Download Economic Philosophers

ECONOMIC
PHILOSOPHERS
Social 30-1
Quick Review
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What do the points on the economic spectrum
represent?
What are the values of Capitalism?
What are the values of Socialism?
Economic Philosophers: Who are they?
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Adam Smith
John Stuart Mill
Karl Marx
Friedrich Engels
John Maynard Keynes
Friedrich Hayek
Milton Friedman
Adam Smith
1723-1790
Born in Scotland
•Considered the father of modern
economics
•He writes at the beginning of the
industrial revolution
•He is considered a deist, but his
religious views are relatively
unknown
•
Smith: The Theory of Moral
Sentiments (1759)
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This book provides the framework for Smith’s most
influential book
Suggests that “conscience arises from social
relationships”
 Although
mankind has inherent self-interest, we can
form moral judgments
 Theory

of sympathy
In other words, greed can be good!
 The
gluttony of the rich can help the poor
Smith: Invisible Hand
As every individual, therefore, endeavors as much as he can both to employ his
capital in the support of domestic industry, and so to direct that industry
that its produce may be of the greatest value; every individual necessarily
labours to render the annual revenue of the society as great as he can. He
generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it. By preferring the support of
domestic to that of foreign industry, he intends only his own security; and by
directing that industry in such a manner as its produce may be of the
greatest value, he intends only his own gain, and he is in this, as in
many other eases, led by an invisible hand to promote an end which
was no part of his intention. Nor is it always the worse for the society that
it was no part of it. By pursuing his own interest he frequently promotes
that of the society more effectually than when he really intends to
promote it. I have never known much good done by those who affected to
trade for the public good. It is an affectation, indeed, not very common
among merchants, and very few words need be employed in dissuading
them from it.
Smith: An Inquiry into the Causes of the Wealth
of Nations (1776)
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“When an individual pursues
his self-interest, he indirectly
promotes the good of
society”
Self interest in a free
market:
 Keeps
prices low
 Builds an incentive for a
variety of goods and services
Smith: An Inquiry into the Causes of the Wealth
of Nations (1776)

So do nations create wealth?
 Enhance
markets to deepen the division of labour
 Use labour more productively instead of unproductively

Let’s see this in Smith’s own words:
Smith: An Inquiry into the Causes of the Wealth
of Nations (1776)
The annual labour of every nation is the fund which
originally supplies it with all the necessaries and
conveniences of life which it annually consumes ... . [T]his
produce ... bears a greater or smaller proportion to the
number of those who are to consume it ... .[B]ut this
proportion must in every nation be regulated by two
different circumstances;
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first, by the skill, dexterity, and judgment with which its labour is
generally applied; and,
secondly, by the proportion between the number of those who are
employed in useful labour, and that of those who are not so
employed
Smith, A., 1976, vol. 2a, p. 10, idem
Smith: Division of Labour
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To increase economic efficiency, workers must be
employed in specialized tasks
Pro’s
 Each
worker becomes skilled in their particular task
 Overall increase in efficiency increases wealth

Con’s
 Workers
are confined to a single, repetitive task
 “Mental mutilation” of workers
John Stuart Mill 1806-1873
Born in England
•Called “the most influential
English-speaking philosopher of
the 19th century
•Proponent of Jeremy Bentham’s
Utilitarianism
•
Mill: “On Liberty”
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For Mill, liberty justifies the
freedom of the individual in
opposition to state control
 Self
harm is permissible,
unless it causes serious, lasting
harm
Mill: “On Liberty”
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This requires a person to be
aware of their actions, thus
children and “backwards”
people will require a despot
to govern them
Remember: Mill’s arguments
are based on “Utility” not
“Natural Rights”
Mill: Utilitarianism
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Mill liked Jeremy Bentham’s idea of Utilitarianism
Mill’s definition of utilitarianism is the “greatesthappiness principle”
 One
must act to produce the greatest aggregate
happiness among people, within reason

But for Mill, there are different levels of happiness
 Higher
Pleasures – intellectual and moral
 Lower Pleasures – physical
Mill: Utilitarianism
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Thus Mill even supported the idea to grant extra
voting power to university graduates
 They
were better able to evaluate the needs of society
than uneducated people
Mill: Economic Philosophy
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Advocate of free markets
 It
is permissible to tax some negative habits (like
alcohol) – to grant the greatest good
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Equal taxation
 He
believed that progressive taxation hurt those that
worked and saved harder

