History of Economic Thought
Before Adam Smith - ANS - Aristotle
- Scholastics
- Mercentilism
- Pre-classicist: David Hume
- Quesnay & Physiocrats
Aristotle (384-322 BC) - ANS Examples of reasoning about economic issues:
1. Exchange can only come if there is a potential surplus from the transaction that parties can share
o Money simplifies transaction
2. Principle of diminishing marginal returns
BUT, no understanding of the economic system as a whole yet
Scholastics - ANS - Priests and teachers at medieval universities from the 13th century onwards
- Determination of a just price = in the interest of society
Natural Price: price emerging under free and effective competition, without monopoly, resource waste
or deceitful behaviour
o Cost of production
o Consumers' perception of utility of good
,- Although fragmentary theories, this was an attempt to establish a systematic theory based on
economic laws
Mercantilism - ANS - Positive surplus in balance of trade:
o Limited import:
---> Only raw materials
---> Most production domestic
o Promote export:
---> Inflow of silver and gold
Aim was to promote country's military and economic power relative to that of other countries
- Favorable balance of trade as measure for welfare
Pre-classicist: David Hume (1711-1776) - ANS - Monetary theory for open economy:
o No effect of money stock on real economy (contrary to mercantilists)
o Long-run theory
o International adjustment following domestic money shock
- Contours for later developed theory of money; MV = PT
Quesnay (1694-1774) and Physiocrats - ANS - Tableau Economique (1759)
o National accounts model
o Empirical knowledge about model parameters
- Supplements to tables:
o Agriculture is basis for economic wealth
o Government should promote free competition and free trade:
,"laissez faire, laissez passer"; contrary to mercantilists!
- His followers: Physiocrats
Classical School
Historical Background - ANS - 2 important revolutions led to start of classical thoughts:
1. Scientific Revolution
o Natural laws --> laissez-faire ("let it go")
o Period of Enlightenment
2. Industrial Revolution
o High growth of industry
o Competition
o Low-paid labor force
Classical School: Main ideas - ANS - Economic liberalism
1. Limited government intervention
o Enforcing property rights, public education, national defense
2. Self-interested economic behavior
o Profits, wages
3. Harmony of interests
o Serve society's interest best by pursuing private interest
, 4. All economic resources and activities important
o Land, labor, capital, entrepreneurial ability
o Agriculture, commerce, production, international exchange
5. Economic laws
o Law of CA, law of diminishing returns, labor theory of value, etc.
Adam Smith - Biography & Works - ANS - University of Glasgow
- Professor Uni of Edinburgh 1748 and University of Glasgow 1751
o David Hume
- Private tutor for young Duke of Buccleuch on journey through France (1764)
o Francois Quesnay
Works:
Theory of Moral Sentiments 1759
The Wealth of Nations 1776
- 5 books:
o I. Price Theory
§ Division of labor
§ Price formation and determination
o II. Capital accumulation and financial system
o III. Historical (development agriculture in Europe)
o IV. International trade
§ Criticism on Mercantilism
o V. Role of Public sector
Before Adam Smith - ANS - Aristotle
- Scholastics
- Mercentilism
- Pre-classicist: David Hume
- Quesnay & Physiocrats
Aristotle (384-322 BC) - ANS Examples of reasoning about economic issues:
1. Exchange can only come if there is a potential surplus from the transaction that parties can share
o Money simplifies transaction
2. Principle of diminishing marginal returns
BUT, no understanding of the economic system as a whole yet
Scholastics - ANS - Priests and teachers at medieval universities from the 13th century onwards
- Determination of a just price = in the interest of society
Natural Price: price emerging under free and effective competition, without monopoly, resource waste
or deceitful behaviour
o Cost of production
o Consumers' perception of utility of good
,- Although fragmentary theories, this was an attempt to establish a systematic theory based on
economic laws
Mercantilism - ANS - Positive surplus in balance of trade:
o Limited import:
---> Only raw materials
---> Most production domestic
o Promote export:
---> Inflow of silver and gold
Aim was to promote country's military and economic power relative to that of other countries
- Favorable balance of trade as measure for welfare
Pre-classicist: David Hume (1711-1776) - ANS - Monetary theory for open economy:
o No effect of money stock on real economy (contrary to mercantilists)
o Long-run theory
o International adjustment following domestic money shock
- Contours for later developed theory of money; MV = PT
Quesnay (1694-1774) and Physiocrats - ANS - Tableau Economique (1759)
o National accounts model
o Empirical knowledge about model parameters
- Supplements to tables:
o Agriculture is basis for economic wealth
o Government should promote free competition and free trade:
,"laissez faire, laissez passer"; contrary to mercantilists!
- His followers: Physiocrats
Classical School
Historical Background - ANS - 2 important revolutions led to start of classical thoughts:
1. Scientific Revolution
o Natural laws --> laissez-faire ("let it go")
o Period of Enlightenment
2. Industrial Revolution
o High growth of industry
o Competition
o Low-paid labor force
Classical School: Main ideas - ANS - Economic liberalism
1. Limited government intervention
o Enforcing property rights, public education, national defense
2. Self-interested economic behavior
o Profits, wages
3. Harmony of interests
o Serve society's interest best by pursuing private interest
, 4. All economic resources and activities important
o Land, labor, capital, entrepreneurial ability
o Agriculture, commerce, production, international exchange
5. Economic laws
o Law of CA, law of diminishing returns, labor theory of value, etc.
Adam Smith - Biography & Works - ANS - University of Glasgow
- Professor Uni of Edinburgh 1748 and University of Glasgow 1751
o David Hume
- Private tutor for young Duke of Buccleuch on journey through France (1764)
o Francois Quesnay
Works:
Theory of Moral Sentiments 1759
The Wealth of Nations 1776
- 5 books:
o I. Price Theory
§ Division of labor
§ Price formation and determination
o II. Capital accumulation and financial system
o III. Historical (development agriculture in Europe)
o IV. International trade
§ Criticism on Mercantilism
o V. Role of Public sector
