economics fundamentals
TRANSCRIPT
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Economists-Moral Philosopers
Adam Smith-The
Wealth of Nations
Karl Marx-Das
Kapital
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The Classics
Adam Smith : The Wealth of Nations/
Theory of Moral Sentiments
Karl Marx: Capital, Communist Manifesto
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Adam Smith
Division of Labor is Key
Labor is the basis of wealth;
The division of labor implies economic
interdependence.
Markets are self-regulating systems for
the orderly coordination of the division of
labor.
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Adam Smith
Invisible Hand
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Adam Smith
Invisible HandAssumptions:
Our preferences are consistent
We act based on self-interest
Individual Good adds up to
Social Good
Government Ensures Property
Rights.
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Adam Smith
Invisible HandAssumptions:
Enough buyers and sellers as for there not to be
a monopoly
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Invisible HandAssumptions:
Perfect Information that backs up our economic
decisions
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Invisible HandAssumptions:
No Externalities
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But first
Sohow is it that, as you are saying Mr.
Smith, if value is originating in labor
(therefore we need more workers anddivision of labor-population growth and
economic growth), all of the profit is kept
by factory owners?
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Conflict theory
All societies are divided into two groups
Owners
Workers
Our society is capitalist.
Owners are bourgeoisie
Workers are proletarians
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Marx on history
The history of all hitherto
existing society is thehistory of class struggle.
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Owners and workers
Owners exploit workers and live off themoney which the workers earn
Members of classes bind together in thepursuit of their common interests.
Workers put up with this inequality
because:They are oppressed wage slaves and cannotfight the system
They are indoctrinated by ideology and religion
into believing what they are told by the
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More from Marx
Technical progress, the growth of
knowledge, and conflict among classes all
foster perpetual change.
Capitalism as an economic system is
irrational in the sense that it stands in the
way of making good the ability of modernscience and technology to meet human
needs.
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Conclusion
Marxism is an understanding of the nature
of social relationships which you are
expected to evaluate. Recognise that it hasstrengths and weakness as a tool of
understanding of our culture.
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John Maynard Keynes (1883-1946)
Born in 1883 in Cambridge, England
Son of John Neville Keynes
Neville was a professor of Economics and Logic at Cambridge Univ., andwrote on Economic Methodology
Won a scholarship to Eton
Boy Genius
Part of Etons social elite
Won a scholarship to Kings College, Cambridge
1911, he became editor of theEconomic Journal. Worked at the Treasury during WWI.
1921, he publishedA Treatise on Probability. This was hisdissertation. It won him a fellowship at
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Keynes, Inter-war Years
Keynes wrote theEconomic Consequences of the Peace (1919),regarding reparation payments
Best Seller
Made him a public celebrity
1923, Tract on Monetary Reform(against returning to the pre-war goldstandard)
Economic Consequences of Mr Churchill(1925, warned of depression)
1930, Treatise On Money
Makes millions in the stock market, commodity, and forex markets.
1936, General Theory of Employment, Interest and Money
1937, he has a serious heart attack
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The General Theory
I believe myself to be writing a book on
economic theory which wil l largelyrevolutionizenot, I suppose, at once
but in the course of the next ten years
the way the world thinks about economic
problems.
-- John Maynard Keynes
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Comment by Paul Samuelson
It is a badly written book, poorly organized; any layman who,
beguiled by the authors previous reputation, bought the book
was cheated of his 5 shi l l ings. I t is not well sui ted for classroom
use. I t is arrogant, bad-tempered, polemical, and not overly-
generous in its acknowledgements... I n it the Keynesian system
stands out indistinctly, as if the author were hardly aware of its
existence or cognizant of its properties; and certainly he is at his
worst when expounding on its relations to its predecessors.F lashes of insight and intui tion intersperse tedious algebra. An
awkward def ini tion gives way to an unforgettable cadenza. When
it is f inally mastered, we find i ts analysis to be obvious and at the
same time new. In short, it is the work of genius.
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The General Theory
a) According to the classical model, the consumer has insatiablewants.
b) The consumer sells his/her labor in exchange for enough incometo buy the goods.
c) The money value of the incomes received must be equal to thevalue of the output produced.
d) So how can unsold goods pile up in warehouses, causing firmsto lay off workers?
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The General Theory (2)
2. Says Law cannot hold. (Supply createsits own demand.)
a) If spending constraints are in effect, thenthere will be a difference between (unlimited)demand and effective demand.
b) Actual (effective) demand will usually be
deficient to purchase total output.
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The General Theory (3)
The market system is not self-regulating: left to its own
devices the market system fails to make sensible use of our
productive potential.
Unemployment is a chronic problem in a capitalist
economy. Government intervention in the economy can
reduce unemployment and instability.
Ergo Fiscal and Monetary Policy!
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Entrepreneurship and the Origins
of Competitive Advantage Simple neoclassical microeconomic theory
allows for little or no role for entrepreneurs
A firm is a production function; it
transforms inputs into outputs
The way the firm transforms inputs into
outputs is assumed to be technically and
economically efficient
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Entrepreneurship
In reality, some firms exploit opportunities for creating profitablecompetitive positions that other firms either ignore or cannot exploit
Seizing such opportunities is the essence of entrepreneurship
Entrepreneurship involves discovery, innovation, and acting on theopportunities that discovery and innovation create (page 132):
To undertake such things is difficult and constitutes a distincteconomic function, first, because they lie outside the routine taskswhich everybody understands and secondly because the environmentresists in many ways that vary, according to social conditions, fromsimple refusal either to finance or to buy a new thing, to physicalattack on the man who tries to product it.
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Creative Destruction
Schumpeter believed that innovation causes most markets to evolve in
a characteristic pattern
There are periods of relative stability, when firms that possess superiorproducts, technologies, or organizational capabilities earn positive
economic profits
These periods are punctuated by fundamental shocks or discontinuities
that destroy old sources of competitive advantage (profits above thenorm) and replace them with new ones
The entrepreneurs who exploit the opportunities these shocks create
achieve positive economic profits during the next period of stability
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The Long-Run Performance of
the Economy According to Schumpeter, the process of
creative destruction implies that static
efficiencythe optimal allocation ofsocietys resources at a given point in timeis less important than dynamic efficiencythe achievement of long-term growth and
technological improvement
What really counts is competition between
new products, technologies, and
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Policy and Managerial
Implications Schumpeters ideas have been used to
defend monopoly, on the grounds that high
economic profits are a necessary reward toencourage innovation, which results inhigher long-run growth
Policy analysis should focus more on theimpacts of policies on innovation and lesson the impacts on prices and current welfare