Economic Thought Exam I

Guan Zhong

Ancient thinker who first discussed the law of demand and quantity theory of money.

Guan Zhong's Price Theory + equilibrium price

Abundant goods become light and fall in price; scarce (locked away) goods become heavy and rise in price.

- Guan Zhong treated equilibrium as a price toward which market forces move — essentially a balance between supply and demand. Once the appropriate balance/equilibrium is reached, movement away from it creates problems.

Guan Zhong's quantity theory of money

argued when money was heavy (tight

money supply), its price should rise (prices

of goods would fall - deflation).

l When money was light (increased supply of money), its price would fall (prices of goods would rise -inflation).

Equilibrium w/ Guan Zhong

There would be movements of goods into and out of markets based on their lightness or heaviness, with a definite tendency towards one price

Guan Zhong's modern monetary theory

state should buy goods when money was heavy (thus adding money to the economy) and selling goods (thus

withdrawing money from the economy) when money was light

Key Greek Economic Contributors

Socrates, Protagoras, Xenophon, Plato, and Aristotle.

Socrates

Did not leave a written word; students were Xenophon and Plato

Origin of the term 'Economics'

Attributed to Xenophon, not Aristotle.

Oeconomicus

Xenophon's treatise on efficient management, leadership, and microeconomics; means "management of the household"; home economics

Oeconomicus by Xenophon

A good manager strives to increase the size

of the economic surplus of whatever unit he

supervises (e.g. family, city, state)

This is Accomplished by

- Skill

- Order

- DIVISION OF LABOR

Xenophon's Concept of Subjective Utility

Something can be beautiful and ugly, or good and bad, at the same time; What is beautiful for running is ugly for wrestling, and what is beautiful for wrestling is

ugly for running. Value is very subjective

Plato's View of the Optimal State

a rigid, static, ideal situation where any change would be "regressive"; once you're in equilibrium, movement away is not good

Plato

More macro view; Division of labor necessary to satisfy the many "wants"

Plato's Concept of Society

-Specialization is the "NATURAL LAW"

- Justice is important for all "CITIZENS"

- Property allowed BUT CHECK CORRUPTION

- Warriors in later age become "leaders"

Plato's most well-known student...

Aristotle: Review "two-party" exchange in terms of marginal utility (I will trade w/ you as long as there is no damage to me)

- Probably as review of legal system in Athen

Aristotle's View on Private Property

Supported private property for all classes, not just citizens (including slaves), to increase efficiency, social peace, and develop moral character. --> Everyone having a piece of the pie is where economic stability happens

Aristotle: Nature of Trade

- Trade can only occur when there is a

surplus

- There must be different subjective estimates of

the value of the surplus in order for trade to

exist

- Traders must establish rapport and see the

benefits of the trade

- There needs to be a dispute administrator

Aristotle's View on Trade and Money

Trade requires surplus and differing subjective values; money's only natural value is exchange.

Aristotle's Stance on Interest

-Money only had one VALUE: Exchange

- Against interest rates because the accumulation of money for its own sake is unnatural. (Distinguished between natural and unnatural arts of acquisition #Needs vs. Wants)

Protagoras

Hinted at a democratic marketplace and argued that the means justify the end.; Unlike Plato who view the "end" justifying the "means"

Roman Economic Contributions

Main Contributions were in the "empirical working" of business

- Need for transportation infrastructure (all roads lead to Rome)

- Need for accurate measurements

- Civil Law (between citizens)

- Common Law (between a citizen and a non- citizen)

- Dispute resolutions (contract protections)

- Percentage damaged in shipment

- Banking (thought interest was a good thing)

Middle Ages Feudal System

Decentralized system, much like the Greeks but the only difference is that they unified social scheme under the Catholic Church's monopoly on learning. (total control)

Scholastic Methodology

Posing questions, lengthy discussions with citations (debates and reference people, usually Aristotle), and drawing conclusions based on citation weight.

