Geschiedenis van het economisch denken
Week 1 – college
Introduction/Pre-Adam Smith
1. Aristoteles
2. Scholastics
3. Mercantilism
4. Pre-classicist: David Hume
5. Quesnay and Physiocrats
1. Aristotle
- he wrote a lot of letters without thought about the economy
- he emphasized on the transaction between two people; people trade if
there’s a surplus to distribute
Examples of reasoning about economic issues:
- exchange can only come about if there is a potential surplus from the
transaction that parties can share
-> money simplifies transaction
- principle of diminishing marginal returns (he didn’t use this term, but
talked about the concept)
- but no understanding of the economic systems yet
2. Scholastics
- the rich, de powerful ones, protected the poor ones in exchange for
work/money
- priest and teachers at medieval universities (the catholic church was at
the top of the hierarchy, owning loads of land) (they looked at the
economy with an ethical viewpoint)
- determination of a just price = in the interest of society
- ‘natural price’: price under free and effective competition, without
monopoly, resource waste or deceitful behavior
-> cost of production
-> consumers’ perception of utility of a good
- although fragmentary theories, this was an attempt to establish a
systematic theory based on economic laws
3. Mercantilism
Traders started getting a more and more important position in society
- positive surplus in balance of trade
-> limited import
-> only raw materials
-> most production domestic
-> 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 of welfare
4. Pre-classicist: Davis Hume
He said that money didn’t play a role in the real economy. If the money
supply increases, then the prices will also increase, which means that
purchasing power does not adjust. He said that more money doesn’t mean
more power and wealth (the opposite of mercantilism)
Monetary theory for open economy:
- no effect of money stock on real economy
- long-run theory
- international adjustment following domestic money shock
Contours for later developed quantity theory of money (MV = PT)
5. Quesnay and Physiocrats
- tableau economique
-> national accounts model
-> empirical knowledge about model parameters
- supplements to tables
-> agriculture is basis for economic wealth
-> government should promote free competition and free trade: ‘laissez
faire, laissez passer.’
His followers were called physiocrats.
Classic School
> historical background
(1776-1871)
Two important revolutions led to start of classical thoughts:
1. Scientific revolution
- natural laws -> laissez-faire (natuurwetten)
- period of Enlightment (de verlichting)
2. Industrial revolution
- huge growth of industry
- competition
- low-paid labour force
> Main ideas classical school (= economic liberalism)
1. limited government intervention
-> only defending property rights, public education, national defence
2. self-interested economic behaviour
-> pursuing only self-interest; profits, wages
3. harmony of interests
-> serve society’s interest best by pursuing private interest (invisible
hand)
4. all economic resources and activities important
-> land, labour, capital, entrepreneurial ability
,-> agriculture, commerce, production, international exchange
5. economic laws
-> law of comparative advantage, law of diminishing returns, labour theory
of value, etc.
Adam Smith
> Price theory = theory of value
-> value in use (waarde in gebruik)
-> value in exchange (waarde in transactie)
Labour theory of value: relative prices are determined by relative
production costs.
-> example hunting society – labour costs -> division of labour increases
productivity
-> first to put focus on labour productivity
-> seemingly no role for demand in formation of prices (only the supply
side)
Smith: wages/rents/profits all tend toward the ‘natural price’ (inheritance
scholastics)
- natural price corresponds to normal levels of costs
- market price is the price that prevails in the market: supply vs effectual
demand
-> excess supply: natural price > market prices;
-> little supply: natural price < market price
- long term: market price < natural price, market price > natural price
> Returns to production factors.
Wages
- employment contract
- at least subsistence level
Wages may differ as to reflect noneconomic (dis)advantages:
1. easier or hardship of employment;
2. level of trust and responsibility;
3. regularity of employment;
4. difficulty/expensiveness to learn employment;
5. probability of success in employment
-> foundation of theory of compensating wage differentials
Profits
- differences in risk
- compensation for management and supervision of business
Rents
- tenant’s income – natural costs (wages/profit)
-> residual pay
Hence, wages/profits cause high prices, but rents are effect of high prices.
(assumption: free and unregulated markets)
, -> Adam Smith zegt dat productiekosten de prijzen bepalen maar hoogte
prijs bepaalt hoogte pacht (want pacht creëert monopolie macht).
> invisible hand
- inheritance physiocrats
> market mechanism and competition
- perfect competition: ‘system of perfect liberty’
-> absence of monopoly;
-> free entry and exit;
-> profit maximization by producers;
-> degree of competition increases with the number of sellers
Competition is key to understanding Smith’s invisible hand mechanism.
> public interest
Competition is good for economic efficiency; as resources are devoted to
most efficient uses, and hence output is maximized.
But a just distribution of resources could not be achieved by the market
alone.
