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HISTORY OF ECONOMIC THOUGHT
Ziyaada Abdulfatai
DEPARTMENT:ECONOMICS
COLLEGE:SOCIAL MANAGEMENT AND SCIENCES
16
1. Why do you believe Adam Smith is the Father of Economic
Liberalism?
Firstly what is economic liberalism?
Economic liberalism is the ideological belief in organizing the
economy on individualist lines, meaning that the greatest possible
number of economic decisions are made by individuals and not by
collective institutions or organizations.
I believe that adam smith is the father of economic liberalism due
to his contributions like the The Theory of Moral Sentiments
(1759), and An Inquiry into the Nature and Causes of the Wealth of
Nations and in those books he explained more about the economy
what philosphers were trying to do but compiled in one. He was of
the first people to theorize economic theory during his time.
Anytime the name Adam smith is mentioned he is immediately
called the father of modern economics or also capitalism. The title
wasn’t given to him like that, he gained the title through his
contribution to economic liberalism. Adam Smith (was a Scottish
moral philosopher and a pioneer of political economy. One of the
key figures of the Scottish Enlightenment,[1] Smith is best known
for two classic works: The Theory of Moral Sentiments (1759), and
An Inquiry into the Nature and Causes of the Wealth of Nations
(1776). The latter, usually abbreviated as The Wealth of Nations, is
considered his magnum opus and the first modern work of
economics. Smith is cited as the "father of modern economics" and
is still among the most influential thinkers in the field of economics
today.
Adam smiths contributions are linked to why his called the father
of economics, his contributions;
Before industrial revolution the economies where not
progressing but with the era of industarial revolution and the
creation of steam engine by james watt , upon discovering
that specialization and division of labor stimulate productivity,
. manufacturers increasingly encouraged mechanizations and
assembly line production in their factories. As a result,
manufacturing productivity also continued to increase.
Highly impressed with these developments during his day,
especially with the effects on productivity by specialization and
division of labor, Adam Smith based most of his theories of
and thoughts of economics on his understandings of this
beginning of industrial revolution in England. Adam Smith was
a Scottish professor who, after spending a few years in France
and interacting with both Quesnay and Turgot, published the
renowned book An Inquiry into the Nature and Causes of the
Wealth of Nations (1776). Within these writings, Smith was
the first to complete a relatively consistent and abstract model
of the nature, structure, and workings of the capitalist system.
.
Contrary to popular understanding Adam Smith was not
necessarily a champion of capitalism. In fact, he felt very bad
for capitalism's adverse effects, especially the pervasive and
systematic social and individual degradation that was
occurring during his time. Interestingly, Smith also provided
the ideological starting material for opposing views of both
contemporary neoclassical (mainstream capitalism) and
Marxian or socialist economic thought. Based, on this
perspective, Smith has not only been considered by many of
today's economic scholars as the father of modern capitalism
but also of the father of radical economics - including socialism
and communism.
Unlike the Physiocrats, yet in similarity to Marxists, Adam
Smith saw capitalism as a system of class conflict and argued
that surplus and profit came from the sphere of production not from exchange. He laid the foundation for the assertion
that value was determined based on labor time in the sphere
of production and not on the utility realized in the process of
exchange (even though he later rejected both value theories).
As a result of his beliefs, Smith was considered a radical for his
time (because of his opposition to both mercantilism and
Physiocrats) and wanted to move forward with capitalism, and
even reform it so that it would be more humane. Smith
supported most of the tenets that would eventually become
the mainstay of neoclassical or mainstream economics. As
already mentioned, he was especially very impressed by the
strengths of the market, and he discussed extensively the
merits of foreign trade and the importance division of labor,
specialization, and productivity.
Smith's general support and basic economic thought regarding
open foreign trade laid the foundation for modern neoclassical
trade theory. For Smith, balanced foreign trade was highly
beneficial because it overcame the narrowness of the home
market and thus provided a vent for surplus. He believed that
a general policy of free trade was also good for long-run
productive potentialities because exposure to an increased
market size could lead to opportunities for more specialization
and division of labor. Foreign trade was also good because it
allowed a country to "increase their enjoyments" as more
variety and choices of products would become available and at
prices that were possibly lower than they were before.
Smith identified four stages of economic and social
development that were applicable, at least until his time
period: hunting, pasturage, agriculture, and commerce. In the
hunting stage, there were no institutionalized privileges and
power relations among the members of society, and a
condition of "equality" in terms of social class and material
wealth existed.
The next higher stage was called pasturage
The third stage of development was agriculture.
