ECS3705 EXAM ESSAYS 2021.

ECS3705 EXAM ESSAYS 2021. ECS3705 - History Of Economic Thought. Compare and contrast the mercantilist and the physiocrat school of thought: To provide a substantial comparison between the mercantilist and the physiocrat school of thought, it is important to analyse why each school of thought arose, as well as the major tenets of each, who benefitted from each school of thought and finally how each school of thought has affected todays perspective in economics. It is also significant to acknowledge that Physpiocracy arose as a reaction to mercantilism at the time. Mercantilism arose in the 1500s, after the feudal system lost its functionality and significance in the Middle Ages. Mercantilism lasted till about 1776. Physiocracy on the other hand, appeared as the first anti-mercantalist movement in Europe around 1756. Physiocracy developed as a response to rebuild France after French mercantilism caused France to become desperately poor at the time. The focus of Phisiocracy was to liberate the agriculture from mercantilist restrictions and tax burdens, as well as to decrease the corrupt and wastefulness of the government. The Physiocratic school of thought identified three classes, the landowners who provide capital for land improvement and social order; the cultivators who are the only productive ones because they extract raw materials from nature, and lastly the artisans which were industries seen as sterile as they provided no value added. - Mercantilism can roughly be characterized as an exercise in nation-building by way of an alliance between the city merchant and the monarch, both of whom had gains in power and prestige as a result of the trends. The major tenents of mercantilism school of thought consisted of gold and silver being the most desirable form of wealth. Mercantilists equated the wealth of a nation with the amount of gold and silver it possessed within its borders. According the mercantilists, a surplus of exports were necessary to generate payments in hard money. The physiocrats overcame this mercantilist bullionism by acknowledging that wealth consists of useful goods rather than precious metals. Another tenet of mercantilism was nationalism. Mercantilist school of thought promoted the wealth of one nation at the expense of another. they believed trade was a zero-sum game, and that not all countries could simultaneously export more than they imported. Mercantilism also promoted duty-free importation of raw materials that could be produced domestically, protection for manufactured goods and raw materials that could be produced domestically, and export restriction on raw materials. The interests of the merchant took precedence over those of the domestic consumer. Merchants received inflows of gold in return for their exports, while the restrictions on imports reduced the availability of goods for consumption at home. Mercantilism ultimately benefitted the merchant capitalists, the government officials and the monarch/king. It is identified as an example of rent seeking behavior, which is the behavior of securing favourable regulations and laws which attempt to increase the profits of those private parties. Phisiocratic thought instead benfitted the peasants and farmers. By promoting lassesfaire physiocratic thought indirectly promoted industry as well. They encouraged free internal gain trade and stimulated the export of farm products and the import of manufactured goods. This laissez-faire approach broke away the drastic mercantilist restrictions which required a strong central government to grant monopoly prilidges to companies engaged in foreign trade. Physciocratic thought focused instead on the emphasis of agriculture, they believed industry, trade and professions were sterile and did not produce a surplus. Physiocracy was a reaction to the mercantilists. The physiocracy was the first anti-mercantilist movement in Europe. It sought to rebuild France by liberating its agriculture from mercantilist restrictions and tax burdens also by making government less corrupt and wasteful. Physiocracy advocated and believed in the existence of natural laws which when given the chance would spontaneously steer the economy towards harmony and prosperity. Physiocracy advocated for “laissez faire”, a term that meant that people should be allowed to do as they please without government interference. They were therefore opposed to the mercantilists view of government intervention. They favoured freedom of business enterprise at home and abroad which is the total opposite of the fear of goods by the mercantilists. Physiocracy emphasised on agriculture meanwhile the mercantilists believed in the circulation of gold and silver. What are the views of the Physiocrats, Smith and Marx concerning the impact of mechanization (the use of machinery in production) on workers, that is, on their real wage and employment levels? The physiocrats favoured capitalist farms employing wage labour and advanced techniques. Big producers having surpluses for sale would be helped by the physiocratic emphasis on agriculture and free internal trade in grain. Adam Smith viewed the division of labour and the accumulation of capital as the primary factors that promote a growing stock of a nations wealth. Smith described the division of labour makes possible the introduction of machinery to increase peoples productivity. Smith failed to realize that new technology often creates new tools amd equipment that themselves cause the division of labour. He saw the introduction of capital as mainly being a result of the division of labour. The division of labour increases the quantity of output produced for three reasons: 1) Each worker develops increased dexterity in performing one single task repeatedly . 2) Time is saved if the worker need not go from one kind of work to another. 