Chapter 1
Continuity: Different schools of thought borrow ideas from each other
Economics is cumulative: keep building on each others work
For each school, 5 questions will be asked
- Historical background of the School: economic theory often develops in response to
change in environment (social, political etc)
- Also of course theories are developed from ongoing search for knowledge,
independent of current events
- What were major tenets of the school?: Broadly stated: what were the ideas of the
school?
- Whom did the School benefit / seek to benefit?
- How Was the School Valid, Useful, or Correct in Its Time?: Past thinkers are not
‘wrong’ necessarily and we have not found ‘absolute truth’ yet.
- Which Tenets of the School Became Lasting Contributions? Which ideas survived the
test of time?
Chapter 2: Mercantilist School
(1500-1780)
Background
Merchant capitalism grew as self-sufficient feudalism faded away. New lands were
discovered, colonies settled. Economic rivalries between countries intensified.
Major tenets of mercantilist school
Gold and Silver are most desirable form of wealth: was a way to achieve power for a
nation. Trade surplus therefore necessary to build stock of silver/gold.
- Limit imports (only raw materials)
- Promote exports (but restrict export of raw materials)
Nationalism: Can only grow wealthy as country at expense of others. Nationalism led to
militarism → strong navies and merchant fleets are necessary.
Colonization and monopolization of colonial trade: want colonies to exploit and serve the
mother country
Opposition to internal tolls, taxes, and other restrictions on the movement of goods:
as taxes would hold back business and increase prices of export (and thus hold back
accumulation of gold & power)
,Strong central Government: needed to promote mercantilist goals & grant monopolies for
foreign trade
Importance of a large, hard-working population: for soldiers to fight for the country and
also for large labour supply to keep wages low.
- Low wages → lower prices on exports → more gold
- Low wages also ensured that labor force would not be idle (e.g. lazy / thieves
etc)
- Only understood income effect (e.g. higher wages → less work)
- Did not understand substitution effect: higher wages → more work
Whom Did the Mercantilist School Benefit or Seek to Benefit?
Merchant capitalists, the kings, and government officials
- Rent seeking behavior: rent = excess of what is necessary for them to keep
performing their activities (e.g. excess over opportunity cost)
- Gov officials were willing to make laws / grant monopolies to secure benefits for
themselves.
How Was the Mercantilist School Valid, Useful, or Correct in Its Time?
Extreme want for gold/silver not weird: economy was booming and more money in circulation
was necessary.
- Wars could be paid by the gold/silver
- Having a lot of gold made tax collection easier
Lasting contributions
Importance of international trade, balance of payments for nations.
Indirectly:
- merchants no longer seen as second-class citizens.
- Nationalism: central gov needed to regulate and make laws
Past as Prologue
Great Depression: many countries enacted high tariffs again, leading to collapse of
international monetary system
Chapter 3: Physiocratic School (1760)
Historical background:
Reaction to mercantilism, governments regulated production a lot. Industry was hindered by
taxes, agriculture by conditions enforced by landowners. Taxes were random and high. All in
all high regulations, export restrictions, high tolls etc.
,Major Tenets of Physiocratic School
Natural order: humans should act in accordance with laws of nature (like physics etc).
Meaning having the right to keep what you produce yourself.
Laissez-faire, laissez passer: let people do as they please without government
interference. Government should only protect life and not more. No regulations etc
Emphasis on agriculture: physiocrats saw agriculture as the only sector really producing
value, others just turn one thing into another (thus no value)
- Capitalist farmer is key figure in economic development
Taxation of landowner: only agriculture produces value, which landowners get → only tax
landowner (as taxing others would just be taxing landowner indirectly, as all value is from
agri.)
Interrelatedness of economy: economy has circular flow
Whom Did the Physiocratic School Benefit or Seek to Benefit?
Peasants (no more obligations to landowners), businesses (no more restrictions etc),
Nobility (they thought taxing nobility directly was more efficient, so removed the all indirect
taxes and just taxed directly), but this was wrong.
Useful / correct in its time?
Industrial productivity used to be low, while agriculture was sometimes high. Their support
for direct taxes was a response to the random taxation from before.
Lasting contributions
Incorrect notions:
- trade and industry does not produce value → therefore also incorrect that only
landowners should be taxed.
