Overarching Themes in Economic Thought

1. Overarching Themes in Economic Thought Valueprices  microeconomics Distribution  factor prices Growth Macro-stability…and its discontents ‘flation BOOM and bust Economic Organization Role of Market Role of State

2. Wisdom of the Ancients • Oikonomia: run harmonious households&communities Heraclitus (~535 – 475 bc) Harmony thru conflict  Self – regulating market Pythagorus (~582 – 507 bc) Harmony thru numbers  Equilibrium Democritus (~460 – 370 bc) • Diminishing marginal utility • Time preference  present value

3. Plato (~427 – 347 bc): preserve the status quo“…the State is the soul writ large.” First principles: • Human inequalities  division of labor {good}  social stratification { scientific breeding} • Private property  acquisitiveness {bad}  turbulence Wealth  corruption

4. Plato’s Ideal Republic: A stationary state Society parallels the mind …the State is the soul writ large • The elite: Communal property/communal women • Philosophers • Soldiers • Shared Austerity Thinking Philosophers Soldiers (Response to scarcity) Fighting No incentive to advance Workers Craving Merchants

5. Aristotle (384 – 322 bc): focus on individual Human inequality  distributive justice …according to individualmerit In opposition to Plato: • Educate, don’t regulate • Private Property >> Communal Property • Productivity  Progress • Peace (communal property  quarrels) • Pleasure in ownership • Philanthropy (give your own stuff as you wish) But … Acquisitiveness for acquisitiveness sake is wrong • Lending at interest is unnatural • Barren money shouldn’t earn money

6. Skipping a millennium or so… Medieval economics…Scholastics: • Preserve feudal status quo  fixation on usury • Escape clauses (per St. Thomas Aquinas) • “Damage suffered”  reward of waiting • “Escaped gain”  opportunity cost • Salamanca school: • “Just price”  Natural price  Supply – Demand Renaissance Nation-state Mercantilism: Build internal market! Policy…theory  Fixation on gold (according to Smith) {Money  Credit…Money  Capitalism/Keeping Score} Favorable balance of trade  Zero-sum view of economic life • William Petty (English landlord, mid 17th century): • Anticipations of Keynes: Jobs, jobs, jobs • Colbert (French minister, late 17th century): REGULATE!!! • Hamilton (American minister, late 18th century) • Promote manufacturing via tariff

7. Transition from Mercantilism to Smith • John Law (1671 – 1729) Money  Power … and paper money employs more people • Innovated paper money backed by value of land (Note the circularity) Mississippi Company, 1717 (owned half of lower ‘48) • A pyramid scheme that collapsed • Lesson learned: Monetary expansion  INFLATION • David Hume (1711 – 1776) • Price inertia  Short-run non-neutrality of money Spread of impacts from few merchants to economy in general Inflation  capitalist profits first  expansion  progress • Long-run neutrality of money • Specie flow mechanism Trade surplus self-destructs

8. Transition to Smith Richard Cantillon(1680? – 1734?): Patron saint of Austrian Econ …Essai, 1755/1880: “The cradle of political economy” (Jevons) • Land theory of value … labor equated to land needed to maintain subsistence: market price reverts to value Circular flow model of economic activity • Landowners – ENTREPRENEURS – Workers • Balance achieved by free market … or by central planner Estimates of flows  precursor of NI accounts • Monetary theory: anticipates Quantity Theory of Money • Concept of velocity • Dynamic effects of monetary injection: • Income effect  Increase spending  Increased price • Prosperity first  Stagflation later … Austrian flavor

9. Transition to Smith: The Physiocrats Fixation on agriculture – Manufacturing & commerce sterile Champions of laissez – faire What would you do if you were king? • François Quesnay (1694 – 1774) … “nothing” • Physician to Mme. de Pompadour • Leader of group: disciples and associates including Mirabeau, Dupont, Turgot, … and Smith • Tableau Economique an Input-Output table Initially: Landlord has cash; farmer has grain; artisan has stock of goods Landlord buys and food and manufactures • Zig – zag to balance flows • Agriculture  increased wealth (counter to Colbert’s favoring mfg) • Taxes ultimately borne by landlords  tax land rents directly • Hoarding (of money) threatens economic stability • Free trade/free competition most profitable for the nation The tableau: http://homepage.newschool.edu/het//essays/youth/tableauoverview.htm#summary