Econ Class 2

Adam Smith:

• Came up with the idea of the ==free markets==
  • Freedom to produce and exchange goods and minimising the role of government interventions and taxations in the free market (he did see the government as responsible for the education and defence sectors of the country)
• The "invisible hand" : forces of supply and demand, every person helps to create the best outcome for all. - looked at concept of supply and demand, said price would determine the output - supply and demand lead to best output
  • invisible hand: ==market determines outcome, with no government interference.==
• Gross Domestic Product: before smith, wealth of nation was based on gold. If you had gold you're rich, if not poor. But smith thought this was inaccurate, because it did not account for all the products and services produced by people. He said wealth of nation was based on the sum of its production and its commerce.
  • Invented a matrix(?) to calculate a nation's wealth based on GDP
• Other ideas:
  • Opening market for domestic and foreign competition - ==likes free trade, thought world was a global market and believed people should trade freely==
• 18th century Scottish economist and philosopher
  • His first idea was in 1776, published "wealth of nations" (book)
  • Ideas developed during the industrial revolution

David Ricardo:

• His first idea was in 1817, published "principle of political economy and taxation"
• At that time, the British empire was importing goods from its colonies, converting them to better goods and exporting them. Furthermore, inventions supported trade (steam engine, cotton loom etc.)
  • The British created a competitive advantage.
• Biggest contribution was trade.
  • Came up with theory of competitive advantage
    • Understood that nations use resources differently.
    • Nations with same resources may produce a certain product with a lower efficiency
    • Nations/businesses should specialise in goods they produce efficiently and trade with nations that produce things that they produce inefficiently.
    • Countries can benefit from international trade by specialising in the production of goods for which they have a relatively lower opportunity costs even if they do not have an absolute advantage.

title: Definition
**Absolute advantage:** The ability for an entity to produce more of a good or a service than a competitor (assuming same resources+tech)

title: Definition
**Competitive advantage:** The ability for an entity to produce a good or service at a *lower opporunity cost* than a competitor

title: Definition
**Opportunity cost**: The real cost of the next best alternative (in the scale of preference) that is forgone in order to obtain more of something else.

• Secondly, the Labour theory of value.
  • Value (price?) of good should not be based on the compensation paid for labour, but on the total cost of production.
• Corn Laws (1815-1846):
  • Tariffs and other trade restrictions on imported food and corn enforced in the UK.
  • Keep corn prices high to favour domestic producers and represent British mercantilism
  • Tariffs work to promote domestic production.
    • e.g. Lets say a car cost $2000 if produced in Australia, but $1900 if it was imported. Tariffs increase the cost of imports by imposing a tax. This would make the cost of the imported car relatively high, say $2100. Then, the domestically produced car would be move favourable, but at an expense to the consumer, as the prices actually go up.
  • The great famine forced a resolution, and the laws were repealed, as buying food for cheap in the global market is better than growing it yourself at a higher cost.

Robert Malthus (pretty irrelevant guy):

• First idea in essay, "an essay on the principle of production"
  • Population would continue expanding until growth is stopped or reversed by disease, famine, war or calamity
  • Population growth will always tend to outrun the food supply that betterment of human and land is impossible without strict limits on reproduction
• Idea debunked, we have an abundance of food thanks to technology, however food transportation leads to famine, as it costs too much to feed people across the world.
• Context: Poor laws
  • Ensure people have access to food, clothing and shelter. But they had to work for it. However, population exploded.
  • Laws maintained from 16th century till after ww2.
• The Malthusian theory of population made a strong and immediate impact on British social policy. It had been believed that fertility itself added to national wealth; the Poor Laws perhaps encouraged large families with their doles.

Karl Marx:

• German economist
• Most prevalent idea was "the ==communist Manifesto==" (1848)
  • Focused on the struggle between capitalists (owners of productive resources/factories etc.) and the working class. (still ongoing today)
  • Examines the effect of capitalism on labour, productivity and economic development and argues for a worker revolution to overturn capitalism in favour of communism. He felt this because there was a disproportionate number of capitalists to working class
  • Labourers: have little power in the capitalist economic system
    • Also exploited with low wages(modern issue) to maximise in profit
  • Communism as an economic concept:
    • Workers should become owners of factories and production. Workers have equal share in ownership of factory. This gives incentive to produce goods as best as possible, as they have a share in the profits.

John Maynard Keynes

• British, came up with his idea in 1936 about ==economic intervention policies (government expenditure)==
• Prominent economist during the great depression, believed government intervention could save the global economy
• Macroeconomic theory of total spending in the economy and its effect on output, employment and inflation:
  • Described GDP as c + i + g
    • Before it was c + i, consumption and investment, now with g, government spending
    • At this time, there was great depression, but Keynes believed that the government could spend to combat depression.
• Advocates for increased government expenditure and lower taxes to stimulate demand and pull the global economy out of the depression
• Government investment can stimulate the private sector of an economy.

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