How the Heck Did We Get Economics?

Income = Expenditures                             "Every dollar spent is income to somebody else"

             = (C - T) + I + G + NX

C=consume consumer goods

I= invest; financial assets

T= taxes

G= gov't purchases (ex, pay teachers, build bridges)

N= french wine? (trade)

*macro-multiplier story*: pay more at grocery store, all richer, right?

well, is someone going to pay Rizzo more when he buys more macaroni? No? Bummer.

French Physiocrats: How did we get this process?

• Source of wealth = agriculture
• Simply, without food we would die
• Farmers feed family, produce surplus they can sell and rest of family can work!
• new horse? machine? son sent to workshop to "tinker"
• farmer becomes even MORE productive
• unjust to not allow farmer to keep food
• Source of wealth linked to production

Mercantilists did not agree. Real source of wealth was:
     1)Amnt of gold in teasury
     2)Wealth / finances of the king
     3)Positive balance of trade

-Trade is zero-sum, wealth was fixed; money is wealth

  --> one nation rich by trading with another, which makes that other country poorer

  --> more gold = able to execute war; everyone recognizes gold as worth something

-King should control trade; supposed to push positive balance

(2 policy implications)

                        Restrict Imports           <----                                ---->           Promote exports

ex. you want French wine; you give away $ & the king does not benefit, France gets the moolah.

(not a problem if $ stays in the country)

-Trade can't be free; individ. would seek private interest that is not in harmony with social interest (social interest is to have gold)

Scottish Moral Philosohers 
-People are compassionate, generous
-Good economics about more than prudence
  -->private choice & social virtue not mutually exclusive

Hume = smarty pants                                       VS.                         Hutchinson = moral absolutest
1)Moral values themselves are social constructions                         2) virtuous activity yields pleasure

Hume : businessman; 1752 read = modern approach to econ.

• Unlike physiocrats, econ. not a social concept (wait.._
•      --->rejected mercantile doctrine, rej. source of wealth was agriculture
• ==> Commerce = source of economic growth
• specie flow mechanism; we can't eat coins, can't wear them, can't live in
• ex: before king wanted a loan, spends his $, goes into circulation, prices of goods go up
• -> let's say prices are cheaper in France, as ppl start recognizing the price change, prices in Fra.increase and prices in Eng decr.
• workings of prices is fine
• mercan. wrong about dynamics

Hume wrote about jealousy of trade:
       1) Competition (merc. thought compet. = destroy)

• Actually --> innovation, efficiency, improvement
• Ex: Kodak didn't switch to digital, Amer. cars vs. Japanese enviro friendly models, east/west German cars

      2) Learning & Innovation
             Amer. work force learned from Japanese production; changed entire process
      3) Division of Labor

•             Imagine producing only for your small town vs. producing for the world
• ex: Kodak employed over 60,000, sold to mass market. Dumb to buy big machinery if only sell a little

Economics of Scale

• machines for lots;  Dumb to buy big machinery if only sell a little
•  Large amnt of goods, ppl divide up labor --. ppl richer, we have more

Law of One Price 
-everything worth..the same?
-$ is neutral, we can about goods & services
- mo' money, --> higher prices
  no money --> lower prices     => mercantilists only looks at 1/2 of equations
  --> prices across borders will naturally adjust


Last thought: what if every country tried same policy? Who has authority to intervene in trade?