BACK TO THE FUTURE OF ECONOMIC THOUGHT

What

WhyHow

1. Pre-classical or prehistory (up to 1776)

2. Classical (1776-1870s)

3. Marginal revolution (1870s-1890s)

4. Neoclassical economics (1890s-today)

5. Keynesian revolution (1936-1960s)

6. Formalist economics (1945-today)

6 TIME PERIODS IN HET

What question should economics and economists seek to answer?

PART I: THE PREHISTORY OF POLITICAL ECONOMY

The School of Athens (1510) by Raphael

CLASSICAL ANTIQUITY, 400BCE OIKONOMOS, CHREMATISTICS AND THE GOOD LIFE

• Thinkers (philosophers): Hesiod, Democritus, Plato, Xenophon, Aristotle

• no market; but force, authority and tradition

• Administrative approach to economic issues

• Questions: What does it mean to live the good life? What is the fair price for a good in the market? Is it morally acceptable to earn money?

The Republic (380BCE), Oeconomicus (362BCE), Nicomachean Ethics (350BCE)

THE SCHOLASTICS, 12-16TH CHRISTIANITY, JUST PRICE AND USURY

• Thinkers (monks): Thomas Aquinas (1225-1274)

• ‘Medieval economics’ aims to regulate Christian behaviour in the spheres of production/consumption/distribution and exchange.

• Questions: How should good Christian behave i their economic affairs? What is the fair price for a good in the market? Is it morally acceptable to earn money?

• Setting the moral scene for the emergence of capitalism

Summa Theologica (Aquinas, 1274)

THE MERCANTILISTS, 16-18TH TRADE, BULLION AND THE WEALTH OF NATIONS

• Thinkers (businessmen): Thomas Mun (1571-1641) & many others

• Looking at the economy from a business perspective (i.e. immediate practical interests > theoretical work).

• Questions: What is the wealth of nations? How should we trade with other countries? How does money work?

• “Every man is his own economist”

• The total wealth of the world is fixed; and wealth = precious metals

England’s Treasure by Foreign Trade (Mun, 1664)

THE MINUTE PAPER

In concise sentences, answer those 2 questions:

1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session?

2) What question(s) remain unanswered in your mind?

PART II: THE BIRTH OF POLITICAL ECONOMY

Market at Covent Garden (1726) by Pieter Angillis

ADAM SMITH (1723-1790) THE FATHER OF POLITICAL ECONOMY

• Question: Why do we behave the way we behave?

• 2 simultaneous motivations: passions & interests

• ‘Moral principle of sympathy’

• ‘the impartial spectator’ makes exchange beneficial for both sides

• Self-interest and selfishness

The Theory of Moral Sentiments (1759)

ADAM SMITH (1723-1790) THE FATHER OF POLITICAL ECONOMY

• Questions: What is the wealth of nations? Why are some nations poor and other rich?

• Division of labour (pin factory example)

• Economic liberalism (i.e. reducing obstacles to commerce) leads to wealth accumulation

• Use and exchange value; the ‘diamond/water paradox’: “Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.”

• ‘Market price’ and ‘natural price’

• What about the famous ‘invisible hand’?

An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

THOMAS R. MALTHUS (1766-1834) POPULATION POLEMIC & DISMAL SCIENCE

• Question: How can we feed a constantly growing population?

• ‘The population principle’ justifies the removal of policies aiming to eliminate poverty.

• political economy as the ‘dismal science’

• the ‘Iron Law of Wages’

An Essay on the Principle of Population (1798)

DAVID RICARDO (1772-1823) TRADE & THE BIRTH OF ABSTRACT MODELS

• Question: How does wealth accumulate in the long term? Can we apply the division of labour between countries?

• Theory of comparative advantage = each country should produce what they are best and most efficient at and then trade.

• Decreasing returns on land = profits decrease in the long term (limits to growth).

On the Principles of Political Economy and Taxation (1817)

JOHN S. MILL (1806-1873) MORALITY, FEMINISM AND ECOLOGY

• Question: How can we improve the role of the individual in society?