Scholastic Methodology on Interest

The question is interest, discussion, and citing Aristotle, who hated interest --> automatically win the case because of reference popularity position, so the Church condemned it then the Jews were bankers

Scholastics had to contend with three issues

- Private Property

- Profits

- Usury (money made from other money; 1/3 that's a sin)

Aquinas — Property, Profit & Just Price

- Aquinas moved toward accepting:

private property + reasonable profits, but not unlimited accumulation; within reasinable moral limits

- You need property and profit, but "don't have too much of it."

Humans are ultimately stewards of God's property, so ownership comes with social/moral responsibilities.

St. Thomas Aquinas

Goods had a double measure:

- value vs.

- exchange

- Main in Scholastics

Private Property under St. Thomas Aquinas

- The Thomists cautioned that this did not

mean they blankly endorsed all private

enterprise: the "love of lucre", they noted,

was a serious sin.

- They stressed the fact that man only has

"stewardship" of God's property and should

make property available for communal use

Scholastic View on Profit

Allowed profit from differentials in prices if merchants cover labor expenses without being motivated by pure gain.

- They went on to argue that the trader, far from being a parasite, is performing a valuable service and increasing general welfare by meeting different needs.

Scholastic View on Price

- The Scholastics decided that a person should not charge more for a good than what he would be willing to pay for it himself.

- This not only to make ethical sense but also seemed like a good way to estimate the

"usefulness" of a good.

Usury

- Mews and Abraham (2007) argue that it is a misconception to claim "money-making

was viewed as morally suspect" during the

Middle Ages.

- They go on to argue that in the 13th century, Franciscan and Dominican friars were not as a means of moralizing condemnation of money-making but a need to regulate financial transactions

-> Franciscans especially developed Montes Pietatis, providing collateral-backed loans at much lower rates than exploitative moneylenders.

- borrower pledges property → receives loan → repays principal plus relatively small interest → property returned.

Mons Pietatis

While loopholes were in place for lending money, the poor had to turn to moneylenders, a 1462 Italian pawn shop system for the poor, charging a fixed 6% fee.

Car Title Loans Interest Rates

Ranging between 200% and 300% with a median loan of $700. -->The use of title loans may be growing --> minimum payment required but took too long to pay it off, which ramps up interest rates as the payment takes longer. (Same thing happening in Middle Age)

The swing of the Pendulum

FROM the "heavenly" incentive of the incentive of the Scholastics --> TO the "mundane" incentive of theincentive of Mercantilist

What does it mean to say that value is subjective?

- A product does not necessarily have value by itself. Its value depends on how a person uses it, wants it, or perceives it.

- Professor's examples: Nursing shoes being valuable to a woman who needed shoes for a marathon; expensive torn jeans/shoes even though they may look damaged.

marginal utility

The additional satisfaction or benefit someone receives from consuming or obtaining one more unit of something.

What was an important early idea about the division of labor?

Division of labor allows people to specialize in different activities, which helps society satisfy wants more efficiently.

Why was private property important

Having property gives people a stake or "piece of the pie." The professor argues that this creates incentives, can increase efficiency, and contributes to social stability.

What was the point of the professor's Cuba story?

- Simply paying workers was not enough to motivate them when goods were scarce and their effort did not significantly improve their situation. His acquaintance created incentives with food and other goods to motivate workers.

- Main economic lesson: Incentives matter. People work differently when their actions produce rewards they actually value.

What was one major difference between Greek and Roman contributions to economic thought?

Greeks = developed philosophical ideas.

Romans = implemented many of those ideas practically.

- The Romans were particularly important in creating institutions that made commerce possible.

Roman's Contribution

roads/infrastructure → standardized weights and measurements → laws/contracts → dispute resolution → banking/credit.

* Roman contract enforcement and how contracts could allow an acceptable amount of damage during transportation.

Why were Roman roads economically important?

- Trade requires transportation infrastructure. Roman roads connected different places, made transportation safer/easier, and therefore facilitated commerce.

- Remember: "All roads lead to Rome."

Why did the Romans need standardized measurements?

Buyers and sellers need to agree about what measurements mean. If everyone's definition of a pound or another unit differs, exchange becomes difficult.

