Economic Thought
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BACK TO THE FUTURE OF ECONOMIC THOUGHT Timothée Parrique, [email protected] What How Why 6 TIME PERIODS IN HET 1. Pre-classical or prehistory (up to 1776) 2. Classical (1776-1870s) 3. Marginal revolution (1870s-1890s) 4. Neoclassical economics (1890s-today) 5. Keynesian revolution (1936-1960s) 6. Formalist economics (1945-today) What question should economics and economists seek to answer? PART I: THE PREHISTORY OF POLITICAL ECONOMY The School of Athens (1510) by Raphael CLASSICAL ANTIQUITY, 400BCE OIKONOMOS, CHREMATISTICS AND THE GOOD LIFE • Thinkers (philosophers): Hesiod, Democritus, Plato, Xenophon, Aristotle • no market; but force, authority and tradition • Administrative approach to economic issues • Questions: What does it mean to live the good life? What is the fair price for a good in the market? Is it morally acceptable to earn money? The Republic (380BCE), Oeconomicus (362BCE), Nicomachean Ethics (350BCE) THE SCHOLASTICS, 12-16TH CHRISTIANITY, JUST PRICE AND USURY • Thinkers (monks): Thomas Aquinas (1225-1274) • ‘Medieval economics’ aims to regulate Christian behaviour in the spheres of production/consumption/distribution and exchange. • Questions: How should good Christian behave i their economic affairs? What is the fair price for a good in the market? Is it morally acceptable to earn money? • Setting the moral scene for the emergence of capitalism Summa Theologica (Aquinas, 1274) THE MERCANTILISTS, 16-18TH TRADE, BULLION AND THE WEALTH OF NATIONS • Thinkers (businessmen): Thomas Mun (1571-1641) & many others • Looking at the economy from a business perspective (i.e. immediate practical interests > theoretical work). • Questions: What is the wealth of nations? How should we trade with other countries? How does money work? • “Every man is his own economist” • The total wealth of the world is fixed; and wealth = precious metals England’s Treasure by Foreign Trade (Mun, 1664) THE MINUTE PAPER In concise sentences, answer those 2 questions: 1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session? 2) What question(s) remain unanswered in your mind? PART II: THE BIRTH OF POLITICAL ECONOMY Market at Covent Garden (1726) by Pieter Angillis ADAM SMITH (1723-1790) THE FATHER OF POLITICAL ECONOMY • Question: Why do we behave the way we behave? • 2 simultaneous motivations: passions & interests • ‘Moral principle of sympathy’ • ‘the impartial spectator’ makes exchange beneficial for both sides • Self-interest and selfishness The Theory of Moral Sentiments (1759) ADAM SMITH (1723-1790) THE FATHER OF POLITICAL ECONOMY • Questions: What is the wealth of nations? Why are some nations poor and other rich? • Division of labour (pin factory example) • Economic liberalism (i.e. reducing obstacles to commerce) leads to wealth accumulation • Use and exchange value; the ‘diamond/water paradox’: “Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use- value; but a very great quantity of other goods may frequently be had in exchange for it.” • ‘Market price’ and ‘natural price’ • What about the famous ‘invisible hand’? An Inquiry into the Nature and Causes of the Wealth of Nations (1776) THOMAS R. MALTHUS (1766-1834) POPULATION POLEMIC & DISMAL SCIENCE • Question: How can we feed a constantly growing population? • ‘The population principle’ justifies the removal of policies aiming to eliminate poverty. • political economy as the ‘dismal science’ • the ‘Iron Law of Wages’ An Essay on the Principle of Population (1798) DAVID RICARDO (1772-1823) TRADE & THE BIRTH OF ABSTRACT MODELS • Question: How does wealth accumulate in the long term? Can we apply the division of labour between countries? • Theory of comparative advantage = each country should produce what they are best and most efficient at and then trade. • Decreasing returns on land = profits decrease in the long term (limits to growth). On the Principles of Political Economy and Taxation (1817) JOHN S. MILL (1806-1873) MORALITY, FEMINISM AND ECOLOGY • Question: How can we improve the role of the individual in