2. LC Economics Syllabus
Economic System and Economic Thought
• Brief historical outline of economic thought –
Smith, Marx, Keynes etc.
• Market, centrally planned and mixed
economies.
3. Exam Questions OL
Short Long
• 2009 Q9 Match • 2010 Q 4 (b) Keynes - Mult
• 2007 Q 9 Match • 2010 Q 5 (b) Smith - COT
• 2006 Q 4 Match • 2008 Q 5 (c) Smith COT
• 2004 Q 8 Cannons of Tax • 2005 Q 5 (c) Smith COT,
• 2003 Q 7 Match DOL
• 2001 Q 4 Match • 1999 Q8
31. 8. State THREE contributions made to economic thought by the Monetarist
economists.
2001
2000
32. Watch out for the following definitions
contained in this presentation!!
• Fiscal Policy • Iron Law of Wages
• Monetary Policy • Law of Diminishing Marginal
• Consumer Surplus Returns
• Price Elasticity of Demand • Economic Rent
(PED) • Law of Comparative
• Cannons of Taxation Advantage
• Quasi Rent • Say’s Law
• Protectionism • The Multiplier
• Laissez-faire • Liquidity Preference Theory
33. Early Economists
• Plato (427-347 BC)
• Aristotle (384-422 BC)
• Thomas Aquinas (1225-1274)
Not on the course but worth a look for interest sake!
34. Plato (427-347 BC)
Division of labor Currency system
Individual Public
subordinate administration &
to the state finance
35. Aristotle (384-322 BC)
True/genuine wealth Unnatural wealth
limited unlimited
E.g.. agriculture, mining e.g.. exchanging
Money
Value in use
Measure of wealth Value in exchange
Store of value
36. Thomas Aquinas (1225-1274)
Christian principals
Common ground co-exist with
economic life
Concerned about
Morality of wealth money lending &
depended on its unjust price
use charged for it
37. The Mercantilist (1500-1780)
• Thomas Mun (1571-1641)
• Believed that;
1. Gold was the prime measure of a
countries wealth.
2.Exploitation of colonies.
3.Protectionism.
38. 7. Trade from and to
England could be
increased by developing
the country as a centre of
exchange.
6. All English exporters should
use the English merchant fleet
and keep as much of their costs
as low as possible.
5. Exporters should gain max benefit by obtaining
high prices for essential goods and lower prices for
more competitive goods.
4. All domestic needs should be supplied by home
industries.
3. Unused agricultural land should be
cultivated.
2. England must reduce the consumption
of all imported goods.
1. England was to become wealthy by
exporting more goods than she imported.
39. The Physiocrat (1750-1800)
• Francois Quesnay (1694-1774)
• Wrote “Economic Table”.
• Believed that;
1. Wealth had its origin in agriculture.
2.Private ownership of property important.
3.Non gov intervention (except for laws).
4.Free trade.
40. A country generated In his famous book he set out the
wealth from the surplus first attempt to explain the circular
created by agriculture- flow of income.
“Produit Net” He did this by comparing the flow
of the economic resources in an
He also showed economy to the circulation of
how the surplus of blood.
agriculture spread
throughout the
country in his book.
He divided society into
3 distinct classes:
1.The Working Class.
2.The Landowners.
3.The Sterile Class.
42. The Classical Economists
1. Adam Smith (1723-1790)
2. Thomas Robert Malthus (1766-1834)
3. David Ricardo (1772-1823)
4. Jean Baptiste Say (1767-1832)
5. John Stuart Mill (1806-1873)
43. Adam Smith
Pursuit of self Classical Economist Laissez-faire
interest Scottish No justification for
Benefited individual (1723 – 1790) government
therefore society “……The Wealth of Nations” intervention except
for defense/justice
Division of Labor
Increases productivity
Invisible hand of
and a country’s
competition
wealth.
E.g.. it takes 18 different Allows self regulation
operations to make a pin! to operate ensuring
economic progress
Labour theory of
Free Trade
value & wealth
With no tariffs/tax,
The value of an item is Cannons of Taxation
markets operate
equal to the amount of Fair tax system;
effectively & trade to
labour that goes into equity
be spread between
producing it economy
nations
certainty
convenience
44. • Labour is the source of a country’s
wealth.
• Wealth should be increased by the
division of labour( showed this by the
observation of straight pins.)
• Developed a labour theory of value;
the value of an item is equal to the
quantity of labour which it can demand
in exchange for itself.
• Free competition ensured that prices
were set freely.
• Encouraged free international trade.