What two types of law did the professor discuss under Rome?

Civil law → disputes between citizens.

Common law → situations involving a citizen and non-citizen.

- His main point was that some legal mechanism existed for resolving commercial disputes even when everyone involved did not have identical status.

Why is dispute resolution important for trade?

People are more willing to enter contracts when they know there is a system for resolving disagreements.

What was the professor's Roman broken-plates example?

- If someone shipped 1,000 breakable plates, the contract could recognize that a small percentage might break during transportation. If breakage stayed within the agreed percentage, the entire contract wasn't canceled.

- Main point: Contracts can account for normal risk, making trade easier and more predictable.

What is the utility of poverty?

- Poverty was viewed as creating an incentive/necessity for people to work

- If workers become too comfortable, the theory claimed their willingness to labor would decrease; poverty therefore supposedly maintained labor supply.

Why was Roman banking important for trade?

- Merchants did not necessarily have to physically carry all of their money over long distances. Banking relationships allowed money/payment to be handled between locations.

- Main benefit: Lower risk and easier long-distance trade

What are important functions of money?

- Medium of exchange — used to buy and sell.

- Unit/measure of value — lets us establish prices.

- Store of value — can be saved and used later.

Why did the Catholic Church have enormous institutional power during the Middle Ages?

The Church had control over much of education, literacy and learning. If rulers needed written agreements or treaties, educated members of the Church often played a major role because literacy was limited

What was the Scholastic Period?

The intellectual/educational tradition of the Middle Ages in which scholars used reasoning, debate, religious teaching and earlier authorities—especially ancient Greek thinkers—to answer questio

How did Scholastic debates work?

Scholars posed questions, debated them, and supported their positions by citing respected authorities. An argument supported by an especially respected authority such as Aristotle carried substantial weight.

What three economic issues did the Scholastics have to confront?

Private property

Profits

Usury

- The Church gradually accepted private property and profits within limits while continuing to object strongly to usury.

Why did the professor compare medieval lending with modern car-title loans?

To show that extremely expensive credit still exists. A borrower's minimum payment can be so small that it does not sufficiently reduce principal and may not even cover accumulated interest.

- Main lesson: Access to credit matters, but the terms of credit matter too.

Irish Potato Famine (Bonus)

-The famine illustrates Malthus's theory because rapid population growth combined with dependence on a limited food system made the population vulnerable to a positive check such as famine and disease.

- Extensive rent = as more food is required, cultivation expands onto additional, increasingly inferior land; population increased -> more families needed food/land -> best productive land is limited -> People have to occupy/cultivate smaller and/or poorer plots -> The difference in productivity between good land and marginal land creates Ricardian rent.

- Prime Minister Robert Peel concluded that Britain needed greater access to imported food. The potato failure became a major catalyst for his attempt to repeal the Corn Laws. Peel moved toward repeal

Mercantilist School

A body of doctrine evolved that superseded feudal concepts, promoted nationalism, gave new dignity and importance to the merchant, and justified a policy of economic an military expansion

How did the doctrine of mercantilism and its policy differ?

Doctrine: wealth of a nation = accumulation of precious metals, especially gold and silver. Mercantilism a "static" set of ideas; a "static" set of ideas; Cohesive set of rules

Policy: Mercantilism competing interests defining economic and political institution; government intervention designed to obtain/retain that wealth — protectionism, restrictions on imports, promotion of exports, monopolies, colonies, tariffs, etc

Major Tenats if the Mercantilist

- Gold & Silver: most desirable wealth; equate to the wealth of nation; Valued bulluions as way to achieve power and riches; trade surplus is good

- Nationalism: Country increase resources in expense to another; led to militarism; strong navies & merchant fleets were required

- Emphasis on exports and reluctant to import; "fear of goods"; reduced consumption/goods at home

- Prohibitions against the outward movement of raw materials helped keep the prices of finished exports low

- Colonization & monopolization of colonial trade: Keep colonies dependent on mother country; benefits spill over to colonies were accidental

- Opposition to internal tolls, taxes, an other restrictions on the movement of goods

- Strong central government: Regulated goos -> hampering exports

- Importance of a large hard working population: Keep labor supply high and wages low -->lower prices on exports & reduce idleness

Mercantilist

- Bernard Mandeville: Poor people should never idle; should work + spend

- William Temple: Children, 4+, taught to read and employed

- Jean Baptiste Colbert

- William Petty

Is there a modern equivalent of mercantilism?

