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Econ 265 > Topic 1: 3 approaches to Political Economy before Adam Smith > Flashcards

Topic 1: 3 approaches to Political Economy before Adam Smith Flashcards

1
Q

What’s a polis?

A

Greek city-state

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2
Q

What’s political economy?

A

Study of how politics and the economy affect each other

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3
Q

What’s usury?

A

Charging interest on loans, which causes a payment of pure interest

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4
Q

What’re usury laws?

A

Laws that limit interest rates

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5
Q

What’s political arithmetic and which approach to political economy used it?

A

An early form of economics using statistics, math and simple models to understand the economy

Used by mercantilists to justify their economic policies

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6
Q

What’s normative and which approach to political economy used it?

A

Judging whether a transaction is sinful, used by Scholastics (obvi)

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7
Q

What’s Laissez Faire and which approach to political economy used it?

A

A policy letting things take their own course, without intervention

Physiocrats felt this way about the economy, to oppose gov’t economic regulations!

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8
Q

What’re the 3 approaches to political economy before Adam Smith?

A

Scholasticism, Mercantilism, Physiocracy

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9
Q

What 2 impacts did all 3 approaches to political economy before Adam Smith share?

A
  1. Still relevant in today’s society/economy
  2. Made important scientific contributions
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10
Q

What important scientific contribution did Scholasticism make?

A

Scholasticism taught us how to understand if a financial transaction concealed usury, by fully understanding the transaction

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11
Q

What important scientific contribution did Physiocracy make?

A

Thier founder François Quesnay created Tableau Économique: A model on the circular flow of income and spending in an economy based on the circular flow of blood in human body

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12
Q

What important scientific contribution did Mercantilism make?

A

Mercantilism taught us how to intervene to change the balance of trade, through first quantitatively understanding trade and the economy via POLITICAL ARITHMETIC

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13
Q

VERY IMPORTANT: In a sentence, summarize each of the 3 approaches to political economy before Adam Smith

A
  1. Scholasticism
    • Bible-thumping holier than thou Aristotle fangirls
  2. Mercantilism
    • The wealth and power hungry quant trading lords
  3. Physiocracy
    • The granola anti-government people ruled by nature
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14
Q

Scholasticism

Generally, what did they believe in?

A
  1. Word of God
  2. Aristotle’s Ideas
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15
Q

Scholasticism

What did they believe about the Word of God?

A

That ppl must follow it bc God would punish/reward their behavior accordingly

Therefore, economic transactions should be just and moral, with no usury and exploitation

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16
Q

Scholasticism

IMPORTANT: What Aristotle ideas did they believe in? (5)

A
  1. “just Price”
  2. Usury is bad
  3. Self-sufficient city-state (polis) and household (oikos)-Aristotle was Greek
  4. Trade is a necessary evil
  5. Divisions of labor due to natural differences in ppl
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17
Q

IMPORTANT: What’s trade?

A

Exchanging goods and services

Can be between 2 people, or 2 countries/nations via imports and exports

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18
Q

Scholasticism

What’re their thoughts on usury?

A

Followed Aristotle

They thought it was bad and unnatural bc barren metal shouldn’t be able to “breed”

BUT they did think there was a different between usury and compensation for bearing risk or from oppurtunity cost

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19
Q

Scholasticism

What’re the Scholastic thoughts on trade?

A

Followed Aristotle: They think it’s a necessary evil

  1. necessary to support life
  2. evil bc of the temptation to sin and lust for wealth, and bc it could bring in foreigners and their foreign ideas
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20
Q

Scholasticism

Due to their thoughts on trade, how did Scholastics view trade and merchants?

A

Due to thinking trade is a necessary evil, they viewed trade and merchants with SUSPICION

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21
Q

Scholasticism

What’re their thoughts on division of labor?

A

Followed Aristotle

They thought it was due to NATURAL DIFFERENCES in people (eg. some ppl were naturally masters (like me) or slaves)

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22
Q

Scholasticism

What type of approach did they have to understanding economic behavior?

A

They had a NORMATIVE approach to understanding economic behavior: judging if a transaction was SINFUL

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23
Q

Scholasticism

What were their thoughts on economic intervention?

A

They were AGAINST any attempts to control the market bc they thought it was UNETHICAL
- includes inflation, hoarding goods, monopolies, etc.

