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1 Group 1: The value of studying Enable us to make fewer errors than in the past when making personal decisions and when ECONOMICS AND ITS HISTORY formulating nat...

1 Group 1: The value of studying Enable us to make fewer errors than in the past when making personal decisions and when ECONOMICS AND ITS HISTORY formulating national and local economic policies. Provides perspective and understanding of our ECONOMICS - Greek word, oeconomicus meant past, of changing ideas and problems, and of our “management of the household. direction of movement.  Aristotle (384–322 B.C.) engaged in economic thinking by distinguishing between GROUP 2: Mercantilist and “natural and unnatural arts of acquisition.  Plato (427–347 B.C.) wrote of the benefits of Physiocrats SCHOOL OF THOUGHT human specialization within the ideal city- (1500-1776) state.  St. Thomas Aquinas (1225–1274) advanced MAIN PRINCIPLES OF THIS SCHOOL the idea of a just price: one in which neither  GOLD AND SILVER ARE THE MOST the buyer nor the seller takes advantage of DESIRABLE FORM OF WEALTH the other.  NATIONALISM There was little trade before 1500, and most  DUTY-FREE IMPORTATION AND EXPORT goods were produced for consumption in the RESTRICTION OF RAW MATERIALS community that produced them without first  COLONIZATION AND MONOPOLIZATION OF being sent to market. Markets and trade COLONIAL TRADE expanded rapidly after 1500, with the great  OPPOSITION TO INTERNAL TOLLS, TAXES, geographical explorations both resulting from AND OTHER RESTRICTIONS ON THE this process and accelerating it. In the 1500s, the MOVEMENT OF GOODS “age of political economy” began to supplant  STRONG CENTRAL GOVERNMENT the“age of moral philosophy.”  IMPORTANCE OF A LARGE, HARDWORKING POPULATION The value of studying Economics and its History BENEFICIARIES OF MERCASNTILIST SCHOOL - merchant capitalists, the kings, and government Why Study Economic Theory? officials 1. Understanding How Economies Work. HOW WAS THE MERCANTILIST SCHOOL VALID, Involves exploring the mechanisms that allow USEFUL, OR CORRECT IN ITS TIME? Bullionism economies to operate smoothly, such as made some sense during the shift from a self- supply and demand, market equilibrium, sufficient to a money-based economy. As inflation, unemployment, and economic commerce grew rapidly and banking was still growth. developing, having bullion was important. It 2. Achieving Economic Goals. Provides tools helped fund wars, pay soldiers, build ships, and and frameworks that help societies achieve handle alliances. British trade with the Baltic and their chosen economic goals, such as East Indies relied on precious metals because economic growth, full employment, price these regions wouldn’t accept paper money stability, and equitable distribution of income. LASTING CONTRIBUTIONS. The mercantilists made a lasting contribution to economics by Why Study the History of Economic emphasizing the importance of international Thought? trade. Mercantilists developed the idea of the balance of payments, which is still relevant Enhances one’s understanding of contemporary today. economic thought. “Contemporary theory wears the scars of yesterday’s problems now PHYSIOCRATIC SCHOOL resolved, yesterday blunders now corrected and OF THOUGHT 1759 cannot be fully understood except as a legacy handed down from the past.” Mark Blaug, The concepts of the physiocratic school may be Economic Theory in Retrospect, 4th ed. (London: summarized as follows; natural order, laissez- Cambridge University Press, 1985) faire, emphasis on agriculture, taxation of the  2 landowner, the interrelatedness of the economy. KEY IDEAS OF MERCANTILISM BENEFICIARIES OF MERCASNTILIST SCHOOL.  Focused on international trade and balance of The physiocrats' ideas would ultimately benefit payments. peasants by ending their heavy obligations to  Supported government regulation to benefit landowners. However, if their vision had been the nation. realized, peasants might have become wage  Elevated merchants’ status in society. laborers on large farms. CRITIQUES OF MERCANTILISM HOW WAS THE MERCANTILIST SCHOOLVALID, USEFUL, OR CORRECTIN ITS TIME?  Missed the benefits of specialization and free LASTING CONTRIBUTIONS. The physiocrats trade mistakenly idealized the capitalistic farmer as  Incorrectly linked higher wages to reduced central to French economic development. labor participation. KEY IDEAS OF PHYSIOCRACY MAIN IDEAS DEVELOPED  Valued agriculture as the only productive  THOMAS MUN (1571–1641) sector.  BALANCE OF TRADE  ROLE OF GOVERNMENT IN TRADE  Proposed taxing landowners based on wealth from land.  GERARD MALYNES (1586–1641)  BULLIONISM AND THE IMPORTANCE OF  Advocated for laissez-faire (minimal PRECIOUS METALS government interference).  POSITIVE BALANCE OF TRADE CRITIQUES OF PHYSIOCRACY  CHARLES DAVENANT (1656–1714)  BALANCE OF TRADE  Limitations of Physiocracy  "POLITICAL ARITHMETIC" AND  Industry and trade viewed as unproductive. NATIONAL WEALTH  Tax burden shifted to small farmer post-  POPULATION GROWTH AND ECONOMIC French Revolution. PROSPERITY CONTRIBUTIONS AND LEGACY  JEAN BAPTISTE COLBERT (1619–1683)  MERCANTILISM  Mercantilism helped develop trade policies  PROTECTIONISM and nationalism.  INFRASTRUCTURE DEVELOPMENT  Physiocrats laid the foundation for economics  COLONIAL EXPANSION as a social science and laissezfaire principles.  SIR WILLIAM PETTY (1623–1687)  POLITICAL ARITHMETIC  THE THEORY OF LABOR AND VALUE GROUP 3: THE CLASSICAL SCHOOL:  FRANÇOIS QUESNAY (1694–1774) FORERUNNERS  THE TABLEAU ÉCONOMIQUE  AGRICULTURE AS THE SOURCE OF It emphasized the role of markets determining WEALTH wealth and efficiency through the mechanism of  NATURAL ORDER AND LAISSEZ-FAIRE supply and demand.  CRITIQUE OF MERCANTILISM 1. Richard Cantillon (1680-1734)  ANNE ROBERT JACQUES TURGOT (1727–1781)  Considered one of the precursors of  LAISSEZ-FAIRE AND FREE TRADE classical economics.  THE LAW OF DIMINISHING RETURNS  *Essai sur la Nature du Commerce en  PRODUCTION AND DISTRIBUTION OF Général* (Essay on the Nature of Trade in WEALTH General) (1755).  Introduced the idea of the "entrepreneur" MERCANTILIST AND PHYSIOCRATIC and described how entrepreneurs assume ECONOMIC THEORIES Key Ideas and risk in the economy.  He also analyzed the nature of economic Impact exchange, the role of money, and the causes of price fluctuations.  3  Cantillon developed a theory of value and 4. The Theory of Value and Wealth - wealth of price. a nation is measured not by its  Intrinsic Value of Goods: He proposed accumulation of gold or silver but by the that the value of goods is determined productive capacity of its economy. by the labor and resources that go into 5. Role of Government producing them, an early precursor to the labor theory of value.  Circular flow of income: Described the 5. Sir Dudley North (1641–1691) economy as a circular flow, where  World’s first prominent free trader money circulates between producers  In 1691 North brief tract, Discourses upon and consumers. Trade, was his only published work.  Trade is not a one-sided benefit to whichever country that realizes a surplus 2. François Quesnay (1694-1774) of exports but rather it is an act of mutual  Leader of the Physiocrats. advantage to both sides.  