economics fundamentals

8/13/2019 Economics Fundamentals

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Economists-Moral Philosopers

Adam Smith-The

Wealth of Nations

Karl Marx-Das

Kapital


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The Classics

Adam Smith : The Wealth of Nations/

Theory of Moral Sentiments

Karl Marx: Capital, Communist Manifesto


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Adam Smith

Division of Labor is Key

Labor is the basis of wealth;

The division of labor implies economic

interdependence.

Markets are self-regulating systems for

the orderly coordination of the division of

labor.


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Adam Smith

Invisible Hand


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Adam Smith

Invisible HandAssumptions:

Our preferences are consistent

We act based on self-interest

Individual Good adds up to

Social Good

Government Ensures Property

Rights.


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Adam Smith


Enough buyers and sellers as for there not to be

a monopoly


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Perfect Information that backs up our economic

decisions


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No Externalities


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But first

Sohow is it that, as you are saying Mr.

Smith, if value is originating in labor

(therefore we need more workers anddivision of labor-population growth and

economic growth), all of the profit is kept

by factory owners?


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Conflict theory

All societies are divided into two groups

Owners

Workers

Our society is capitalist.

Owners are bourgeoisie

Workers are proletarians


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Marx on history

The history of all hitherto

existing society is thehistory of class struggle.


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Owners and workers

Owners exploit workers and live off themoney which the workers earn

Members of classes bind together in thepursuit of their common interests.

Workers put up with this inequality

because:They are oppressed wage slaves and cannotfight the system

They are indoctrinated by ideology and religion

into believing what they are told by the


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More from Marx

Technical progress, the growth of

knowledge, and conflict among classes all

foster perpetual change.

Capitalism as an economic system is

irrational in the sense that it stands in the

way of making good the ability of modernscience and technology to meet human

needs.


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Conclusion

Marxism is an understanding of the nature

of social relationships which you are

expected to evaluate. Recognise that it hasstrengths and weakness as a tool of

understanding of our culture.


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John Maynard Keynes (1883-1946)

Born in 1883 in Cambridge, England

Son of John Neville Keynes

Neville was a professor of Economics and Logic at Cambridge Univ., andwrote on Economic Methodology

Won a scholarship to Eton

Boy Genius

Part of Etons social elite

Won a scholarship to Kings College, Cambridge

1911, he became editor of theEconomic Journal. Worked at the Treasury during WWI.

1921, he publishedA Treatise on Probability. This was hisdissertation. It won him a fellowship at


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Keynes, Inter-war Years

Keynes wrote theEconomic Consequences of the Peace (1919),regarding reparation payments

Best Seller

Made him a public celebrity

1923, Tract on Monetary Reform(against returning to the pre-war goldstandard)

Economic Consequences of Mr Churchill(1925, warned of depression)

1930, Treatise On Money

Makes millions in the stock market, commodity, and forex markets.

1936, General Theory of Employment, Interest and Money

1937, he has a serious heart attack


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The General Theory

I believe myself to be writing a book on

economic theory which wil l largelyrevolutionizenot, I suppose, at once

but in the course of the next ten years

the way the world thinks about economic

problems.

-- John Maynard Keynes


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Comment by Paul Samuelson

It is a badly written book, poorly organized; any layman who,

beguiled by the authors previous reputation, bought the book

was cheated of his 5 shi l l ings. I t is not well sui ted for classroom

use. I t is arrogant, bad-tempered, polemical, and not overly-

generous in its acknowledgements... I n it the Keynesian system

stands out indistinctly, as if the author were hardly aware of its

existence or cognizant of its properties; and certainly he is at his

worst when expounding on its relations to its predecessors.F lashes of insight and intui tion intersperse tedious algebra. An

awkward def ini tion gives way to an unforgettable cadenza. When

it is f inally mastered, we find i ts analysis to be obvious and at the

same time new. In short, it is the work of genius.


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The General Theory

a) According to the classical model, the consumer has insatiablewants.

b) The consumer sells his/her labor in exchange for enough incometo buy the goods.

c) The money value of the incomes received must be equal to thevalue of the output produced.

d) So how can unsold goods pile up in warehouses, causing firmsto lay off workers?


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The General Theory (2)

2. Says Law cannot hold. (Supply createsits own demand.)

a) If spending constraints are in effect, thenthere will be a difference between (unlimited)demand and effective demand.

b) Actual (effective) demand will usually be

deficient to purchase total output.


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The General Theory (3)

The market system is not self-regulating: left to its own

devices the market system fails to make sensible use of our

productive potential.

Unemployment is a chronic problem in a capitalist

economy. Government intervention in the economy can

reduce unemployment and instability.

Ergo Fiscal and Monetary Policy!


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Entrepreneurship and the Origins

of Competitive Advantage Simple neoclassical microeconomic theory

allows for little or no role for entrepreneurs

A firm is a production function; it

transforms inputs into outputs

The way the firm transforms inputs into

outputs is assumed to be technically and

economically efficient


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Entrepreneurship

In reality, some firms exploit opportunities for creating profitablecompetitive positions that other firms either ignore or cannot exploit

Seizing such opportunities is the essence of entrepreneurship

Entrepreneurship involves discovery, innovation, and acting on theopportunities that discovery and innovation create (page 132):

To undertake such things is difficult and constitutes a distincteconomic function, first, because they lie outside the routine taskswhich everybody understands and secondly because the environmentresists in many ways that vary, according to social conditions, fromsimple refusal either to finance or to buy a new thing, to physicalattack on the man who tries to product it.


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Creative Destruction

Schumpeter believed that innovation causes most markets to evolve in

a characteristic pattern

There are periods of relative stability, when firms that possess superiorproducts, technologies, or organizational capabilities earn positive

economic profits

These periods are punctuated by fundamental shocks or discontinuities

that destroy old sources of competitive advantage (profits above thenorm) and replace them with new ones

The entrepreneurs who exploit the opportunities these shocks create

achieve positive economic profits during the next period of stability


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The Long-Run Performance of

the Economy According to Schumpeter, the process of

creative destruction implies that static

efficiencythe optimal allocation ofsocietys resources at a given point in timeis less important than dynamic efficiencythe achievement of long-term growth and

technological improvement

What really counts is competition between

new products, technologies, and


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Policy and Managerial

Implications Schumpeters ideas have been used to

defend monopoly, on the grounds that high

economic profits are a necessary reward toencourage innovation, which results inhigher long-run growth

Policy analysis should focus more on theimpacts of policies on innovation and lesson the impacts on prices and current welfare

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