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24
Q

Scholasticism

What did they believe about “Just Price”? (5)

A

Followed Aristotle

  1. Fair PRICES
    a. cover the normal and necessary costs of production
    b. give a reasonable profit
    c. didn’t exploit buyers or sellers
  2. Fair INFORMATION
    Must tell the buyer relevant price and market condition info (ie. your price of grain is high but disclosing to customer that there’s another big shipment of grain coming, insinuating a future lower price of grain)
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25
Q

Scholasticism

READING: Who was Raymond de Roover and what were his thoughts on “Just Price”?

A
  1. He was a modern economic historian from 1900s that looked back in time
  2. He argued that in reality, the “Just Price” was just equal to the CURRENT MARKET PRICE
    • except when there’s collusion or authority intervention from gov’t/guilds
  3. Therefore, he thought that Scholastics were more favorable to market competition that is generally assumed
    • (That they actually recognized the importance of competition in a functioning market and didn’t oppose it, bc they understood that prices set through competitive market processes (based on supply and demand) were generally “just” and acceptable).
26
Q

IMPORTANT: What’s the market price?

A

The price determined by supply and demand in a functioning market

27
Q

Mercantilism

IMPORTANT: What did Mercantilists believe in? (4)

A

Wealth and power hungry quant trading lords

  1. Power of the nation-state
  2. Trade surplus to accumulate national wealth and power
  3. Pro-heavy gov’t regulation to force that trade surplus
  4. Political arithmetic
28
Q

Mercantilism

What were the Mercantilist thoughts on trade?

A
  1. They wanted a TRADE SURPLUS to accumulate SPECIE (gold/silver) and therefore national wealth/power
  2. So, they were pro-heavy gov’t regulation to force that trade surplus
29
Q

Mercantilism

What were the Mercantilist thoughts on monopolies?

A

Mercantilists SUPPORTED gov’t-backed monopolies to accumulate national wealth

30
Q

Mercantilism

What policies did Mercantilists like for forcing positive trade surplus?

A
  1. Policies on imports: tariffs, quotas, regulations, outright bans
  2. Policy on exports: subsidies
31
Q

Mercantilism

What’s trade surplus?

A

Exports > Imports

32
Q

Mercantilism

What were Mercantilist thoughts on political arithmetic?

A
  1. They used political arithmetic to inform and justify their policy objectives
  2. Petty and other mercantilists believed that to make sound economic policies, governments needed empirical/quantitative data on important factors like population, national wealth, and the balance of trade
33
Q

Mercantilism

How did Mercantilists try to seek power of the nation-state? (4)

A

How mercantilists tried to seek power of the nation-state:

  1. Find gold or silver mines (but failed)
  2. Piracy against other nations
  3. Alchemy
  4. Trade surplus
34
Q

Mercantilism

What’s alchemy?

A

Trying to convert base metals into gold

35
Q

Mercantilism

Who were some famous Mercantilists?

A
  1. Thomas Mun (see notes)
  2. John Law (see notes)
  3. William Petty (proposed political arithmetic)
  4. Gregory King
36
Q

Mercantilism

IMPORTANT: Who was mercantilist Gregory King?

A

Mercantilist Gregory King

  1. developed SOCIAL TABLES
  2. Created “GREGORY KING’S LAW”
37
Q

Mercantilism

What were mercantilist Gregory King’s social tables?

A

Gregory King’s social tables estimated the DISTRIBUTION of England’s INCOME AND POP’N

38
Q

Mercantilism

What was the purpose of mercantilist Gregory King’s social tables?

A

Gregory King’s social tables were an early attempt to calculate national income and understand a nation’s economy

39
Q

Mercantilism

Who was a modern-day supporter of Mercantilism?

A

JOHN KEYNES (1936)

40
Q

Mercantilism

What did Mercantilism’s modern-day supporter John Keynes think?

A

He thought that mercantilism was sensible in its historical context of 18th century England

Bc at that time, there was high underemployment and low investment. So, mercantilist policies could have helped increase net exports -> increase money supply -> decrease interest rates -> increase investment

41
Q

Mercantilism’s Opponents

Who opposed Mercantilism?

A

ADAM SMITH and DAVID HUME both opposed GOV’T INTERVENTION

42
Q

Mercantilism’s Opponents

How was Adam Smith against Mercantilism?

A

He preferred the “invisible hand”, automatic adjustment, and natural law/equilibrium when it came to the economy, so he thought gov’t intervention was unnecessary

43
Q

Mercantilism’s Opponents

How was David Hume against Mercantilism? (3)

A

He thought:
1. Gov’t intervention in trade was unnecessary

  1. An unfavorable balance of trade was stable, as long as that nation’s industry and pop’n stayed stable
  2. Money is NOT the main determinant of national wealth
44
Q

Mercantilism’s Opponents

What did David Hume use to justify his arguments against Mercantilism?

