural social order changed, and the absence of any form of central planning ○ Smith did not disregard the role of government  Adam Smith led the way by providing a framework for analyzing the economic questions of income growth, value and distribution. ○ Concept of Market have been systematic, which is now the study of Economics ○ We use market has been a tool to for efficient allocation. Econ 109 (History of Economic Principle) Page 17 Econ 109 (History of Economic Principle) Page 18 Thomas Robert Malthus Saturday, October 29, 2022 1:43 PM Thomas Robert Malthus  Biography  Born in 1766 and died in 1834  Academic researcher and teacher  First professional economist of Cambridge  Author of an essay on the Principle of Population as It Affects the Future Improvement of Society where he explained his "Theory of Population" → Highly debated theory on Population  During classical economics, Utilitarianism is very prevalent -- the greatest happiness for the greatest number of people → Very positive and very optimistic views  However, Malthus is very pessimistic → His economic ideas focus more on the negative side (threat to the society); positive situation is not present all the time. → essay on the Principle of Population as It Affects the Future Improvement of Society (a pessimistic answer to the optimistic views during Malthus time which is the Theory of Population)  Two (2) postulates on the Theory of Population 1. Population, when unchecked increases in a geometrical progression of such a nature as to double itself every twenty five years 2. Under even the most favorable circumstances, the means of subsistence (i.e., the food supply) cannot possible increase faster than in arithmetic progression "Population when remain unchecked will grow faster than food production" → There have been many people who debated this concept as such 1. There have been no empirical bases for this claims (encourage intellectuals to provide empirical data to prove his claim) 2. Modern Economics have now basis to accept/reject this theory  Actual checks to population growth (to avoid his Theory; can effectively decrease the population -- very pessimistic view)  Positive checks → Disease, increase in death rate, war, famine  Preventive Checks → Moral restraint, contraception, abortion  Population Measurement  Increase in Population ○ Procreation > Cumulative Effects of Checks  Decrease in Population ○ Procreation < Cumulative effects of checks  Unchanged Population ○ Procreation = cumulative effects of checks  Theoretical Limitation  overlooked checks in advanced economics → Families limit offspring due to reasons other than financials (focused more on career) → Technological advancement (in the past -- there is no modern family birth control methods) Econ 109 (History of Economic Principle) Page 19 David Ricardo Saturday, October 29, 2022 1:43 PM David Ricardo  Biography  Born in London of a Jewish immigrant stockbroker (very well versed in stocks and investment) ○ His parents are investor  Greatly influenced by Adam Smith in his economic ideas  Analytical foundations  Classical Rent Theory ○ Rent (Agricultural Rents) → Always the difference between the produce obtained by the employment of two equal quantities of capital and labor → Land rent -- agriculture is the major economic activity during his times  Theory of value → Value is equal to the real cost of labor (wages) and capital (profit) -- (excluding land rent) → Ricardo and Adam Smith have the same idea that incorporated labor and capital into their theory of value. "but empirically, Ricardo argued that relative quantities of labor are the major determinants of relative market values" → If you compare the two market value of the production level -- and if you get the market value of these two -- relative difference between this two is more on the difference in the labor employed in those production processes. → Major factor of production is Labor even though there is already capital in the scenario  Malthus' Population Principle → Agreed about Malthus on his Theory of Population on his economic ideas and analysis  The Wages-fund doctrine → Adam Smith -- Capitalist would provide tools to workers -- workers will work -- profit from production -- profit is saved and invested for capital accumulation -- new capital accumulated -- more productivity, labor -- increased in average wage -- increase in income per capita -- increase in aggregate demand -- economic growth  Malthus vs Ricardo about the Corn Law (View on Trade)  Corn law → During classical view, encourage domestic producers to produce their own corn in order to prevent the importation of corn form other countries. ○ Malthus → In favor of the Corn Law Protectionist policy -- Close and direct link between the general level of wages and the price ◊ Domestic firm will be encourage to produce corn -- it would increase the demand for labor -- increase the level of wages -- prices will increase -- Labor cost will increase -- income for people Ricardo Econ 109 (History of Economic Principle) Page 20  ○ Ricardo → Against the Corn Law (he is against on Malthus) Advocate of Free Trade (the same on Adam Smith) There is a close and inverse link between wages and profit ◊ If there is an increase demand for labor and wages -- wages increase (is a cost of production) -- profit will definitely decrease -- profit is used to save and invest (for capital accumulation -- thus there will be a lower chance for economic growth "Response of Malthus to Ricardo's claim: Malthus singled out insufficient aggregate demand as a cause of weak investment incentives and consequent reduction of profits → It is not about increase in wages would lead to decrease on profit, it can also be the insufficient demand -- would cause to a weak investment incentive -- reduce profit  Comparative Advantage  There are mutual gains from trade as long as nations specialize in the production of lower cost goods → Consistent on the view about the Corn Law -- where he believes that it is okay to import corn from international market as long as it is much cheaper that it can domestically produce.  