Economists-Moral Philosopers
Adam Smith-The
Wealth of Nations
Karl Marx-Das
The Classics
• Adam Smith : The Wealth of Nations/
Theory of Moral Sentiments
• Karl Marx: Capital, Communist Manifesto
Adam Smith
• Division of Labor is Key
• Labor is the basis of wealth;
• The division of labor implies economic
• Markets are self-regulating systems for
the orderly coordination of the division of
Adam Smith
• Invisible Hand
Adam Smith
• Invisible Hand – Assumptions:
– Our preferences are consistent
– We act based on self-interest
– Individual Good adds up to
Social Good
Government Ensures Property
Adam Smith
• Invisible Hand – Assumptions:
– Enough buyers and sellers as for there not to be
a monopoly
• Invisible Hand – Assumptions:
– Perfect Information that backs up our economic
• Invisible Hand – Assumptions:
– No Externalities
But first…
So…how is it that, as you are saying Mr.
Smith, if value is originating in labor
(therefore we need more workers and
division of labor-population growth and
economic growth), all of the profit is kept
by factory owners?
Conflict theory
• All societies are divided into two groups
– Owners
– Workers
• Our society is capitalist.
– Owners are bourgeoisie
– Workers are proletarians
Marx on history
The history of all hitherto
existing society is the
history of class struggle.’
Owners and workers
• Owners exploit workers and live off the
money which the workers earn
• Members of classes bind together in the
pursuit of their common interests.
• Workers put up with this inequality
– They are oppressed wage slaves and cannot
fight the system
– They are indoctrinated by ideology and religion
into believing what they are told by the
More from Marx
• Technical progress, the growth of
knowledge, and conflict among classes all
foster perpetual change.
• Capitalism as an economic system is
irrational in the sense that it stands in the
way of making good the ability of modern
science and technology to meet human
• Marxism is an understanding of the nature
of social relationships which you are
expected to evaluate. Recognise that it has
strengths and weakness as a tool of
understanding of our culture.
John Maynard Keynes (1883-1946)
• Born in 1883 in Cambridge, England
• Son of John Neville Keynes
– Neville was a professor of Economics and Logic at Cambridge Univ., and
wrote on Economic Methodology
Won a scholarship to Eton
Boy Genius
Part of Eton’s social elite
Won a scholarship to King’s College, Cambridge
1911, he became editor of the Economic Journal.
Worked at the Treasury during WWI.
1921, he published A Treatise on Probability. This was his
dissertation. It won him a fellowship at
Keynes, Inter-war Years
• Keynes wrote the Economic Consequences of the Peace (1919),
regarding reparation payments
– Best Seller
– Made him a public celebrity
• 1923, Tract on Monetary Reform (against returning to the pre-war gold
• Economic Consequences of Mr Churchill (1925, warned of depression)
• 1930, Treatise On Money
• Makes millions in the stock market, commodity, and forex markets.
• 1936, General Theory of Employment, Interest and Money
• 1937, he has a serious heart attack
The General Theory
“ I believe myself to be writing a book on
economic theory which will largely
revolutionize—not, I suppose, at once
but in the course of the next ten years—
the way the world thinks about economic
-- John Maynard Keynes
Comment by Paul Samuelson
“It is a badly written book, poorly organized; any layman who,
beguiled by the author’s previous reputation, bought the book
was cheated of his 5 shillings. It is not well suited for classroom
use. It is arrogant, bad-tempered, polemical, and not overlygenerous in its acknowledgements... In it the Keynesian system
stands out indistinctly, as if the author were hardly aware of its
existence or cognizant of its properties; and certainly he is at his
worst when expounding on its relations to its predecessors.
Flashes of insight and intuition intersperse tedious algebra. An
awkward definition gives way to an unforgettable cadenza. When
it is finally mastered, we find its analysis to be obvious and at the
same time new. In short, it is the work of genius.”
The General Theory
According to the classical model, the consumer has insatiable
The consumer sells his/her labor in exchange for enough income
to buy the goods.
The money value of the incomes received must be equal to the
value of the output produced.
So how can unsold goods pile up in warehouses, causing firms
to lay off workers?
The General Theory (2)
2. Say’s Law cannot hold. (“Supply creates
its own demand.”)
a) If spending constraints are in effect, then
there will be a difference between (unlimited)
demand and “effective demand”.
b) Actual (effective) demand will usually be
“deficient” to purchase total output.
The General Theory (3)
• The market system is not self-regulating: left to its own
devices the market system fails to make sensible use of our
productive potential.
• Unemployment is a chronic problem in a capitalist
economy. Government intervention in the economy can
reduce unemployment and instability.
• Ergo Fiscal and Monetary Policy!
Entrepreneurship and the Origins
of Competitive Advantage
• Simple neoclassical microeconomic theory
allows for little or no role for entrepreneurs
• A firm is a production function; it
transforms inputs into outputs
• The way the firm transforms inputs into
outputs is assumed to be technically and
economically efficient
• In reality, some firms exploit opportunities for creating profitable
competitive positions that other firms either ignore or cannot exploit
• Seizing such opportunities is the essence of entrepreneurship
• Entrepreneurship involves discovery, innovation, and acting on the
opportunities that discovery and innovation create (page 132):
• “To undertake such things is difficult and constitutes a distinct
economic function, first, because they lie outside the routine tasks
which everybody understands and secondly because the environment
resists in many ways that vary, according to social conditions, from
simple refusal either to finance or to buy a new thing, to physical
attack on the man who tries to product it.”
Creative Destruction
• Schumpeter believed that innovation causes most markets to evolve in
a characteristic pattern
• There are periods of relative stability, when firms that possess superior
products, technologies, or organizational capabilities earn positive
economic profits
• These periods are punctuated by fundamental shocks or discontinuities
that destroy old sources of competitive advantage (profits above the
norm) and replace them with new ones
• The entrepreneurs who exploit the opportunities these shocks create
achieve positive economic profits during the next period of stability
The Long-Run Performance of
the Economy
• According to Schumpeter, the process of
creative destruction implies that static
efficiency – the optimal allocation of
society’s resources at a given point in time
– is less important than dynamic efficiency
– the achievement of long-term growth and
technological improvement
• What really counts is competition between
new products, technologies, and
Policy and Managerial
• Schumpeter’s ideas have been used to
defend monopoly, on the grounds that high
economic profits are a necessary reward to
encourage innovation, which results in
higher long-run growth
• Policy analysis should focus more on the
impacts of policies on innovation and less
on the impacts on prices and current welfare

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