Yes, neo-mercantilism: government-directed economic policy emphasizing protection of domestic production, trade restrictions/tariffs, strategic industries, and national economic power.

- The government and private monopolies join forces to increase public revenue.

- neo-mercantilist countries promoting

their own well being by promoting their

economic growth by expanding exports,

seeking for a balance of trade surplus

and increasing the level of government

foreign reserves

Mercantilist School Benefit?

Merchant capitalist, kings, and gov officials; those who were most powerful and entrenched had most favored monopolies and privileges

Economic rent

profits beyond those that would be just necessary to keep the merchant capitalists engaged in their present activities, just sufficient to compensate them for their opportunity costs

Mercantilism can be understood as an extreme example of:

rent seeking behavior: attempts by private parties to increase their profits by securing favorable laws and regulations from government

Bullionism usefuless

bullion provide a reserve that could be used to hire and maintain soldiers, build ship, buy allies, and bribe enemies.

- major significant in making international payments

Mercantilist lasting contributions

- emphasizing the importance of international trade

- permanently influenced attitudes toward merchants; promoting nationalism; bringing new products, providing outlets for manufacture goods, and furnishing incentives for capital investment growth; expanding the internal market, promoting free movement with no tolls, establishing uniform laws and taxes, and protecting people and goods in transit

Jean Baptiste Colbert

- represents the soul of mercantilism which was called colbertism

- A bulliontist who believed in strength came from finances which rests on collection of taxes

- Nation become richer at the expense of another

- Hated by enforcing feual system of compulsory labor of peasants on the road

- Favored large hardworking, and poorly paid population

- Every father of 10 would be exempt from taxes

What policies did Jean Baptist Colbert introduce in France?

- Colbert implemented French mercantilism through strong government direction of the economy: encourage domestic manufacturing + protect French industries + regulate production + promote exports + restrict imports + accumulate national wealth.

- Colbert = mercantilism put into government policy.

William Petty

- Foreshadowed classical economics

-favored freer foreign trade than many of the mercantilists,

- imported goods lightly taxed

-opposed laws

prohibiting the export of money

- favored a large population

- enthusiasm for the mercantilist vision of "full employment."

- a predecessor to those contemporary economists who advocate public service employment to reduce sifictural and cyclical unemployment.

William Petty's Main Contribution

- bringing measurement/data/quantitative analysis into economics (macro) — often called political arithmetic.

Major Tenets of the Physiocratic School

- Natural Order: The term physiocrat itself means "rule of nature "; laws of nature govern human societies just as those discovered by Newton govern the physical world

- Laissez-Faire: let people do as they please without government interference; opposed to almost all feudal, mercantilist, and government restrictions, favoring freedom of business enterprise at home and free trade abroad.

- Emphasis on Agriculture: Only agriculture (and possibly mining) was productive, because it produced a surplus, a net product above the value of the resources used in production.

- Taxation of the landowner: thought that because only agriculture produced a surplus, which the landowner received in the form of rent, only the landowner should be taxed

- Interrelatedness of the economy: Quesnay in particular analyzed circular flow of goods and money within the economy.

Whom Did the Physiocratic School Benefit or Seek to Benefit?

- The peasants ultimately would gain from the ideas of the physiocrats because onerous obligations to the landowners would end

- Business interests stood to gain from the prescription to remove all restrictions on production and the movement of goods. By advocating the doctrine of laissez-faire, the physiocrats were promoting industry, even though this was not their intention; they were interested in encouraging freer internal grain trade and in stimulating the export of farm products and the import of manufactured goods.