The Classical Growth Theory → The same as Solow Growth Model -- poor countries can actually catch up with the rich countries -- investment and savings are the key) → More Capital Accumulation -- increase in productivity level (GDP) -- poor countries can catch up to rich countries. → Rich countries would reach the maximum savings and investment and capital accumulation -- growth after the maximum point (steady state level) will be negative when there is a further growth of accumulation.  As long as profits are positive (more savings), the capital stock will increase, and the increased demand for labor caused by a growing wages-fund will temporarily increase the average wage rate. But when wage rates rise above subsistence, population increases (because people have now the capacity to spend more, because it is above subsistence). A larger population requires a greater food supply, so that, barring imports, cultivation must be extended to inferior lands. As cultivation pushes outward aggregate rents increase and profits fall, moving the economy toward a long-run equilibrium or stationary state. Econ 109 (History of Economic Principle) Page 21   → Point Y (productivity level), if point P1 (is the population) -- Y1 is the output -- S1 is the subsistence wage -- Profit is positive (output is way more than the subsistence wage) ○ Positive profit would mean more capital accumulation -- increase in capital stock will also increase demand for labor -- increase working population -- increase subsistence wage (if there is higher subsistence wage -- possible increase in population ----this process continues until it reaches Y* ○ Y* (profit = 0, and there is no room for capital accumulation); P* is the total population ○ David Ricardo believe that it can reach into the stationary level in the society -- especially it has been extended to the gap of using the land and population growth continues to rise.  Theoretical Limitations (overlooked checks in advanced economies  Families limit offspring due to reasons other than financial  Technological advancement Econ 109 (History of Economic Principle) Page 22 Jeremy Bentham Saturday, October 29, 2022 1:43 PM Jeremy Bentham  Biography  Born on 1748-1832  Lawyer  Major Contributions  Utility doctrine (Doctrine of Self Interest) → In terms of the pleasure-pain principle ▪ He used the Felicific Calculus  Felicific Calculus → Attempt to measure economic welfare scientifically by summing up (monetize) collective pleasures and pains □ Protagoras -- started to study choice in terms of pleasure and pain (even hedonic calculus to pleasure and pain) ▪ Two interpretation of the Utility 1. Natural Identity of interest → Spontaneous order and harmony (in the society) ◊ Basic foundation of Adam Smith of his doctrine -- if we follow the self-interest of every individual in the society will lead to the economic welfare 2. Artificial identity of interest or Utilitarianism → Denies the natural harmony → Focuses on the results and consequences of a certain choice or action ◊ Jeremy Bentham believes that self-interest is not all the time will lead to the best of the society -- sometimes self-interest will hurt the society ◊ In choosing and deciding to self-interest, it should always consider also if that certain self-interest will lead to the best for the society. "the greatest happiness for the greatest number" (should be followed) □ Application: International Trade □ Philippines is the rice importing country Econ 109 (History of Economic Principle) Page 23 → Philippines is the rice importing country ▪ import rice because the price domestic price is higher than the price at the world market. ▪ Government think of what is the best for the economy and the general consumers. ▪ Goal: to provide Filipino consumers affordable rice □ Bentham: this decision is justifiable □ Issue: how about the Local Farmers? (however, in every program there will be losers and winners) -- it is not bad to go on imports as long as the gains from trade will have an additional welfare) Econ 109 (History of Economic Principle) Page 24 Nassau Senior Saturday, October 29, 2022 1:43 PM Nassau Senior  Biography  Born in Berkshire in 1790  Law graduate  Chair of Political Economy at Oxford in 1825  Government official  Major Contributions  Defined economics as the science of Wealth → Bentham -- focuses on happiness for the greatest number of people → Senior -- economics is the science of wealth not happiness  Attempted to unify and systematize economic theory from this time. → What a bold initiative in his side.  