HIST 3305 Lecture Notes - Lecture 5: Middle Ages, Microeconomics, Investment Goods
Notes History of Economic Thought
Lecture 1
Period Classical period Neoclassical period Modern economics
Main focus Wealth Allocation of scarce resources ‘Modeling’
Starting point 1776 1870 1940/50
Characteristi
c
Wealth of Nations Marginal revolution
In the 19th century, the adequacy and importance of classical economics declined. The
alternatives were:
- Marx and socialism
- Historical economics
- Marginalism: mainstream of neoclassical period
- Institutionalism
- Keynesian economics
There are two types of explanation for the transition of economic ideas/schools.
-External factors: changes in societal circumstances.
-Internal factors: failure of consistency of theories; increasingly instruments and
techniques prove inadequate.
Change from classicism to marginalism: Industrial revolution, classical economics was not
appropriate for this.
Why did economics start as a science in 1776? What was so special about Adam Smith’s Wealth
of Nations?
The Wealth of Nations stated that the division of labor will make wealth grow. People are
constantly trying to improve their conditions. People advance together, yet primarily out of self-
interest. However, this self-interest does not mean that some people benefit while others are hurt.
Interdependence results in mutual adjustments in behavior, and such patterns channel passions in
socially desirable directions. Not all rules need to be imposed to reach an agreement and to
promote coordination. The main idea behind this is that people can’t live without social
interaction.
Smith: self-interest yields a better societal result than acting out of social interest. This is in
contradiction to the common opinion that wanted to suppress self-interest to promote the general
interest. Besides self-interest, appropriate institutions are required for advancement of
individuals:
- Directing behavior of individuals into a contribution to the general interest.
- Offer opportunities and limitations; not necessarily a positive outcome for everyone.
Goal: to improve one’s condition.
Means: wealth.
How to accumulate wealth: division of labor and thus trade/exchange.
We should all benefit: room for self-interest and institutions.
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Smith’s ideas were in complete contrast with previous ideas.
Before 1776: Pre-classical period.
Early pre-classical period: Greek philosophers and scholastic writers. Economics from an
ethical/religious point of view.
Later pre-classical period: 1500-1776: Mercantilists and forerunners of classical school.
In the middle ages, importance of the market, wage labor, and growth of economic activity
became more important. As a result, society transformed. Economics became subordinated to
political objectives, to increase state power.
Who? Greek philosophers and
scholastic writers
Mercantilists Smith/classical
school
Focus Community State Market
Objectives Ethical/religious Political Economic
Mercantilism
Political objectives were to increase wealth and power. Mercantilists were no longer
philosophers, but government officials and merchants. Growth of wealth and trade in a time of
increasing trade, emerging cities, and state building. Economics was the management of the
national household.
1. Wealth. Money = power. Wealth = stock of gold and silver. Wealth was strongly linked to
political/state power.
2. Sources of wealth.
- Natural resources
- Stealing from others
- Foreign trade: E > M (Thomas Mun)
3. Zero-sum game. Total world amount of wealth is fixed. One country’s gain is another
country’s loss. Economic warfare.
4. Government. Necessity of regulation
- Individual interest conflicts with national interest
- Market induces conflicts
- Advancing political objectives.
An important point of mercantilism is the regulation of the economy. Strengthening the economy
by a positive balance of trade.
1. Facilitating production, transport, and export
2. Measures to keep products cheap in comparison to foreign products. Low wages = low
cost of production = competitive advantage in foreign trade. Low wages also encourage
labor supply. How: large population, regulation of food prices. ‘Utility of poverty’
doctrine.
3. Improve tax revenues
4. Trading companies and colonies
5. Military.
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Mercantilism Classicism
Wealth Money Consumer goods
Sources Foreign trade Division of labor and
accumulation of capital
Economic game Zero-sum Positive-sum
Government and interests National interest and
individual interests conflict
National interest is sum of
individual interests
Why was mercantilism inadequate?
Transition feudal – commercial society.
- Shifts from services to goods
- Changes in level of aggregate demand
- Changes in patterns of production, distribution, and consumption
- Shift in power
- Profit as distinctive source of income.
Classical economics: Independence
1. Market as principle of organization
2. Economic process governed by laws of nature.
Forerunners classical economics
Charles Davenant: Wealth as money is an inadequate concept of wealth.
William Petty: Quantification of causal relationships between economic variables. Political
arithmetic. Importance of division of labor, effect on capital accumulation.
Dudley North: Trade as a positive-sum game. Plea for free trade.
David Hume: There is no need for jealousy of trade:
Price-specie flow mechanism: Trade surplus inflow of gold and silver (specie) prices
increase prices in export sector increase export decreases and import increases trade
surplus turns into a deficit outflow of gold and silver quantity of money decreases
prices decrease etc.
Richard Cantillon: role of entrepreneur, role of market. Abstraction as method. However: still a
large role for government.
Lecture 2
Analysis of Wealth of Nations
Paradox: In an advanced society, the worker and the landlord have to pay a large part of their
income to taxes. However, they’re better off in the advanced society compared to the primitive
society.
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Document Summary
In the 19th century, the adequacy and importance of classical economics declined. There are two types of explanation for the transition of economic ideas/schools. Internal factors: failure of consistency of theories; increasingly instruments and techniques prove inadequate. Change from classicism to marginalism: industrial revolution, classical economics was not appropriate for this. The wealth of nations stated that the division of labor will make wealth grow. People are constantly trying to improve their conditions. People advance together, yet primarily out of self- interest. However, this self-interest does not mean that some people benefit while others are hurt. Interdependence results in mutual adjustments in behavior, and such patterns channel passions in socially desirable directions. Not all rules need to be imposed to reach an agreement and to promote coordination. The main idea behind this is that people can"t live without social interaction. Smith: self-interest yields a better societal result than acting out of social interest.