Tableau Économique* (Economic Table) in 1758, a model showing how goods and money flow through the economy. Group 4: Malthusian Theory THE  Advocated for a system called *laissez- CLASSICAL SCHOOL—THOMAS faire* ROBERT MALTHUS 3. David Hume (1711-1776)  Scottish philosopher and economist  Hume came closest to the ideas of Smith 1. Thomas Robert Malthus (1766–1834)  1752 essays, "Of Money" and "Of Interest," England he developed the quantity theory of money, o 18th-century British Philosopher which explains the relationship between o Son of Daniel Malthus the amount of money in circulation and o Popular author of the book: “An Essay on inflation. the Principle of Population” appeared in  Discussed the concept of free trade and 1798. international economic relations. o Malthusian Growth Model &population  Price-Specie Flow Mechanism: Hume growth philosophies. developed the theory that trade imbalances o Founder of the Statistical Society of would self-correct through changes in the London along with Charles Babbage and money supply. Richard Jones.  Criticism of Mercantilism: Argued that a Malthusian Theory of Population nation's wealth is based on its production and trade capacity. o Theory of exponential population and arithmetic food supply growth. 4. Adam Smith (1723-1790) o States that food production will not be  Considered the father of classical able to keep up with growth in the human economics, and his work significantly population, resulting in disease, famines, shaped economic theory. war, and calamity.  His seminal book, *The Wealth of Nations* HISTORICAL AND INTELLECTUAL SETTING (1776), is one of the most influential works in economics and marks the beginning of 1. Increase in poverty. Unemployment the Classical and poverty were increasingly visible  Published The Theory of Moral Sentiments problems, creating calls for remedial (1759) treatment. The Speenhamland System was a method of Key Contributions of Adam Smith giving relief to the poor, based on the price 1. The Invisible Hand - pursuing their own self- of bread and the number of children a man interest, had. The Speenhamland law aimed to ensure 2. Division of Labor that even the poorest families received a 3. Free Markets and Laissez-Faire basic income, regardless of their work  4 earnings. This was intended to alleviate (2) Equality of individuals within nations. poverty and stabilize rural economies. Condorcet favored the wide distribution of property, social security, and universally free education for women 2. Corn Laws. These laws placed tariffs on and men. imported grain and effectively placed a minimum price on grain imported to England from abroad. As early as 1790, (3) The perfectibility of humanity. England had found it necessary to import Condorcet favored birth control to limit food. But the Napoleonic wars had kept the population. these imports relatively low, and the results were extremely high domestic grain prices and land rents. Malthus’ Population Theory In 1st Edition. He presented here his law of population: Population, when left unchecked, 3. Intellectual Setting. increases geometrically; subsistence (necessities required to sustain life) increases at William Godwin (1756–1836). best only arithmetically. o Father-in-law of the poet Shelley, was a Preventive checks to population are those that minister, novelist, and political philosopher reduce the birth rate. He was not in favor of who turned anarchist and atheist and using contraceptives, birth control, prostitution, whose doctrines resembled those of the which he referred to as 'vice.' French revolutionaries. o 1793 he published his influential book, An Policy implication: The poor laws. According to Enquiry. Concerning Political Justice and Its Malthus, poverty and misery are the natural Influence on General Virtue and Happiness. punishment for the failure of the lower classes o First to formulate the philosophy of to restrain their reproduction. anarchism. The human race is perfectible In 2nd edition (1803). Malthus stated that if a through a continuous advance toward man is born into a world that is already fully higher rationality and increased well-being. occupied, and if he is not provided with Because a person’s character depends on subsistence by his parents and society does not the social environment instead of being want his labor, then he has no rightful claim to immutable and determined by heredity, a even the smallest portion of food. perfect society will produce perfect people. In 6th edition. Malthus offered a specific proposal concerning the poor laws. He The Marquis de Condorcet (1743–1794). withdrew his harsh statement from the earlier o An eminent French mathematician of edition where he had proposed a mode for their aristocratic family, gradual abolition that was not harsh. He stated o He and Thomas Paine founded the journal that "we are bound in justice and honor to Le Républicain. formally disclaim the right of the poor to o Condorcet favored universal suffrage for support." men and women. He vigorously opposed the provisions of the French Constitution in 1791 that established property Malthus’ Theory of Market Gluts qualifications for voting and election to In Book II of his Political Economy: Malthus office. developed his theory of the potential o Most important work, Sketch of the insufficiency of effective demand. He assumed Intellectual Progress of Mankind. that workers received a subsistence wage and that employers hired these workers because (1) Equality among nations. “As the greatest they produced a value greater than what they of plagues and as the greatest of received in wages, allowing employers to make crimes.” a profit.  5 Policy Implication: Corn Laws He defended the Outcome: Corn Laws, which impose tariffs on imported  In 1819, Parliament adopted Ricardo's plan, grain. This would enrich the landlords and mandating the Bank of England to resume gold consequently promote unproductive payments in bullion. consumption to avoid necessary stagnation.  By 1821, payment in gold coins was restored.  The gold standard became a cornerstone of monetary stability for over a century, except THE CLASSICAL SCHOOL— DAVID RICARDO during wars and financial crises. o British economist, businessman, financier, and THE THEORY OF DIMINISHING RETURNS AND speculator. He is credited with systematizing economics in the 19th century and was one of the RENT most influential of the classical economists. “Rent,” said Ricardo, “is that portion of the produce o Born: April 18/19, 1772, London, England of the earth, which is paid to the landlord for the use o Died: September. 11, 1823, Gatcombe Park, of the original and indestructible powers of the soil.” Gloucestershire He modified this definition by including as rent the o Popular author of the book: “The Principles of return on long-run capital investments that are Political Economy and Taxation” appeared in amalgamated with the land and increase its 1817. productivity. According to Ricardo, rent arises at o contributions to economic theory such as the both the extensive and intensive margins of comparative advantage theory, labor theory of cultivation. value, and the theory of rents. THE CURRENCY QUESTION Rent at the Extensive Margin of Cultivation Key Points on Ricardo and the Gold Standard: When in the progress of society, land of the The Crisis (1797): second degree of fertility is taken into  England suspended cash payments during the cultivation, rent immediately commences on wars with France due to a run on gold, leading to that of the first quality, and the amount of that an irredeemable paper currency. rent will depend on the difference in quality of these two portions of land.  