A

He used his PRICE-SPECIE FLOW MECHANISM to justify his thoughts against Mercantilism

45
Q

Mercantilism’s Opponents

Why did David Hume think that gov’t intervention in trade was unnecessary?

A

David Hume thought that the flow of money and trade b/n nations is self-regulating, like water

If one nation loses money due to trade, its goods will become cheaper, attracting money back from other nations. Similarly, if a country accumulates too much money, its goods become expensive, and money will flow out to other nations.

Therefore gov’t doesn’t need to intervene

46
Q

Mercantilism’s Opponents

Why did David Hume think that Money was NOT the main determinant of national wealth?

A

David Hume instead thought that labor, industry, and money circulation determined national wealth

47
Q

Mercantilism’s Opponents

Generally, what was David Hume’s “Price-Specie Flow Mechanism”?

A

It was David Hume’s thoughts on the effect of mercantilist policies

He used it to argue mercantilist gov’t intervention to force a trade surplus was useless/had no lasting effect.

48
Q

Mercantilism’s Opponents

Specifically, what was David Hume’s “Price-Specie Flow Mechanism”?

A

In chronological order for a nation:

  1. Their mercantilist gov’t intervention forces a trade surplus
  2. increases the gold and silver they bring in
  3. increases their money supply
  4. In short-run, producers sell more goods/services AND workers sell more of their labor AT ORIGINAL PRICES
  5. Then everyone realizes there’s more money in the economy, so producers increase prices and workers demand increase in wages by same amt of money increase in economy
  6. Exports decrease and imports increase to ORIGINAL level, so no lasting positive effect
49
Q

Physiocracy

What did the Physiocrats believe in? (4)

A

Granola anti-gov’t ppl ruled by nature

  1. Rule by nature (natural law and natural resources)
  2. Agriculture-based economy
  3. Natural resources are the source of national wealth
  4. Laissez faire: Anti-gov’t intervention bc of their founder’s Tableau Economique, unless it supported agriculture
50
Q

Physiocracy

What did they view as the economy’s “primary sector”?

A

Physiocrats viewed economic activities using NATURAL RESOURCES as the primary sector

Eg. agriculture, fishing, mining

51
Q

Physiocracy

Why did they think that economic activities using NATURAL RESOURCES were the primary sector?

A

Bc this was the only sector of the economy that produced a SURPLUS (outputs worth more than inputs)

52
Q

Physiocracy

How did the Physiocrats think you could increase national wealth?

A

Through increasing WORKING CAPITAL in order to increase agricultural production

53
Q

Physiocracy

What’s working capital?

A

Any capital that increases productivity

For the Physiocrats, this means agricultural productivity, so fertilizer, tools etc

54
Q

Physiocracy

Specifically, what were the social classes in Physiocracy?

A

Think PPP
1. Productive class
- Farmers and agricultural workers

  1. Proprietors class
    • Landowners and nobility
    • They owned the land and received rent payments from the productive class
  2. Sterile class
    • Non-agricultural workers
    • Sterile bc they only transformed existing goods w/out creating new national wealth
54
Q

Physiocracy

Generally, what were the social classes in Physiocracy?

A

Think PPP
1. Productive class
2. Proprietors class
3. Sterile class

55
Q

Physiocracy

What were the Physiocrat thoughts on gov’t intervention and why?

A

They were LAISSEZ FAIRE: AGAINST gov’t intervention, UNLESS it supported agriculture

Bc they believed there was a natural equilibrium and circular flow to the economy, like human body

56
Q

Physiocracy

Who founded Physiocracy and what did he do?

A

François Quesnay founded Physiocracy, and he was the one that created Tableau économique

57
Q

Physiocracy

What were their thoughts on taxes?

A

Physiocrats thought only the PROPRIETOR CLASS should pay taxes, bc it wouldn’t affect resource allocation or productivity

58
Q

Who was Mandeville the Clown?

A

Bernard Mandeville wrote “The Grumbling Hive” to support his idea that private vices created public benefits

Ie. Bad behaviors that increase consumption (such as vanity, gluttony, etc.) create demand and employment, leading to a good economy

59
Q

What was Bernard Mandeville’s “The Grumbling Hive” about?

A
  1. The world is a beehive
  2. And the bees are greedy vain and gluttonous with high consumption, which supports their economy and employment
  3. But then disaster strikes: they become virtuous and cut their consumption, causing economic depression

Econ 265 (5 decks)

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