The fourth stage of development, the commerce stage, was
the inevitable result of the third stage. Because economic
powers of landowners were limited, landowners were thereby
forced to accept extension of freedoms to other producers
within society
Regarding the field of development economics, Smith was
actually the first to believe that increased modernization or
efficiency of commercially oriented agriculture would provide
an economic base for expansion of cities and the continuous
enlargement of profitable manufacturing. In fact, the entire
capitalist society was created from the growth of mutually
beneficial exchange between the capitalist-agricultural industry
and commerce development. From this perspective, Smith can
be looked upon not only as the father of modern international
trade theory, as already mentioned, but also the father of
modern development economics.
In the study of economic thought, there has always been a
dispute regarding the source of "value" particularly whether
value is created, on the one hand, in the realm of exchange as
determined by individual utility or satisfaction, or on the other
hand, in the sphere of production based on labor time. Smiths'
theory of value formed the first frameworks of this theory. His
theory was based on recognition that the process of production
can be reduced to a series of human exertions. In other words,
that all items going into a commodity, including capital (raw
materials and tools) are products of labor either directly,
indirectly, or from past labor. This view suggests that the
amounts of both direct labor (labor that uses the means of
production) and indirect labor (labor embodied in the means of
production) along with past labor embodied in raw material,
tools, and equipment determines the exchange value of the
commodity. Therefore, in order for a commodity to have value,
it must be a product of human labor. Smith was the first
economist to link profit to production and the first to establish
a relationship between profit and labor embodied in a
commodity.
Smith's price theory was called the "adding-up" theory since
profit and rent were also included with wages (Dobb, 1973).
The primary difference between this theory and labor theory of
value was the inclusion of profit and rent. The adding-up price
theory holds that prices were equal to wages plus rent plus
profits which were also equal to costs of production. However,
based on Smith's analysis, costs of production was equal to
labor time only if capital-to-labor ratios were the same across
industries.
Smith's "natural price," the price around which market prices
fluctuated, was an equilibrium price determined or created by
the costs of production yet realized in the market by forces of
supply and demand. In his price theory, demand would
allocate capital among the industries and determine supply,
but the cost of production would determine the natural price.
In other words, Smith's theory of price claims that although
societal demand determined the quantity produced for any one
commodity, the natural or equilibrium price for that
commodity could only be determined by the costs associated
with its production.
Smith divided production into two basic sectors: agriculture
and manufacturing. The factors of production included land,
labor and capital (today's economics includes a fourth factor
called "entrepreneurship"). The distribution of both actual
ownership and the laws of property ownership created three
main classes within the society, landlords, laborers, and
capitalists. Each class received different forms of money
returns: rent, wages, and profit.
The level of production in any society depended on the number
of productive laborers and the level of their' productivity.
Productivity depended on specialization or the division of
labor. The extent of the division of labor, in turn, was
determined by the extent and magnitude of a well-developed
market and a commercial exchange economy where
specialization could increasingly take hold. The most obvious
division of labor was rural agriculture-urban manufacturing.
According to Smith's analysis, economic development was
expected first in agriculture, then in manufacturing, and third
in foreign trade. Again, a commercial society was both a
requirement and necessity to develop urban-rural
specialization. While diverting from Physiocratic ideology which
held that agriculture was the center of all economic life and
meaningful production, Smith praised manufacturing sector's
ability to accumulate capital and profit. While agreeing with
Physiocratic ideas, Smith argued that capital employed in
agriculture was the most' productive capital. In other words, in
the context of a so-called natural order of things, agriculture
came first -as long as, of course, all markets were kept free.
After the development of the agricultural sector in laissez-faire
(i.e. a condition of perfect competitiveness) capitalism, capital
would then flow into the manufacturing sector and enable it to
develop as well.
Although Smith contributed many founding principles for
Marxism and socialist thought, he felt that capitalism would
reach its greatest height when government would adopt a
"laissez-faire" policy, or as Smith called it, "the obvious and
simple system of natural liberty" (Smith, 1776, p. 651).
Laissez-faire policy encourages free interplay of supply and
demand to regulate economies and allows all economic
behavior to be characterized by selfish and acquisitive
motives. Interestingly, the assumption of a "selfish and
acquisitive behavior" has since become one of the foundations
for neoclassical economics.
In the end of his analysis, Smith concluded that it was best
promote a laissez-faire policy for improving economic welfare
because as productivity increased, made possible through
expanding markets and resulting opportunities for specialization
and division of labor, everyone would be better off. He was also
led to this laissez-faire conclusion based on the assertion that
economic progress came from the accumulation of capital and that
a "natural" flow of capital could contribute to overall economic
welfare. Furthermore, free, competitive markets and harmonizing
forces of the "invisible hand" would help capital be directed or
employed in a productive manner. From this perspective, Smith
believed that government interventions, including unnecessary
regulations, monopolies, subsidies, et cetera, would therefore tend
to misdirect these capital flows and diminish economic welfare.
