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Notebook II~ Economists on Capitalism.docx

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EC 060
Ross Thompson

II. Adam Smith: Market-Led Growth September 4 I. Order & the Invisible Hand A. If everyone works in self-interest, then societal needs will be met B. Principles: 1. Society involves self-interest based on personal freedom  Make own choices  Ownership of private property 2. Division of Labour  Interdependence of men 3. Competition  Quality  Price  Lots of small production firms 4. Interaction will establish equilibrium  Will meet everyone’s needs C. How this will happen: 1. Markets will establish competitive prices 2. Capitalism will establish quantity of goods people want   in demand for cars   in price of cars & profit rate   Investment in car production   competition in car industry  price of cars  THIS IS EQUALIZATION OF WAGE RATES/LABOUR & PROFIT RATES (they follow same pattern) D. Laissez-Faire Gov’t 1. Maintain rules of game (protect property ownership, enforce laws) 2. Public goods gov’t ought to finance (extent= debatable)  Colonies, education, infrastructure 3. Gov’t CANNOT establish monopolies (joint-stock companies) E. Problems with this View 1. Large-scale firms may be an outcome of the capitalist market 2. Public Goods  How broad? 3. Resource Limits 4. Knowledge Limits 5. Sufficiency of Aggregate Demand II. Capitalist Dynamics A. Accumulation of capital 1. People invest money: Classes Contribute to Source of What they Spend $ on Contribute to Production Income Growth Landlords Land Rent Luxury Nothing Capitalists Invest Money Profit Investment/Consumption Invest part of profit Laborers Labor Wage Subsistence Nothing 2. Investment is a means of employing laborers II. Further Discussion of Adam Smith September 6 I. Accumulation of Capital A. Accumulation of capital means growth of capital invested to make profit B. Rate of Accumulation= ΔK/ I/ growth ca/it. K= K= Capit. I= Investment C. Determined by productivity & Investment (comes from profit) D. ΔK= cP, / =Kr c=share of profits invested r=rate of profit P=profit E. Example: K=$100 r= 50% P=$50 c=50% I=$25 F. w=wage/worker N=# workers Assume 100%K is invested in hiring K=wN N1=50, N2=62.5 (comes from 50*1.2) G. “Life is more complicated than perpetuated growth” II. Population Growth A. Lack of labor  increase in wages (increased competition for labor) B. Population grows (more babies born, better food & medical care) C. Increase in number laborers, decrease in wage rate D. Constant wage at subsistence level III. Productivity Growth A. Virtuous Circle of Growth 1. As division of labor increases, production increases (dexterity, time between jobs, invention)  On job by workers/capitalists  By machine makers  Philosophers/engineers 2. As market grows, division of labor also grows 3. Increase in investments/profits leads of an increase in market 4. Increase in productivity increase in profit & investment Virtuous Cycle of Growth: incr. Profit & Market Investment Growth incr. incr. Division of Production Labor Internally Limitless Growth II. Adam Smith: A Critique & David Ricardo: Natural Scarcity and Stagnation September 11 I. Critiquing Adam Smith A. Criticisms (Limits to Growth) 1. Resources 2. Population (drives up wages) 3. Investment substitutes equipment for labor  Industrialized vs. craft economy 4. Market growth (not enough demand) 5. Institutions constrain growth 6. Innovation slows II. Ricardo: Falling Production and Stagnation A. Similarities to Smith: 1. There are three social classes 2. Prices reflect labor embodied- L theory of value 3. Markets can achieve equilibrium B. Scarce Land and its Consequences 1. Accumulation of K requires adding L 2. L requires subsistence-fixed basket of goods (Corn) 3. Increased subsistence requires increased cultivation 4. As cultivation increases, poorer land is used 5. As poorer land is used, productivity of labor decreases 6. As productivity decreases, the surplus above subsistence level also decreases 7. Differential land fertility leads to increase in rents 8. As rents increase and the surplus decreases, profits decrease 9. This ends when profits near zero C. Example: Land Plots A B C D Output/worker (bushels) 40 30 20 10 Worker wage rate 10 10 10 10 Surplus (profit) 30 20 10 0 Period 1 used not used not used not used P=30, rent=0 Period 2 used used not used not used P=20, rAnt =10 P=10, rAnt =20B rent =10 Period 3 used used used not used Period 4 used used used used P=10, rAnt =30B rent C20, rent =10 1. Rent evens out profit for various types of land because of market competition 2. No rent in period one also because of competition- at that time there was plenty of good, level-A soil available for use. 3. Profits fall because resources are finite, leads to stagnation D. Critique of Ricardo’s Theories 1. New land, increased fertility  Work until better land all used (finite planet) 2. Innovate to increase fertility & productivity 3. Free trade in agricultural products (strongly advocated by Ricardo)  Abolish Corn Laws  Flood markets with cheaper food, (lowers wage rate, increases profit)  Every country can specialize in (& export) what they’re good at producing, increases global output E. Environmental Limits to Growth 1. Limited resources 2. Externalities that impair growth & impose costs  Pollution, global warming  In producing goods, also cause negative impact  Usually comes from gov’t/international governing bodies III. Carl Marx: A. Materialist theory of history (economist determinism) B. Economic theory of capitalism C. Communist Manifesto (theory of how history changes): 1. History is a history of struggle between the classes 2. Classes defined relations of production between those who produce surplus & those who receive it.  Ancient Rome: Master-Slave  Feudalism: Lord-Serf  Capitalism: Capitalist-Wage Laborer 3. History is propelled by development of forces of production (new techniques that increase productivity)  Class structures that can’t advance  forces of production decline Graph of Production O
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