Classical and Modern Economic Thought – Lecture Review

A collection of question-and-answer flashcards covering major economic thinkers and concepts from physiocracy to Keynesian and marginalist theories.

According to the physiocrats, which single human activity is the true source of wealth?

Agriculture (work on the land).

What was the physiocrats’ view on state intervention in the economy?

The State should not intervene except to levy a single tax on land rent; the economy must follow natural laws.

Why did physiocrats justify private landownership despite the landowner’s leisure?

They saw it as rightful payment for generations of land improvement and conservation.

What single tax did physiocrats consider legitimate?

A tax on the rent of land (land rent).

Which key contribution did physiocrats make to economic thought compared with mercantilists?

They viewed the economy as an interconnected system rather than isolated monetary or trade issues.

Who authored the Tableau Économique and what did it attempt to explain?

François Quesnay; it modeled the circulation of income among social classes like blood through the body.

In mercantilist doctrine, what was regarded as the main source of national wealth?

Accumulation of precious metals through a positive balance of foreign trade.

Which economic policy is most closely associated with mercantilism?

Proteccionism via tariffs and import restrictions to secure a trade surplus.

How did mercantilism shift economic thought away from medieval norms?

It moved economics from moral/ethical reasoning to political power and state-centric enrichment.

What social class grew in power due to expanding trade during mercantilism?

The bourgeoisie (merchant capitalist class).

What is Adam Smith’s famous 1776 work and why is it important?

“The Wealth of Nations”; it is considered the first systematic treatise of modern economics and capitalism.

Which 1759 book by Adam Smith argues that humans act from both self-interest and empathy?

“The Theory of Moral Sentiments.”

What production change marks the shift from artisan workshop to manufacture in Smith’s analysis?

Workers gather under one capitalist roof, each performing a specialized task with owned machinery and materials.

Name Smith’s three reasons why division of labor raises wealth.

(1) Increases worker skill, (2) Reduces time lost switching tasks, (3) Encourages invention of better tools.

According to Smith, what natural human tendency drives growth in wealth?

The propensity to exchange (trade).

Differentiate Smith’s ‘value of use’ and ‘value of exchange.’

Value of use is a good’s utility; value of exchange is the market price paid for it.

State the labor theory of value as presented by Adam Smith for a primitive society.

The relative price of goods equals the relative quantities of labor required to produce them.

Which types of labor did Smith call ‘productive’ and ‘unproductive’?

Productive: labor that produces vendible goods/services (workers, merchants, industrial capitalists); Unproductive: labor that does not add exchangeable value (soldiers, clergy, lawyers, artists, etc.).

What two determinants of value did David Ricardo emphasize?

(1) Amount of labor embodied in production, (2) Scarcity for goods not reproducible at will.

Why is scarcity an exceptional determinant of value for Ricardo?

It applies mainly to unique goods (e.g., rare wine) that cannot be reproduced freely; most goods follow labor value.

In Ricardo’s distribution theory, which three social classes receive distinct incomes?

Workers (wages), Capitalists (profits), Landowners (rents).

Explain Ricardo’s theory of differential rent.

As population grows, cultivation extends to poorer soils; higher prices of produce create surplus returns on better land, captured as rent by landowners.

According to Ricardo, toward what minimum do real wages tend?

A subsistence level sufficient for workers and their families.

Define Karl Marx’s concept of ‘plusvalía’ (surplus value).

The difference between the value created by labor and the wage paid, appropriated by capitalists as profit.

What is materialist (historical) conception of history in Marx’s thought?

Historical change is driven by material relations of production and class struggle, not abstract ideas.

Describe Marx’s notion of alienation under capitalism.

Workers are separated from the product, production process, their own essence, and other people, turning work into a meaningless activity.

What transition did Marx foresee as inevitable following capitalism?

A proletarian revolution leading to a classless, collectively owned means of production and planned economy.

Who wrote “Sistema nacional de economía política” and what policy did he advocate?

Friedrich List; he advocated national protectionism to nurture infant industries.

Why did List criticize free trade for developing nations?

Because it benefits already industrialized countries; emerging nations need tariffs and state guidance to industrialize.

What core methodological shift defines the marginalist (neoclassical) revolution?

Focus on individual decision-making and utility maximization rather than class relations.

Define the term ‘homo economicus.’

An idealized individual who always chooses the utility-maximizing option given scarce resources.

According to marginalists, how is value determined?

Subjectively by each consumer’s marginal utility at the moment of exchange.

Explain the concept of ‘utility marginal.’

The additional satisfaction gained from consuming one more unit of a good; it declines with quantity consumed.

What market condition do marginalists assume leads to optimal outcomes without state intervention?

Perfect competition where no buyer or seller can influence prices.

Which 1929 event exposed weaknesses in laissez-faire and perfect-market assumptions?

The Wall Street Crash of 29 October 1929 (Black Thursday).

What seminal 1936 book did John Maynard Keynes publish?

“The General Theory of Employment, Interest and Money.”

Summarize Keynes’s critique of Say’s Law.

He argued that supply does not automatically create its own demand; insufficient demand can cause long-term unemployment.

What is ‘effective demand’ in Keynesian theory?

The actual level of aggregate spending (consumption + investment) that determines output and employment.

Name the two policy tools Keynes recommended to boost demand.

Fiscal policy (government spending/taxation) and monetary policy (interest-rate/ money-supply management).

How does a government’s public-works program raise employment according to Keynes?

By increasing investment spending, generating incomes, boosting consumption, and thus stimulating further demand.

Why did Keynes favor a low interest rate?

To encourage businesses to borrow and invest rather than hold or lend money, thereby raising aggregate demand.

What are ‘animal spirits’ in Keynes’s vocabulary?

Entrepreneurs’ psychological expectations that drive investment decisions under uncertainty.

Define ‘propensity to consume.’

The fraction of disposable income households spend on consumption rather than saving.

Why can lowering wages fail to eliminate unemployment, per Keynes?

If demand is too low, firms won’t hire, regardless of wage levels, because they cannot sell additional output.

What distinguishes classical liberalism from economic liberalism advocated by physiocrats and Smith?

Both favor minimal state intervention, but classical liberalism extends to broader political freedoms; physiocrats and Smith focused on removing economic regulation.

In physiocratic classification, who belonged to the ‘classe stérile’?

Artisans and merchants who merely transform or distribute goods but do not create new wealth.

What two components make up aggregate demand in Keynesian analysis?

Consumption and investment.

According to mercantilists, why was a positive balance of trade crucial?

It brought in specie (gold/silver), strengthening state power and wealth.

What production stage succeeds manufacture in industrial evolution (though not detailed in notes)?

Machine-based factory (industrial capitalism), witnessed by Ricardo.

How did industrialization change workers’ relation to their product, as described in the notes?

Tasks became repetitive and partial; workers no longer saw the final product, fostering alienation.

Which economist overturned Ricardo as Britain’s leading theorist with a new mainstream framework?

Alfred Marshall (though mainly noted in passing).

What central problem do marginalists claim economics universally studies?

Allocating scarce resources to satisfy unlimited wants in order to maximize utility.