• Role of the government- defence,
education & education.
• Favoured taxation of rent to fund
government and developed canons of
tax: equity, economy, convenience &
certainty.
• Wrote: wealth of nations.
45. The wealth of Nations
(benefits of free trade)
• The pursuit of self interest- “what
benefits the individual, best
benefited the society.”
• Division of Labour- increased
productivity increased the wealth in a
country. He illustrated his theory
with the example with the
manufacture of pins.
• The labour of value theory- the value
of an item was equal to the amount
of labour that went into the
producing the product. The value of
anything is equal to the labour it can
save you.
• Invisible hand of competition- Smith
advocated the operation of a self
regulating market, thus ensuring
economic progress was achieved.
46. • Paradox of value- Smith
• State protection of property distinguished between “value in
rights- encourages the use” and “value in exchange”.
accumulation of property wealth. Some items had a vast utility but
• Perfect competition- free entry are not exchanged, while others
into markets; profits are sufficient possessed little utility but could
to reward entrepreneurs, operate effectively and allow the
inefficiencies penalised and price gains from trade to be spread
would be based on the cost of between nations.
production. Monopolies would • Smith advocated specialism of
not persist. labour.
• Laissez-faire- no justification for • He distinguished between
government intervention except productive and non productive
for defence/ justice. labour.
• Cannons of Taxation-to fund the
state’s defence/justice systems
taxation was necessary and he
developed the four principles of
fair tax system:
Equity
Economy
Certainty
Convenience.
47. Thomas Robert Malthus
Iron Law of Wages Classical Economist
Wages will naturally tend English Theory of
towards the subsistence (1776-1834) Population & Food
level (just enough to get “The Principles of Population” •Population grows
by/ the equivalent of Applied the Law of geometrically
normal profit). Diminishing Returns to (2,4,8,16,32).
If they get any higher, Land •Food grows
the population will rise arithmetically
and wages will be (1,2,3,4,5,6).
•Best land taken up
competed back down to •If population is not
first, then next best,
subsistence level. kept in check famine &
then inferior….
•At each stage the disease would result.
An increase in wage above ( The Green Revolution
amount of food is less
subsistence level helped to avert his
than before.
= increase in population predictions.)
If wages above the •SOL did not fall in
= increase in supply of
subsistence level population 19th C but his ideas
labour
will. were more relevant in
=decrease in wage
Therefore the supply of the population
labour will and Wage Rates explosion of the 20th C
will .
This would lead to a in
population and force wages up
to subsistence level.
48. David Ricardo Law of
Classical Economist Comparative
Economic Rent
English Costs/Advantage
(1772-1823)
•If population
“The Principles of Political •Supported idea of free
increases inferior land
Economy & Tax” trade.
used.
•For use of land rent •A country should
was paid. specialise in the
•Cost of producing on production of those
the best land was goods in which it is
lower. relatively most
•Food produced on efficient .
•And trade for the
good land earned a
surplus over that remainder of it’s
produced on inferior requirements.
land.
•This surplus led to an
increased rent Accepted the Subsistence Wage Theory
payable for the use of He agreed that an
good land. increase in wage above subsistence level
= increase in population
=decrease in wage
49. Jean Baptiste Say (1767-1832)
Wrote: “Treatise on Political Economy”
t
Say’s Law
is
om
on
Ec
ch
en
Fr
Enterprise
• Say said enterprise was the 4th Factor of
Production .
•The return being profit or loss.
50. • “Supply creates it’s own demand”.
People make products they are most efficient at.
Say’s
Law
•
• They exchange their surplus for money.
• They use this to buy goods that they want.
• Therefore the supply of goods creates a demand for goods.
According to Say, people work, not for its own sake, but only to satisfy
their demand for goods & services.
Workers cannot satisfy all their own needs directly from their own work. Through specialism they
can exchange their surplus of output for the surplus output of others.
Production is therefore an essential core of the demand for other goods.
As a result there can never be overproduction.
Aggregate Demand = Aggregate Supply – production on one side is reciprocated by demand on the
other.
Economic crisis & over production could not exist because production
created demand.
However they did occur and he explained this by the restrictions imposed
Supply on free trade.
creates its
own If you make and manage to sell what you’re good at producing, you then have the
demand. money to demand what others can produce.
51. John Stuart Mill
(1806-1873)
Wrote:
“Principals of
Political
Economy…”
52. John Stuart Mill (1806-1873)
Wrote: “Principals of Political Economy…”
• He advocated the following;
1. Demand & supply were important in
assessing the value of a product.