- Capitalist farmer key for econ. development: as industry grew rapidly
Lasting contributions
- Saw economics as social science (circular flows)
- Founded law of diminishing returns
- Analysis of tax shifting
- Attention to proper role of government in economy
François Quesnay
- Founder of Physiocrats
- Thought of economy as circular flow (blood through body)
- Was against ‘wasteful spending on luxury’
- Only Agriculture produces value
Natural laws: free trade is good for the wealth of a country
, Tableau Economique: depicted the circular flow of goods in an ideal, freely competitive,
economy.
- Only tenant farmers produce real value (as they have to provide food for everyone)
- Beginning of National Income Analysis / National Accounts model.
Chapter 4: Classical School
(1780-1870)
Historical Background
Scientific revolution: experimental evidence becomes important, universe is governed by
natural laws. → Seen in Classical theory: no controls necessary on economy, laissez-faire.
Natural laws will guide economy.
Industrial Revolution: business was booming from international trade, labor force was large
due to high birth rate and falling death rate. Peasant had to work hard in factories, no rights,
while laws were passed that encouraged private ownership and scale economies
Major Tenets of Classical School
Minimal government involvement: economy will go to full employment without gov.
intervention, gov should only enforce property rights, national defense and public education
Self-interested economic behavior: to be self-interested is human nature
Harmony of interest: pursuing their own individual interests, people served the best
interests of society.
Importance of all economic resources and activities: all economic activity contributes to
nations wealth (not just commerce (mercantilists), or agriculture (physiocrats))
Economic laws: focus on econ. laws: comparative advantage, the law of diminishing
returns, population etc
Whom Did the Classical School Benefit or Seek to Benefit?
All of society (ideas caused economic growth). Not all equally, as workers had to work very
hard for low wages during the Industrial Revolution.
How Was the Classical School Valid, Useful, or Correct in Its Time?
Governments were wasteful → less gov would be better. Removal of feudal system →
business was promoted.
Which Tenets of the Classical School Became Lasting Contributions?
1. the law of diminishing returns,
2. the law of comparative advantage
3. the notion of consumer sovereignty
4. the importance of capital accumulation to economic growth
Continuity: Different schools of thought borrow ideas from each other
Economics is cumulative: keep building on each others work
For each school, 5 questions will be asked
- Historical background of the School: economic theory often develops in response to
change in environment (social, political etc)
- Also of course theories are developed from ongoing search for knowledge,
independent of current events
- What were major tenets of the school?: Broadly stated: what were the ideas of the
school?
- Whom did the School benefit / seek to benefit?
- How Was the School Valid, Useful, or Correct in Its Time?: Past thinkers are not
‘wrong’ necessarily and we have not found ‘absolute truth’ yet.
- Which Tenets of the School Became Lasting Contributions? Which ideas survived the
test of time?
Chapter 2: Mercantilist School
(1500-1780)
Background
Merchant capitalism grew as self-sufficient feudalism faded away. New lands were
discovered, colonies settled. Economic rivalries between countries intensified.
Major tenets of mercantilist school
Gold and Silver are most desirable form of wealth: was a way to achieve power for a
nation. Trade surplus therefore necessary to build stock of silver/gold.
- Limit imports (only raw materials)
- Promote exports (but restrict export of raw materials)
Nationalism: Can only grow wealthy as country at expense of others. Nationalism led to
militarism → strong navies and merchant fleets are necessary.
Colonization and monopolization of colonial trade: want colonies to exploit and serve the
mother country
Opposition to internal tolls, taxes, and other restrictions on the movement of goods:
as taxes would hold back business and increase prices of export (and thus hold back
accumulation of gold & power)
,Strong central Government: needed to promote mercantilist goals & grant monopolies for
foreign trade
Importance of a large, hard-working population: for soldiers to fight for the country and
also for large labour supply to keep wages low.
- Low wages → lower prices on exports → more gold
- Low wages also ensured that labor force would not be idle (e.g. lazy / thieves
etc)
- Only understood income effect (e.g. higher wages → less work)
- Did not understand substitution effect: higher wages → more work
Whom Did the Mercantilist School Benefit or Seek to Benefit?
