History of Economic Thought: Exam 1
Terms in this set (76)
wrote "Theory of Moral Sentiments" (1759) and "The Wealth of Nations" (1776)
Adam Smith's "school of thought"
Classical (Laissez Faire)
refers to the people of Adam Smith's time (and country) that applied scientific ideas to other parts of life, that believed policies should be based on evidence
this book touched on why we are sometimes selfish and sometimes sympathetic
The Theory of Moral Sentiments
the _____________ man is selfish, and maximizes his own utility (from the Wealth of Nations)
sometimes we imagine how the "_____________" would judge our behavior and act accordingly, rather than from a religious theory of morality (from the Wealth of Nations)
Das Adam Smith Problem
refers to the German Historians of thought on the contradictory of Adam Smith's 2 books
sympathy for others __________ (rises or declines?) with social distance
why do we need markets?
they are needed in places where charity is no longer equitable, sympathy is lacking, and where people are selfish
what is the wealth of a nation?
GDP per capita
Sir James Steuart
a mercantilist intellectual opponent to Adam Smith; believed the government must intervene in foreign trade to produce a "favorable balance of trade"
According to Smith, what is the measure of wealth over time?
labor is the measure of value
"It is not from the ____________ of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own ___________" (The Wealth of Nations)
benevolence, self interest
According to Adam Smith, economic progress results from increasing the __________
division of labor
with one blacksmith creating pins, the short run supply is __________, but the long run supply is ___________, due to ___________.
inelastic, elastic, the high prices and eventual entry of blacksmiths to the market
how do we increase demand?
population growth, income growth, improved transportation, and most importantly eliminate barriers to trade
Smith's empirical evidence noted that rich countries were nations that focused on ___________.
Why did Smith believe classes at schools like Oxford and Cambridge were so boring?
Because professors were not paid on the basis of how interesting their lectures were
Why didn't Smith think the government should set wages, and that they should set themselves?
1) disagreeable or agreeable conditions
2) costs of training
3) irregular or insecure employment
5) probability of success
an idea of Smith; laws that set a maximum rate of interest you can charge on something, and that exceeding that cap would be "usury/evil"
Panic of 1772
banks invested heavily in real estate and the banks failed; Smith was involved in helping solve the crises
Real bills doctrine
built from Smith's ideas about banks needing more supervision; banks were to only make short-term loans that were based on real transactions
"small note mania"
people who were not really bankers, "tavern bankers," were lending out small loans that were hurting both the lender and the borrower; led to a ban on small bank notes
wrote "An Essay on the Principle of Population" (1798)
Thomas Robert Malthus
population growth causes misery; overpopulation = starvation
While economist __________ saw population growth meaning bigger factories and more economies of scale, __________ saw population growth as starvation and poverty
Adam Smith, Thomas Malthus
according to Malthus, the rate at which population grow...
geometric progression: 1, 2, 4, 8, 16, 32, etc...
according to Malthus, the rate at which food (subsistence) grows...
arithmetic progression: 1, 2, 3, 4, 5, 6, 7, etc...
according to Malthus, 4 checks on population growth are...
plague/disease, war, famine, moral restraint
populations delaying the age of marriage or remaining celibate till marriage in order to slow population growth
"Iron Law of Wages"
Malthusian law that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker
Malthus's theory of "general glut"
persistent overproduction of stuff that leads to cuts in production, which ultimately ends in persistent high unemployment and low wages
Malthus's response and solution to "general glut"
public works (highways, etc.)
supported by Ricardo; supply creates its own demand; unemployment will be cured by lower wages while excess savings will be cured by lower interest rates
Malthus believes savings gluts were __________ while Ricardo believes gluts were __________
the "Price Revolution"
the sustained increasing inflation in Europe during the 16th century
what caused the "price revolution"
the continual inflow of gold and silver from the New World. More gold and silver meant
more coins in circulation, more competition for the goods and services produced by the
Spanish economy, and therefore, higher prices.
