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Economics • Term Economics coined around 1870 • Derived from the Greek – oikos- for house or settlement – nomos for laws or norms 19th Century Economists • Adam Smith The Invisible Hand • David Ricardo Comparative Advantage • Karl Marx Mode of Production Market Economics Market economics – based on societies where property is owned by individuals Market - where buyers and sellers seek to maximize their results by trading Profit – made when labour and capital are used to produce goods to sell in the market Economic theory - how and why goods are exchanged in the market Mercantilism • Gold is wealth • Coined by Adam Smith • Latin mercari to run a trade Mercantilism: Gold • Gold and silver bullion are synonymous with wealth. • Coincided with emergence of nation states in Europe, 19th c. Gold used to fund the military. • Large gold reserves fund larger force for a longer period of time Mercantile Theory • Total volume of trade is unchangeable • Governments use tariffs to encourage exports and discourage imports • Emphasized positive balance Adam Smith - Wealth of Nations • Proposed the invisible hand • Competition produces the best distribution of goods and services, • Encourages specialization • More value with the same labour. • Systems are self-regulated by the activity of their parts John Maynard Keynes • Coined Macroeconomics • Government intervention and spending in the economy is a necessity. • Keynesian theory led to government spending which ended the 1930’s Depression Monetarism • Formulated in the late 1940's and early 1950's by Milton Friedman • University of Chicago School • Supply-side Economics Economics and Trade Globalization The Nature of Trade • Mercantilism--power and profit (navigation acts, England and Holland, good night Amsterdam) • Smith’s critique: trade should be natural and for mutual benefit, surplus products • But a fundamental proposition is that the extent of [the division of labour] must always be limited by the extent of…the market Comparative Advantage • • • • Coined by Ricardo. England and Portugal: trade wine and cloth Methuen Treaty, 1703 If countries specialize according to their comparative advantage, they can prosper through trade, regardless of how inefficient they may be in their chosen specialty. Britain and Free Trade • Empire, the Royal Navy and Gunboat Diplomacy, in addition to the Bank of England. • Alexander Hamilton and Friedrich List: infant industries and the comparative advantage Creating a Global Economy Role of the Core Country • 19th century UK • International currency – British Gold Sovereign • International trading system • Source of investment capital • Source of technology Economic Growth of USA • Resources • Industrialization • High-wages and large internal market • High-productivity • Transportation networks • Tariffs • Modern Corporation The Modern Corporation • Alfred Chandler, The Visible Hand: the Managerial Revolution in American Business • • • • Oligopolies Market share Strategic planning Rise of the business school The New Core Economy: US Re-establishing the Global Economy • Post WWII • International Monetary Fund • $US dollar reserve currency • GATT • Influence of Keynes • Government pursues economic stability restricting market discipline if necessary • Cold War military alliances Trade Levels as % of GDP World Merchandise Trade 74.7 80 70 64.1 54.8 60 45.2 50 40 60.5 39.5 35.9 25.3 30 20 10 0 1913 1955 1973 1994 Primaries Manufactures Average Tariffs Import Coverage US tariffs % US ntbs % EU tariffs% EU ntbs% 30 25 20 15 10 5 0 1950 1989 Post Uruguay Communications Costs Foreign Direct Investment ’70-95 Sectoral Employment US 1900-2000 (% of employment) 80 70 60 Agric Services Indust 50 40 30 20 10 0 1900 1960 1980 2000 Today’s Tri-polar World? US model: • shareholder capitalism, • role of pension funds with assets = 60% GDP • maximizing short-term profit • low taxes • flexible labour markets • large income disparities • low savings (easy credit) European Model • • • • • • Social market economies Generous welfare state Central wage bargaining High employment taxes Regulated and skilled labour market Co-determination “Hausbanken” as shareholders • Large management boards Japanese Model • Managerial capitalism; keiretsu with cross shareholding and banking; • Long term national interests with government role • Hierarchical with less income disparity • Lifetime employment • High savings US Response: Potential Loss of Core Status • Create level playing field • New issues: services. intellectual property, investment • Role of government: domestic regulation • Deepen integration and globalization • World trade organization (proposed by Canada, 1990)