Schools of Schools of Economic Economic ThoughtThought

Chapter 1Chapter 1

IntroductionIntroduction The word "economics" is derived from The word "economics" is derived from

oikonomikosoikonomikos, which means skilled in , which means skilled in household management. household management.

Why?Why?

Modern economic thought emerged in Modern economic thought emerged in the 17th and 18th centuries as the the 17th and 18th centuries as the western western

world began its transformation from world began its transformation from a farming to an industrial society. a farming to an industrial society.

IntroductionIntroduction

Theories try to answer basic Economic Theories try to answer basic Economic QuestionsQuestions

How do we decide How do we decide whatwhat to produce to produce with our limited resources? with our limited resources?

How do we decide How do we decide whowho gets goods & gets goods & services? services?

HowHow are we going to produce those are we going to produce those goods & services? goods & services?

MercantalismMercantalism

Merchants and Statesmen Merchants and Statesmen 16th and 17th centuries. 16th and 17th centuries. Mercantilists believed that a nation's Mercantilists believed that a nation's

wealth came from its accumulation of wealth came from its accumulation of gold and silver.gold and silver.

High interest in exportation of goodsHigh interest in exportation of goods Importation restricted with high tariffs Importation restricted with high tariffs

= = ProtectionismProtectionism Brought politics and economics Brought politics and economics

togethertogether

PhysiocratsPhysiocrats 18th century French philosophers 18th century French philosophers Idea of the economy as a circular flow of Idea of the economy as a circular flow of

income and output. income and output. They opposed the Mercantilist policy of They opposed the Mercantilist policy of

promoting exportation promoting exportation Believed agriculture was the sole source Believed agriculture was the sole source

of wealth in an economy. of wealth in an economy. Physiocrats advocated a policy of laissez-Physiocrats advocated a policy of laissez- faire, which called for minimal faire, which called for minimal government interference in the economy. government interference in the economy.

ClassicalClassical Began with the publication in 1776 of Began with the publication in 1776 of

Adam Smith's Adam Smith's The Wealth of NationsThe Wealth of Nations. . Identified land, labor, and capital as the Identified land, labor, and capital as the

three factors of production and the three factors of production and the major contributors to a nation's wealthmajor contributors to a nation's wealth

Ideal economy is a self-regulating Ideal economy is a self-regulating market system that automatically market system that automatically satisfies the economic needs of the satisfies the economic needs of the populace. populace.

"invisible hand" that leads all individuals "invisible hand" that leads all individuals

David Ricardo- Classical David Ricardo- Classical

focused on the distribution of income focused on the distribution of income among landowners, workers, and among landowners, workers, and capitalists. capitalists.

Conflict between landowners and labor Conflict between landowners and labor and capital. (Have vs. Have-Nots)and capital. (Have vs. Have-Nots)

Quickly growing population makes Quickly growing population makes increased competition for jobs, pushes increased competition for jobs, pushes wages downwages down

Thomas Malthus- Thomas Malthus- Classical Classical

Diminishing returns explain low living Diminishing returns explain low living standards standards

Population increases, outstripping the Population increases, outstripping the production of food.production of food.

A rapidly growing population against a A rapidly growing population against a limited amount of land meant diminishing limited amount of land meant diminishing returns to labor. returns to labor.

The result, he claimed, was chronically low The result, he claimed, was chronically low wages, which prevented the standard of living wages, which prevented the standard of living for most of the population from rising above for most of the population from rising above the subsistence level. the subsistence level.

Keynesian SchoolKeynesian School John Maybard KeynesJohn Maybard Keynes 1930s, reaction to great depression1930s, reaction to great depression Theory: People/Business Owners tend to Theory: People/Business Owners tend to

save too much causing unemploymentsave too much causing unemployment Unemployment = poverty = low standard of Unemployment = poverty = low standard of

livingliving

Spending = job creation = employment = Spending = job creation = employment = increase in personal wealth = increase increase in personal wealth = increase personal spending = economic growth!!personal spending = economic growth!!

Insisted that direct government intervention Insisted that direct government intervention was necessary to increase total spending. was necessary to increase total spending.

SummarySummary

Economic theories are constantly Economic theories are constantly changing. changing.

Monetarism (value of $ predicts inflation)Monetarism (value of $ predicts inflation) Rational Expectations Theory (limited government intervention- Rational Expectations Theory (limited government intervention-

people predict government actions minimizing affects))people predict government actions minimizing affects)) Supply-Side Economics (incentives to save & invest to create Supply-Side Economics (incentives to save & invest to create

economic growth)economic growth)

All theories created to answer the 3 All theories created to answer the 3 basic Economics questionsbasic Economics questions

QuestionQuestion

Why do you think so many people Why do you think so many people have such differing views on how to have such differing views on how to handle economic problems?handle economic problems?

Personal socio-economic standingPersonal socio-economic standing Political PreferencesPolitical Preferences Personal BeliefsPersonal Beliefs GovernmentGovernment