Lecture One (1-188) ... History of Finance, Key Economic Concepts, and Why the West Got Rich First Flashcards
who wrote the book that sparked the ideas of how the west + Japan got rich first and why was it significant?
Angus Deaton
The Great Escape
Revealed unknown truths about pre-capitalism life (dug through govt. documents to find it)
what did The Great Escape book argue & desribe?
it seeked to discover why western econonomies + Japan were the first to escape poverty
argued that “now” is the best time ever to be alive
what is the bad news bias
“if it bleeds it leads”
emotion grabs attention better than fact
what is the Malthusian equilibrium trap?
argued that agricultural output grew arithmetically/linearly, while population grew exponentially
population rises until deaths = births and the population stabilizes
… at this point, everyone is barely surviving (nearly starving)
what was the escape from Malthus equilibrium?
it turns out:
agricultural output ACTUALLY grows exponentially
population ACTUALLY grows logarithmically
… this allowed the population to be sustained and living standards grew
what happens when incomes reached “middle income” (in relation to population growth)
births tended to stabilize / flatten out once GDP per capita reached $15,000 (i.e. hit middle income)
some countries, like Canada would actually have falling populations if it weren’t for immigration
what are the economic implications of birth rates < death rates? … not just that there’s a falling population?
looming economic problem:
- fewer taxpayers to pay for medicare, pensions, social benefits
- not as many young investors to buy stocks / bonds that you invested in
population growth actually follows a __________ growth curve. What other factor drags it down and prevents it from being exponential.
logistic
women’s education level
In Thomas Malthus’ Essay on the Principle of Population (1798), what was his key concern + what was his solution
Malthus argued that government policies to “help the poor” were counterproductive
instead, he argued for government measures to suppress population growth: euthanization, sterilization, and child birth limits
what was Charles Darwin’s (1887) perspective on Malthus’ Essay on Prinicple of Population (1798)
argued that during times of hardship, favorable human variations would be preserved and weaker ones would be destroyed
… the result would be the formation of new species
“Science-based” Neo-Malthusian Policies
describe both of: Poor Laws and Eugenics
Poor Laws concentrated the poor in sex-separated workhouses, & spiked the gruel with chemicals thought to suppress sex drives
Eugenics was a “settled science” and a scientifically inaccurate theory where humans can be improved through selective breeding of the population
- NAZI eugenics was initially supported by Western progressives (i.e. sterilizing the poor, cognitively diverse, etc.)
instead of the Malthus equilibrium trap, what ended up happening?
instead … countries escaped one-by-one (West + Japan were first, which led into Needham’s Question)
what was Needham’s Question (1954)
… and what is the mainstream economics answer?
Why did the West escape first?
… adoption of free markets and capitalism first
in economic history, do the left & right wing tend to switch sides?
Yes!
in the 1700s, free markets were a radical left wing idea, as conservatives liked feudal estates, serfs and slaves
what were some of the “other potential solutions” to Needham’s Question
- Absence of imperialism, colonialism and slavery made the West rich
- Climate change made the West rich
- Western Christianity + traditional education made the West rich
did the absence of imperialism, slavery, and colonialism make the West rich?
countries with imperialism and colonialism (Russia, Spain) and Adam Smith argued that these countries had:
TOTAL COSTS > TOTAL BENEFITS
Who argued that imperialist economies actually had total costs > total benefits? Describe his rationale
Adam Smith
- large military spending, colony administration, rebellions and depressed wages harmed the economy
… while low taxes from colonies under dominance didn’t support it
what objectives were used to justify these imperialist nations in Britain, Germany, and Spain
non-economic objectives like “national greatness”
… to make up for the lack of total economic benefits
why was imperialism and slavery unsuccessful
made few people very rich and many people very poor
Britain’s middle classes would have been richer if Britain had avoided colonialism, slavery, imperialism, etc.
at what point / what catalyst made countries transition from slavery and imperialism to more democratic / just countries
once the middle class became politically important, they ended slavery and granted colonies independence
Euro countries with huge slave populations became less rich than countries without slavery / colonial empires
what was the ad hominem fallacy (Aristotle)
you’re criticizing the person and not the argument
what did Larry Summers argue was the highest returning investment for economic growth in developing countries? And why?
girls education
… because it gave them the ability to read, write, and make better decisions (like using contraception, legal rights, etc.)
