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Fall 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.