Reviewing Economic Theorists

“it is the greatest happiness of the greatest number that is the measure of right and wrong”◦ monetary expansion as a means of helping to

create full employment◦ Proposed forced saving◦ Believed in government intervention or non-

intervention as necessary for public good.

◦ Bedrock of liberal economic thought and debate

Jeremy Bentham - Utilitarianism

A system of economic regulations aimed at increasing the power of the state.◦ The State tried to regulate and strengthen the

national economy: Favorable Balance of Trade (export more than

import) Encourage Agriculture Build up a sea presence Colonize!

◦ Led to many international conflicts: War of the Spanish Succession War of Austrian Succesion

Seven Years War (1756-1763)

Do You Recall Mercantilism?

Strongly opposed to Mercantilism Believed in ‘Liberal’ Economic theory

◦Individual freedom◦Economic Individualism◦Laissez-faire: opposed gov’t

intervention in social and economic affairs, even if the need for action seemed great to reformers

Adam Smith

Basic Capitalist Principles1. Goods and services are produced for profitable

exchange. This is good!

2. Anything that sells (including labor) is a commodity.

3. “Invisible Hand” (competition) regulates the economy – both commodities AND incomes

Businesses Households

Goods & Service

Labor & Investments

Consumer Spending

Wages

Thomas Malthus - “HOW MUCH IS THERE?”◦ believed human population would outstrip the food

supply resulting in massive famines. Population grow geometrically; land usage arithmetically Underestimated the explosion in agricultural tech. Advocated end of welfare and industry regulation

David Ricardo - “WHO GETS WHAT?”◦ “Iron Law of Wages” – wages always remained at

subsistence levels b/c of surplus of labor◦ Predicted the squeezing of capitalist profits by rising

food and rent costs.◦ Advocated the end of tariffs on foreign grain (Corn

Laws)

The ‘Debbie-Downers’

Built upon ‘Socialist’ views that called for a fairer distribution of resources (‘Utopian’)

Historical Materialism – Reliant on sociological study of historical societies and economic data.

Theory of Surplus Value: true value of a product is labor and, since the worker receives a small portion of his just labor price, the difference is surplus value, “stolen” from him by the capitalist.

Karl Marx & Frederick Engels

From Smith: Gains from trade were GREAT – but only for the Capitalist, and only because he exploited the laborer.

From Malthus: the unplanned nature of the economy can be disastrous – social planning is necessary for survival

From Ricardo: Squeezing of capitalists’ profits will lead to crises:

Overproduction Boom and Bubble cycles (recessions and depressions) Growth of gap between ‘haves’ and ‘have-nots’ Capital ‘flight’ and ‘exportation’ (globalization)

Building on Smith, Malthus, and Ricardo

Freedom as core belief: individuals must be free to pursue their interests and choices.

Book: Principles of Political Economy◦ Standard economics textbook until 1920.◦ Political economy could distinguish the laws

governing economic behavior, enabling governments to create appropriate institutions. Incentives were key: if people felt they had

something to gain, the system would work.

John Stuart Mill – the classical economist of the 19th century

The Great Depression of the 1930s led to a rethinking of the relationship between supply and demand.

Business cycles are a regular part of unregulated markets, but this was different.

Classical economists held that supply was the most important.◦ Say’s Law: in a free market workers would always be

willing to lower their wages to a level where employers could profitably offer them jobs

◦ Keynes was the first to recognize that was not often the case: workers retain wage expectations. Consumption will drop, savings will become paramount.

The Keynesian Revolution

Classical economics said that as consumption dropped, so would interest rates for borrowing, which would spur investors to take this ‘cheap’ money and help balance the economy.

Keynes pointed out that this was not how investment worked: businessmen would not invest if they predicted lowered long-term profits.

The Answer: the govt’ spends, which lowers unemployment, and this creates demand again.

Keynes continued…

First and most important of early challenges to Keynesianism.◦ Milton Friedman was a student.

Government planning (any form of socialism) was doomed to fail◦ The Economic Calculation Problem

Friedman would develop his ideas into a counter-narrative regarding the Depression.◦ Federal Reserve had contracted the money supply

which resulted in hoarding of cash (saving), that had caused the recession to turn into a depression.

Ludwig von Mises – Austrian School