APPLIED ECONOMICS a Brief History of Economic Thought Leading to the Main Competing Economic, Philosophical and Political Theories of Our Time

APPLIED ECONOMICS A Brief History of Economic Thought Leading to The Main Competing Economic, Philosophical and Political Theories of Our Time JOHN MAYNARD KEYNES VS. F.A. HAYEK IN THE BATTLE FOR YOUR MIND AND YOUR LIFE! Economics Science of Economics Marshall High School Mr. Cline Unit One- DA * Classical Economics • The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day. • It encompasses many disparate schools of economic thought. • Ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition, and questioned whether property is best left in private or public hands. • In medieval times, Scholastic scholars such as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price. • Since medieval times, economics was developed almost exclusively in the West until the 20th century. • Scottish philosopher Adam Smith is often cited as "the Father of Modern Economics" for his treatise The Wealth of Nations (1776). • His ideas built upon a considerable body of work from predecessors in the eighteenth century, particularly the Physiocrats. * Classical Economics • Physiocracy (from the Greek for "Government of Nature") is an economic theory developed by a group of 18th century French economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development" and that agricultural products should be highly priced. • Their theories originated in France and were most popular during the second half of the 18th century. • Physiocracy is perhaps the first well-developed theory of economics. • The most significant contribution of the Physiocrats was their emphasis on productive work as the source of national wealth. • This is in contrast to earlier schools, in particular mercantilism, which often focused on the ruler's wealth, accumulation of gold, or the balance of trade. • At the time the Physiocrats were formulating their ideas, economies were almost entirely agrarian. That is presumably why the theory considered only agricultural labor to be valuable. * Classical Economics • Physiocrats viewed the production of goods and services as consumption of the agricultural surplus, since the main source of power was from human or animal muscle and all energy was derived from the surplus from agricultural production. • The perceptiveness of the Physiocrats' recognition of the key significance of land was reinforced in the following half-century, when fossil fuels had been harnessed through the use of steam power. • Productivity increased manyfold. • Railways, and steam-powered water supply and sanitation systems, made possible cities of several millions, with land values many times greater than agricultural land. • Thus, whilst modern economists also recognize manufacturing and services as productive and wealth- creating, the underlying principles laid down by the Physiocrats remain valid. * Classical Economics • Physiocracy also has an important contemporary relevance in that all life remains dependent on the productivity of the raw soil and the ability of the natural environment to renew itself, and as such is the basis of the sub field of Agricultural Economics, also known as agronomics. • Smith's successors included such classical economists as Thomas Malthus, Jean-Baptiste Say, David Ricardo, and John Stuart Mill. • They examined ways the landed, capitalist, and laboring classes produced and distributed national output and modeled the effects of population and international trade. • Jean-Baptiste Say (1767–1832) was a Frenchman born in Lyon who helped popularize Adam Smith's work in France. • His book A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression, now known as Say's Law of markets. * Classical Economics • Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole economy. • People produce things, to fulfill their own wants, rather than those of others, therefore production is not a question of supply, but an indication of producers demanding goods. • He stated that "products are paid for with products“ and "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another“ • Say agreed that a part of the income is saved by the households, but in the long term, savings are invested. * Classical Economics • Investment and consumption are the two elements of demand, so that production is demand, so it is impossible for production to outrun demand, or for there to be a "general glut" of supply. • Say also argued that money was neutral, because its sole role is to facilitate exchanges, therefore, people demand money only to buy commodities; "money is a veil". • To sum up these two ideas, Say said "products are exchanged for products". • At most, there will be different economic sectors whose demands are not fulfilled. But over time supplies will shift, businesses will retool for different production and the market will correct itself. * Classical Economics • An example of a "general glut" could be unemployment, in other words, too great a supply of workers, and too few jobs. • Say's Law advocates would suggest that this necessarily means there is an excess demand for other products that will correct itself. • This remained a foundation of economic theory until the 1930s. • Say's Law was first put forward by James Mill (1773– 1836) in English, and was advocated by David Ricardo, Henry Thornton, and James Mill's son John Stuart Mill. • However two political economists, Thomas Malthus and Jean Charles Léonard de Sismondi, were unconvinced. * Classical Economics • Malthus became widely known for his theories about change in population. His An Essay on the Principle of Population observed that sooner or later population will be checked by famine and disease, leading to what is known as a Malthusian catastrophe. • He wrote in opposition to the popular view in 18th-century Europe that saw society as improving and in principle as perfectible • He thought that the dangers of population growth precluded progress towards a utopian society: • "The power of population is indefinitely greater than the power in the earth to produce subsistence for man". • As a cleric, Malthus saw this situation as divinely imposed to teach virtuous behavior. * Classical Economics • Malthus wrote: That the increase of population is necessarily limited by the means of subsistence, That population does invariably increase when the means of subsistence increase, and, That the superior power of population is repressed, and the actual population kept equal to the means of subsistence, by misery and vice. • Malthus argued that two types of checks hold population within resource limits: positive checks, which raise the death rate; and preventive ones, which lower the birth rate. • The positive checks include hunger, disease and war; • the preventive checks, abortion, birth control, prostitution, postponement of marriage and celibacy. * Classical Economics • In later editions of his essay, Malthus clarified his view that if society relied on human misery to limit population growth, then sources of misery (e.g., hunger, disease, and war) would inevitably afflict society, as would volatile economic cycles. • On the other hand, "preventive checks" to population that limited birthrates, such as later marriages, could ensure a higher standard of living for all, while also increasing economic stability. • Regarding possibilities for freeing man from these limits, Malthus argued against a variety of imaginable solutions, such as the notion that agricultural improvements could expand without limit. Of course, in this instance he was wrong. * Classical Economics • Of the relationship between population and economics, Malthus wrote that when the population of laborers grows faster than the production of food, real wages fall because the growing population causes the cost of living (i.e., the cost of food) to go up. • This is an example of what Keynes would later refer to as “sticky wages”, and therefore he is considered a philosophical precursor to Keynes • Difficulties of raising a family eventually reduce the rate of population growth, until the falling population again leads to higher real wages. • In the second and subsequent editions Malthus put more emphasis on moral restraint as the best means of easing the poverty of the lower classes. • Malthus is arguably the most misunderstood and misrepresented economist of all time. * Classical Economics • The adjective “Malthusian” is used today to describe a pessimistic prediction of the lock-step demise of a humanity doomed to starvation via overpopulation. • When his hypothesis was first stated, the uproar it caused among noneconomists overshadowed the instant respect it inspired among his fellow economists. • So irrefutable and simple was his illustrative side-by-side comparison of an arithmetic and a geometric series—food increases more slowly than population—that it was often taken out of context and highlighted as his main observation. • The observation is, indeed, so stark that it is still easy to lose sight of Malthus’s actual conclusion: that because humans have not all starved, economic choices must be at work, and it is the job of an economist to study those choices. .

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