Use facts and practicality in his analyses → Senior -- makes sense on the Malthus' Theory of Population but not confident on the accuracy of the theory because of the lack of empirical support.  Senior vs Malthus  The normal state of affairs in industry is Increasing Returns → Malthus -- Decreasing returns ▪ Increase in population will increase in capital until that even the inferior land (or less productive lands) are used into production -- util it reaches the stationary levels ▪ Grounded more on the Diminishing Marginal Returns → Senior -- Increasing returns ▪ Labor skills increases in relation to increased population and capital thus the normal state of affairs in the industry is increasing return  Senior vs Smith  Smith -- economic wealth focuses more Physical goods which are product of productive labor → His Theory of Value -- sources of value are wealth, profit and rent  Senior -- Wealth includes all goods and services that: 1. Possess utility 2. Are relatively scarce, and 3. Are capable of being transferred → Senior- it should not only consider the physical goods but also services should also be accounted for National Wealth → Both utility (demand factors) and scarcity (supply factors) together determine value  Capital and Interest → His original contribution to Economics  Abstinence (Savings) → Postponement of consumption for capital accumulation (Savings) for the future → Abstaining from the unproductive use of capital  Interest (Rewards for saving) → The reward for abstinence The same idea of savings and interest in the modern economics Econ 109 (History of Economic Principle) Page 25 Econ 109 (History of Economic Principle) Page 26 Jean-Baptiste Say Saturday, October 29, 2022 1:43 PM Jean-Baptiste Say  Biography  1767-1832  Industrialist and scholar  Major Contributions  Say's Law → Supply creates its own demand ▪ Supply first and demand will follow ▪ Implied that disturbance from unemployment would be temporary because a free enterprise economy was self-adjusting □ It has its own way of coming to the equilibrium. □ Unemployment will be temporary, after that, it will just return to its employment rate. ▪ Market glut from underconsumption is impossible □ Oversupply from underconsumption will be impossible. □ Say -- For example, the Philippine economy has produced 100 unit of goods, the market value for this specific good will become and income to the laborers in the form of wages -- those wages and income will be used for the laborers to pay for those 100 goods produced in the economy. (so it will return to its supply) Underconsumption is not possible -- what if part of the income will be saved -- According to Say, yes savings is possible, but savings for future consumption will still be used for future consumption will still be used for consumption or buying goods for the economy. Econ 109 (History of Economic Principle) Page 27 John Stuart Mill Saturday, October 29, 2022 1:43 PM John Stuart Mill  Biography  1806-1873  Supports utilitarianism  Attempted to summarize and synthesize existing economic knowledge  Economics as a broad field and a part of a larger science of man → The same with Nassau -- goal is to unify, synthesize, summarize different economic knowledge during their time.  Major Contributions  Capital, capital accumulation, population growth and technology play a crucial role in production and economic development  Diminishing marginal returns and declining incentive to invest limit economic growth → Diminishing marginal returns and profit -- diminishing ability to invest → Less investment, capital accumulation and productivity -- less economic growth  Believer of Say's Law at first but was also the earliest writer to saw a period of general glut that limits the Say's Law → Mill -- whole income of a person, it is possible that a part of it may be used for consumption and part will be save -- it will result to underconsumption -- because not all income is being consumed.  Supply and Demand → Senior -- Theory of value -- both demand factors, utility and scarcity (or supply factors) determine the value of a good → Mill -- Supply and demand ▪ Static-equilibrium price formation ▪ Competition equalizes quantity demanded and quantity supplied through value adjustments □ Demand and supply are being pushed to equilibrium ▪ Demand and supply schedules  The Doctrine of Alternative Costs (Mill vs Ricardo)  Ricardo -- land rent was not a cost of production (because land has no alternative use -- used for agricultural production)  Mill -- land rent is considered a cost of production once alternative uses of land are identified → For example, land is being used in two ways: agricultural production and residential purposes ▪ Benefit will be gained for using the land would have become the cost.  