The price of gold rose from 3.17 to 5.10 pounds per ounce by 1813, causing inflation and loss of When land of the third quality is taken into trust in paper money. cultivation, rent immediately commences on the second, and it is regulated as before, by the Ricardo's Analysis: difference in their productive powers. At the  He blamed inflation on the Bank of England over same time, the rent of the first quality will rise, issuing paper money, unchecked by gold for that must always be above the rent of the redemption. second, by the difference between the produce  Compared this to feudal coin clipping, where which they yield with a given quantity of capital excessive money supply devalued currency. and labour. With every step in the progress of population, which shall oblige a country to The Problem and Solution: have recourse to land of a worse quality, to  The issue was not gold's price rising but the enable it to raise its supply of food, rent, on all pound's value dropping—more pounds were the more fertile lands, will rise. needed to buy the same gold amount. The produce from marginal land will bring in  Ricardo advocated for a return to the gold enough revenue to cover all the expenses of standard to stabilize the currency and curb production plus the average rate of profit on inflation. the investment in labor and capital. The value  He proposed a gold bullion standard: the bank of farm produce depends on the labor required would trade gold bullion (not coins) for paper per unit of output on the least productive land currency, with a minimum of 20 ounces per in use. The better land produces a surplus that transaction. is taken by the landowner as rent.  6 Rent at the Intensive Margin of the land they own and the least productive, or Cultivation marginal, land in use. The rent paid to landlords arises from this differential in land quality, and as If successive units of labor and capital are population grows, more marginal land must be added to a piece of land while technology cultivated, driving up rents on the more fertile land. remains constant, each added unit of investment will add less to the output than Ricardo argued that rising rents would eventually previous units. eat into profits and wages, creating a potential conflict between landowners, capitalists, and workers. The Theory of Exchange Value and Policy Implications Relative Prices 1. Laissez-Faire Wages—Ricardo opposed Ricardo posited that the value of a commodity regulation of wages or government relief for the is determined by the amount of labor required poor. He believed that wages should be left to to produce it. This theory forms the basis of his the free competition of the market, arguing that analysis of exchange value and how prices are the Poor Laws in Britain (which provided relief determined in the market. to the indigent) were counterproductive. 1. Goods that are reproducible by labor—These include most manufactured goods; whose value 2. Taxation of Rent—Ricardo argued that a tax on rent would only affect landlords and could not corresponds to the amount of labor embedded in be passed on to other classes. Because rent is their production. derived from the differential in land 2. Non-reproducible goods—Such as art, antiques, productivity, a tax on rent would not increase the price of goods or discourage agricultural or land, where scarcity plays a significant role in production. their value. Ricardo argued that the value of a commodity is not 3. Opposition to the Corn Laws—Ricardo strongly determined by its absolute price, but rather by its opposed the Corn Laws, which restricted the relative exchange value when compared to other importation of grain into Britain. He argued that goods. This relationship is shaped by the quantity of these laws artificially raised the price of grain, labor embodied in each good. benefiting landlords at the expense of both workers and capitalists. The Distribution of Income 1. Wages—In line with his labor theory of value, Ricardo on Unemployment Ricardo believed that wages would naturally adjust to the subsistence level, which is the amount Ricardo’s views on unemployment were shaped needed to support the worker and his family. He by his belief in Say’s Law of Markets, which recognized that wages could temporarily rise above posits that supply creates its own demand. this level, but in the long run, they would gravitate According to this view, the very act of producing towards subsistence. goods generates enough income in the form of wages, rents, and profits to buy those goods. 2. Profits—Profits, according to Ricardo, were the residue left after wages and rents had been In the third edition of his Principles of Political deducted. Profits depended on the cost of Economy and Taxation, he introduced the production and were inversely related to wages. As concept of technological unemployment, where wages increased, profits decreased, and vice versa. the introduction of new machinery could Ricardo believed that the long-term tendency of temporarily reduce the demand for labor. profits was to fall due to diminishing returns as more labor and capital were employed in less fertile Ricardo opposed any government measures to lands. discourage the use of machinery. He argued 3. Rents—Ricardo’s theory of rent, known as the that restricting the use of machinery would Law of Rent, is based on the idea that land varies in harm both capitalists and workers by reducing fertility. Rent is the income earned by landowners profits and encouraging capital to flee abroad in based on the difference between the productivity of search of higher returns.  7 Assessment on Classical School- David influencing later economists like John Stuart Ricardo Mill and Karl Marx. Significant Contributions: Weaknesses and Inaccuracies in Ricardo’s 1. Abstract Reasoning in Economics. His Analysis systematic approach in simplifying real- world complexities to derive general 1. Overemphasis on the Law Diminishing Returns. economic principles allowed economists to Did not fully account for the technological predict outcomes under different economic advances and capital accumulation that conditions. This abstraction set the stage for historically increased output per unit of labor. modern economic modeling. 2. Misconception About Landlords and 2. Theory of Comparative Advantage: Agricultural Productivity. Overlooks the fact Ricardo’s comparative advantage theory that land improvements (such as better remains one of his most important cultivation methods) made by landlords could contributions. It demonstrates how trade increase the surplus available for rent on more between nations can be mutually beneficial, productive land, benefiting both landlords and even if one country is more efficient at society. producing all goods. The theory explains 3. Unrealistic Assumptions About Land Use: Land that a country should specialize in has competing uses, and each plot commands a producing goods for which it has the lowest payment to cover its opportunity cost. This opportunity cost and trade for others, means that rent should be considered a cost of fostering overall global efficiency and production, not just a residual after wages and economic integration. profits are deducted. 