The Great Mine at Potosi
the mountain of silver in Bolivia where a high percentage of total silver inflow came from
inflation's: definition, equation, and theory's country of origin
too much money chasing too few goods, P=M/Y, Spain
according to David Hume, an increase in the money supply in the short run will increase __________, but in the long run and increase in the money supply will only increase __________.
output, prices (inflation)
Adam Smith claimed that the money supply consisted of
gold and silver coins + bank notes (that promised to pay in coin on demand)
Adam Smith's "wagon road in the sky"
Banking activities that included issuing bank notes was like "a wagon road in the sky." It was great when it worked, making it much easier and quicker to travel from point A to point B. But there was always a danger that it would suddenly disappear and that the wagons using it would crash to the ground.
Ricardo's "high price of bullion"
the price of bullion (gold and silver) tells us about the nation's price level
______________ completed the classical development of the Quantity Theory of Money, which is defined as ___________.
John Stuart Mill, MV=PY
velocity of money
the speed at which money circulates through the economy
refers to the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources
British "Corn Laws"
law that restricted the import of "corn" (whatever feeds the people of Britain) below a certain price, in order to protect domestic producers from cheap foreign competition
Ricardo's theory of comparative advantage
the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
John Stuart Mill's "Theory of Reciprocal Demand"
the theory that explains where prices between two goods end up when dealing with trade that involves comparative advantage
wrote "Principles of Political Economy and Taxation" (1817)
according to Ricardo, who gains from growth in the long run?
landlords, as they own a factor of production that is fixed
what are Ricardo's three factors of production?
land, labor, and capital
diminishing marginal production (Ricardo)
marginal product decreases as more labor is added
on lower quality land, production will be __________, even if the labor force is __________ as other land.
lower, the same
the amount of labor on the best land ("2 doses on land A")
the poorest land brought into production ("land B")
in Ricardo's theory of rent, when wages fall, __________ make more money.
Ricardo noticed that when _________ fall, the __________ margin shifts, bringing more ___________ into production
wages, extensive, land
the long run equilibrium for the supply of doses of capital and labor will be determined by the
iron law of wages
Ricardo noticed that when (food, products, services) prices ________, the __________ margin shifts, and __________ rents the landlords get paid
rise, extensive, increases
disciple of Ricardo, this economist was in favor of the "single tax movement," which would replace all taxes with land taxes
a tax that charges more for the use of good land and less for the use of bad land; thought to support government without hurting the economy
progressive land tax
author of "Communist Manifesto" (1848) and "Capital: A Critique of political Economy" (1867)
the Factory Acts (1833)
regulations set to improve conditions for children working under the long and terrible conditions of factories; no child workers under nine years of age, regulation of hours, improved conditions
"the theory of the Communists may be summed up in the single sentence: Abolition of __________."
labor theory of surplus value
Marxist theory that the laborer in the capitalist system only works a fraction of the day for himself (to see profits for himself) and the remaining fraction of the day for his employer (profits that the employer sees); profits/hours the capitalist employer sees is the surplus value
according to Marx, labor wages are a form of _________ capital
according to Marx, depreciation is a form of ________ capital
Marxist Algebra : what is the meaning of V, C, S, and R?
V= variable capital
C= constant capital
S= surplus value (profit)
R= total revenue of the firm
surplus value formula(s)
R= C + V + S or S = R - C - V
s' = the rate of surplus value (exploitation) = ?
p' = profit rate = rate of return to capital = ?
o' = organic composition of capital (capital-labor ratio) = ?
according to Marx, capitalists are interested mostly in maximizing the ______________________ of labor
rate of exploitation
the "transformation problem"
firms can have different rates of exploitation but still have the same profit rates, so how do we transform labor values into market values?
how can we tell how much of the total surplus should go to workers in each industry?
calculate surplus in each industry on the basis of the aggregate rate of exploitation