E C O N O M I C S PARKINBADE Lecture 2 15 September 1998

Economic Problem  Economic problem  provide for material well-being society  Economic tasks  production --  organize economic system yielding sufficient production for survival  mobilize effort; allocate effort viably  reproduction --  distribution of income so more production can occur

Solutions to Economic Problem  Solutions to the Economic Problem  Tradition  Command  Market continued

Solutions to Economic Problem  Tradition Solution  production and reproduction based on past traditions  tasks organized by heredity, produce distributed by tradition  Command Solution  production and reproduction organized by authority of economic commander-in-chief continued

Solutions to Economic Problem  Market Solution  production and reproduction result from individuals pursuing own self interest, interacting in institutional context of markets  not easily explained like tradition and command economies  complex interdependence  requires history and theory for understanding

Pre-Market Solutions to Economic Problem  Ancient Rome and Greece  traditional agriculture  slavery (command)  surplus  wealth (surplus) from power  disdain of economic activity continued

Pre-Market Solutions to Economic Problem  Feudalism  manorial estate (tradition and command)  barter economy  wealth from power  guilds (tradition)  dominance of church  disrepute of gain  economy embedded in social relationships

Market Solution to Economic Problem  Market Society  economy separated out from other social relationships  labour, land and capital take on new meanings  how does this system of “free” individuals, each pursuing own self-interest, solve economic problem rather than degenerating into chaos? continued

Market Solution to Economic Problem  Market Economy  economy separated out from other social relationships  approval and reinforcement of principle of gain/self-interest  self-interest plus competition  solution to economic problem continued

Adam Smith, The Wealth of Nations (1776)  “[An individual, by directing his industry] in such a manner that its produce may be of the greatest value, he intends only his own gain, and he is in this... 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.”

Market Solution to Economic Problem  Dynamic tendency of market system to develop production and needs  Market as a new form of social control; pinnacle of individual freedom, yet strictest of economic taskmasters.  consequences of interdependence  free will and determinism  dependence on market  circular flow of economic life

Textbook p. 18 Wages, rent, interest, profits Labour, land, capital, entrepreneurial ability Expenditures on goods & services Goods & services Figure 1.2 A Picture of an Economy Copyright © 1997 Addison-Wesley Publishers Ltd. Goods markets Households Factor markets Firms

Interdependence -- Key Issues  A. Individual vs. Social Determination  1) individual demands determine what market does  2) market determines choices available  B. Needs and Scarcity  1) individual needs naturally infinite, so finite goods available to satisfy them naturally scarce  2) individual needs are developed by society, so scarcity a social phenomenon continued

Interdependence -- Key Issues  C. Role of Firm  1) responds to individuals’ demands  2) initiator, creator new products, helps develop new demands  D. Static Allocation vs.Dynamic Reproduction  1) markets allocating resources at a given point in time  2) market system grows and changes, producing new goods, developing new needs