4. Impact of Machinery on Employment: New 3. Marginal Analysis: Ricardo employed machinery often creates additional demand for marginal analysis to assess the additional skilled labor, leading to higher productivity and impact of changes in production factors, new employment opportunities. particularly in agriculture. His use of 5. Insufficient Focus on Demand in Value Theory: marginal reasoning, such as explaining how Ricardo’s labor theory of value placed too much the productivity of the last (marginal) unit emphasis on the cost of labor in determining the of land determines rent, was value of goods, neglecting the role of demand. groundbreaking for his time and has This detour from the importance of both supply become central to modern economic and demand in price determination was analysis. corrected by later economists in the neoclassical tradition, such as Alfred Marshall. Some scholars, 4. Law of Diminishing Returns: Ricardo however, argue that Ricardo’s theory fits better developed the law of diminishing returns in into the evolution of value theory than agriculture, showing that as more labor and previously thought, suggesting a more nuanced capital are applied to a fixed quantity of reinterpretation of his work. land, the additional output from each extra unit of input will eventually decline. This principle helps explain how increases in Group 5: The Classical School: population and demand for food drive up Bentham, Say, Senior, and Mill rent, as more land is brought under cultivation, including less fertile land. JEREMY BENTHAM (1748–1832) Born: February 15, 1748, in London, 5. Distribution of Income: Ricardo extended England.Education: Entered Queen's College, economic analysis to cover the distribution Oxford,at age 12 and earned a bachelor's degree of income among workers, landlords, and atthe age of 15; later studied law at Lincoln's Inn. capitalists. He was particularly concerned with how rents, wages, and profits Philosophical Focus: Regarded as the founder of interacted in the economy, highlighting the modern utilitarianism; advocated for the conflicts between these groups as principle of "the greatest happiness of the economic growth progressed. His insights greatest number of people." laid the groundwork for further development in distribution theory,  8 Utilitarianism B Bentham’s Legacy to Economics  The principle of greatest happiness.  Bentham’s view of human nature became the  Hedonism – People pursue things that provide basis for the economic theories of Ricardo, John pleasure and avoid things that produce pain; all Stuart Mill, and the early marginalists, especially individuals seeks to maximize their total William Stanley Jevons. pleasure.  The concept of utility maximization, assuming that  Utilitarianism expanded hedonism by people make choices by comparing the advocating for actions that maximize happiness satisfaction they get from different goods and for the great number, balancing its diminishing marginal utility are at the heart of the individualistic focus with concern for society’s marginalist theory of demand. well-being.  People were thought to be perfectly rational and to make careful decisions. For example, entrepreneurs would aim to maximize their profits Utility. The ability of something, whereby it by balancing their revenues against their costs. tends to produce benefit, advantage, pleasure, JEAN-BAPTISTE SAY (1767–1832) good ,or happiness or to prevent the happening of mischief, pain, evil, or unhappiness to the  “Supply creates its own demand.” person or group affected.  The Frenchman who popularized Adam Smith's theories to the Continent. Principle of Utility  His major work, A Treatise on Political  Human beings are controlled by two main Economy (1803). forces: pain and pleasure.  Say's career was temporarily discontinued due  The principle of utility means judging every to Napoleon's disapproval of his strong laissez- action as good or bad based on whether it faire beliefs. seems likely to increase or decrease the  Say went on to become a political economy happiness of the people affected by it. professor following Napoleon's defeat at Waterloo. Diminishing Marginal Utility Value Theory, Costs of Monopoly, and  Wealth is a measure of happiness but that wealth Entrepreneurship has diminishing marginal utility as it increases.  Say opposed the labor theory of value of the Implications of Bentham’s Ideas classical school, replacing it with supply and  Bentham emphasized that legislators should work demand. to increase the community's overall happiness.  Say’s discussion of supply and demand, Rather than people serving the government, the however, did not include development of government should serve the people. schedules showing price-quantity relationships  He did not worship laissez-faire as a principle to be as did that of Marshall. blindly accepted. Bentham advocated the  Instead, the phrases "supply" and "demand" philosophy that if special reasons exist, the were used quite imprecisely. government ought to intervene.  Say made a contribution to the modern theory  Bentham concluded that money is the instrument of cost of monopoly. that measures the quantity of pleasure or pain  Say contributed to economic thought by emphasizing entrepreneurship as a fourth Economic Criticisms factor of production along with the more  Bentham recognized that assessments of pleasure traditional ones. and pain are subjective; they vary from person to  (Richard Cantillon originated the concept of the person. entrepreneur).  Achieving the goal of maximizing happiness for the Say’s Law of Markets greatest number requires making interpersonal utility comparisons, which depend on measuring  Overproduction is impossible. utility in precise, cardinal terms.  James Mill in 1808: “If a nation’s power of purchasing is exactly measured by its annual produce … the more you increase the annual produce, the more by that very act you extend  9 the national market, the power of purchasing production of remote to that of immediate and the actual purchases of the nation.” results.  “Even when money is obtained with a view to  Alfred Marshall later redesignated the function hoard or bury it, the ultimate object is always of savings as waiting—that is, postponing to employ it in a purchase of some kind. The consumption. heir of the lucky finder uses it in that way, if the  Saving is the activity that produces new miser do not: for money, as money, has no investment spending. other use than to buy with.”  Interest rate (i) rises, then more saving (S)  “Supply creates its own demand” in the long occurs S = f(i) run but not in the short run.  Say's law extension: Since saving is a positive function of interest rate and investment is a negative function of interest rate, the rate will NASSAU WILLIAM SENIOR (1790–1864) adjust to a level where all savings will be  The eldest child of a rural pastor who had ten invested. children.  