Download History of economic thought

History of economic thought
Presentation 5
Petr Wawrosz
Predecessors of
classical political
economy
England
Historical background
• At the start of the seventeenth century, England and Scotland were
separate countries, and were in almost all respects marginal to the
European system – prosperous but intellectually rather backward,
and politically and militarily negligible on the European stage. Trade
was dominated by Dutch ships and merchants, and Britain exported
little but wool and woolen textiles.
• By the later seventeenth century things were changing on almost
every front. England became the center of the new science, with
the foundation of the Royal Society (1662) and the publication of
Newton’s Principia (1687). New institutions were emerging, such as
the Bank of England (1694). London overtook Amsterdam as a
trading center, three naval wars with the Dutch opened the way to
British control of the seas, and the Navigation Act of 1660 ensured
that British ships and merchants were the beneficiaries.
• The Dutch could be imitated
• The concept of free trade, however the Navigation Act.
Historical background
• By the seventeenth century, financial markets were becoming quite well
organized but the law still set a maximum to interest rates. Repeated
proposals to lower the maximum legal rate to what would certainly have
been an unsustainably low level came very close to being passed in the
1690s. Low interest was the “causa causans” of prosperity because it
would encourage merchants and farmers to expand their businesses.
• three views about interest rates:
• (a) hat they reflected the “plenty or scarcity” of money, providing a
possible motive for aiming at a positive trade balance to increase the
money stock and allow lower interest rates;
• (b) that they depended on supply and demand of loans, and hence on net
saving and on profit opportunities open to borrowers;
• (c) the naive view that they could be set by legal fiat.
• Dudley North (1641–91): Interest rates, he argued, are determined by
supply and demand for loans. it was “stock” (capital or wealth) – not the
quantity of money – that determined the supply. Low interest rates, as in
Holland, are the result, not the cause, of wealth.
Richard Cantilion (168? – 1734)
• Essay on the Nature of Commerce (1755) he
developed a theoretical framework for analysis of
economic circulation in the economy (can be
seen as a first general equilibrium model
describing relation between production and
consumption).
• Was able to distinguish between short-run and
long-run effects of changes in the stock of money
(between real and monetary magnitudes in the
economy).
Bernard de Mandeville (1670 – 1733)
• Poem: The Fable of the Bees
• The poem suggests many key principles of
economic thought, including division of labor and
the invisible hand
• The poem describes a bee community thriving
until the bees are suddenly made honest and
virtuous. Without their desire for personal gain
their economy collapses and the remaining bees
go to live simple lives in a hollow tree, thus
implying that without private vices there exists no
public benefit.
David Hume (1711 – 1776)
• A Treatise of Human Nature (1741)
• Political Discourses (1752)
• Quantitative theory of money: the change of stock of
money (if nothing else changes) has no real effect.
• Money is the oil that makes the wheels turn more
quickly.
• Criticized mercantilist and explained consequences of
positive balance of payment.
• The question: why farmers create the surplus /more
production than they nead for their living): they
deamnd other goods.
France
The Physiocrats
• The first school of economic thought. They represented a
reaction against the policies of Jean Baptiste Colbert who
advocated strict regulation of commerce, protective tariffs.
• The concept of Laissez faire, laissez-passer. They believed
that
- a natural system, free from the intrusions of an improper
man made law, would result in a harmony and
improvement of the human condition.
- the ordre positif (positive order or rule of man) could be
made consistent with ordre naturel (the order of nature),
the well being of society could be increased.
• A key idea was that agriculture (land or extractive industry
which included grasslands, pastures, forests, mines and
fishing was the productive sector of an economy.
Francois Quesnay (1694 – 1774)
• Tableau Economique (Economic Table, 1759):
the construction showing the flows of
commodities and income in the economy.
More detailed than Cantilion. He tried to
estimate coefficient on the basis of empirical
knowledge of French economy.
Robert Jacques Turgot (1727-81)
• Analysis of investment and production: saving as
the resource for capital. Capital accumulation
contributes to growth of production. But if man
increases a stock of capital goods there will come
a decline in the rate of return of new investment
= the law of decreasing (diminishing) return.
• The use of capital should be increased as long as
the marginal productivity is greater than the rate
of interest.