Development of Economic Thought and Institutions Flashcards

Flashcards testing core economic terms, theories, historical models, and institutions covered in the lecture notes.

Invisible Hand

Adam Smith's concept that competition acts as an automatic equilibrating mechanism in a market economy, guiding self-interested individuals to produce goods, quantities, and prices that serve the common good.

Division of Labor

The specialization of tasks within a firm, among firms, or across nations, identified by Adam Smith as the major cause of increases in productivity and economic growth.

Natural Price

The long-run cost of production of a commodity, defined by Adam Smith as the price just high enough to cover wages, profit, and rent at average or natural rates.

Market Price

The short-run price of a commodity determined by the interaction of short-run supply (the quantity brought to market) and effectual demand.

Wages Fund

The total pool of capital ($F$) that capitalists have available to pay workers in the short run, determining average wages as $F/L$ where $L$ is the labor force.

Subsistence Wage

The long-run natural price of labor required for workers to maintain themselves and a family of two children.

Compensating Wage Differentials

Adam Smith's theory that wage inequalities across occupations arise naturally because higher monetary rewards are needed to compensate for unattractive job characteristics or disadvantages.

Malthusian Law of Population

Thomas Malthus's principle that population grows at a geometric rate ($1, 2, 4, 8, 16\text{...}$) while food supply increases only at an arithmetic rate ($1, 2, 3, 4, 5\text{...}$).

Positive Checks

Checks on population growth in Malthusian theory that raise the death rate, including famine, pestilence, war, and infanticide.

Preventive Checks

Checks on population growth in Malthusian theory that lower the birth rate, consisting of moral restraint, delay of marriage, and restraint of sexual passion.

Iron Law of Wages

The doctrine that any increase in wages above subsistence stimulates population growth, expanding the labor supply and driving real wages back down to subsistence.

Law of Diminishing Returns

The principle formulated in 1815 that as population grows and less fertile land is brought into agricultural cultivation, the marginal product per acre declines and food production costs rise.

Less-Eligibility

The Malthusian concept that public assistance given to the undeserving poor must be strictly less than what they would obtain through independent employment.

Just Price

St. Thomas Aquinas's medieval doctrine that a seller's price is moral when it equals the true value of the commodity as determined by its cost of production.

Usury

The practice of charging interest on money lent, condemned by Aristotle and Medieval Schoolmen as unnatural and immoral because money was considered merely an unfertile medium of exchange.

Mercantilism

An economic doctrine of the 17th and 18th centuries focused on maximizing state power by accumulating gold through trade surpluses, tariffs, export bounties, and low wages.

Specie-Flow Mechanism

David Hume's theory demonstrating that gold inflows from a trade surplus raise domestic prices, reducing exports and automatically eliminating the surplus over time.

Backward-Bending Labor Supply Curve

The mercantilist concept that wage increases cause workers to reduce their hours worked because laborers opt for leisure once a target income is reached.

Statute of Artificers (1563)

English legislation giving local justices of the peace the power to set maximum wage rates annually and establishing a mandatory seven-year apprenticeship for manufacturing trades.

Physiocracy

An 18th-century French economic school asserting that natural law governs human behavior, land is the sole source of wealth, and governments should not regulate economic activity (laissez-faire).

Intensive Growth

Rapid and sustained growth in per capita output ($\text{Output}/\text{Population}$) initiated by the Industrial Revolution.

Extensive Growth

Preindustrial economic expansion where total output and population grow at roughly the same rate, keeping per capita output constant.

Great Divergence

The historical divergence after 1800 in which per capita incomes in Western Europe and Western Offshoots grew rapidly while incomes in non-Western regions stagnated or declined.

Malthusian Cycle

A preindustrial economic cycle where population growth approaches a technological ceiling, depressing per capita income to subsistence and leaving society vulnerable to mortality crises.

Economic Institutions

The fundamental political, social, and legal rules defined by Douglass North that govern economic activity and structure individual incentives.

Inclusive Economic Institutions

Institutions defined by Acemoglu and Robinson that secure private property rights, enforce an unbiased legal system, and allow free contracting, thereby fostering innovation and sustained growth.

Extractive Political Institutions

Political systems that concentrate power in the hands of an elite, enabling them to structure economic rules to extract resources and wealth from the rest of society.

Culture of Growth

Joel Mokyr's term for the Enlightenment-driven belief in social progress and the systematic pursuit and practical application of useful knowledge.

Putting-out System

A preindustrial production method where merchant-capitalists outsourced raw materials to rural workers who produced finished goods in their homes on commission.

Leading Sector

In Walt Rostow's Take-off stage, a rapidly expanding sector (such as railroads in Germany) whose growth stimulates other industries through linkage effects.

Gerschenkron's Great Spurt

Alexander Gerschenkron's thesis that economically backward nations industrialize via sudden, discontinuous great spurts focused on heavy industry, large plant sizes, and institutional support.

Universal Banks

Joint-stock investment banks developed in 19th-century continental Europe that provided long-term capital and managerial guidance to heavy industry and rail transport.

Crowding Out Effect

The reduction in private sector investment caused by heavy government borrowing, such as British government debt during the wars with France.

Bubble Act (1720)

British legislation prohibiting the formation of joint-stock companies without explicit Parliament authorization, passed after the South Sea Bubble and repealed in 1825.

Corn Laws

British tariffs and import prohibitions on foreign grain designed to protect agricultural rents, contentious in the 19th century until their repeal in 1846.

Western European Marriage Pattern

A demographic norm marked by late female marriage ages ($23-26\text{ years}$) and significant lifelong celibacy, serving as an endogenous mechanism regulating birth rates.

Human Development Index (HDI)

A composite index developed by the UN combining per capita GDP, life expectancy at birth, and literacy/schooling metrics to evaluate broader quality of life.

Zollverein (1834)

A customs union formed by German states in 1834 that eliminated internal tariffs and established a single free trade market essential for German industrialization.