If saving rises, equilibrium interest rate will fall.  Appointed as Oxford's first political economy Thus, will increase borrowing and purchases of professor (1825). capital goods  Added him to a number of royal commissions looking into important social problems Productive Labor  Departed significantly from classical economics and moved toward the neoclassical position that  Senior disagreed with Smith's assumption that triumphed after 1870. all service producers are unproductive.  Senior believed that the proper distinction was Positive Economics not between productive and unproductive  According to Senior, economists should concern labor, but between productive and themselves with analyzing the production and unproductive consumption. distribution of wealth, not the promotion of happiness Policy Positions  The economist has no right to contribute a single word of advice, regardless matter how general or 1. Poor laws - living conditions of those true his conclusions may be. receiving welfare should be worse than  A Political Economist's job is to state general those of the poorest paid laborers. principles, not to advocate or argue against them. 2. Trade Unions. Prohibition of all conspiracies and restraints of trade by labor Senior’s Four Propositions 3. Factory Acts. Senior published a pamphlet 1. Principle of income or utility maximization opposing the English Factory Acts, which at the time limited the working day to 12 hours 2. Principle of population in factories where children were employed. 3. Principle of capital accumulation 4. Principle of diminishing returns John Stuart Mill (1806-1873)  Born in London, the eldest son of the British Abstinence historian, economist, and philosopher James Mill and his wife, Harriet Barrow.  The exchange value of goods, according to  His father gave him a rigorous education, Senior, depends on demand and supply. introducing him to Greek at the age of three  Supply depends on the costs of production. and to Latin when he was eight.  Abstinence: a term by which we express the Mathematics and economic theory were conduct of a person who either abstains from also part of the curriculum. the unproductive use of what he can command, or designedly prefers the  10 Equality and Social Reform International Trade: He builds on David Ricardo's theory of comparative  Support for Worker Rights: Mill was advantage, advocating for free trade and concerned about income inequality and explaining how it benefits nations. supported worker cooperatives and profit- sharing arrangements between workers Money and Credit: Mill explores the role of and capitalists. He believed these reforms money in facilitating exchange and the could address the exploitation of labor and effects of credit on the economy. ensure fairer distribution of wealth.  Gender Equality: Mill was also an advocate for women's rights, arguing in his work The Book IV: Influence of the Progress of Subjection of Women that women should Society Mill discusses how economic have equal opportunities in the labor progress affects different aspects of market and political life. society, particularly focusing on long-term  John Stuart Mill's Principles of Political economic development and changes in the Economy, published in 1848, is one of his structure of the economy. Some of the major works and is divided into five books. main ideas include: Book I: Production This book covers the The Stationary State: Mill predicts that, fundamental principles of production. eventually, economic growth will slow, leading to a "stationary state" where the 1. The Role of Labor accumulation of wealth ceases. Unlike 2. Capital some earlier economists, Mill sees this as a potentially positive development, with 3. Nature more focus on social welfare and quality of 4. Technology and Innovation life. Income Inequality: He considers how economic progress can lead to widening Book II: Distribution Mill distinguishes inequality, and the need for social reform between the laws governing production to address it. and distribution The Role of Government: Mill supports the Key topics in this book include: idea that government intervention can The Distribution of Wealth: Mill argues promote social justice in the context of a that wealth distribution is determined by progressing economy. laws and customs of society, and can be changed through legislation. Book V: On the Influence of Government Wages, Profits, and Rent: He discusses the Mill elaborates on the role of government distribution of income among labor in the economy, addressing both its (wages), capital (profits), and land (rent). positive and negative impacts. Key points The Role of Institutions: Mill emphasizes include: the importance of social institutions in Laissez-Faire vs. Government determining how wealth is distributed. Intervention: While Mill generally supports the principle of laissez-faire (non- intervention), he also argues that Book III: Exchange In this book, Mill government intervention is justified in examines the principles governing trade cases where it can promote social welfare, and markets. He addresses the following correct market failures, and reduce concepts: poverty. Value and Price: Mill refines the classical Taxation: Mill discusses the importance of theory of value, explaining that prices are a fair taxation system and advocates for determined by both the cost of production progressive taxation. and the forces of supply and demand. Public Goods and Services: He emphasizes the role of the state in providing public  11 goods, such as education and  Developed the concept of mutualism, infrastructure, that arebnecessary for advocating for a society based on voluntary economic and social development. exchanges and cooperative enterprises while critiquing private property and centralized authority. GROUP 6: THE RISE OF 4. Henri de Saint-Simon (1760-1825) SOCIALIST THOUGHT  Author of The Letters from an Inhabitant of SOCIALIST SCHOOL OF THOUGHT Geneva (1814), outlining his vision for a new social order. Socialism refers to any political or economic  Advocated for an industrial society driven ideology that advocates for the community, by scientific progress and meritocracy, rather than individuals, to collectively own and emphasizing the need for a planned control property and natural resources. economy to serve the public good and The government is responsible for making all reduce inequality. decisions regarding production and distribution, as well as setting output levels and prices, while 5. Charles Fourier (1772-1837) providing citizens with essential goods and  Author of The Theory of the Four services, including food and healthcare. Movements (1808), where he proposed his ideas about social organization. Utopianism- refers to the belief in or pursuit of  Contributions: Envisioned a utopian an ideal society that is perfect in its political, society organized into self-sustaining social, and moral aspects. : The Oneida communities called "phalansteries," Community critiquing capitalism and advocating for Anarchism- is a political philosophy that opposes social reforms that promoted equality and centralized authority, advocating for a society individual fulfillment. without governments or hierarchies. Spanish Revolution (1936-1939) 6. Rosa Luxemburg (1871-1919)  A Marxist theorist who emphasized the Soviet Communism- refers to the political and importance of democracy within economic system implemented in the Soviet socialism. Union, where the state controlled all means of  Critiqued both reformist and production and resources. Five-Year Plans authoritarian approaches to socialism. Social Democracy- is a political ideology that supports a balance between free-market 7. Vladimir Lenin (1870-1924) capitalism and government intervention to  Leader of the Bolshevik Revolution promote social justice. Nordic model (1917) and founder of the Soviet Union.  