Cantillon—Circular Flow



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Cantillon—Circular Flow

  • Cantillon—Circular Flow

  • Quesnay—Tableau Economique

  • Smith—Invisible Hand

  • Jean-Baptiste Say—Law of Markets

      • Centrality of entrepreneur
      • Oversupply in one market  shortage in another
    • Malthus—Gluts  deficient effective demand
    • Sismondi—production outstrips demand  gluts
      • Factor immobility inhibits price clearing
      • Regulate … constrain unfettered capitalism
    • Marx—Crises: Disproportion/Realization/Liquidation
  • Mill—Say’s Law holds if money is viewed as a commodity

  • Walras—General Equilibrium

  • Keynes—deficient effective demand

  • Arrow-Debreu—Conditions of market clearing






Nassau Senior, Outline of the Science of Political Economy, 1836

  • Nassau Senior, Outline of the Science of Political Economy, 1836

  • Wealth = scarce goods & services that have utility

  • (supply) (demand)

  • Bridge from Classical economics to Neo-classical economics? Not quite.

  • Four postulates:

  • People want as much wealth as possible at as little sacrifice as possible

  •  Services have value/Demand affects value

  • Population limited by “moral or physical evil” or fear of lacking subsistence

    • Means of subsistence increase faster than population owing to accumulation of capital … the Malthusian devil is tamed
  • Productivity may be increased by accumulating capital (= “abstinence”)

    • Abstinence (on margin) as factor of production  Profit/Interest
    • Productivity of “waiting”…roundabout production
      • Increasing returns in manufacturing
  • Diminishing returns in agriculture



Malthusian Specter

  • Malthusian Specter

  • Division of Labor

  • Drudgery/Ignorance

  • Inequality

  • Monopoly



John Stuart Mill, Principles of Political Economy, 1848

  • John Stuart Mill, Principles of Political Economy, 1848

  • Synthesis of Classical Economics

      • Economic man  self-interest as motive force
      • Invisible hand  harmony through competition
      • Minimal government …but still a role
      • Discern economic laws
        • Say’s Law: Saving is spending
        • Law of Population
        • Iron Law of Wages
        • Law of Diminishing Returns in agriculture (“most significant proposition”)
        • Law of Comparative Advantage
  • Mill: Competition  Efficient Production

  • but Political Redistribution can enhance utility

      • Natural science production. But Institutions  distribution
      • Wiggle room in “wage-fund”  union bargaining not futile
          • Anticipation of Welfare State
      • Harriet Taylor’s contribution(?)
          • "when two persons have their thoughts and speculations completely in common it is of little consequence in respect of the question of originality, which of them holds the pen."


… [W]e (Mill & Taylor) dreaded the ignorance, selfishness and brutality of the mass; but our ideal of ultimate improvement went far beyond Democracy and would class us [as] Socialists…[W]e looked forward to a time when society will no longer be divided into the idle and the industrious; when the rule that they who do not work shall not eat will be applied not to paupers only, but impartially to all; when the division of the produce of labor , instead of depending …on the accident of birth, will be made…on an acknowledged principle of justice; and when it will no longer … be impossible for human beings to exert themselves strenuously in procuring benefits which are not to be exclusively their own, but to be shared with the society they belong to.

  • … [W]e (Mill & Taylor) dreaded the ignorance, selfishness and brutality of the mass; but our ideal of ultimate improvement went far beyond Democracy and would class us [as] Socialists…[W]e looked forward to a time when society will no longer be divided into the idle and the industrious; when the rule that they who do not work shall not eat will be applied not to paupers only, but impartially to all; when the division of the produce of labor , instead of depending …on the accident of birth, will be made…on an acknowledged principle of justice; and when it will no longer … be impossible for human beings to exert themselves strenuously in procuring benefits which are not to be exclusively their own, but to be shared with the society they belong to.

  • …We saw clearly that to render any such social transformation possible or desirable, an equivalent change of character must take place both in the uncultivated herd who now compose the laboring masses, and in the immense majority of their employers…Education, habit, and the cultivation of the sentiments will make a common man dig or weave for his country, as readily as fight for his country. It is only by slow degrees…that men in general can be brought up to this point…The deep-rooted selfishness which forms the general character of the existing society, is so deeply rooted, only because the whole course of existing institutions tends to foster it.

  • John Stuart Mill, Autobiography, 1873



Principles in Mill’s Principles text

  • Principles in Mill’s Principles text

  • …happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete.

  • Operation of Supply and Demand

      • Value (price) adjusts to clear the market
  • Short-run / long-run distinction…PLong-Run= Cost

  • “Productive labor”  Capital/Saving employs “productive labor”Say

  • Economies of scale  monopoly

      • Role for public utilities
  • Free trade  losers as well as winners

      • Division of gains from trade … reciprocal demand
      • Tariffs and terms-of-trade  strategic trade theory
      • Defense of infant industry protection
  • Socialism  indolence

      • Competition  efficiency … but then redistribute
  • Technology can benefit all positive steady state

      • Agricultural technology must overtake diminishing returns
      • Role for government guidance  progress
  • Human drives + Institutions  Economic Outcomes

      • Institutions are subject to political intervention


Analytics

  • Analytics

    • Non-competing groups (limited mobility) and wages
    • Joint products and theory of value
    • Opportunity cost of land  cost of production entering value
    • Economics of the firm – economies of scale
    • Supply and demand with numerical examples
    • Say’s Law elucidated (treat money as commodity)
  • Applications

    • Peasant proprietorship championed  sand into fertile soil
    • Co-operative socialism (producer co-ops)
    • Flat income tax
      • Exemption for low income
      • Progressive rates penalize enterprise
    • Wage fund as limit on wage share
      • Weakened in later editions  Labor unions can be effective




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