Principle of Economics of Scale  Two causes of growth 1. Division of Labor → Increase efficiency -- increase productivity level -- higher economies of scale 2. Introduction of processes requiring expensive machinery (that could produce volume of goods) → Machinery -- production of goods and services -- higher economies of scale  Non competing labor groups  Disparities that persist in certain labor market cannot be explained by the principle of competition ○ There are really non-competing labor groups in the labor market → Example: an electrician cannot compete with a chef Econ 109 (History of Economic Principle) Page 28  Stationary State and Wealth Redistribution  Stationary state as the launching pad for an improved social system ○ Ricardo -- stationary state where the economy will reach to the point of its maximum (profit = 0) ○ Mill -- he just proposed that it can be used when the economy has reached the stationary state or maximum profit -- we can use to rethink and evaluate wealth distribution and to improve social system (equality in the economy)  Government and Laissez-Faire  Laissez-faire (Free Market) should still be the principle but government can interfere for the greater good to make capitalism fairer (utilitarianism) ○ Mill is a supporter of Utilitarianism  Recantation of the Wages-Fund Doctrine  Can the capitalist reduce his or her income in order to spend more on labor, ceteris paribus? ○ Can the capitalist redistribute income for laborer -- increase the wages of the laborers -- is it possible? □ Laborers are in the lower rank in the society ○ → The graph shows that his question would still not produce significant result -- once there is an increase in wage -- by the redistributing income from the capitalist to its laborers -- then that would increase the aggregate demand of the laborers in the economy. □ Increase in aggregate demand -- increase in the general level of prices -- then there is no sense in increasing the wages of the laborers. Econ 109 (History of Economic Principle) Page 29 Fall in the Classical Economics Saturday, October 29, 2022 1:43 PM Fall in the Classical Economics  Entry of historicist and socialist critics of economic orthodoxy  The policy conclusion of classical theory simply were not acceptable to the majority of social scientist  Economic analysis advanced in a new direction One of the reasons the classical (mostly macro views - adam smith doesn’t consider unproductive labor as part of the nation’s wealth) economist fall - change of economic views and inquiry Classical economists are mostly macro views Econ 109 (History of Economic Principle) Page 30 Karl Marx Saturday, October 29, 2022 1:43 PM Karl Marx  Biography  Born in Trier, Prussia (now Germany) in 1818 and died in 1883  A law student at the University of Bonn but did not finish → His professor was dismissed due to his pro-constitutional and anti-religious views, which left Karl Marx lost his focus on academe  Transferred to Berlin to study  Finished his PhD dissertation at age 23 at the University of Jena  A critic of Capitalist  Journalist → He became an editor of the newspaper, which he became free to express all his views on the government, socialist views → This has led him guilty of treason and thrown out of Germany and became stateless (he also died stateless) → He met his friend Friedrich Engels, having the same views as him (capitalist), he sponsored the publication and writings of Karl Marx. ▪ Engels is a son of a business man but his view is anti-capitalist.  Author of the Communist Manifesto and Capital (Das Kapital) → He poured all his views on capitalism, a very revolutionary thinking (he did not conform on traditional and existing ideas, he thinks beyond) → In these books, he explained the criticism about capitalism and what is not good about capitalism  He is very revolutionary and socialist → Very different from the existing system → He is not afraid to voice out the existing issues during that time  Contribution  Philosophy of Dialectal Materialism → Material needs are the cause of conflicts ▪ ▪ Marx's Social Pyramid □ The origin of the society is production Forces of Production (inputs of production) ◊ These are mixed to produce goods and services  Land  Labor  Capital  Technology Econ 109 (History of Economic Principle) Page 31  Relations of Production ◊ Private property  CAPITALIST (bourgeoisie) □ Are defined by the fact that they do own the factories and the things that are made in them. □ They control the means of production and the products that come from them. ◊ Wage system  The Working Class (Proletariat) □ Workers are the members of common body with the same situations, opinions, goals and what they are fighting for. □ Defined by the fact that they own or control the means of production □ Materials you use in order to labor and produce goods □ They don’t own the factories of the things that they make Social Superstructure ◊ They governs the relations and forces of production  Law  Religion  Government □ He saw conflict between relations of production and forces of production Workers are earning are being paid lesser and the capitalist are getting richer ◊ The poor becomes poorer while the rich becomes richer The reason: Capitalism and the goal of capitalist which is to earn profit ◊ The higher the profit, the better Wage System: ◊ Wages received by the workers is less than the price of the goods and services, and that difference is the Profit ◊ The profit is increasing, while the wages is lower, thus there is a gap and conflict between the Capitalist and the working class  He blames the capitalism in creating this gap He predicted that if this laborers realize this gap, (the exploitation of labor services) then it will result to social revolution □ Marx vs Smith Smith -- individualistic ◊ individual interest will lead to economic interest Marx -- group supremacy ◊ Identifies that every laborer as a member of group (Proletariat), and they realize that they have the same goals of fighting against exploitation -- result to Social Revolution between the Proletariat