Economists-Moral Philosopers

1
Economists-Moral Philosopers
Adam Smith-The Wealth of Nations
Karl Marx-Das Kapital
2
The Classics

• Adam Smith The Wealth of Nations/ Theory of
  Moral Sentiments
• Karl Marx Capital, Communist Manifesto

3
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.

4
Adam Smith

• Invisible Hand

5
Adam Smith

• Invisible Hand Assumptions
• Our preferences are consistent
• We act based on self-interest
• Individual Good adds up to
• Social Good
• Government Ensures Property
• Rights.

6
Adam Smith

• Invisible Hand Assumptions
• Enough buyers and sellers as for there not to be
  a monopoly

7

• Invisible Hand Assumptions
• Perfect Information that backs up our economic
  decisions

8

• Invisible Hand Assumptions
• No Externalities

9
But first
Sohow is it that, as you are saying Mr. Smith,
if value is originating in labor (therefore we
need more workers and division of
labor-population growth and economic growth), all
of the profit is kept by factory owners?
10
Conflict theory

• All societies are divided into two groups
• Owners
• Workers
• Our society is capitalist.
• Owners are bourgeoisie
• Workers are proletarians

11
Marx on history

• The history of all hitherto existing society is
  the history of class struggle.

12
Owners and workers

• Owners exploit workers and live off the money
  which the workers earn
• Members of classes bind together in the pursuit
  of their common interests.
• Workers put up with this inequality because
• They are oppressed wage slaves and cannot fight
  the system
• They are indoctrinated by ideology and religion
  into believing what they are told by the powerful.

13
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 modern science and technology
  to meet human needs.

14
Conclusion

• Marxism is an understanding of the nature of
  social relationships which you are expected to
  evaluate. Recognise that it has strengths and
  weakness as a tool of understanding of our
  culture.

15
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., and wrote 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 the Economic Journal.
• Worked at the Treasury during WWI.
• 1921, he published A Treatise on Probability.
  This was his dissertation. It won him a
  fellowship at

16
Keynes, Inter-war Years

• Keynes wrote the Economic 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 gold standard)
• 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

17
The General Theory
I believe myself to be writing a book on
economic theory which will largely
revolutionizenot, I suppose, at once but in
the course of the next ten years the way the
world thinks about economic problems. --
John Maynard Keynes
18
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
shillings. It is not well suited for classroom
use. It is arrogant, bad-tempered, polemical, and
not overly-generous in its acknowledgements... In
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. Flashes of
insight and intuition intersperse tedious
algebra. An awkward definition gives way to an
unforgettable cadenza. When it is finally
mastered, we find its analysis to be obvious and
at the same time new. In short, it is the work of
genius.
19
The General Theory

1. According to the classical model, the consumer
   has insatiable wants.
2. The consumer sells his/her labor in exchange for
   enough income to buy the goods.
3. The money value of the incomes received must be
   equal to the value of the output produced.
4. So how can unsold goods pile up in warehouses,
   causing firms to lay off workers?

20
The General Theory (2)

• Says Law cannot hold. (Supply creates its own
  demand.)
• If spending constraints are in effect, then there
  will be a difference between (unlimited) demand
  and effective demand.
• Actual (effective) demand will usually be
  deficient to purchase total output.

21
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!

22
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
• Where do techniques come from? How are they
  improved, and why?
• Schumpeter emphasizes the role and importance of
  entrepreneurs

23
Entrepreneurship

• In reality, some firms exploit opportunities for
  creating profitable competitive positions that
  other firms either ignore or cannot exploit
• Seizing such opportunities is the essence of
  entrepreneurship
• Entrepreneurship involves discovery, innovation,
  and acting on the opportunities that discovery
  and innovation create (page 132)
• To undertake such things is difficult and
  constitutes a distinct economic function, first,
  because they lie outside the routine tasks which
  everybody understands and secondly because the
  environment resists in many ways that vary,
  according to social conditions, from simple
  refusal either to finance or to buy a new thing,
  to physical attack on the man who tries to
  product it.

24
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 superior products,
  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
  the norm) 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

25
The Long-Run Performance of the Economy

• According to Schumpeter, the process of creative
  destruction implies that static efficiency the
  optimal allocation of societys resources at a
  given point in time is less important than
  dynamic efficiency the achievement of long-term
  growth and technological improvement
• What really counts is competition between new
  products, technologies, and organizational
  techniques, not price competition (pages 84-5)
• This kind of competition is as much more
  effective than the other as a bombardment is in
  comparison with forcing a door, and so much more
  important that it becomes a matter of comparative
  indifference whether price competition in the
  ordinary sense functions more or less properly
  the powerful lever that in the long run expands
  output and brings down prices is in any case made
  of other stuff

26
Policy and Managerial Implications

• Schumpeters ideas have been used to defend
  monopoly, on the grounds that high economic
  profits are a necessary reward to encourage
  innovation, which results in higher long-run
  growth
• Policy analysis should focus more on the impacts
  of policies on innovation and less on the impacts
  on prices and current welfare