Economists Flashcards
Who was Adam Smith?
18th century Professor of Moral Philosophy
developed the idea that as long as robust competition constrains firms, their self-interested profit-seeking inadvertently causes them to act in ways that are socially optimal - as though they’re guided by an INVISIBLE HAND to do the right thing.
Was Adam Smith naive about his beliefs?
No.
He believed that people who run businesses prefer to collude rather than compete whenever possible, and that gov’s have a very important economic role to play in fostering the robust competition needed for the invisible hand to work its magic.
He also belived that gov’s must provide many essential public goods like national defence, that aren’t readily produced by the private sector.
Who was David Ricardo?
British. 18th/19th century
Discovered the concept of comparative advantage and argued (correctly) that intl trade is a win-win situation for the countries involved.
Comparative adv destroyed the intellectual respectability of MERCANTILISM, the mistaken theory behind colonialism that viewed tade as being one-sided and consequently argued that trade should be set up to benefit the mother country at the expense of its colony.
What else did Ricardo correctly analyse?
In addition, he correctly analysed the economic phenomenon of diminishing returns, which explains why costs tend to increase as you increase production levels.
he was also a strong ealry proponent of the quantity theory of money, the idea that increasing the money supply increases prices.
Who was karl marx?
German
The foremost economist among 19th century socialists.
Few of his major economic theories are now believed to be true, but because proponents of his Marxist ideas came to power in dozens of countries during the 20th century, he is surely one of the most influential economists who ever lived.
remember: when reading marxist theory, bear in mind that a fair question to ask is: just how Marxist were 20th century marxist governments
What was marx’s most important intellectual contribution?
That capitalism is a historically unique form of social and productive organisation.
In his book, DAS KAPITAL (capital), he analysed capitalism as a brand-new form of social and economic organisation based on capital accumulation and factory production.
he called the owners of factories ‘capitalists’ and argued that they would be forced to exploit the workers who laboured in their factories.
According to Marx, who were the only capitalists who would survive?
In particular, he believed that the only capitalists who would survive and whose businesses would grow were those who paid workers the minimum salaries necessary for the workers to survive.
Thus, even as producitivity and output rose more rapidly, workers would endure permanent, grinding poverty out of which they’d never be able to rise except by means of violent overthrow of the capitalists - an overthrow in which the workers would gain control over the factories.
According to Marx, how would this violent overthrow be facilitated?
It would be facilitated by what he saw as an inevitable tendency toward concentration and monopoly.
When only one monopoly firm in each industry existed, the workers would find it much easier to revolt and take over the system.
Was Marx correct in his thinking?
No.
In particualr, workers’ wages DO rise over time - in fact, they rise on average as fast as technological innovation increases productivity levels.
That’s because capitalists compete over the limited supply of workers, and wages get bid up as quickly as productivity improvements allow one capitalist to bid higher wages to steal workers away from other capitalists.
What else did Marx get wrong?
In addition, competition does NOT lead to each industry being dominated by a single monopoly firm, and even if that were inevitable true, gov’s would still have a strong interest in preventing that outcome.
Instead, competition remains robust in most industries, and consequently delivers all the benefits of Adam Smith’s invisible hand.
Who was Alfred marshall?
British. 19th and 20th century.
He invented the supply and demand method for analysing markets. Applying maths to economic theory, he clearly deifferentiated between SHIFTS of demand and supply curves and MOVEMENTS ALONG s and d curves.
He also made the revolutionary prediction that the market price would be where the d and s curves cross.
How did marshall go one-step further in his work?
Marshall went one swtep further and realised that by comparing points along the d and s curves with the market price, you can quantify the benefits that consumers and producers derive from makret transactions.
These benefits = consumer and producer surplus and their sum is the total economic surplus.
Who was john Maynard keynes?
British. 19th and 20th century.
Invented modern macroeconomics and the idea of using gov-provided economic stimuli to overcome recessions. Much of the rest of 20th century macroeconomics was a series of responses to his seminal ideas.
What were Keyne’s famous ideas in response to?
The great depression of the 1930’s.
He first claimed that the great recession was caused by a collapse in the expenditures of goods and services. He then asserted that monetary policy had been ineffective in combating the decline in expeneditures. And he finally concluded, given his dismay of monetary policy, that fiscal policy was the only remaining source of salvation.
According to Keynes, what was the best way to increase expenditures in such dire circumstances?
The only way to do so was for the gov to speand heavily to pay for programmes that would buy up lots of goods and services in order to get the economy moving again.
Were Keyne’s policy prescriptions adopted during the great depression?
yes, many countries adopted Keyne’s policy prescriptions during the great depression and later formed the bedrock of the post-war welfare state.
And although many of his specific ideas about the cause of the great depression and the best policies for dealing with recessions are no longer embraced, his underlying idea that govs are responsible for taming the business cycle remains very much with us today.
Who were Kenneth Arrow and gerard Debreu?
Arrow (glasses) - American
Debreu - french born American
20th century.
mathematcially proved that Adam Smith’s ionvisible hand idea was in fact, true. Not only do competitive firms provide society with the utility maximising combination of goods and services, but also they do so efficiently, at minimum cost.
Since this proof came in the 50’s, is served to dispove the assertions of totalitarians and commmunists that centrally planned economies were more productive or more efficient than market economies.
Who was Milton Friedman?
1912-1960. American.
He convinced economists that the quantity theory of money is, in fact, true: sustained inflations are the result of sustained increases in the money supply (printing too much money).
This insight put limtis on using monetary policy to stimulate the economy.
According to Friedman, what caused the great Depression?
Friedman argued that the Great Depression was chiefly a monetary disaster and that its severity was the result of a gruesmonly tight money supply that kept real interest rates much too high.
This diagnosis of the cause of the great depression is now the standard explanation, meaning that the intellectual ammunition for Keyne’s solution to recessions - large increases in gov spending - has lost much of the sway that it once had.
Who was Paul Samuelson?
1915(b) American.
His most important idea was that all economic behaviour can be thought of as consumers and firms maximising utility or profits subject to a set of constraints.
This idea of CONSTRAINED MAXIMISATION has become the dominant paradigm that governs how economists conceive of economic behaviour.
What did Samuelson do with Keyne’s and classical economic ideas?
Remember: keynes argued for large gov interventions to mitigate recessions.
Classical economists i.e. Smith and Ricardo argued for minimal gov interventions, fearing that gov interventions tend to make things worse.
Samuelson developed a judicious blending of Keynesian and classical ideas about the proper use of gov intervention in the economy.
What was Samuelson’s NEOCLASSICAL SYNTHESIS?
His NEOCLASSICAL SYNTHESIS states that during a recession the gov needs to be willing to make large interventions in the economy to get it moving again, but when the economy is operating at full potential, the proper role of gov is to provide public goods and take care of externalities.
Many economists embrace this view of the gov’s place in the economy.
Who was Robert Solow?
1924 (b) American.
made huge contributions to the understanding of economic growth and rising living standards.
In addition to developing innovative models of how economies grow over time, he also showed that the dominant long-run force propelling economic growth is technological innovation.
What was the consesnsus before Solow?
Before Solow, the economic profession belived that increases in output were the result of increases in inputs.
in particular, increases in output were solely the result of using more workers or more captial (i.e. bigger factories).
What Solow demonstrated was that AT MOST 50 per cent of the long run growth of living standards can be explained by increases in labour and Capital.
The rest has to be the result of technological innovation.