-> inequalities may arise
> international trade
Main criticism of Mercantilism
- Smith: Laissez-faire principle also applied to international trade
Tarde policies prevent the market from functioning efficiently:
- import restrictions create monopoly for domestic producers
- export subsidies direct money to less productive use
> role of government
- minimal government
- state has 3 functions:
1. protect society against violence and foreign invasion;
2. protect individual against injustice and oppression by other members;
3. erect and maintain public works and institutions, which an individual
would never find profitable to erect/maintain
-> fits mentioning of public goods,
> role of money
- money is ‘dead stock’
- if the stock of money increases, the money price of goods and services
also increases
-> real prices remain unaffected (inheritance Hume)
- money is not productive
- opposite view than Mercantilists, who considered gold and silver as basis
for wealth
Week 1 – college
Introduction/Pre-Adam Smith
1. Aristoteles
2. Scholastics
3. Mercantilism
4. Pre-classicist: David Hume
5. Quesnay and Physiocrats
1. Aristotle
- he wrote a lot of letters without thought about the economy
- he emphasized on the transaction between two people; people trade if
there’s a surplus to distribute
Examples of reasoning about economic issues:
- exchange can only come about if there is a potential surplus from the
transaction that parties can share
-> money simplifies transaction
- principle of diminishing marginal returns (he didn’t use this term, but
talked about the concept)
- but no understanding of the economic systems yet
2. Scholastics
- the rich, de powerful ones, protected the poor ones in exchange for
work/money
- priest and teachers at medieval universities (the catholic church was at
the top of the hierarchy, owning loads of land) (they looked at the
economy with an ethical viewpoint)
- determination of a just price = in the interest of society
- ‘natural price’: price under free and effective competition, without
monopoly, resource waste or deceitful behavior
-> cost of production
-> consumers’ perception of utility of a good
- although fragmentary theories, this was an attempt to establish a
systematic theory based on economic laws
3. Mercantilism
Traders started getting a more and more important position in society
- positive surplus in balance of trade
-> limited import
-> only raw materials
-> most production domestic
-> 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 of welfare
4. Pre-classicist: Davis Hume
He said that money didn’t play a role in the real economy. If the money
supply increases, then the prices will also increase, which means that
purchasing power does not adjust. He said that more money doesn’t mean
more power and wealth (the opposite of mercantilism)
Monetary theory for open economy:
- no effect of money stock on real economy
- long-run theory
- international adjustment following domestic money shock
Contours for later developed quantity theory of money (MV = PT)
5. Quesnay and Physiocrats
- tableau economique
-> national accounts model
-> empirical knowledge about model parameters
- supplements to tables
-> agriculture is basis for economic wealth
-> government should promote free competition and free trade: ‘laissez
faire, laissez passer.’
His followers were called physiocrats.
Classic School
> historical background
(1776-1871)
Two important revolutions led to start of classical thoughts:
1. Scientific revolution
- natural laws -> laissez-faire (natuurwetten)
- period of Enlightment (de verlichting)
2. Industrial revolution
- huge growth of industry
- competition
- low-paid labour force
> Main ideas classical school (= economic liberalism)
1. limited government intervention
-> only defending property rights, public education, national defence
2. self-interested economic behaviour
-> pursuing only self-interest; profits, wages
3. harmony of interests
-> serve society’s interest best by pursuing private interest (invisible
hand)
4. all economic resources and activities important
-> land, labour, capital, entrepreneurial ability
,-> agriculture, commerce, production, international exchange
5. economic laws
-> law of comparative advantage, law of diminishing returns, labour theory
of value, etc.
Adam Smith
> Price theory = theory of value
-> value in use (waarde in gebruik)
-> value in exchange (waarde in transactie)
Labour theory of value: relative prices are determined by relative
production costs.
-> example hunting society – labour costs -> division of labour increases
productivity
-> first to put focus on labour productivity
-> seemingly no role for demand in formation of prices (only the supply
side)
Smith: wages/rents/profits all tend toward the ‘natural price’ (inheritance
scholastics)
- natural price corresponds to normal levels of costs
- market price is the price that prevails in the market: supply vs effectual
demand
-> excess supply: natural price > market prices;
-> little supply: natural price < market price
- long term: market price < natural price, market price > natural price
> Returns to production factors.
Wages
- employment contract
- at least subsistence level
Wages may differ as to reflect noneconomic (dis)advantages:
1. easier or hardship of employment;
2. level of trust and responsibility;
3. regularity of employment;
4. difficulty/expensiveness to learn employment;
5. probability of success in employment
-> foundation of theory of compensating wage differentials
Profits
- differences in risk
- compensation for management and supervision of business
Rents
- tenant’s income – natural costs (wages/profit)
-> residual pay
Hence, wages/profits cause high prices, but rents are effect of high prices.
(assumption: free and unregulated markets)
, -> Adam Smith zegt dat productiekosten de prijzen bepalen maar hoogte
prijs bepaalt hoogte pacht (want pacht creëert monopolie macht).
> invisible hand
- inheritance physiocrats
> market mechanism and competition
- perfect competition: ‘system of perfect liberty’
-> absence of monopoly;
-> free entry and exit;
-> profit maximization by producers;
-> degree of competition increases with the number of sellers
Competition is key to understanding Smith’s invisible hand mechanism.
> public interest
Competition is good for economic efficiency; as resources are devoted to
most efficient uses, and hence output is maximized.
But a just distribution of resources could not be achieved by the market
alone.
-> inequalities may arise
> international trade
Main criticism of Mercantilism
- Smith: Laissez-faire principle also applied to international trade
Tarde policies prevent the market from functioning efficiently:
- import restrictions create monopoly for domestic producers
- export subsidies direct money to less productive use
> role of government
- minimal government
- state has 3 functions:
1. protect society against violence and foreign invasion;
2. protect individual against injustice and oppression by other members;
3. erect and maintain public works and institutions, which an individual
would never find profitable to erect/maintain
-> fits mentioning of public goods,
> role of money
- money is ‘dead stock’
- if the stock of money increases, the money price of goods and services
also increases
-> real prices remain unaffected (inheritance Hume)
- money is not productive
- opposite view than Mercantilists, who considered gold and silver as basis
for wealth