and Bourgeoisie  Powerful revolt will lead to the exploited being ruling the society □ This is the path of the capitalism when the Capitalist will not address this exploitation. Capitalism kills its own system This is because of the internal conflict that will lead to demist of the capitalism) Econ 109 (History of Economic Principle) Page 32  ▪ Production (economics) as a pre-requisite to History □ Economics as a science of production Source of the society is economic production ◊ Production are needed to satisfy the material needs --> able to live and make history  Labor theory of Value → Labor is the objective source of value, even surplus value (profit) ▪ → Value of labor power = wage + profit (actual price of the goods or service) ▪ The wages that the capitalist gives to the working class + the mark-up price from the capitalist ▪ Wage is only a part of the actual price which are being received by the working class and the profit is receive by the capitalist. □ This is where the conflict came from -- why is the working class receive only the part of the actual price, considering that the product will not be produced without labor. Thus, the wage received by the laborers should also be the actual price Much worse is that the capitalist makes profit higher that the wages is still on the bare minimum. But only because workers only receive "wage" in the process of production, there is exploitation of labor  The Laws of Capitalist Motion → Which are the tendencies of capitalism that would cause its own fall 1. The Law of Accumulation and the Falling Rate of Profit → Increase in productivity due to capital accumulation cheapens commodities leading to falling average profit Because of capital accumulation, ◊ Increase in capital stock -- increase output level -- Increase in productivity -- supply increase in the economy -- price of commodities decreases -- fall of average profit ◊ Increase cost -- decrease price of commodities due to high production -- falling of average profit 2. The law of Increasing Concentration and the Centralization of Industry → Less productive firms are driven out of the market At the age of capital accumulation ◊ Firm who cannot keep up in the competition and less productive compared to other firms -- driven out ◊ Higher productivity level -- cheaper prices of goods and services -- higher quality of goods ◊ Firms that are efficient in producing goods and services is the only one who can survive in the competitive market.  This will result to centralization of Industry --> can lead to Monopoly □ Free market -- monopoly is a market failure -- demise of capitalism 3. The Law of a growing Industrial Reserve Army of Unemployed Econ 109 (History of Economic Principle) Page 33  3. The Law of a growing Industrial Reserve Army of Unemployed → Workers are displaced by technology increasing unemployment When unemployment increases -- higher supply of laborer in the market -- decreases wage rate in the market --> high unemployment ◊ Lesser wages -- lesser incomes for the laborers 4. The law of Increasing Misery of the Proletariat → Lower wages because of high number of unemployed Unemployment increase due to the replacement of labor for machinery -- due to capital accumulation → Introducing child and women labor With capital accumulation -- introduction of machineries -- it would be a decrease in the demand for muscular strength -- opportunity to hire less serve value of labor force (which is the women and child labor) Society is patriarchal (men is the laborer) Instead of selling only his own labor power, therefore, the worker is forced to sell that if his wife and children … increased exposure to the rigors of factory life leads to high child mortality rates and to moral degradation among women and children. → The society is not yet open for the employment of women → There is a negative notion of Karl Mark in employing women and children into the market and labor force. 5. The Law of Increasing Misery of the Proletariat → Overproduction due to capital accumulation but wages are falling Capitalism --> capital accumulation --> increase productivity --> higher level of supply and production ◊ Since machinery displaces labor force --> increasing unemployment rate --> increasing the supply in the market (overproduction) --> decrease wages --> ◊ The Great Depression --> oversupply but people were not consuming but rather they save money to stocks or investment --> further increase in unemployment ◊ Karl Marx has predicted the Great Depression --> because of capitalism, crises and depression will happen.  