history of economic thought, Study notes of Economics

Download history of economic thought and more Study notes Economics in PDF only on Docsity! 1.5 A BRIEF HISTORY OF ECONOMIC THOUGHT: THE ORIGINS OF ECONOMICS IDEAS 9TH TO 15TH CENTURY - From the 9th century to the 15th century, Europe’s political, military and economic structure was the feudal system . People lived in small estates surrounded by a wall, called manors. These manors belonged to the lord, who owned the land and everything in it. The lord provided protection to peasants in exchange for their service or labour. The lord would manage all aspects in his manor and provide the king with soldiers and taxes. - In the feudal system, the land was granted to people in exchange for their service, from the king down to the peasants. Most people were peasants who worked the land and grew crops in farms that spread around the villages that formed around the lord’s castle. Bakers, carpenters, blacksmiths and some peasants were considered free. - This was a system based on tradition, homage and fealty, which solved the basic economic questions of what, how and for whom to produce. - At this time, most people in the world were involved in agriculture or manual production. Markets were simple, small-town fairs where goods were exchanged for others ( barter ). There were very few merchants. - Towards the end of the Middle Ages, markets became a central event and merchants became richer and richer. Their political and economic power grew alongside their wealth, until ultimately they outgrew the lords. Some merchants aligned behind the king to obtain trading permits and privileges. This made kings stronger and more powerful. - As markets grew, feudalism faded into mercantilism . New economic activities arose and traders depended on the king for the rights to trade and to finance their activities. By the end of the 15th century, Western Europe had become a mercantilist economy. The king’s power increased enormously with trade, as did the role of the government in the economy. 18TH CENTURY - In Western Europe, mercantilism and the growth of markets produced growth that provided the base for the Industrial Revolution. From about 1750 to the end of the 1800s, machine production almost replaced manual production. In many countries, technological improvements led to new methods of production where machines could produce goods more cheaply and at a faster rate than craftspeople. - The Industrial Revolution changed the economy and transformed society forever. The population moved from working in the rural areas to working in factories in the cities. The organisation of work also changed: division of labour and mass production were introduced, which reduced the costs of production and increased the amount of goods. - With the appearance of factories and machines, production was broken down into many small stages. Each person was assigned to one type of task, which he or she repeated over and over again. The person became specialised in that specific task. This production approach is called division of labour and specialisation. - In this system, production was faster, the amount of goods that could be produced was greater and the price of the goods was lower. Together with these developments, there was also technological progress and many new inventions, such as the steam engine, that changed society in many ways. 18TH CENTURY Adam and laissez faire 19TH CENTURY - Utility theory in classical economics - Concept of margin - Say’s law in classical macroeconomics - The marxist critique of classical economics 20TH CENTURY - The keynesian revolution - The emergence of macroeconomic policy - The monetarist/new classical counter revolution 21ST CENTURY - Behavioral economics and the diagloue with psychology - Growing awareness of the interdependence between the economy, society and the environment, and the need to move towards a circular economy feudalism The dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants were obliged to live on their lord's land and give him homage, labour, and a share of the produce, in exchange for military protection. mercantilism The economic system predominant in Europe during the 1500s, based on the idea that a nation's wealth and power were best served by increasing exports, in an effort to collect precious metals like gold and silver. Mercantilism replaced the feudal economic system in Western Europe. - power shifted and kings were limited by democratic reforms. As central power was challenged, so was the role that government should have in guiding the economy. ADAM SMITH: - Adam Smith (1723–1790) is considered the father of modern economics. - In 1776, he wrote his most important book on economics: An Inquiry into the Nature and Causes of the Wealth of Nations. - He was an advocate for the ' free market ' and believed that if everyone followed their own best interest, with little government intervention in the economy, it would result in the most efficient outcome for all. - Smith believed in the existence of an ‘ invisible hand ’ that guides demand and supply in an economy. The invisible hand is the tendency of free markets to regulate themselves by means of competition in the search for self-interest. - INVISIBLE HAND: The idea of the invisible hand goes together with the concept of ‘ laissez-faire ’, that opposed any government intervention in business affairs. 'Laissez-faire' is a term that comes from the French phrase laissez faire et laissez passer , in English ‘Let do and let pass’; that is, letting things work on their own. In economics, laissez-faire assumes that the less the government is involved in the economy, the better off business, and wider society, will be. This laissez-faire approach and the belief of the invisible hand of market forces was the widely accepted orthodox view of the time, in reaction to the existing feudal mercantilist system. This was only the beginning 19TH CENTURY JEAN-BAPTISTE SAY: - published his book Treatise on Political Economy , where he became famous for what is now called Say’s law of Markets. - SAY’S LAW OF DEMAND: Say’s law states that the production of goods creates its own demand. In other words, supply creates its own demand. a buyer's ability to buy goods and services is based on the buyer's successful past production for the market. A person's ability to purchase goods or services depends on their ability to produce and thereby generate income.When a firm produces and sells a good, it creates wages for workers and produces income for businesspeople. As both workers and businesspeople now have income to spend, they will purchase goods and services. Therefore, production increases wealth and leads to demand for other goods. Thus, the source of demand is production, not money itself. - This implies that production is the key to economic growth and prosperity of a country. Therefore the government should encourage production rather than promote consumption. Say's law supports the view that governments should not interfere with the free market and should adopt laissez-faire economics, in accordance with Adam Smith. KARL MARX: (father of socialism) - The most famous critic of capitalism was a German philosopher called Karl Marx. - He wrote extensively about capitalism with the aim of understanding the capitalist system and all its mechanisms in full. He was critical of the capitalist system, which he saw as oppressive of the majority of the population. - Marx studied change in economic systems. He argued that workers would eventually revolt and therefore that capitalism would not last as it would be replaced by a socialist economic system. - His ideas inspired many of the communist regimes in the 20th century and appeared as a massive critique of capitalism after railroads and mass production in factories started spreading around the world. - Das Kapital, capitalism (the free market economy) was doomed because it would not serve the best interest of workers; therefore these economies would go through a period of economic depression and revolutionary upheavals that would require the government to take over, resulting in a communist system, also known as command economy . NEOCLASSICAL SCHOOL OF THOUGHT: - emerged in 1870, with contributions from William Jevons, Leon Walras and Carl Menger. - These economists disagreed with classical economists about how to value a good. For classical economists, the value of a good is determined by the costs of labour and other inputs required to produce it. However, for neoclassical economists, the value of a good is determined by the value that consumers place on the good based on the ‘utility’ that they get from consuming the good. Utility: is a measure of satisfaction or usefulness a consumer receives when they consume a product. Neoclassicals believed that utility could be measured and given a value. There are two ways of measuring utility: total utility and marginal utility. Total utility: is the total satisfaction gained by consuming a certain amount of a good or service. For example, suppose it is a very hot day and someone offers you ice cream. You decide to eat three ice cream cones. The total utility that you get would be the total pleasure gained from eating all of the three ice creams. division of labour The distribution of different parts of a manufacturing process or task to different people in order to improve efficiency. mass production The production of large quantities of a standardised product by an automated mechanical process.