2.Law of diminishing marginal returns.
3.Predicted the emergence of dominant firms.
4.Establishment of trade unions to counteract
the power of dominant firms.
Mill became disillusioned by the capitalist system & began
to lean towards a mild form of socialism.
53. Correctly predicted the
emergence of large
The excess of earnings companies and oligopolies
should be due to economies of scale.
redistributed in order
to increase welfare of Saw a role for trade
society in general. unions in moderating the
power of large
companies.
He was guided by
the principle that
the individual has
He believed that the right to do
Demand & Supply whatever he wishes
were equally as as long as it causes
important in no harm to others.
determining Value.
Recognised the
importance of the LDMR
Wages are determined by the capital available to pay wages divided by the working population.
Wages can be increased by:
1.Cutting the population.
or
2.Increasing the capital fund.
54. “Nothing can be done for Ireland without
transforming the rural population from cottier
tenants into ….land proprietors (owners)”.
JS Mill, “Principles of Political Economy” (1848)
57. Capitalism Predicted
Karl Marx
Socialism Growth of oligopolies
Socialist
Communism Forecasted
German
Emergence of trade
(1818-1883)
cycles
“The Communist Manifesto”
Social revolution
Where proletariat
Labour theory would take public
People required to work ownership of the FOP
more hours than
necessary to generate
the income needed to Saw a class division:
pay their wages. Two tiered society
=unequal distribution of
wealth
Profit Capitalists (owners)
Labour produced a Profits invested in Proletariat (workers)
surplus value which was technology
profit for employers Reduced need for labor He overlooked the
= unemployment power of the trade
unions to improve the
Marx inspired many communist regimes, such rights of the workers.
as the Soviet Union that collapsed in 1991.
58. Labour Theory of Value
• The value of a good was the cost needed to
produce the good.
• Labour paid just enough to raise a family but
workers were required to work a number of
hours in excess of this.
• For this he was producing profit/value for his
employer.
• This excess value was called the “Surplus
Value” and represented the exploitation of
the workers by the capitalist.
59. • Marx predicted a worker revolution to collectively
seize the means of production.
• He believed that since workers generated all the
income they deserved all the profits.
• The exploited working class would grow in numbers,
organise themselves, revolt and over throw
capitalists.
• The workers would then redistribute wealth.
• A Communist society could be created to replace
Capitalism- it would be a classless society with no
need to struggle.
• He downplayed the role of land, labour, capital and
especially enterprise in generating income and profit.
60. Criticism of
Karl Marx
• Despite what Marx believed, the growth of unions
ensured protection of working class and improved
the.
• Middle & professional classes emerged.
• Technology did not lead to mass unemployment.
• The Labour theory of value has been discarded:
Labour is useless without land or capital.
• He falsely predicted that the advances of
technology would lead to mass unemployment.
However
• Predictions on emergence of oligopolies & trade
cycles came true.
61. The Neo-classical Economists
Alfred Marshall (1842-1924)
•Came up with the concept of elasticity.
•Introduced the concept of short & long runs.
•Introduced the concept of Diminishing
Marginal Utility.
•Scissors analogy.
•Quasi-rent
•Saw a role for government in the economy.
62. Competition Quasi Rent
Theory of Value
The value of an item is determined; Regulated economic Economic rent earned
•SR by utility and demand activity as well as by FOP in SR when D>S
•LR by cost of production some government
intervention.
Consumer Surplus
Growth of monopolies
could be prevented by; The difference between
•Gov regulation what a consumer actually
Alfred Marshall pays for a good and the
•Consumer information Neo-classical maximum which he/she
•More accountability English would have been willing to
(1842-1924) pay rather than going
Marginal Revenue “The Principles of without it.
Productivity Economics & Money,
The return to each FOP is Credit & Commerce”.
determined by its MPP- i.e. the Price-elasticity of
productivity of the last unit of demand
FOP used to produce output.
Quantified buyers’
sensitivity to price
Distribution of income/wealth changes
The return to each FOP is determined
by their marginal utility
63. Marshall’s scissors
analogy.
• Demand & supply are
interdependent just
like the blades of a
scissors.
• One cannot cut
without the help of
the other.
64. Keynesian Economists
• John Maynard Keynes (1883-
1946)
• Studied at Eton and Cambridge.