Overproduction -- firms has closed -- increase in unemployment -- wages are falling  End of Capitalism → What would drive the end of Capitalism ▪ Internal contradictions in the process of gaining surplus value (profit) → Business Aspect Increasing capital accumulation to produce a lot goods and services without realizing the that there is a decrease in profit. → Social Aspect Exploitation of labor, when realized can lead to Social Revolt → Solution ▪ A new mode of production Econ 109 (History of Economic Principle) Page 34   Karl Marx vs Adam Smith in Division of Labor Karl Marx → has seen the conflicts on Capitalism System → Alienation or detachment of the laborer on value of final goods and services being produced → Division of Labor -- highly specialize production process --> the workers slowly appreciate their contribution to the final goods that is being produced. (the worker think that there is only a small part that they have worked on) --? Lesser satisfaction of workers --> issues of capitalism Adam Smith → Division of Labor as a driving factor towards economic growth (efficiency and productivity)  Ten Point Communist Agenda for Advanced Economies from Communist Manifesto (new system of producing things) 1. Abolition of property in land and application of all rents of land to public purposes □ Abolition of private property towards public ownership 2. A heavy progressive graduated income tax 3. Abolition of all right of inheritance 4. Confiscation of the property of all emigrants and rebels 5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly 6. Centralization of the means of communication and transport in the hands of the state 7. Extension of factories and instruments of production owned by the state, the bringing into cultivation of wastelands, and the improvement of the soil generally in accordance with a common plan 8. Equal obligation of all to work; establishment of industrial armies, especially for agriculture 9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country by a more equitable distribution of the population over the country □ Very Chinese: China has become a boom on population (population growth --> people in the farmland has flocked in the cities just to get a job and earn income) --> they invest on manufacturing industries they dispersed it on farmlands to prevent the farmers flocked to the cities because the job has already placed in there in order to have an employment 10. Free education for all children in public schools; abolition of children factory labor; combination of education with industrial production, etc.  Other Notes  These solutions is not 100% effective, there are some issues exists with these solution Thus, there is a mixed economy of which, we have to let the private market operate on its own, but it does not we have to reject government intervention Government intervention is needed to improve market outcome ▪ Market economy if being left out creates market failure. The trend ▪ Free market (leaves market alone) --> Command Economy (purely state run government) --> Mixed Economy (balance between Market and Command economy) □ Mixed Economy: When markets failed, due to externalities, monopoly, equity vs efficient issues, the government should step in to improve market outcome Econ 109 (History of Economic Principle) Page 35 Econ 109 (History of Economic Principle) Page 36  Karl Marx (Crash Course) Sunday, November 13, 2022 10:12 PM  Conflict Theory  Freedom (How can people be free) → Natural Constraints → Social Constraint → Superstructure  He saw historical development in terms of modes of production and economic classes → Modes of Production □ Defined by a combination of forces of production and relations of production Forces of Production ◊ The technical, scientific and material part s of the economy  Tools, buildings, material resources, technology and the human labor that makes them go. ◊ Modern Capitalism: includes factories, oil, and the internal combustion engine  Also includes cultural and social technologies, the idea of assembly line and mass production. Relations of Production ◊ How people organize themselves around labor  Do people work for wages, or does everyone produce and sell their goods own goods, or how does ownership or property work, or is trade a central part of the economy. ◊ Specify how the surplus is taken from the people who produce it, and who gets to decide how the surplus is used. ▪ Primitive communism ▪ Feudalism □ There is a legal system between the lord and the peasant ▪ Capitalism → The classes were not defined by laws, but defined by their place in the relation of production  Industrial Capitalism → Two main classes: ▪ The Working Class (Proletariat) □ Defined by the fact that they own or control the means of production □ Materials you use in order to labor and produce goods □ They don’t own the factories of the things that they make ▪ Capitalist (bourgeoisie) □ Are defined by the fact that they do won the factories and the things that are made in them. □ They control the means of production and the products that come from them. → The difference of who controls the means of production lead to exploitation in capitalism, in the form of wage labor. ▪ If the proletariat lack access to means of production, then they only have one thing they can sell: their labor. They must sell their labor because it will lead them to starvation. ▪ Marx counters that they are only being paid to live on barely. ▪ Marx also argues that they are being paid less than the worth of what they produce. → The source of surplus in capitalism is that there is a difference between the value of the wage and the value of what is being produced -- surplus is also synonymous to profit ▪ So the bourgeoisie get to decide what to do with the profits. □ So Marx believes that the bourgeoisie will always be looking to make profits as large as possible, both driving down wages and by driving up productivity. □ This lead to one of the big problems of capitalism: Crises of Production In capitalism, there were crises of having too much. It reaches to a point where the forces of production were so developed that it could produce far more than we needed. However, the