Current trends in finance and demography. Describe the current shape of Canada and China’s population pyramids now and in 2050
Canada: shows baby boom at age 50 today and high elderly population in 2050 supported by few younger workers … (Canada’s solution is to increase immigration)
China: very large working population, small elderly population (Mao era deaths), and very small child population … leading to 2050 population with very large elderly population and very few working-age people
How can demographics be used to predict stock market performance?
in theory, people borrow when they’re young and buy stocks when they’re old
in the 1980s baby boomers borrowed to buy homes and in the 2000s invested in the stock market once mortgages were paid off. This helps describe the run up in stock market valuation in the early 2000s
governments and corruption played a huge role in helping countries escape poverty; who advocated for the importance of government in the 1600s and what did he argue
Thomas Hobbes
argued that any form of government was better than no government, as it encouraged people to accumulate wealth (without the fear of it being taken away)
“[When] men live without a common power to keep them all in awe, [it is] every man against every man [and] life is solitary, poor, nasty, brutish and short”.
who spit that line^ ?
Thomas Hobbes, 1652
even bad government is better than no government … - “_______ _______”
who spit that line ^ ?
Thomas Hobbes !
who is this philosopher (1700s era)
- Lived at the beginning of the UK’s high growth era
- Connected many ideas together to create economics
- Outspoken liberal
Adam Smith
who is this philosopher:
- argued that slavery harmed productivity (unethical and economically inefficient)
- colonies should all be made independent
- argued that the economy’s goal should be to create widespread wealth
- decisions should be made with rational thinking
Adam Smith
if there is a lower (middle aged / young worker) ratio, then will the net demand for stocks be higher or lower?
lower middle aged / young worker ratio means lower net demand for stocks … stock prices fall
what were countries “escaping” from, how did they live in the 1500s, 1600s, and 1700s
- answer from both an economic perspective (one word) and a social / living conditions perspective.
Mercantilism
Life back then was nasty, brutish and short where there was rampant disease, plagues, short life spans, short height people, and people lived like they were in a third world country everywhere
who “perfected” Mercantilism
Jean-Baptiste Colbert (1618 - 1683)
- he was the Finance Minister for the King of Canada & France (King Louis XIV)
what were the Principles of Mercantilism (3)
… hint: it’s about the elites and how they should be treated
served the elites only
- elites were the only ones who could create and enjoy culture
- nations exist to support the elite
- war is grand & uplifting, and wars cost money
T or F: In Mercantilism, the purpose of ordinary people is to pay taxes to increase the greatness of the nation
True
- they aimed to maximize taxes on the poor while elites paid no tax
- entire economy was monopolized with no competition
- high trade barriers
- laws/regulations were set by elites who bought the rights to set laws
what was the Wealth of Nations and what was its impact on the economy in the 1700s
written by Adam Smith, it brought Mercantilism to an end
- flipped principles of mercantilism upside down and argued for uplifting the middle class and not focusing on national greatness
… was a part of a broader movement called the Enlightenment
what about free markets made Adam Smith argue for it and resent against Mercantilism? hint: one word
Specialization
argued for free markets over monopolistic nature of mercantilism
Specialization boosts productivity so freer markets make nations wealthier
why do specialists need markets
without markets, specialists starve, die of exposure, … so everyone has to be a generalist and make their own food, clothes and shelter
How free markets work … the invisible hand
Free markets are guided by the self interests of individuals, not their benevolence (according to Smith)
The prices of goods signal what specialists are needed
Free markets are self-organizing complex systems
counties allocate capital through capital budgeting. describe the difference between NPV and MVA (economic value added)
MVA subtracts out the annualized cost of capital (cost of providing returns to investors)
also, MVA is the sum of economic value added for each year
(accept if MVA > 0)