Inheritance tax
 Represents
an unfair advantage in a utilitarian society
 Taxes more fairly distributes wealth
Mill: Economic Philosophy
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The form of association, however, which if mankind
continue to improve, must be expected in the end to
predominate, is not that which can exist between a
capitalist as chief, and work-people without a voice
in the management, but the association of the
labourers themselves on terms of equality,
collectively owning the capital with which they
carry on their operations, and working under
managers elected and removable by themselves
Principles of Political Economy with some of their Applications to Social Philosophy, IV.7.21 John
Stuart Mill: Political Economy, IV.7.21
Mill: Economic Philosophy

Mill promotes “economic democracy” rather than
Capitalism
A
democracy allows for the advocacy of the greatest
good
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He also supports the idea of “worker cooperatives”
rather than businesses
 Permits
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a more even distribution of money
His political views mimic his economic ones
Karl Marx
1818-1883
Born in Prussia, died in England
•Considered one of the greatest
economists in history
•His most famous book: “The
Communist Manifesto” serves as the
foundation for Marxist thought
•Close friend of Friedrich Engels
•
Marx: Marxism
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The combination of Marx’s theories about society,
economics, and politics
Believed there was a fundamental Class Struggle
between the people who own production and those
who labour
He was extremely critical of Capitalism
 Called
it the “dictatorship of the bourgeoisie”
 Viewed owners of production as selfish – running
systems for their own benefit
Marx: Marxism
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Marx called for a revolution of society
 “Dictatorship
of the proletariat”
 This would form socialism – a workers’ democracy
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Socialism would in turn be replaced by a classless
society: Pure Communism
His ideas led to the formation of socialist states:
 Soviet
Union in 1922
 People’s Republic of China in 1949
Marx: The Communist Manifesto
(1848)
Proletariat
Bourgeoisie
Marx: The Communist Manifesto
(1848)
“The history of all hitherto
existing society is the history
of class struggles”
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This book contains all of
Marx’s and Engel’s thoughts
on society, politics, and
economics
Marx: The Communist Manifesto
(1848)
“The bourgeoisie … has created enormous cities,
has greatly increased the urban population as
compared with the rural, and has thus rescued a
considerable part of the population from the
idiocy of rural life…. The bourgeoisie, during
its rule of scarce one hundred years, has
created more massive and more colossal
productive forces than have all preceding
generations together… railways, electric
telegraphs, clearing of whole continents for
cultivation, canalization of rivers.”
Marx: The Communist Manifesto
(1848)
Marx: The Communist Manifesto
(1848)
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10 Short-Term Demands
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Abolition of property in land and
application of all rents of land to public
purposes.
A heavy progressive or graduated
income tax.
Abolition of all right of inheritance.
Confiscation of the property of all
emigrants and rebels.
Centralization of credit in the hands of
the State, by means of a national bank
with State capital and an exclusive
monopoly.
Centralization of the means of
communication and transport in the hands
of the State.
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Extension of factories and instruments of
production owned by the State; the bringing
into cultivation of waste-lands, and the
improvement of the soil generally in
accordance with a common plan.
Equal liability of all to labour. Establishment
of industrial armies, especially for
agriculture.
Combination of agriculture with
manufacturing industries; gradual abolition
of the distinction between town and country,
by a more equitable distribution of the
population over the country.
Free education for all children in public
schools. Abolition of children's factory
labour in its present form and combination
of education with industrial production.
Marx: Das Kapital 1867-1894
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This multi-volume work was a critical analysis of
capitalism as a political economy
 Attempts
to demonstrate how capitalism is a precursor
to socialism
Friedrich Engels 1820-1895
Born in Prussia, died in England
•Close friend and supporter of Karl
Marx
•Extremely appalled by the working
conditions in England
•
Engels: The Condition of the Working
Class in England (1844)
Engels: The Condition of the Working Class in
England (1844)
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What was working life like in England?
 High
mortality from diseases, filthy living quarters
 Absolutely no safety measures
 Long, tedious working hours (overworking)
 Minimal pay
 Extensive use of child labour