3) Machinery can be invented to increase productivity once tasks have been simplified and made routine through the division of labour. Marx’s view on capitalisms inexorable march towards self-destruction is that mechanization leads to a reduced profit rate, which immediately raises the question why capitalists would wish to mechanise at all. Marx answer is that mechnasation canbe beneficial to the individual firm even though it will harm the industrial sector as a whole; it raises the profits of one firm at the expense of the profits of the whole sector. Moreover, mechanization can reduce the necessary labour time(the time workers need to earn back their wages) which creates greater scope for exploitation. Write an essay in which you explain what contributes to wealth creation according to the following theorists: the mercantlisits, the physiocrats, adam smith and karl marx According to the physiocrats wealth consists of useful goods rather than precious metals. Those goods are produced in the primary sector (mainly agriculture, but also mining and fisheries) contributed to the national product. Manufacturing, trade, finance and the professions were considered sterile, meaning that the value of their output was merely equal to the cost of production, no extra value being added. According to mercantilists gold and silver are the most desirable form of wealth, they tended to equate the wealth of a nation with the amount of gold and silver bullion possessed. Wealth was seen by the mercantilists as the surplus on the Balance of payments. This increased through stimulating exports and restricting imports, extensive regulations to ensure high quality exported goods, extensive regulations to ensure a supply of trained, hard-working yet low paid workforce, and tax bases. Another opposing view between Mercantilism and physiocracy is that these two schools of thought do not define wealth in the same way. Physiocrats believed that only agriculture produced a surplus. Physiocrats thought that the industry, trade and professions were useful but sterile. Meanwhile the mercantilists believed that a nation should a surplus of exports in order to be rich and wealthy. Mercantilists equated the amount of wealth to the gold silver circulating within it’s borders. Meanwhile physiocrats analysed the circular flow of goods and money within the economy at large at not necessarily within the nation's boarders as opposed to mercantilists. Smiths views on money were clearly in opposition to the mercantilists. If moneys function is to serve as a medium of exchange, then paper money would do equally as well as gold and silver and would require less effort to produce. However, Smiths opposition to bullionism leads him to underestimate the importance of money and the contribution it makes towards wealth creation. although bullionism is mistaken as the only measure of wealth, it does not mean that money is productively sterile as Smith argues. Money does not contribute to production in the same way as raw materials, tools, labour or machinery do, however, it does indirectly contribute towards the productivity of society by making it easier to trade. Pg 29 The mercantilists argued that consumable commodities are soon destroyed, whereas gold and silver are more durable. Smiths refutation of the mercantilist overemphasis on gold, however, ignored the special qualities of this metal. Smith was influenced by the Physiocrats. He praised their system and from their thinking, drew his theme of wealth as the consumable goods annually reproduced by the labour of society, the incorporation of lasses-faire and the concept of the circular process of production and distribution. However, Smith did expand the physiocrat idea of wealth creation by stating that wealth consists of useful material goods produced in all sectors, not only the primary sector as the physiocrats believed. He However, Smith did exclude immaterial services which he emphasized had no direct contribution to material production. Smith viewed the main cause of increasing wealth is increasing division of labour. Adam Smith viewed the division of labour and the accumulation of capital as the primary factors that promote a growing stock of a nations wealth. Smith described the division of labour makes possible the introduction of machinery to increase peoples productivity. Smith failed to realize that new technology often creates new tools amd equipment that themselves cause the division of labour. He saw the introduction of capital as mainly being a result of the division of labour. Increased specialization of labor acts together with an enlargement of the capital stock to increase productivity, which in turn increases national output. Greater national output enables higher levels of consumption within the society, and the latter constitutes a rise in the true wealth of the nation. - The modern contrary view is that wealth of a nation consists of the quantity and quality of useful goods (food, housing, clothing, education, law and order, entertainment etc.) which its citizens can enjoy. - Hence, a “wealthy” nation is a nation in which people can enjoy an abundance of such goods as measured by the country’s GDP. - Mercantilists view wealth as money rather than as useful goods, because wealth in the form of money is malleable. It can be taxed and redirected in accordance with the particular preferences and ambitions of the king, which is mostly to finance his court and his military ventures. - Wealth as useful goods already has a purpose, namely, to meet the needs, which these goods are designed to meet for the common people. Thus, mercantilism boils down to a programme of enriching the king (and the merchant) at the expense of the general population. MILL: Mill regarded wealth as useful material goods. By implication, he saw the provision of services as unproductive labour, unless these services indirectly contributed to the production of material goods. Modern economists regard both material and immaterial goods as productive. According to Mill, wealth creation is not limited by the lack of demand but rather by the lack of supply (Says law). According to mill only supply factors limit wealth creation, not demand factors. There will always be enough total demand for total production to be sold. Therefore, investment in additional production capacity need not be held back by worries about future aggregate demand being insufficient to take up the additional production. On the basis of Say’s law, Mill also claimed that all savings would end up being invested rather than being hoarded. Write an essay on the economics of Thomas Malthus, in which you pay attention to his population theory, his views on the Poor Laws and his rejection of Say’s law. Malthus’s population theory absolved the wealthy from any