Class Twelve

Today: French Physiocrats, Scotish enlightment people, David Hume

Last: why IR happened? May be it’s just something as simple as a changing attitudes. What was the thing we free of when the IR started?

1.       A system called Mercantilism (highly feudal, political system) responsible for the poor economic condition in the world at that time.

Modern equivalent of Mercantilism: “Progressive Corporatism”

i.                     Protectionism(guild),

ii.                   Government granted monopolies

iii.                  Import and export regulations. Even what allowed to sell and whom you are able to sell.

iv.                  Price and amount control

v.                   Wage controls (Today we wary about minimum wage, in the past we wary about maximum wage)

We live in a world where you didn’t expect state to do things for you; you expect state to do things to you.

Why? Because it’s expected that this is the way the world goes: the King, the church, owns all territories. The resources and labors then deemed belonged to them. King, the church thus manage the land for their own interests.

2.       *What idea lead to the breakdown of such system?

i.                     French Physiocrats(Quesnay): Living in a time when scientific revolution was just starting.

If we can see the natural law to find reason (relationship between us and the world), maybe we can find the social law to explain human relationships as a way to explain economy.

*The economy is changing; Circular flow of economic activity.

Income=expenditures= how we spend our money (Consumer spent-Tax) +Investment +Government +NX goods from other countries.

*Then, how the idea break down the Mercantilism? How the economic growth come from it? They thought, agriculture of food production, is the source of all economic growth. Better growing food, the country got rich.

*Incredible:

The idea that being able to produce food with less people is good

All other industries except agriculture are a waste of time.

*What is the source of wealth?

PHY: the ability to produce more only in agriculture. (For the first time, economic freedom drops out as a prescription for how to get rich)

Merc:

i.                     King’s bank account (in a real material sense)

ii.                   How much gold/currency was in the country

iii.                  Pisitive Trade Balance

SMP:

ii.                   Scottish Moral Philosophers (the most famous Adam Smith)

*Good economics requires more than cold math calculation.

They ask whether commercial society itself, capitalism itself, is compatible with good social outcome.

The choice between private interests and private virtue versus public good and public virtue was a false choice. Further private interests, not always is often producing stuff that we all want.

Within SMP, there’s a lot tensions about how this process work.

i.                     David Hume(died in front the publication of Adam Smith’s famous book):

Anything people did was moral. Everything we felt pleasure from, would be deemed virtuous by society.

ii.                   Adam Smith:

Virtue only yields pleasure because it conforms to some nature law, which means something that is generally regarded right or wrong.

Most prominent moral philosopher was no Adam Smith, but David Hume.

*Of the Balance of Trade & Of the Jealousy of Trade

Laws of economics could stand on their own, in spite of who’s articulating them, in spite of time and place, both externally and internally.

He reject mercantilism not only as false but also dangerous. He judge physiocrats better than mercantilism, but still half right.

*“Commerce” all commerce is the engine drives improving living standards, materially and aesthetically. (Division of labor was not appear until his death)

Against Mercantilism:

i.                     Trade to be zero sum. (we are poor forever)

ii.                   Money as the source of wealth. (Gold/Silver can be used everywhere. Having lot money, I’m rich. Given i, if you have gold, others don’t. )

iii.                  The king had a responsibility (duty) to protect the country by managing trade. (restrict imports, encourage exports to get more gold) Private interest vs. Social interest

*The story was not end when gold come to England, something is going on in economy.

Changing Price: England price go up, everybody go to cheap stuff. You go to France, you give them your gold. Then price in France rise, the price in England go back to the starting point.

*Money doesn’t matter! Money is neutral! The purchasing power of money matters.