• Individual liberty will lead to a better society

• Proponent of utilitarianism

• Power relations in international trade

• desirable ‘stationary state’

• culmination of classical theory

Principles of Political Economy (1848)

KARL MARX (1818-1883) A DEEP LOOK AT CAPITALISM

• Question: how does capitalism function?

• Thesis 1: capitalism is fundamentally exploitative

• Thesis 2: capitalism is inherently unstable and would lead to its own collapse

• Thesis 3: capitalism is only an intermediate stage before socialism and then communism.

Das Kapital I, II, III (1867 - 1885, 1894)

THE MINUTE PAPER

In concise sentences, answer those 2 questions:

1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session?

2) What question(s) remain unanswered in your mind?

PART III: THE MARGINALIST REVOLUTION

Modern Times (1936) by Charlie Chaplin

Marginal Revolution: a sudden change in economic science, with the abandonment of the classical approach, and the shift to a new approach based on a subjective theory of value and the analytical notion of marginal utility. !

3 different countries, 3 different thinkers, 1 idea

Léon Walras (1834-1910) William S. Jevons (1835-1882) Carl Menger (1840-1921)

THE DIAMOND/WATER PARADOX REVISITED

• We should not look at the total utility of water and diamonds, but rather the utility of each unit.

• Subjective theory of value

• Marginal thinking is thinking ‘at the margin’, meaning thinking about the utility of an additional unit.

• On the theoretical side, political economy becomes economics.

SUPPLY, DEMAND AND EQUILIBRIUM

• DEMAND depend on prices, the prices of other goods consumer’s income and preferences

• SUPPLY depend on cost of production, prices and level of technological knowledge

• When SUPPLY = DEMAND, we have EQUILIBRIUM

DIFFERENCES BETWEEN

• For classical, the economic problem concerns the continuous functioning of an economic system based on the division of labour

• Objective value (cost of production)

• Prices as indicators of ‘difficulty of production’

• Distribution is a problem with autonomous characteristics (social classes and power relations)

• For marginalists, the economic problem concerns the optimal utilisation of scarce available resources to satisfy the needs and desires of economic agents

• Subjective value (utility)

• Prices as indicators of scarcity

• Distribution is only a specific case of price theory

• Concept of equilibrium

CLASSICAL MARGINALIST

PART IV: NEOCLASSICAL ECONOMICS

Starry Night Over the Rhone (1888) by Vincent van Gogh

ALFRED MARSHALL (1842-1924) THE FIRST NEOCLASSICAL ECONOMIST

• Project: reconcile the subjective marginalist approach with the objective approach

• Turning classical theories (Ricardo, Mill) into theoretical models

• Marshall brought the professionalisation of PE; on the institutional side, political economy becomes economics

• First degree in economics: 1903

Principles of Economics (1890)

THE MINUTE PAPER

In concise sentences, answer those 2 questions:

1) What are the 2 most significant/useful/meaningful/ surprising/disturbing things you have learned (so far) during this session?

2) What question(s) remain unanswered in your mind?

PART V: KEYNES & HAYEK

Duel between Onegin and Lenski (1899) - Ilya Repin

JOHN M. KEYNES (1883-1946) TAKING CONTROL OF THE ECONOMY

• The father of macroeconomics

• Questions: what determines the overall level of prices in the economy? What cause recessions and depressions? What is the role of the government?

• Critique of laissez-faire (economic liberalism). Instead, the government needs to intervene

• Keynes revolutionary idea: counter-cyclical economic policies

The General Theory of Employment, Interest and Money (1936)

FRIEDRICH HAYEK (1899-1992) LIBERALISM AND SPONTANEOUS ORDER

• The most influent theorist of economic liberalism in the XXth century; disciple of Smith

• Idea: Government intervention would only make things worse in the long run

• Only the market (an example of ‘spontaneous order’) can regulate such a complex system as the economy

• A 40 years battle against Keynes

The Road to Serfdom (1944)

PART VI: THE AGE OF FRAGMENTATION

Gangs of New York (2002) - Martin Scorsese