- favored capitalistic farms employing wage labor and advanced techniques.

How was the Physiocratic School valid, useful or correct in its time

By emphasizing the productivity of agriculture, they were getting away from the older concept that only commerce produces and augments wealth; the physiocrats emphasized production rather than exchange as a source of wealth

Which tenets of the Physiocratic School became lasting contributions?

- The school was wrong to consider industry and trade as sterile; the more industry and trade developed in France, the more conspicuously inaccurate the physiocratic analysis became.

- another error—the belief that only landowners should be taxed because only land could yield a surplus. Wealthy industrialists got away with not paying; This physiocratic tax concept left a long legacy.

physiocrats made several lasting contributions to economics

- examining society as a whole and analyzing the laws that governed

- law of diminishing returns

- originated the analysis of tax shifting and incidence that today is an importan part of applied microeconomics

- by advocating laissez-faire, the physiocrat: turned the attention of economists to the question of the proper role of government in the economy.

Francois Quesnay

- founder and leader of the physiocratic school

- noted that small farms were incapable of using the most productive methods; he favored large farms managed by "entrepreneurs," thereby anticipating the large agricultural enterprises that have emerged in our time.

- Tableau Economique

Quesnay Tableau Economique

- depicted the circular flow of goods and money in an ideal, freely competitive economy

- This was the first systematic analysis of the flow of wealth on what later came to be called a macrocconomic basis.

- shows how the net product circulates among the three classes and how it is reproduced each year.

- foreshadowed national income analysis and laid the foundation for statistical work to describe an economy

- The table also explicitly conveyed the concept of equilibrium within the economy as a whole because if one of the interdependent variables changed, others would change also.

- -Quesnay's table is a predecessor of the input-output analysis

What was the economic philosophy of the Physiocrats, represented by Quesnay?

- The Physiocrats believed nature/agriculture was the fundamental source of wealth.

- Quesnay showed the economy as an interconnected flow between sectors.

- Agriculture generates the surplus, which then circulates through the rest of the economy.

The Historical Background of the Classical School

-Two revolutions, one relatively mature and the other just beginning, were of particular significance to classical economic thought: Scientific & Industrial Revolution

Classical School: Scientific Revolution

Isaac Newton; Newton popularized the already existing idea that the universe is governed by natural laws; Newton's impact can be seen in the ideas of the classical school. the lingering feudal institutions and the restrictive controls of mercantilism were no longer necessary. Newtonian science furnished a nature as fully effective as the earlier will of God. If the Divine Will had created a mechanism that worked harmoniously and automatically without interference, then laissez-faire was the highest form of wisdom in social affairs. Natural laws would guide the economic system and the actions of people. Society would be best served if people were free to follow the natural law of self-interest. Newtonian thinking in classical economics provided an ideology that justified property incomes.

Classical School: Industrial Revolution

- This growth of industry led to increased

emphasis on the industrial aspect of economic life in current thinking.

- Many mercantilist practices were breaking down under the upsurge of business activity that was spreading in every direction.

- These laws brought land under a strict

regime of private ownership and encouraged larger scale, more capital-intensive agriculture. This raised the productivity of farm labor and land but also turned peasants into wage laborers who sought employment

- as the factory system developed, driving an increasing number of them into the labor market as wage workers

Major Tenets of the Classical School

Classical doctrine is frequently called economic liberalism. Its bases are personal liberty, private property, individual initiative, private enterprise, and minimal government interference.

- Minimal government involvement: The economy was held to be self-adjusting and tending toward full employment without government intervention. Government activity should be confined to enforcing property rights, providing for the national defense, and providing public education.

- Self-interested economic behavior

- Harmony of interests: By pursuing their own individual interests, people served the best interests of society

- Importance of all economic resources and activities: The mercantilists had said that wealth was derived from commerce; the physiocrats had viewed land and agriculture as the source of all wealth.

- Economic laws

Whom Did the Classical School Benefit or Seek to Benefit?