His argument: “The industrial revolution made
workers far worse off”
John Maynard Keynes 1883-1946
Born in England
•Possibly the most significant
economist in history –
revolutionized economics
•He was a successful investor
himself
•
Keynes: Keynesian Economics
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His theories originate on the
concept of “free markets”
Supply and demand will
determine market strength
 The market can largely fix
itself
 However, some “wounds” are
too serious
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This was the belief of many
classical liberal thinkers
Keynes: Keynesian Economics
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Governments can (and should) step
in to ensure that a disaster does not
occur
Note: Keynes is writing in the context
of the Great Depression of the
1930s
In a depression, spending will
stimulate the economy. This will
prevent:
Lay-offs
 Hoarding of money

Keynes: Keynesian Economics
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Keynes argued that the cycle of inflation which followed
a depression was caused by one thing: consumer
demand
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So all you needed to do to control such a wide-ranging
cycle, was to control consumer demand
How it Works:
Inflationary times – raise interest rates at central banks, and
stop infrastructure building to “cool down” inflationary
demand
 Depression times – lower interest rates, decrease taxes, and
increase spending (even run a deficit) to put money back into
the economy

Keynes: Keynesian Economics
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Keynes created the Mixed Economy
 In
times of prosperity, the private sector should be
allowed to operate itself
 In recessions, governments should intervene by spending
money and boosting the economy

Therefore a government should:
 Save
in times of wealth
 Spend in times of need
Keynes: Keynesian Economics
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From the 1930’s -> 1970’s Keynesian economics
dominated
 The
pressures of WWII forced governments to borrow
money to kick their economies into high gear
 However, in the 70’s people realized that government
spending was creating inflation
Keynes: Keynesian Economics
Keynes: Demand-Side Economics
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Demand-Side Economics is an alternative name for
Keynesian economics
This is because his economic theory is founded on
the idea of the government controlling consumer
demand
 By
controlling the demand, you will control the economy
 Since the government tends to be the largest spender in
the land, they are the ones best suited for this control

Demand-side economics influenced another Western
ideal: The Welfare State
Friedrich Hayek 1899-1992
Born in Austria-Hungary
•However, was a British economist
•Vehemently defended classical
liberalism
•
Friedrich Hayek: Anti-Collectivist
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Highly critical of collectivist societies because of the
extremely high level of government control for these
societies to function
Flaw 1:
 Excessive
government control would in turn lead to the
government interfering in the social lives of citizens

Flaw 2:
 Although
a centrally planned economy could regulate
supply with relative accuracy, they could never have
enough information to regulate demand with any
accuracy
Friedrich Hayek: Anti-Collectivist
But when economic power is
centralized as an instrument of
political power it creates a degree
of dependence scarcely
distinguishable from slavery. It has
been well said that, in a country
where the sole employer is the state,
opposition means death by slow
starvation.
-The Road to Serfdom, "Planning
and Power
Friedrich Hayek: His Solution
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Excessive government intervention leads to tyranny
 BUT,

intervention can bring economic freedom
Therefore, liberalism works best when it is flexible
enough to accommodate society as it changes
Milton Friedman 1912-2006
An American economist, statistician,
author, and professor
•Sometimes ranked the second most
popular economist of the 20th century
(behind Keynes)
•He challenges “naïve Keynesian
theory”
•Advocate of Free Market Economics
•
Milton Friedman: Central Bank
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Friedman believed that inflation was primarily the
result of an excess supply of money produced at
central banks
 Thus
the amount of money produced should be linked to
economic indicators (like inflation)

For the most, let the free market manage itself –
only minimal government intervention should be
necessary
Milton Friedman
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From my point of view, we in the United States have
gone overboard in respect to the extent of regulation
and detailed control of labor standards, industry, and
the like. It’s bad for us…I am in favour of cutting
taxes under any circumstances and for any excuse, for
any reason, whenever possible. – Milton Friedman,
2006
Milton Friedman

Promotes classical liberal policies:
 Minimize
government involvement
 Reduce government programs of all kinds
 Opposes
public education, public health, and public housing
The Economic Philosophers Grouped
Classical
Liberalists
Note: Hayek
and Friedman
responded to
rejections of
liberalism by
touting a
return to
classical
liberalism
• Adam Smith
• John Stuart Mill
Rejections of • Karl Marx
Liberalism • Friedrich Engels
Liberal
Responses
• John Maynard Keynes
• Friedrich Hayek
• Milton Friedman
So where do the economic philosophers
sit?