responsibility for poverty, and focused on the idea that the poor had only themselves to blame for their position. His population theory is that population when unchecked, increases geometrically; subsistence at best increases arithmetically. The weakness in Malthus population theory was tha he seriously underestimated the potential for productivity increases in agriculture. Mechanization provided revolutionary development to agriculture. Examples are the introduction of mechanized ploughing and sowing that made large-scale agriculture possible. Various other developments such as better seeds, fertilization, irrigation and pest controls have improved the productivity of agriculture. According to Malthus population theory population increases geometrically (i.e. exponentially) and food production increases arithmetically (i.e. linearly). In this thoeyr he idenitified two types of checks to popualtiopn growth, the preventive checks and the positive checks. The preventive checks was essentially those that reduce of birth rates , either morally which according to Malthus was the “moral restraint” or the immoral way which included prostitution and birth control. The positive checks are those that increase the death rate such as poverty and misery, faimne and any other natural punishments that came upon those who failed to contain population growth. Poor Laws: Poor laws liberalized previous law by providing that the poor should have a minimum income irrespective of their earnings. According to Malthus, poverty and misery are the natural punishment for the failure by the “lower class” to restrain their reproduction. This concluded that there must be no government relief for the poor, that to give them aid would cause more children to survive, thereby ultimately worsening the problem of hunger. Some of his ideas were adopted in the harsh poor law amendment of 1832. He opposed the poor laws . Ultimately, in Malthus view, the difference between the rich and the poor comes down to a difference in moral character. It is an attempt to convince us that poverty is inevitable, that it is the consequences of poor choices and the moral inferiority of the poor, and that there is little that can be done about it. There is a long history of blaming the poor for being poor and downplaying other possible sources of inequality arising from differences in power, social position, institutional structure, and so on, followed by an argument that attempts to help the poor only serve to increase the incentive for immoral behavior. Increasingly, we appear to be heading down this road again. But before we do, we should remember where it leads. Market glutes: This theory by Malthus shows the reason why a lack of demands contrains growth and ultimately how Say’s law fails. Spending b y landlords is essential to avoid a glut of goods on the market that in turn would produce economic stagnation. According to Malthus, rent is a surplus based on the difference between the price of agriculatural produce and the costs of production. Its expenditure therefore addsto effective demand without adding to the cost of production. Malthus’s explanation for the failure of Say’s law: Malthus saw the economy as having perfectly synchronized production rounds of equal lengths. Thus all firms start producing at the same time, pay wages at the same time and start selling fished goods at the same time. It would then appear that the finance to buy up the output of the current production round consists of nothing more than the wages paid out during the current production round. Entrepreneurs are thus prevented from making any profit even when workers spend their wages in full (no leakages). Because these wages are a cost of production for the firm, the following must hold for the firm sector as a whole: aggregate demand for goods = cost of producing these goods. Firms can at best earn back what they previously paid in wages and demand is never sufficient for firms to make a profit. As a result of not making a profit, firms will not be inclined to invest and economic activity would stagnate. This was the problem Malthus saw. The only way for firms to make a profit is to find a demand for their goods which is not a cost of production for them. Malthus had the opinion that aggregate effective demand could fall short of aggregate supply, thus leading to a contraction in aggregate output. Say on the otherhand argued that aggregate effective demand would always be sufficient to buy up aggregate supply. The fact that Malthus is right in claiming that Say’s law does not necessarily hold and that market glutes occurs does not mean that his reasoning as to why Says law fails and how market glutes can be avoided is necessarily correct. However, Malthus theory of market gluts and the need for unproductive consumption had several policy implications. Write an essay on Ricardos theory of rent in which you refer to the role it plays in his broader value theory and to its relevance in the debate surrounding the Corn Laws. If you wish to criticize Ricardos theory of rent, how would you do so? David Ricardo was a leading figure in further developing the ideas of the classical scool. He began with his basic premises and used logic to deduce generalizations. The theory of diminishing returns and rent: Ricardos law of diminishing returns and theory of rent developed in response to the debate over the corn laws. Rent is the productive value of land expressed as a monthly or annual income which land owners can extract from their land. Rent reflects the value and relative scarcity of lands productive contribution. First, the extensive margin of cultivation states that the grade of land partly determines the rent, and that extensive use of the land, will yield diminishing returns to rent. Second, the intensive ,argin of cultivation states that if successive units of labour and capital are added to a piece of land while technology remains constant, each added unit of investment will add less to the output than previous units. The theory of exchange value and relative prices: Ricardo wrote that for a commodity to have exchange value, it must have use value. Utility is not the measure of exchangeable value, although it is essential to it. Possessing utility, or use value, commodities derive their exchange valure from two sources, their