Developed Leninism, emphasizing the Key Proponents of Socialist Thought role of a vanguard party in leading the proletariat. 1. Karl Marx (1818-1883)  Co-author of The Communist Manifesto Impact on the Evolution of Economics (1848) and author of Das Kapital (1867).  Developed the theory of historical  The contributions of these thinkers and events materialism and critiqued capitalism. have shaped the discourse on economic systems, social justice, and the role of 2. Friedrich Engels (1820-1895) government in managing the economy.  Co-authored The Communist Manifesto and  Socialist thought has influenced debates on collaborated with Marx on various works. wealth distribution, workers' rights, public  Advocated for workers' rights and social ownership, and the balance between market reforms forces and social welfare.  The evolution of socialism has led to various 3. Pierre-Joseph Proudhon (1809-1865) interpretations and adaptations, including  Author of What Is Property? (1840), where he democratic socialism, social democracy, and famously stated that "property is theft.  12 eco-socialism, each addressing contemporary 3. Pierre-Joseph Proudhon (1809-1865) issues within the economic landscape. Key Works: What is Property?, The Philosophy of Poverty MAIN IDEAS DEVELOPED BY MAJOR Main Ideas: ECONOMISTS Mutualism: Proudhon advocated for a system he 1. Karl Marx (1818-1883) Key Works: The called mutualism, where individuals and small Communist Manifesto (with Friedrich Engels), groups would engage in cooperative exchange Das Kapital without state intervention. “Property is Theft”: In his famous declaration, Main Ideas: Proudhon argued thatproperty, as understood Historical Materialism. Series of class struggles under capitalism (where individuals or driven by changes in economic structures. corporations own the means of production), was a form of exploitation, as it allowed capitalists to Labor Theory of Value: Marx expanded on the profit from the labor of others without labor theories of classical economists like Adam contributing to the actual production process. Smith and David Ricardo, arguing that the value of goods is determined by the labor required to He proposed that property in the form of produce them. personal possession (use-based property) was legitimate, but ownership of land, capital, and Class Struggle: Marx emphasized the conflict industry by absentee owners was not. between the bourgeoisie (owners of capital) and the proletariat (working class). Alienation: Marx argued that capitalism 4. Henri de Saint-Simon (1760-1825) alienates workers from the products they create, Key Works: The New Christianity, The Industrial the labor process, their fellow workers, and their System own humanity, reducing them to mere tools for profit generation Main Ideas: Communism: Marx envisioned a stateless, Industrialism: Saint-Simon advocated for a form classless society where the means of production of socialism where the state would manage the would be communally owned, eliminating economy in the interest of all, particularly exploitation and allowing individuals to fully focusing on industrial production. realize their potential. Classless Society: He envisioned a society without class distinctions, where everyone would contribute according to their abilities, and 2. Friedrich Engels (1820-1895) social harmony would be achieved through Key Works: The Condition of the Working rational organization of industry. Class in England, Socialism: Utopian and Scientific (with Marx) Philanthropic State: Saint-Simon proposed that the state should be a central authority guiding economic development, particularly in helping Main Ideas: the poor and organizing labor. He contributed to the development of Marxist theory, especially the critique of capitalism and the analysis of historical materialism. 5. Charles Fourier (1772-1837) Argued that the conditions of the working class Key Works: The Theory of the Four Movements, were a direct result of capitalist exploitation and The New Industrial World that socialism was a scientific solution to these Main Ideas: problems, contrasting it with utopian socialism, which he saw as idealistic and impractical. Utopian Socialism: Fourier is considered one of the founders of utopian socialism, advocating for Working class would eventually overthrow the establishment of small, self-sufficient capitalism in a revolution, leading to a communities called phalansteries, where people communist society. would live and work together cooperatively.  13 Critique of Capitalism: Fourier believed that Labor Theory of Value capitalism led to the degradation of human life Rooted in the works of Adam Smith and further and social relations. developed by Karl Marx, this theory suggests Harmony through Cooperation: Fourier that the value of a good is determined by the envisioned a society organized around labor required to produce it. Marx argued that cooperation rather than competition, with social this perspective highlighted the exploitation of harmony achieved by aligning economic and workers under capitalism. social institutions with human nature and Class Struggle desires. This concept, central to Marxist theory, suggests that history is driven by conflicts between 6. Vladimir Lenin (1870-1924) different social classes, particularly the bourgeoisie (owners of production) and the Key Works: The State and Revolution, proletariat (workers). This idea influences Imperialism: The Highest Stage of Capitalism economic discussions about inequality and labor Main Ideas: rights. Theory of Imperialism: Lenin extended Marx’s Collective Ownership critique of capitalism to the global stage, arguing Advocated by socialist thinkers, this concept that imperialism was the highest stage of challenges private property rights in favor of capitalism. collective ownership of the means of production. Vanguard Party: Lenin argued that the working It has influenced various economic models that class, left to its own devices, would only develop prioritize community welfare over individual a trade-union consciousness (focused on wages profit. and conditions) and needed a vanguard party to Welfare Economics lead it to revolutionary consciousness and action. Emerging from utilitarianism, this branch of economics evaluates economic policies based on State and Revolution: Lenin emphasized the their impact on social welfare. Socialist thought need for a revolutionary overthrow of the contributed to its development by emphasizing capitalist state, which he saw as an instrument of the importance