- classical economics served all society because the application of its

heories promoted capital accumulation and economic growth

- Merchants and industrialists achieved a new status and dignity as promoters of the nation's wealth, and entrepreneurs were assured that by seeking profit they were serving society.

How Was the Classical School Valid, Useful, or Correct in Its Time?

- By helping to remove the remnants of the feudal sys-tem, classical economics promoted business enterprise.

- Classical economics and those who endorsed it enlarged the market not only by achieving freer international trade but also by promoting an urban labor force.

Which tenets of Classical school became lasting contributions?

- The classical economists gave the best analysis of the economic world up to their time, tar surpassing the analyses of the mercantilists and physiocrats

- (1) th law of diminishing returns, (2) the law of comparative advantage, (3) the notion of consumer sovereignty, (4) the importance of capital accumulation to economic growth, and (5) the market as a mechanism for reconciling the interests of individuals with those of society.

- Some advocates of classical economics carried their call for laissez-faire to absurd extremes- people depended on the Gov so much that they couldn't do everything and death came from it

Adam Smith's Wage Fund Theory

- Wage fund theory is what makes someone a classical economist.

- The basic idea is that there is a relatively fixed pool of money available to pay workers. If population/labor force increases while the wage fund stays relatively stable, the amount available per worker falls

To Smith, what is the relationship between development and property rights?

- Secure property rights encourage people to: work → invest → accumulate capital → increase productivity → promote economic development.

- People need confidence that they can benefit from what they produce/own.; piece of the pie

Key influences on Smith's thinking

- general intellectual climate of his time: Enlightenment

- influenced by the physiocrats, particularly Quesnay and Turgot.

- The physiocrats' attack on mercantilism and their proposals to remove trade barriers won his admiration.

- Francis Hutcheson, Smith's instructor at Glasgow College

- David Hume

The Theory of Moral Sentiments

discussed the moral forces that restrain selfishness and bind people together in a workable society

- Sympathy, unsocial & social passions, system of justice, overcome selfishness

- sympathy and benevolence restrain selfishness

Wealth of Nations

- assumed the existence of a just society and showed how the individual is guided and limited by economic forces.

- competition channels economic self-interest toward the social good

- This was the book that established him as one of the premier economic thinkers in the history of economic thought.

Wealth of Nations: Division of Labor

- increases the quantity of output produced for three reasons. First, each worker develops increased dexterity in performing one single task repeatedly. Second, time is saved if the worker need not go from one kind of work to another. Third, machinery can be invented to increase productivity once tasks have been. simplified and made routine through the division of labor.

- division of labor depends upon:

extent of the market + sufficient capital.

You can't endlessly specialize if there isn't enough demand or enough equipment/capital for specialized workers.

- Exports also remove surplus products for which there is no demand at home and bring back products for which there is a domestic demand.

Wealth of Nations: The Harmony of Interests and Limited Government

- hidden within the apparent chaos of economic activity is a natural order. There is an invisible hand that channels self interested behavior in such a way that the social good emerges.

- The key to understanding Smith's invisible hand is the concept of competition.

- Stated in contemporary economic terms, the result is that resources get allocated to their highest valued uses; economic efficiency prevails.

- This harmony of interests implies that intrusion by government into the economy is unneeded and undesirable. According to Smith, governments are wasteful, corrupt, inefficient, and the grantors of monopoly privileges to the detriment of the society as a whole.

- -In a direct attack on mercantilism, Smith argued that government should not interfere in international trade.

- he saw three major functions of government: (1) to protect society from foreign attack, (2) to establish the administration of justice, and (3) to erect and maintain the public works and institutions that private entrepreneurs cannot undertake profitably.

What Smith presented as the motivation behind market forces.

- Self-interest.

--> Individuals pursue their own interests, and through exchange/competition this can generate broader economic coordination — the idea associated with the invisible hand.

Wealth of Nations View on Tariffs & Taxes

- favored two kinds of protectionist tariffs: (1) those that protect a domestic industry essential to the national defense and (2) those that equalize the tax burden on a particular domestic industry by imposing a, tariff on imports of that good. Otherwise, free trade is in order.