Hence, the role of government, in his view, should be restricted to
provide for national defense and security, the enforcement of
contracts or administering justice, and to provide a certain amount
of infrastructure and public works/services.
2. Write a critique about the views of Karl Max and John Maynard Keynes on
Economic Thought. Why do their view differ?
Karl Marx: It's Exploitation!
Karl Marx, a German economist and political scientist who lived from
1818 to 1883, looked at capitalism from a more pessimistic and
revolutionary viewpoint. Where Adam Smith saw harmony and growth,
Marx saw instability, struggle, and decline. Marx believed that once the
capitalist (the guy with the money and the organizational skills to build a
factory) has set up the means of production, all value is created by the
labor involved in producing whatever is being produced. In Marx's view,
presented in his 1867 tome Das Kapital (Capital), a capitalist's profits
come from exploiting labor—that is, from underpaying workers for the
value that they are actually creating. For this reason, Marx couldn't
abide the notion of a profit-oriented organization.
This situation of management exploiting labor underlies the class
struggle that Marx saw at the heart of capitalism, and he predicted that
that struggle would ultimately destroy capitalism. To Marx, class
struggle is not only inherent in the system—because of the tension
between capitalists and workers—but also intensifies over time. The
struggle intensifies as businesses eventually become larger and larger,
due to the inherent efficiency of large outfits and their ability to
withstand the cyclical crises that plague the system. Ultimately, in
Marx's view, society moves to a two-class system of a few wealthy
capitalists and a mass of underpaid, underprivileged workers.
Marx predicted the fall of capitalism and movement of society toward
communism, in which “the people” (that is, the workers) own the means
of production and thus have no need to exploit labor for profit. Clearly,
Marx's thinking had a tremendous impact on many societies, particularly
on the USSR (Union of Soviet Socialist Republics) in the twentieth
century.
In practice, however, two events have undermined Marx's theories.
First, in socialist, centrally planned economies have proven far less
efficient at producing and delivering goods and services—that is, at
creating the greatest good for the greatest number of people—than
capitalist systems. Second, workers' incomes have actually risen over
time, which undercuts the theory that labor is exploited in the name of
profit. If workers' incomes are rising, they are clearly sharing in the
growth of the economy. In a very real sense, they are sharing in the
profits.
While Marx's theories have been discredited, they are fascinating and
worth knowing. They even say something about weaknesses in
capitalism. For instance, large companies do enjoy certain advantages
over small ones and can absorb or undercut them, as shown by
examples as old as Standard Oil (now ExxonMobil) and General Motors
and as recent as Microsoft and IBM, in high technology, and ConAgra
and Dole in agriculture. In addition, as we will see in Wealth and
Poverty, income distribution in U.S.-style capitalism, which is a “purer,”
less-mixed form of capitalism than that of Europe, can tend to create a
two-tier class system of “have's” and “have not's.”
Keynes: The Government Should Help Out the Economy
John Maynard Keynes, a British economist and financial genius who
lived from 1883 to 1946, also examined capitalism and came up with
some extremely influential views. They were, however, quite different
from those of Karl Marx and, for that matter, Adam Smith. In 1936, he
published his General Theory of Employment, Interest, and Money. We
will examine Keynes's theories later. They mainly involve people's
propensity to spend or to save their additional money as their incomes
rise, and the effects of increases in spending on the economy as a
whole.
The larger significance of Keynes's work lies in the view he put forth
about the role of government in a capitalist economy. Keynes was
writing during the Great Depression. It's worth noting at this point that in
the United States unemployment reached about 25 percent and millions
of people had lost their life savings as well as their jobs. Moreover,
there was no clear path out of the depression, which led people to
seriously question whether Smith's invisible hand was still guiding
things along. Was this worldwide collapse of economic activity the end
of capitalism?
Keynes believed that there was only one way out, and that was for the
government to start spending in order to put money into private-sector
pockets and get demand for goods and services up and running again.
As it turns out, President Franklin D. Roosevelt gave this remedy a try
when he started a massive public works program to employ a portion of
the idle workforce. However, the United States entry into World War II
rendered this a less than pure experiment in government spending. The
war effort boosted production to extremely high levels (to make guns,
ammunition, planes, trucks, and other materiel) while simultaneously
taking millions of men out of the civilian workforce and into uniform.