• Wrote: Treatise on Money
(1930), The General Theory of
Employment, Interest & Money
(1936)
65. John Maynard Keynes (1883 – 1946)
He wrote The General Theory of Employment Interest and Money. He represented the
UK government at the Versailles peace conference in 1919 and at Bretton Woods in
1944. He strongly criticized the laissez- faire balanced budget policies of the UK
government in the 1920’s and 1930’s. He maintained that full employment was not a
natural state and that economies could settle in equilibrium at less than full
employment i.e. an economy could slide into a slump and stay there.
His unorthodox views created a storm among the establishment but he stuck to his view
that the government would have to intervene in the economy, increase its own
spending and raise aggregate demand to the full employment level. Keynes was not in
favour of overthrowing capitalism but instead put forward ideas to support it. Keynes
also had his Liquidity Preference Theory of Interest Rates and The Multiplier. Keynes was
into controlling the economy through fiscal policy and demand management.
66.
67.
68. Favored government John Maynard Keynes
intervention Keynesian Liquidity
•It is the job of the British preference theory
government to run the (1883-1946)
economy “The General Theory of
Employment, Interest & Money”
•Gov should stimulate
demand in a recession 3 reasons (motives)
by spending money for holding money
(fiscal policy).
•Gov can use fiscal
policy (any action taken by
the government which alters •Transaction motive
current revenue & exp) to •Precautionary
create full employment •Speculative
If Inv<Saving=Leakage Investment decisions
Leads to a decrease in Depends on
national income & expectations not rate
employment of interest
The multiplier
Shows the relationship between an initial injection into the circular
flow of income and the eventual total increase in national income.
69. KEYNESIAN ECONOMICS.
Keynesian economics was born during the Great Depression of the 1930s
and has been, for the most part, followed in most capitalist countries ever
since. English economist John Maynard Keynes (1883-1946) argued that
self-adjusting market forces would take a long time to restore full
employment. He held that the government should intervene to increase
aggregate demand through the use of fiscal policy, which involves
government spending and taxation. By increasing government spending, for
instance, jobs will be created which will increase income levels, which will
increase the aggregate demand for goods and services and thus create new
jobs.
Modern Keynesians (also, known as neo-Keynesians) recommend monetary
policy, in addition to fiscal policy, to manage the level of aggregate demand.
An increase in the money supply, for example, leads to a decrease in the
interest rate which increases private investment and consumption, boosting
the aggregate demand in the economy.
An increase in aggregate demand under the Keynesian system, however, not
only generates higher employment but also leads to higher inflation. This
causes a policy dilemma—how to strike a balance between employment and
inflation. According to laws that were enacted following the Great
Depression, policy makers are expected to use monetary and fiscal policies to
achieve high employment consistent with price stability.
70. Supported
Laissez-faire and Believed in
the free market. privatisation &
deregulation.
Nobel Prize
winner 1976
The Monetarists
Milton Friedman (1912-2009)
Wrote:
•A Monetary History of the United States 1867-
1960
•Inflation- Causes and Consequences.
•Free to Choose.
71. Monetary policy
Should be the main Milton Friedman Laissez faire
instrument used by the Monetarist •Minimum state
government to manage (1912 -2009) intervention
the economy. “A Monetary History of the US” •De-regulation of
(Actions taken by the markets
gov/ECB which influences •Privatisation
the money supply, interest
rates and availability of Friedman supported Laissez-
credit). faire & the free market.
He believed that government
spending in a recession would
Control of money only lead to inflation
supply
Control inflation by Reduction in inflation
Supply side policies Leads to increases competitiveness,
strict control of
Improve market cheaper exports & job creation in
money supply.
efficiency, boost the long run.
Restrict loans & high
supply, reduce the Companies keep wage increases to a
interest rates.
power of trade unions. minimum to avoid cost-push inflation.
Low inflation creates stable wages &
prices, encourages investment,
Monetarist:
increases national competiveness and
i.e. advocates use of interest rate and
as a result generates economic
restricted money flow to control inflation.
growth and jobs.
74. Supply-sider theorists
Late 20th Century
1. Economy developed by stimulating the supply of goods.
2. Reduce taxes, encourage work, investment &
government revenue.
3. Deregulation & privatisation encourages competition,
increase word production & reduce prices.
• Controversial because it advocates reduction of higher
rates of tax which benefits the wealthy.
• However supply siders claim that reducing tax rates
will lead to increased tax revenue.
• This is because increasing tax rates is a disincentive to
work & invest.
75. J. K. Galbraith
Maverick
Keynesian/liberalist
(1908-2006)
• Wrote the book
“The Affluent Society”.
• Recommended that
governments should increase
tax to reduce conspicuous
consumption.
• Warned of economic power of
multinational oligopolies.