society? • Individual liberty will lead to a better society • Proponent of utilitarianism • Power relations in international trade • desirable ‘stationary state’ • culmination of classical theory Principles of Political Economy (1848) KARL MARX (1818-1883) A DEEP LOOK AT CAPITALISM • Question: how does capitalism function? • Thesis 1: capitalism is fundamentally exploitative • Thesis 2: capitalism is inherently unstable and would lead to its own collapse • Thesis 3: capitalism is only an intermediate stage before socialism and then communism. Das Kapital I, II, III (1867 - 1885, 1894) THE MINUTE PAPER In concise sentences, answer those 2 questions: 1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session? 2) What question(s) remain unanswered in your mind? PART III: THE MARGINALIST REVOLUTION Modern Times (1936) by Charlie Chaplin Marginal Revolution: a sudden change in economic science, with the abandonment of the classical approach, and the shift to a new approach based on a subjective theory of value and the analytical notion of marginal utility. ! 3 different countries, 3 different thinkers, 1 idea Léon Walras (1834-1910) William S. Jevons (1835-1882) Carl Menger (1840-1921) THE DIAMOND/WATER PARADOX REVISITED • We should not look at the total utility of water and diamonds, but rather the utility of each unit. • Subjective theory of value • Marginal thinking is thinking ‘at the margin’, meaning thinking about the utility of an additional unit. • On the theoretical side, political economy becomes economics. SUPPLY, DEMAND AND EQUILIBRIUM • DEMAND depend on prices, the prices of other goods consumer’s income and preferences • SUPPLY depend on cost of production, prices and level of technological knowledge • When SUPPLY = DEMAND, we have EQUILIBRIUM DIFFERENCES BETWEEN CLASSICAL MARGINALIST • For classical, the economic • For marginalists, the economic problem concerns the continuous problem concerns the optimal functioning of an economic utilisation of scarce available system based on the division of resources to satisfy the needs and labour desires of economic agents • Objective value (cost of • Subjective value (utility) production) • Prices as indicators of scarcity • Prices as indicators of ‘difficulty of production’ • Distribution is only a specific case of price theory • Distribution is a problem with autonomous characteristics (social • Concept of equilibrium classes and power relations) PART IV: NEOCLASSICAL ECONOMICS Starry Night Over the Rhone (1888) by Vincent van Gogh ALFRED MARSHALL (1842-1924) THE FIRST NEOCLASSICAL ECONOMIST • Project: reconcile the subjective marginalist approach with the objective approach • Turning classical theories (Ricardo, Mill) into theoretical models • Marshall brought the professionalisation of PE; on the institutional side, political economy becomes economics • First degree in economics: 1903 Principles of Economics (1890) THE MINUTE PAPER In concise sentences, answer those 2 questions: 1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session? 2) What question(s) remain unanswered in your mind? PART V: KEYNES & HAYEK Duel between Onegin and Lenski (1899) - Ilya Repin JOHN M. KEYNES (1883-1946) TAKING CONTROL OF THE ECONOMY • The father of macroeconomics • Questions: what determines the overall level of prices in the economy? What cause recessions and depressions? What is the role of the government? • Critique of laissez-faire (economic liberalism). Instead, the government needs to intervene • Keynes revolutionary idea: counter-cyclical economic policies The General Theory of Employment, Interest and Money (1936) FRIEDRICH HAYEK (1899-1992) LIBERALISM AND SPONTANEOUS ORDER • The most influent theorist of economic liberalism in the XXth century; disciple of Smith • Idea: Government intervention would only make things worse in the long run • Only the market (an example of ‘spontaneous order’) can regulate such a complex system as the economy • A 40 years battle against Keynes The Road to Serfdom (1944) PART VI: THE AGE OF FRAGMENTATION Gangs of New York (2002) - Martin Scorsese .