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ECONOMIC PHILOSOPHERS Social 30-1 Quick Review 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? 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) 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) “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; 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 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” 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” 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 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 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 Advocate of free markets It is permissible to tax some negative habits (like alcohol) – to grant the greatest good 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 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 He also supports the idea of “worker cooperatives” rather than businesses Permits 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 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 Marx called for a revolution of society “Dictatorship of the proletariat” This would form socialism – a workers’ democracy 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” 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) 10 Short-Term Demands 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. 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 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) 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 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 This was the belief of many classical liberal thinkers Keynes: Keynesian Economics 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 Keynes argued that the cycle of inflation which followed a depression was caused by one thing: consumer demand 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 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 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 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 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 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 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 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?