What is Economics? Part 2

Adam Smith ( )  His book called “The Wealth of Nations” dealt with the basic problem of how social order and human progress can be possible in a society where individuals follow their own self-interests.  Smith argued that this individualism led to order and progress.

 Smith, Adam ( ), is generally regarded as the founder of modern economics. His major book was The Wealth of Nations (full title: An Inquiry into the Nature and Causes of the Wealth of Nations). Published in 1776, it was the first complete work on political economy. The book discusses the relationship between freedom and order, analyzes economic processes, and attacks the British mercantile system’s limits on free trade or

 The book dealt with the basic problem of how social order and human progress can be possible in a society where individuals follow their own self-interests. Smith argued that this individualism led to order and progress. To make money, people produce things that other people are willing to buy

 Buyers spend money for those things that they need or want most. When buyers and sellers meet in the market, if competition is allowed to work, a pattern develops that results in social harmony. Smith said that all this would happen without any conscious control or direction, “as if by an invisible hand

 To make money, people produce things that other people are willing to buy. Buyers spend money for those things that they need or want most. When buyers and sellers meet in the market, if competition is allowed to work, a pattern develops that results in social harmony.  Smith said that all this would happen without any conscious control or direction, “as if by an invisible hand.”

 Smith believed that the value of goods was determined primarily by the cost of production—that is, the cost of labor, land, and capital. He identified specialization, or division of labor, as the basic factor in creating wealth. Specialization means that different workers concentrate on the specific jobs they are best fitted to perform

 Smith said that wages depended on the productivity and basic needs of workers, and rent on the productivity of land. Profits, he said, were the difference between selling prices and the cost of labor and rent. Smith said profits would be used to expand production, thus creating more jobs.

 Smith believed that free trade and a self- regulating economy would result in social progress. He criticized tariffs and other limits on individual freedom in trade. He preached that government need only preserve law and order, enforce justice, defend the nation, and provide for a few basic services that could not be met through the market.

 His argument for a “hands off” government policy toward business, along with his analysis of economic forces, formed the basic ideas of economic liberalism.

 Smith believed that free trade and a self- regulating economy would result in social progress. He criticized tariffs and other limits on individual freedom in trade.  He preached that government need only preserve law and order, enforce justice, defend the nation, and provide for a few basic services that could not be met through the market.  His argument for a “hands off” government policy toward business, along with his analysis of economic forces, formed the basic ideas of economic liberalism.

 A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.  Economic liberalism is the ideological belief in organizing the economy on individualist lines, meaning that the greatest possible number of economic decisions are made by individuals and not by collective institutions or organizations.

Thomas Malthus ( )  An English clergyman and economist that first introduced the idea of diminishing returns.  This theories were loosely based on Darwin’s theory of Natural Selection.

 Malthus wrote “Essay on the Principle of Population”. His main idea in this book is that population tends to increase more rapidly than food supplies.  He believed that wars and disease would have to kill off the extra population, unless people limited the number of their children.  He also suggested that we didn’t help the needy; an idea that seems to contradict his occupation as clergyman.

Malthus, Thomas Robert ( ), was an English economist. He is best known for his Essay on the Principle of Population (1798). His main idea in this book is that population tends to increase more rapidly than food supplies. He believed that wars and disease would have to kill off the extra population, unless people limited the number of their children

 Malthus's Essay suggested to Charles Darwin the relationship between progress and natural selection. This was a basic idea in Darwin's theory of evolution. Malthus's prediction failed to come true in the 1800's. Improved methods of agriculture provided enough food for most people. But rapid population growth in the 1900's, especially in underdeveloped countries, led to renewed interest in Malthus's theories

 Many conservationists warn that food production cannot keep pace with population indefinitely. But others disagree, claiming that food production technology continues to improve.