- To finance these government activities, Smith recommended good taxation: 1) first, taxes should be proportional to the revenue enjoyed under the protection of the state. 2) taxes should be predictable and uniform as to the time of payment, the manner of payment, and the amount to be paid. 3) taxes should be levied at the time and in the manner most convenient to the contribution. 4) taxes should be collected at minimum cost to the goverment.

Wrath of Nations: THE ECONOMIC LAWS OF A COMPETITIVE ECONOMY

- Value, Market Price, Wages, Profit, Rent, Role of Money and Debt, and Economic Development

- Taken together, Smith's views on wages, profits, and rents constitute an attempt to formulate a theory of the functional (factor share) distribution of income.

How did the concept of middle knowledge by Luis de Molina allow for the concept of free markets to reconcile with the Catholic Doctrine of the time?

- Molina's middle knowledge helped reconcile divine knowledge with human free will.

- Economically, this provided room for individuals to make genuinely free choices. If humans have meaningful choice, voluntary exchange and market decisions can be compatible with religious doctrine.

- Free will → voluntary choice → voluntary market exchange.

How did Adam Smith and Luis de Molina discuss what Smith called the two meanings of value?

- Both distinguish something similar to:

value in use versus value in exchange.

- Smith's diamond-water paradox illustrates it.

Why did Vernon Smith indicate that both books by Adam Smith need to be evaluated?

- Many have misinterpreted him: Smith means a self-loving nature does not imply that people fail to nurture an empathetic other regarding attitude and conduct toward others in their community of family, neighbors, and friends."

- argues that "the power of Sentiments to bring order to contemporary experiments where the traditional game-theoretic models failed decisively to predict human action even under the conditions of

anonymity

- Don't read The Wealth of Nations alone.

Adam Smith also wrote The Theory of Moral Sentiments.

--> The market system therefore shouldn't be interpreted as humans being nothing but greedy/selfish. Smith also considered sympathy, morality, social norms, and concern for others.

The Economic Laws of a Competitive Economy: Value

- 2 kinda of value paradox

- Smith directed his attention toward exchange value, the power that the possession of a commodity provides to purchase other goods-its "natural" price.

- the costs of production determine a good's exchange value or relative price.

- LABOR THEORY OF VALUE IN A PRIMITIVE SOCIETY: Smith argued that in a society in which labor was the only resource, the relative value of a good would be determined by the amount of labor necessary to produce it- elaboration of the labor cost theory of value

—> The value of any commodity to a person who possesses it, if he wishes to exchange it for other commodities,

"is equal to the quantity of labour which it enables him to purchase or command.

Labour, therefore, is the real measure of the exchangeable value of all commodities —> deer-beaver example

—> In a primitive economy, according to Smith, labor is both the source (labor cost theory) and the measure (labor commanded theory) of exchange value.

The Economic Laws of a Competitive Economy: Value...

VALUE THEORY IN AN ADVANCED ECONOMY: Smith realized that the growth of capital would invalidate a simple labor cost theory of value.

- In a society where capital investments and land resources become important, said Smith, goods will normally be exchanged for other goods, for money, or for labor at a figure high enough to cover wages, rent, and profits.

- Demand, according to Smith, does not influence the value of commodities; the cost of production-wages, rent, and profits—are the only determinants of value in the long run.

The Economic Laws of a Competitive Economy: Market Price

- Like Cantillon, Smith distinguished between the intrinsic or natural price of a good and its short-run market price.

-According to Smith, there are ordinary, or average, rates of wages, rent, and profif in every society or neighborhood. He called these the natural rates of each.

- When a commodity is sold for its natural price, there will be exactly enough revenue to pay these natural rates of wages, rent, and profit; long-run price sufficient to cover the normal payments/costs of production

- market price depends on the aberrations of short-run supply and demand, and it will tend to fluctuate around the natural price. If it is above the natural price, more goods will come to market, depressing the price. If it is below the natural price, some productive factors will be withdrawn, the quantity supplied will fall, and the market price will rise toward the natural price.; actual current price determined by supply and demand