EconoTalk
Keynesian economics is an approach to economic policy that favors
using the government's power to spend, tax, and borrow to keep the
economy stable and growing. A Keynesian is an economist or other
believer in Keynesian economics.
The validity and desirability of Keynes's prescription for a sluggish
economy—using government spending to prime the pump—are still
debated today. Again, we will look at the theory and practice of what
came to be known as Keynesian economics later.
Many other economists of note advanced theories and otherwise added
to the body of knowledge in the science. We will look at their ideas as
they arise in our examination of economics. However, Adam Smith, Karl
Marx, and John Maynard Keynes (later Lord Keynes) are widely
recognized as the most influential—Smith because he founded and
formalized the science of economics, Marx because he challenged
capitalism and had such a forceful impact on society and politics, and
Keynes because he prompted new practices as well as new theories in
the world of economic policy. Keynes also played a key role in the
founding of the International Monetary Fund and in other political
economic measures taken at the end of World War II.
Why do their view difer?
Keynes noticed that during the great Depression the prices stayed
the same or continued to rise despite the fact that there was too
much supply and hardly any demand. He correctly assumed that this
was due to the fact that companies were raising their prices to cover
items they were not selling. We see this today in our own economic
crisis.
Keynes also noticed that Union workers were the few middle class
people that were able to cope financially with the hard times as their
collective strength kept their wages from falling.
There by he based his theory on the fact that organized labor was a
good thing as it kept the economy alive.
Marx, on the other hand, advocated that labor own the means of
production where they work, and not simply organize for rights.
There by they had control of the factories and were able to reap
more of the profit depending on their station in the workplace--the
higher the station the better the wage--which would help unify
control. He also argued for the state ownership of natural resources.
Unlike Marx, Keynes nowhere advocated for the public, worker, or
state ownership of wither the means of production or the natural
resources.
All Keynes wanted was a stable capitalist economy & realized that
you could NOT have one without protecting the well-being of the
middle class who make up the majority of the purchase power of any
given Nation.
3. Conceptualize the word "Mercantlism"
Mercantilism was an economic theory and practice, dominant in
Europe from the 16th to the 18th century, that promoted
governmental regulation of a nation's economy for the purpose of
augmenting state power at the expense of rival national powers. It is
the economic counterpart of political absolutism. Mercantilism
includes a national economic policy aimed at accumulating monetary
reserves through a positive balance of trade, especially of finished
goods. Historically, such policies frequently led to war and also
motivated colonial expansion. The Mercantilism theory varies in
sophistication from one writer to another and has evolved over time.
High tariffs, especially on manufactured goods, are an almost
universal feature of mercantilism policy. Other policies have
included:
Building overseas colonies;
Forbidding colonies to trade with other nations;
Monopolizing markets with staple ports;
Banning the export of gold and silver, even for payments;
Forbidding trade to be carried in foreign ships;
Export subsidies;
Promoting manufacturing with research or direct subsidies;
Limiting wages;
Maximizing the use of domestic resources;
Restricting domestic consumption with non-tariff barriers to trade.
Mercantilism in its simplest form is bullionism, but mercantilist
writers have emphasized the circulation of money and reject
hoarding. Their emphasis on monetary metals accords with current
ideas regarding the money supply, such as the stimulative effect of a
growing money supply. Specie concerns have since been rendered
moot by fiat money and floating exchange rates. In time, the heavy
emphasis on money was supplanted by industrial policy,
accompanied by a shift in focus from the capacity to carry on wars to
promoting general prosperity. Mature neomercantilist theory
recommends selective high tariffs for "infant" industries or to
promote the mutual growth of countries through national industrial
specialization.
The term "mercantile system" was used by its foremost critic Adam
Smith, but "mercantilism" had been used earlier by Mirabeau.
While many nations applied the theory, one exemplar was France,
economically the most important state in Europe at the time. King
Louis XIV followed the guidance of Jean Baptiste Colbert, his
controller general of finances (1662–83). They were determined that
the state should rule in the economic realm as it did in the
diplomatic, and that the interests of the state as identified by the king
were superior to those of merchants and everyone else. The goal of
mercantilist economic policies was to build up the state, especially in
an age of incessant warfare, and the state should look for ways to
strengthen the economy and weaken foreign adversaries.
Policies
French finance minister and mercantilist Jean-Baptiste Colbert served for over
20 years.
Mercantilist ideas were the dominant economic ideology of all of
Europe in the early modern period, and most states embraced it to
a certain degree. Mercantilism was centred in England and
France, and it was in these states that mercantilist polices were
most often enacted.