 Malthus was born on Feb. 17, 1766, in Surrey. He decided to be a clergyman and graduated from Cambridge University. About 1796, he took a parish in Surrey. He became a professor of history and political economy in the college of the East India Company in 1805 and held this post until his death on Dec. 23, 1834

Economic Systems  Making decisions about how to make economic choices has two basic approaches: the Free-Market approach and the Command Approach.  Free-Market: decisions based on private ownership of property and resources.  Command: situation where resources, including land, labour, and capital, are jointly or publically owned.

Class Assignment – 50 marks  Read Pages 21 in the text book. Submit to me a one page position paper(typed) on what you think would be the best approach to resource ownership…free-market approach vs command approach. Be sure to consider opportunity cost theory as well. Be sure to give reasons and examples to support your position. Due tomorrow.

Economic Systems

 In Canada, we have a combination (Mixed Economy) of a Free Market and a Command Approach as many of our resources are privately owned while some resources(parks, CBC, govt offices…) are publically owned.  Countries such as China, North Korea, and Cuba are examples of Command Economies.

 Free market refers to an economy where the government imposes few or no restrictions and regulations on buyers and sellers. In a free market, participants determine what products are produced, how, when and where they are made, to whom they are offered, and at what price—all based on supply and demand. A purely free market does not exist— because all countries choose to impose some level of central decisions and regulations

 A command economy is one where the government controls the economy, acting as the central planner, dictating production quotas and distribution levels, and setting prices. Command economies traditionally have been inferior to free market economies in their ability to allocate goods and services efficiently.

 This inefficiency creates shortages and wasteful surpluses. The problem is caused by the inability of the government central planners to accurately predict consumer demand preferences. This inefficiency has caused a number of governments with command economies to shift to a more market-based economy. (ie China) 

 Although no county on the planet adopts either approach exclusively, they will usually have a mix of both approaches.  Countries that lean toward the Free-Market approach are called capitalist.  Countries that favor the Command approach are know as socialist or communist countries.

Traditional Economies  Traditional economies focus on being self sufficient with extra goods or services often traded for outside resources.  This type of economy is found in static societies that focus on survival and not economic prosperity.  Goods are traded without a monetary exchange in what is know as a barter system.

Traditional Economies  The Maasai of the African Savannah  The Lapps of the Scandinavian Tundra  The Senoi of Malayasia

 Other groups are the Mongols of the Gobi Desert, the Bedouin of the Sahara, the Bushmen of the Kalahari, the Waura and Yanomami of the Amazon, the Mbuti of the African rain forest, the Negrito of Malaysia and other indigenous groups

Command Economy  In a pure command economy all production decisions are made by a central authority of political leaders.  These leaders decide on what, how and for whom to produce goods based on the interests of the state.  Individuals are obligated to serve the state.  In turn the state is responsible for providing for the needs of the citizen/workers.

 Individuals in Command Economies are rewarded or punished based on how they contribute. Modest wages are set and jobs are given out to meet the needs of the state.  Consumer goods are hard to find as most production centers around providing capital goods(airplanes, machinery, computers, buildings…).

The Free Market Economy  In a pure market economy activities are created and controlled by many individuals that make decisions based out of self-interests.  Goods and services are controlled by what consumers demand and prices are determined by what gives the highest profit margin.

 Free Market economies look to reduce costs and maximize profit which can encourage innovations but can also result in failed businesses.  Free markets favor the wealthy as they can afford better products and services and are therefore more influential on economic decision making.

Consider this:  Suppose, for instance, that we were time travelers called on to act as consultants to a nation emerging from a history of tradition-bound organization.  We could imagine the leaders of such a nation saying, “We have always known a highly tradition- bound way of life. Our men hunt and our women gather fruits. We are prepared, if necessary, to force many of our men to work on community projects for our collective development. Tell us, wise time traveler, is there any other way we can organize our society so that it will function successfully?”

Scenario  If you were to sit and watch two young children trying to decide how to trade hockey cards.  How do you think it would play out? What would the conversation sound like?

Why We Study Economics  Many (although not all) of the problems we encounter in the world today have to do with the workings or mis-workings of the market system, and precisely because our modern- day problems often arise from the operations of the market, we study economics itself to better grasp how to deal with our ever changing societies.