vast majority of people couldn't afford Econ 109 (History of Economic Principle) Page 37  more than we needed. However, the vast majority of people couldn't afford to buy it. ◊ The crises were the economy collapsed, despite the fact that there was more than enough to go around. □ Crises pf production The contradiction between the forces of production and the relations of production Marx understood history as a series of advances in the forces of production such as the greater coordination among capitalist, more technological complexity, and more organization innovation. Ut eventually, this advances always stall, as the forces of production run up against the limits created by the relations of production. In the early days of capitalism, the relations of production included things like private ownership, competition among capitalist and wage labor which has allowed for explosive economic growth. But eventually, these very same thing became limitations on the forces of production such as the factories, technology and human labor. Because capitalist drove down wages in pursuit of profit and they competed with each other, leading to lack of coordination in the economy. Capitalism is about wounding the population that could not afford to buy anything, while at the same time being offered way more goods than it would ever need. And when the economy in shambles, there is no way for the forces to keep developing, there is no money to invest in new factories or new technologies. So the relations of production that created economic growth became precisely the things that caused crises □ Marx saw this as an impasse that all modes of production eventually meet \ ▪ The way forwards is Class conflict □ History is a matter of struggling classes, which each aligned with either the forces or relation of production. The bourgeoisie are aligned with the relations of production because these relations are what we allow them to extract surplus form the workers. □ However, the proletariat want revolution. They want change which they want further development of the forces of production, of which labor makes up the large part and they want a complete change in the relations of production. They want to end the exploitation and they want the surplus to benefit them as labor is the one who created the surplus. Econ 109 (History of Economic Principle) Page 38 Neoclassical Economics Saturday, October 29, 2022 1:43 PM Neoclassical Economics → This period starts at and ends with → The primary contribution evolves around Marginalism, Mathematical Methods, Subjective Utility and Static Analysis → The transition into the neo classical era shifted from macro to micro, they also wanted to understand production, cost production theory, consumer utility etc. → Neoclassical - marginal utility, marginal costs to try to explain maximalization → People started using mathematical methods in economic inquiry → Utility - subjective view and not objective → Unlike previous eras, most economists have unified views ○ Twin Founders of Modern Neoclassical Economics 1. Alfred Marshal 2. Leon Walras Econ 109 (History of Economic Principle) Page 39 Twin Founders of Modern Neoclassical Economics Saturday, October 29, 2022 1:43 PM Twin Founders of Modern Neoclassical Economics  Alfred Marshall and Leon Walras  Alfred Marshal Leon Walras  made a synthesis of the contributions of  laid down three pillars of neoclassical classical economists economists  Looked into how empirical data prove  “Everything is interconnected” theories to solve social and economic  Consider every factor. Industry, firms issues  Very complicated approach  Partial equilibrium analysis - tried to  Disagrees with ceteris paribus because its explain an economic concept, he usually unrealistic used “one firm/industry” as a model to  Demand Function: explain. Hence “partial”. He did this Price adjusts until equilibrium is because he thinks that the world is too reached complex if we take all industries to account. Its difficult to come up with one finding if all is considered.  Influenced the use of “ceteris paribus”  Putting too complicated or too many variables inhibits observing the effect of one specific variable  Isolate variables  Too complicated because everything is mixed up so solutions and recommendations would not be appropriate  Demand Function: Qty adjusts until equilibrium is reached  Related marginal utility to demand; the utility of an individual is reflected buy the demand dof that person corresponding to that good/service Econ 109 (History of Economic Principle) Page 40 Econ 109 (History of Economic Principle) Page 41 Alfred Marshall Saturday, October 29, 2022 1:43 PM Alfred Marshall  Biography  Born in Clapham, England in 1842  Indulged in Mathematics at Cambridge University  Lecturer on Political Economy  Teacher of John Maynard Keynes  His principle of Marginal Utility was derived independently  Combined inductive theory and deductive empiricism  He is not only a synthesizer, but also he also contributed significantly through economics (e.g. Time, ceteris paribus, partial equilibrium analysis) → When analyzing the economy, he tried to focus on the firm or industry to explain behavior of that economy in order for it to be not complicated. "to make economics as an engine of Scientific Discovery"  Ideas  Partial equilibrium analysis → use of ceteris paribus (conditioning laws)  Time → involvement of time in his analysis  Say’s law VS Marshall → Say's Law  Supply first and demand will follow → Marshall:  Supply decisions is affected by demand: when demand increases, supply also increases  the amount demanded increases with a fall in price and diminishes with a rise in price"  Contributions  Time → First to use the conditioning clause "ceteris paribus or "other things being equal" → Short-Run versus Long-Run time horizons and Competitive equilibrium (using Fishing Industry)  Short-Run Supply → There is existence of fixed cost → is also the marginal cost of the firm → Increase in price when there is increase in demand, and it will also increase the short run supply of fish, an increase in supply shifts supply curve to the right. → Econ 109 (History of Economic Principle) Page 42  When D (demand) increases -- shifts the demand curve to the right D' ◊ Increase in the equilibrium point (red line) -- results to increase in price  Increase in Price -- Increase in Demand -- Increase in Short Run Supply of An increase in Supply -- a shift of Supply curve to the right (SRS -- SRS') (Blue Line) ◊ New Equilibrium (Green Line) -- which is also the Long Run Supply Curve → Supply decisions follow demand changes: "The short term Normal Supply rises with an increase in the demand for fish" ◊ D -- D' --> the supply of fish also increases from SRS -- SRS', making the new equilibrium, dropping the price to the marginal price (prior to the increase in demand) → Short run supply = Marginal Cost  Long Run → Reflective to the modern aggregate long run cost curve ◊ Long run cost curve  Is just an envelope of short-run average cost curve  It also covers the short run average cost curve Internal economies and diseconomies ◊ U-shaped long run AC curve  There is a U shaped long run average cost because of internal economies and diseconomies  Internal Economies – Factors internal to the industry or firm  All costs are variables, (efficiency in capital, labor and inputs of production increases the productivity level  Increase in capital or labor --there is an increase in efficiency of capital and labor -- increase in productivity level – Due to internal economies, Long run curve is decreasing (because the cost decreases)  Internal Diseconomies – Due to internal diseconomies, Long run curve is increasing – In the long run, the firm have been bigger -- there have internal coordination problems (e.g. management issues) or there have an increase in advertising costs -- there have been high cost in production -- diseconomies of scale Price = LRAC = SRAC --> long run equilibrium for the firm  External Economies Econ 109 (History of Economic Principle) Page 43  → → Firm For example: industry is growing in a certain locality -- that would increase the supply of highly specialized and skilled labor -- encourages other firms to enter the market -- there has been an existing of new methods that will be used by the new firms mixed with new methods that will increase productivity (Positive external effects to other firms) -- decrease other firms average cost-- resulting in a lower average cost in the long run → Industry With the entry of more firms in the market -- increase supply curve shifting it to the right (from point A to B) -- low cost (because of positive externalities) ◊ Positive Externalities  When there is availability of better skilled labor, specialization of technology and tools for production,  It is called positive externality because it positively affects the firm.  Marshal tried to explain it using a certain industry and firm (partial equilibrium analysis)  In a certain market equilibrium, it is possible to not account in costing for market equilibrium – Modern Economics now uses different externalities.  Externality is one of the main reasons of market failure  Negative Externality  The action of a certain individual that can negatively affect other people negatively  In a certain market equilibrium, it is possible to not account in costing for market equilibrium  Example: pollution doesn't directly accounted in the price of the free market or the economy, that is why there is a need of government intervention to improve market outcomes.  Demand  Law of Demand → The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with the fall in price, and diminishes with a rise in price (principles, p. 99) → Basically the same thing as the law of the modern economics  Consumer Surplus → Named and popularized by Marshall  The most significant contribution of Marshal in economics → Successive decline in prices increases utility from consumption  If prices decreased, we are richer now than before. That would increase utility.  We can consume more good, that would increase utility increasing consumer surplus → Used demand curve to estimate utility  Used demand to explaining consumer surplus Supports government intervention in free markets to promote maximum satisfaction through taxes and subsidies Econ 109 (History of Economic Principle) Page 44  → Supports government intervention in free markets to promote maximum satisfaction through taxes and subsidies  Support government to improve market outcomes in the economy.  Consumer Surplus (Taxes and Subsidies) → → Scenario: A tax increase When tax increases --> there is a decrease in supply (S to S') shifting the supply curve to the left ◊ aEA --> deadwei