of equitable resource bourgeois control. distribution. Market Regulation 7. Rosa Luxemburg (1871-1919) Socialists advocate for government intervention Key Works: Reform or Revolution, The to correct market failures and promote social Accumulation of Capital welfare. This idea led to debates on the role of the state in the economy, influencing modern Main Ideas: economic policies. Critique of Reformism: Luxemburg was critical of the idea that socialism could be achieved through gradual reforms within a capitalist HISTORICAL TEXTS IN ECONOMICS FROM THIS system. PERIOD Spontaneity of the Masses: Luxemburg believed "The Communist Manifesto" by Karl Marx in the spontaneous revolutionary potential of and Friedrich Engels (1848) the working class. This pamphlet calls for the overthrow of Imperialism and Capitalism: Like Lenin, capitalist societies and the establishment of a Luxemburg saw imperialism as an inherent classless society. It outlines the historical feature of capitalism struggle between the bourgeoisie and the proletariat, advocating for workers' rights and revolution. ORIGINS OF SOME KEY CONCEPTS IN MODERN ECONOMICS  14 "Das Kapital" by Karl Marx (1867) Engels during the 19th century. It is rooted in a critical analysis of capitalism, with a focus on This seminal work critiques political economy, class struggles, historical materialism, and the focusing on capitalism's mechanisms, such as idea of revolutionary change to establish a labor, value, and surplus value. Marx argues that classless, stateless society. capitalism is exploitative and inevitably leads to its own downfall. Origins and Intellectual Foundations "The State and Revolution" by Vladimir Lenin Marxism originates from a synthesis of various (1917) intellectual traditions, particularly Hegelian dialectics and Feuerbachian materialism. Lenin discusses the state's role in society, the need for revolutionary action, and the transition Historical Materialism and Class Struggle from capitalism to socialism. He emphasizes the At the core of Marxist theory is historical necessity of proletarian dictatorship to materialism, the idea that the mode of dismantle bourgeois power. production—how society organizes the "Socialism: Utopian and Scientific" by production of goods and services—shapes all Friedrich Engels (1880) aspects of society, including law, politics, culture, and ideology. In this text, Engels distinguishes between utopian socialism, which is idealistic and Class struggle arises from this conflict, as the impractical, and scientific socialism, which is ruling class (those who control the means of grounded in a materialist analysis of history and production) seeks to maintain its dominance society. He argues for a systematic approach to over the working class, or proletariat. Marx achieving socialism. argued that capitalism, the current stage of history in his time, is characterized by the "The Accumulation of Capital" by Rosa exploitation of workers by capitalists, who Luxemburg (1913) extract surplus value from labor. Luxemburg explores the dynamics of capitalist accumulation and its global implications. She argues that capitalism's need for continuous Marxist critique on capitalism expansion ultimately leads to crises and 1. Capitalism is generally considered by scholars necessitates revolutionary change to achieve to be an economic system that includes private socialism. ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, GROUP 7: Marxism and Its Ideology competitive markets, voluntary exchange, and Karl Marx wage labor. Born: May 5, 1818 in Trier, Prussia (now 2. Capitalism has been the subject of criticism Germany). Died: March 14, 1883 from many perspectives during its history. Criticisms range from people who disagree Philosopher, Social Theorist, and Economist with the principles of capitalism in its entirety, to those who disagree with particular Published the "The Communist Manifesto" outcomes of capitalism. with Friedrich Engels (1848) Believed in the labor theory of value to explain 3. Karl Marx saw capitalism as a progressive the relative difference in market prices historical stage that would eventually stagnate due to internal contradictions and be followed Presented a great challenge to laissez-faire by socialism. economics in "Das Kapital" (1867) Developed theory of historical materialism 4. In Karl Marx’s view, the dynamic of capital would eventually impoverish the working class and thereby create the social conditions for a Marxism is a social, political, and economic revolution. theory developed by Karl Marx and Friedrich  15 5. Marxists have offered various related lines of Deng Xiaoping’s reforms in China (post-1978) argument claiming that capitalism is a demonstrated that private enterprise was more contradiction-laden system characterized by effective in reducing poverty than collective recurring crises that have a tendency towards ownership. increasing severity. 6. Normative Marxism advocates for a Modern Perspective: revolutionary overthrow of capitalism that Marx’s materialist theory of history remains would lead to socialism, before eventually relevant for understanding how economic transforming into communism after class structures influence societal development. antagonisms and the state cease to exist. His ideas on the interplay between material conditions and societal evolution have been integrated into modern thought, even if Marxism Marxist influences and legacy as a political ideology has faded. Relevance of Karl Marx: Marxism, founded by Karl Marx, has had a Marx's predictions and theories have largely profound influence on various spheres of been discredited, yet his legacy remains thought, from economics and political theory to influential in understanding societal dynamics. social structures. Historical Influence: Economic Thought and Class Struggle: From 1949 to the late 1980s, Marxism shaped Marx emphasized that class conflict between the the political and economic systems of nearly 40% bourgeoisie (capitalists) and proletariat of the world’s population. However, the collapse (workers) drives economic and social change. of communism in the Soviet Union and its satellites marked a sharp decline in Marx’s Capitalism exploits workers by extracting surplus influence. value, leading to inequality and, eventually, proletarian revolution. Failures of Communism: Atrocities by self-proclaimed Marxist regimes Historical Materialism: damaged his reputation. Societal progress is driven by material Communism, as practiced, failed to provide a conditions, not ideas. standard of living comparable to capitalist Each historical period is defined by its mode of economies, exposing flaws in Marx’s ideas about production, which shapes social, political, and human nature and economic systems. ideological structures. Changes in economic systems lead to societal transformation. Marx's Views on Human Nature: Marx believed human nature was shaped by Critique of Capitalism: social and economic relations, rejecting the notion of inherent or biological human nature. Marx highlighted capitalism’s contradictions, such as economic crises and wealth This perspective, derived from Hegel’s concentration, making it unsustainable. philosophy, suggested class struggle and collective ownership would lead to liberation Capitalist economies are viewed as inherently and prosperity. exploitative and prone to instability. Economic Critique: Surplus Value and Exploitation: Marx assumed that abolishing private property Surplus value arises when workers are paid less would eliminate scarcity, but historical evidence, than the value of their output, forming the basis such as the Soviet Union and Maoist China, of capitalist profits. proved otherwise.  