Intro to Economic Systems

Historical Background

History of Economic Thought

Learning Goal: Trace the development of modern economics from it’s historical and philosophical foundations to the present debate between

CONSERVATIVE—RADICAL—LIBERAL THEORIES

TIMELINE

I. Adam Smith publishes Wealth of Nations 1776

(AKA Classical Theory)

II. Karl Marx publishes Capital, Vol. 1 1867

(AKA Radical Theory)

III. John Maynard Keynes publishes General Theory

and F.A. Hayek (AKA Liberal and Conservative Theory )

Adam Smith and Classical Theory

In 1780’s he asked the question:

“What makes Nations wealthy?”

List 8 criteria at your table and share….. Consider the time period

Smith’s Invisible Hand

“He intends only his own gain, and he is in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”.

Paraphrase in your own words:

Smith’s Assumptions

It is human nature to act in self-interest

Private property is a foundation of a capitalist and free economy

Unfettered prices with no government intervention into the economy will produce

Maximum Economic Well-Being

(MAX PRODUCTION, BEST MIX OF CONSUMPTION, OPTIMAL DISTRIBUTION)

Smith’s Assumptions continued

ON THE APPROPRIATE ROLE OF GOVERNMENT:

1. National Defense

2. Protection of Private Property

3. Public Works Projects (Infrastructure)

Smith’s Classical Theory is basis for Neo-Classical Theory

SMITH-- By following price signals, if everyone pursues their own self-interest, we will be led as if by an invisible hand, to our maximum economic well-being.

Neo-Classical Theory-- add mathematical and graphical modeling and Marginal Analysis– Decisions are based on additional benefits vs. additional costs of a situation

Add Hayek and Freidman to Smith’s Ideas = Today’s Conservative Theory

A. Perspective: Free Markets create economic and social harmony

B. Point: Government interference destroys efficient market outcomes– if left alone, markets will self correct

C. Policy: Support only Free-Market Policies

(AKA: Laissez Faire Economics

Add Hayek and Freidman to Smith’s Ideas = Today’s Conservative Theory

A. Perspective: Free Markets create economic and social harmony

B. Point: Government interference destroys efficient market outcomes– if left alone, markets will self correct

C. Policy: Support only Free-Market Policies

(AKA: Laissez Faire Economics

08/20/13

Consider ideas contained in Adam Smith’s “Wealth of Nations”– Illustrate Smith’s contention the invisible hand of self-interest guides an economic system to maximum effectiveness.

Transition time--

If Adam Smith’s philosophy was informed by his observations re: mercantilism/colonialism-- 1760-s through 1780’s---- then:

Consider the time period and place in which Karl Marx developed his philosophy and radical theory of economics:

Place-- Time: Conditions:

Karl Marx’s Radical Theory of Economics

Perspective: Capitalism is a destructive system of exploitation.

Point: Government involvement cant fix unacceptable social costs caused by the drive for profits. (For firms to survive they must value profits over people)

Policy: Reject private ownership of resources

Worker owned production

Citizen Movements

Community Planning

Marx @ The Communist Manifesto (1848)

(This system)… may be summed up on the single sentence: Abolition of private property….

(It) deprives no man of the ability to appropriate the fruits of his labor. The only thing it deprives him of is the ability to enslave others by means of such appropriations.”

Summarize:

Transition – Last Theory

COPY AND RESPOND

If Adam Smith’s philosophy was informed as a response to mercantilism, and Karl Marx’s philosophy was informed as a response to industrial exploitation– how would conditions in the US in the 1930’s inform the philosophy of J.M. Keynes?

Liberal Theory of JM Keynes

Perspective: Free Markets are best, but can produce inequitable outcomes

Point: Government intervention creates both accountability and stability in markets.. Equity gains far outweigh efficiency losses.

Policy: Support Free Market policies with “government regulated Capitalism”

Primary Source Quote: JMKThe General Theory of Employment, Interest and Money 1936

“Our criticism of the accepted classical theory of economics has consisted not so much in finding the logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world”.

Paraphrase:

POLICY DEBATE– WHICH IS THE BEST SYSTEM?

Objective: How are we going to distribute the valuable resources of society?

You will be assigned an argument to present, and determine factual, logical evidence to support your conclusions. (3)

Adam Smith– Why is Capitalism best?

Karl Marx– What’s wrong with Capitalism, and why/how is communism/socialism better?

Keynes—What’s wrong with Capitalism, and why/how should government respond?