Merchant capitalists, the kings, and government officials
- Rent seeking behavior: rent = excess of what is necessary for them to keep
performing their activities (e.g. excess over opportunity cost)
- Gov officials were willing to make laws / grant monopolies to secure benefits for
themselves.
How Was the Mercantilist School Valid, Useful, or Correct in Its Time?
Extreme want for gold/silver not weird: economy was booming and more money in circulation
was necessary.
- Wars could be paid by the gold/silver
- Having a lot of gold made tax collection easier
Lasting contributions
Importance of international trade, balance of payments for nations.
Indirectly:
- merchants no longer seen as second-class citizens.
- Nationalism: central gov needed to regulate and make laws
Past as Prologue
Great Depression: many countries enacted high tariffs again, leading to collapse of
international monetary system
Chapter 3: Physiocratic School (1760)
Historical background:
Reaction to mercantilism, governments regulated production a lot. Industry was hindered by
taxes, agriculture by conditions enforced by landowners. Taxes were random and high. All in
all high regulations, export restrictions, high tolls etc.
,Major Tenets of Physiocratic School
Natural order: humans should act in accordance with laws of nature (like physics etc).
Meaning having the right to keep what you produce yourself.
Laissez-faire, laissez passer: let people do as they please without government
interference. Government should only protect life and not more. No regulations etc
Emphasis on agriculture: physiocrats saw agriculture as the only sector really producing
value, others just turn one thing into another (thus no value)
- Capitalist farmer is key figure in economic development
Taxation of landowner: only agriculture produces value, which landowners get → only tax
landowner (as taxing others would just be taxing landowner indirectly, as all value is from
agri.)
Interrelatedness of economy: economy has circular flow
Whom Did the Physiocratic School Benefit or Seek to Benefit?
Peasants (no more obligations to landowners), businesses (no more restrictions etc),
Nobility (they thought taxing nobility directly was more efficient, so removed the all indirect
taxes and just taxed directly), but this was wrong.
Useful / correct in its time?
Industrial productivity used to be low, while agriculture was sometimes high. Their support
for direct taxes was a response to the random taxation from before.
Lasting contributions
Incorrect notions:
- trade and industry does not produce value → therefore also incorrect that only
landowners should be taxed.
- Capitalist farmer key for econ. development: as industry grew rapidly
Lasting contributions
- Saw economics as social science (circular flows)
- Founded law of diminishing returns
- Analysis of tax shifting
- Attention to proper role of government in economy
François Quesnay
- Founder of Physiocrats
- Thought of economy as circular flow (blood through body)
- Was against ‘wasteful spending on luxury’
- Only Agriculture produces value
Natural laws: free trade is good for the wealth of a country
, Tableau Economique: depicted the circular flow of goods in an ideal, freely competitive,
economy.
- Only tenant farmers produce real value (as they have to provide food for everyone)
- Beginning of National Income Analysis / National Accounts model.
Chapter 4: Classical School
(1780-1870)
Historical Background
Scientific revolution: experimental evidence becomes important, universe is governed by
natural laws. → Seen in Classical theory: no controls necessary on economy, laissez-faire.
Natural laws will guide economy.
Industrial Revolution: business was booming from international trade, labor force was large
due to high birth rate and falling death rate. Peasant had to work hard in factories, no rights,
while laws were passed that encouraged private ownership and scale economies
Major Tenets of Classical School
Minimal government involvement: economy will go to full employment without gov.
intervention, gov should only enforce property rights, national defense and public education
Self-interested economic behavior: to be self-interested is human nature
Harmony of interest: pursuing their own individual interests, people served the best
interests of society.
Importance of all economic resources and activities: all economic activity contributes to
nations wealth (not just commerce (mercantilists), or agriculture (physiocrats))
Economic laws: focus on econ. laws: comparative advantage, the law of diminishing
returns, population etc
Whom Did the Classical School Benefit or Seek to Benefit?
All of society (ideas caused economic growth). Not all equally, as workers had to work very
hard for low wages during the Industrial Revolution.
How Was the Classical School Valid, Useful, or Correct in Its Time?
Governments were wasteful → less gov would be better. Removal of feudal system →
business was promoted.
Which Tenets of the Classical School Became Lasting Contributions?
1. the law of diminishing returns,
2. the law of comparative advantage
3. the notion of consumer sovereignty
4. the importance of capital accumulation to economic growth