scarcity and the quantity of labour required to obtain them. Write an essay on the Chicago school of economics with particular reference to Friedman and Lucas. Explain and critically discuss Marx’s Law of Motion of Capitalism, according to which capitalism inevitably destroys itself. Explain why capitalism has not yet destroyed itself, and why this may still happen for reasons advanced by Marx. Marx sought to analyze the changing forces of production within a capitalist used six important interrelated concepts to construct his thoeyr of capitalism, these were the labour theory of value, the theory of exploitation, capital accumulation and the falling rate of profit, capital accumulation and crises, centralization of capital and concentration of wealth, and class conflict. The labor theory of value is the starting point for the entire theory of law of motion of capitalist development. Workers are the source of all value, but do not receive all the value. Instead, the capitalist pays labour the value of its labour power. This amount is less than the value of the output, the difference beibg surplus value expropriated by the capitalist in the form of property income. Surplus value is the source of capital accumulation, which in turn produces a falling rate of profit, worsening business crises, and technological unemployment. All three bolster the sized of the industrial reserve army of the unemployed and either directly or indirectly add to the immiserization of the proletariat. The declining rate of profit and worsening business crises also cause a centralization of capital and concentration of wealth. The eventual result of the process is class conflict. The theory of capitalist development stands in clear contrast to that presented by Adam Smith. In Russia and Eastern Europe, capitalism was displaced by socialism; in Germany and Italy it drifted into fascism. And while wars, brute political power, exigencies of fate, and the determined efforts of revolutionaries have all contributed their share, the grim truth is that these changes occurred largely for the very reason Marx foresaw: capitalism broke down. Why did it break down? Partly because it developed the instability Marx said it would. A succession of worsening business crises, compounded by a plague of wars, destroyed the faith of the lower and middle classes in the system. But that is not the entire answer. European capitalism failed not so much for economic as for social reasons -- and Marx foresaw this too! For Marx recognized that the economic difficulties of the system were not insuperable. Although antimonopoly legislation or anti-business-cycle policies were unknown in Marx's day, such activities were not inconceivable: there was nothing inevitable in the physical sense about Marx's vision. The Marxist prediction of decay was founded on a conception of capitalism in which it was politically impossible for a government to set the system's wrongs aright; ideologically, even emotionally, impossible. The cure for capitalism's failings would require that a government would have to rise above the interests of one class alone -- and that was to assume that men could free themselves from the shackles of their immediate economic self-interest. Marx's analysis made that doubtful. It is just this lack of social flexibility, this bondage to shortsighted interest, that weakened European capitalism -- at least until after World War II. For one who has read the works of Marx it is frightening to look back at the grim determination with which so many nations steadfastly hewed to the very course that he insisted would lead to their undoing. It was as if their governments were unconsciously vindicating Marx's prophecy by obstinately doing exactly what he said they would. When in Russia under the tsars all democratic trade unionism was ruthlessly stamped out, when in England and Germany monopolies and cartels were officially encouraged, the Marxist dialectic looked balefully prescient indeed. All through the late 19th and early 20th centuries, when one inspected the enormous gulf between rich and poor and saw evidence of the total indifference of the former for the latter, one had the uneasy feeling that the psychological stereotypes that Marx cast in his historical drama were all too truly drawn from life. Things moved differently in America during those years. America too had its share of reactionaries and revolutionaries. The economic history of the United States contains more than enough exploitation and ugliness. But capitalism here evolved in a land untouched by the dead hand of aristocratic lineage and age-old class attitudes. To some degree this resulted in a harsher social climate in America than in Europe, for America clung the credo of "rugged individualism" long after the individual had been hopelessly overwhelmed by the environment of massive industrialism. Yet out of the American milieu came a certain pragmatism in dealing with power, private as well as public, and a general subscription to the ideals of democracy which steered the body politic safely past the rocks on which it foundered in so many nations abroad. It is in these capabilities for change that the answer to Marxian analysis lies. Indeed, the more we examine the history of capitalism, especially in recent decades, the more we learn both to respect the penetration of Marx's thought and to recognize its limitations. The problems he diagnosed within capitalism are still very much with us, including above all a tendency to economic instability and to the concentration of wealth and power. Yet in different nations we find widely different responses to these problems. The point, in weighing Marx's powerful vision and the analytics that follow from it, is his failure to make allowances for the role of sociopolitical culture, an element he barely mentions. There is a spectrum of views and values on the prerogatives of capital, the centrality of the market, and the respective roles of the private and the public sectors in all nations whose institutions are capitalist. It is in this spectrum of institutions, behaviors, and attitudes that the successor vision to Marx must be sought.  Karl Marx saw capitalism as a progressive historical stage that would eventually stagnate due to internal contradictions and be followed by socialism.