16 This exploitation benefits the bourgeoisie at the Theory of Diminishing Marginal Utility: Jevons expense of the proletariat. developed the concept that as more units of a good are consumed, each additional unit provides less utility, which clarified the "water- Influence on Social and Political Movements: diamond paradox" by explaining why diamonds are more valued than water despite being less Marxism inspired socialist and communist states essential. in the 20th century, particularly in Russia and China. Although many regimes abandoned Marxist Rational Choice and the Equimarginal Rule: He principles, his ideas continue to influence introduced the equimarginal principle, discussions on inequality, labor rights, and suggesting that consumers maximize utility by reform. equalizing the marginal utility per dollar spent across goods. Modern Relevance: Theory of Exchange: Jevons applied his utility Marxist critiques of capitalism remain relevant, maximization principle to exchanges, theorizing particularly regarding wage inequality, labor that trade continues until the marginal utility exploitation, and global economic crises. ratios between goods equalize across trading Concepts like surplus value are invoked in parties, enhancing mutual utility. addressing issues such as multinational exploitation in developing countries. Labor Theory: Jevons posited that the optimal amount of work occurs when the marginal utility of earnings equals the marginal disutility of Group 8 - The Marginalist School - labor, viewing labor as a subjective cost rather Jevons, Menger, Von Wieser, and than a direct measure of value. Von Bohm-Bawerk Public Policy Views: Jevons advocated for The founders and their works/ contributions limited government intervention, supporting child labor restrictions, health regulations, and 1. William Stanley Jevons (1835–1882). cautious public assistance while opposing o British economist, made pioneering extensive welfare dependency. contributions to economic theory, logic, and statistics. o Jevons invented a logic machine, showcased at 2. Carl Menger (1840–1921) the Royal Society in 1870, and published o Born in Galicia, studied at Vienna and Prague, influential works, including The Theory of and earned his doctorate from the University Political Economy (1871). of Cracow. o Challenged the traditional labor theory of value o Published *Principles of Economics* in 1871, by proposing that value depends on utility a foundational work for the Austrian School. rather than labor, emphasizing the importance o Menger aimed to create a systematic of consumer utility in determining value. economic theory and a comprehensive o Introduced the law of diminishing marginal approach to social sciences. utility, arguing that the additional satisfaction from each extra unit of a commodity decreases as its quantity grows. Contributions: Menger's Value Theory. Menger introduced the subjective theory of value, which asserts that the Contributions: value of goods is determined by individual Value Theory: Jevons challenged the labor preferences and needs rather than by intrinsic theory of value, arguing instead that value properties or labor. depends entirely on utility, not labor.  17 The Theory of Imputation. Menger developed Noted Principles: the theory of imputation, which explains how the a. Marginal Utility. Value of a good or service is value of higher-order goods (such as capital determined by its additional or marginal benefit goods) is derived from the value of lower-order to the consumer. The law of diminishing goods (such as consumer goods) marginal utility states that as consumption of a good increases, the additional satisfaction gained from consuming each additional unit 3. Friedrich von Wieser (1851–1926) decreases. o Austrian economist who studied law before b. Marginal Cost. This refers to the additional cost being inspired by Carl Menger's economic incurred by producing one more unit of a good ideas. or service. o He pursued further studies in economics and c. Equilibrium. Marginalists introduced the idea of became a professor at the University of Prague equilibrium, where individuals or firms maximize and later at the University of Vienna. their utility or profits. In a market, equilibrium is o Held high-ranking government positions, reached when the quantity supplied equals the including minister of commerce. quantity demanded, and no further gains can be o He is credited with introducing the term made from trade. "marginal utility" to economics, though the d. Opportunity Cost. Marginalist theory concept was already developed by Menger, emphasized that economic decisions involve Dupuit, and Jevons. trade-offs, and the true cost of any decision is the value of the next best alternative that is foregone (opportunity cost). Contributions: Exchange Value vs. Natural Value: Wieser CRITICISMS distinguishes between "exchange value" (what goods are worth in the market, shaped by Oversimplification: Critics argue that marginalist people's purchasing power) and "natural theory often simplifies complex economic value" (value based solely on utility or behavior by assuming rationality and perfect usefulness). information, which may not reflect real-world scenarios. Opportunity Costs: Wieser introduces the idea Focus on Microeconomics: The Marginalist that the cost of producing something is not just School is primarily concerned with individual monetary but also includes the value of the decisions rather than macroeconomic factors like next-best alternative that was sacrificed. unemployment and inflation, which are important for understanding broader economic trends. 4. Eugen von Böhm-Bawerk (1851–1914) o Key figure in the early Austrian School Marginal Utility Measurement: Some alongside Carl Menger and Friedrich von economists questioned the feasibility of Wieser, served as a professor of political accurately measuring marginal utility since utility economy at the University of Vienna and as is subjective and varies between individuals. Austria’s finance minister. o Major contribution to economic analysis was his focus on the role of time—not in terms of LEGACY economic growth or change, but as a Despite its criticisms, the Marginalist essential factor in everyday economic School fundamentally reshaped economic theory. activities, shaping values, prices, and Marginal analysis became a cornerstone of both incomes. microeconomic and macroeconomic theory. The o introduced the idea of "roundabout" tools and concepts developed by marginalists production, explaining that longer, more continue to influence modern economics, capital-intensive production processes especially in the fields of pricing, consumer choice increase productivity and justify paying theory, and the study of competitive markets. interest to investors.