SUMMARY - Little History of Economics, A - Niall Kishtainy

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Here is a summary of the key points:

  • Adam Smith saw the ultimate goal of the economy as consumption of goods, rather than production for exports and accumulating gold like the mercantilists.

  • David Ricardo was a British stockbroker who applied logic and analysis to understand how Britain's wealth was distributed between landowners, capitalists, and workers.

  • He argued that high food prices caused by the restrictive Corn Laws actually increased rents collected by landlords, rather than farmer profits, since farmers had to pay high rents to landlords for fertile land.

  • The Corn Laws also reduced capitalist profits by raising wages and the costs of feeding workers. Only landlords directly benefited from high food prices.

  • Ricardo concluded that removing the Corn Laws would lower food prices, benefiting workers by reducing their living costs and helping capitalists by lowering production costs. This challenged the protectionist views of the landed aristocracy.

    Here is a summary of the key points:

  • Arthur Pigou is considered a pioneer of welfare economics, which examines the overall benefit to society from economic decisions rather than just private costs and benefits.

  • He argued that markets can fail to maximize social welfare when individuals and firms make choices that benefit themselves but impose external "costs" on others that are not reflected in prices.

  • For example, a neighbor playing loud music receives private enjoyment but ignores the external cost of annoyance imposed on others nearby. Or a factory may maximize profits by ignoring external costs like pollution that impact downstream fishermen.

  • By not factoring in these external costs and benefits to third parties, the decisions made in markets can be inefficient from the perspective of overall social welfare. The market equilibrium is not necessarily the socially optimal outcome.

  • Pigou advocated using corrective taxes or subsidies as a way for government to internalize externalities and improve the social efficiency of market outcomes when external costs and benefits are present. This helped lay the foundations for ideas around environmental policy tools.

    Here is a summary:

  • Joseph Schumpeter viewed capitalism as an evolutionary, ever-changing system driven by entrepreneurial innovation and "creative destruction."

  • Entrepreneurs introduce new technologies and business models that disrupt existing industries and companies, creating cycles of boom and bust. This brings economic growth but also short-term instability.

  • Schumpeter stressed the role of entrepreneurs and innovation in spurring long-term economic development, unlike other economists who saw capitalism as always seeking equilibrium.

  • However, he argued that as firms grew larger and more bureaucratic over time, innovation would shift from daring entrepreneurs to rational corporate planning, dampening disruptive change.

  • This would make capitalism increasingly stagnant and cause intellectuals to lose faith in the system, paving the way for socialism instead of disruptive entrepreneurship.

  • While Schumpeter's prediction of socialism proved wrong, he characterized capitalism as constantly shifting and highlighted entrepreneurs' key function in driving long-run progress through unpredictable waves of invention and "creative destruction."

    Here is a summary of the key points:

  • Dependency theory argued that rich countries exploit poor nations through unequal trade relationships and foreign investment that enriches companies abroad rather than promoting local development.

  • Andre Gunder Frank and Raúl Prebisch developed these ideas, arguing poor countries face deteriorating terms of trade as they export raw materials rather than manufactured goods. This traps them in poverty.

  • They believed poor countries should pursue import substitution policies rather than specializing in exports, unlike classical trade theory. Frank saw only revolution as the solution, while Prebisch thought capitalism could work with the right policies.

  • Latin American examples like banana and mining companies dominating economies supported the view of neo-colonial exploitation extracting wealth rather than developing countries.

  • While dependency theory declined, critics note powerful countries have enforced unequal trade conditions and politically intervened in poorer nations, especially during the Cold War to counter communism. Overall it presented an alternative perspective to conventional growth theories.

    Here is a summary of the key points Sen raised about the Bengal famine:

  • He questioned why people starved near well-stocked food shops if famines were simply caused by lack of overall food availability. This contradicted conventional explanations.

  • He noted the famine did not affect his wealthy acquaintances, suggesting lack of income/purchasing power, rather than food shortage, was a major cause of starvation.

  • He developed the concept of "entitlements" - the means by which people can gain access to food, such as through income, employment, barter, etc. Famines occur when people lose these entitlements.

  • Market disruptions like floods or speculation that push up food prices can cause famines even when food production remains high, by making food unaffordable to the poor.

  • Policies like employment programs that protect people's entitlements can help avert famines during crises like droughts, as seen in Maharashtra despite a drought there.

In summary, Sen argued famines are caused more by loss of access to food due to economic factors, rather than sheer lack of availability, challenging conventional explanations of famines.

Here is a summary of the key points:

  • Thomas Piketty argues that wealth inequality tends to increase over time when the rate of return on capital (r) exceeds the overall economic growth rate (g). This causes inheritance wealth to grow faster than income.

  • It is difficult to precisely measure the productivity of high earners, whose pay is often determined more by company customs and pay scales rather than direct output.

  • Wealth refers to assets like property, businesses, stocks, and land that generate income through returns, separate from earned labor income. Returns on wealth allow wealth to accumulate faster than overall economic growth.

  • Governments can influence inequality through tax rates, public spending, and policies that impact rates of return and economic growth. Extreme inequality may threaten efficiency by limiting opportunities and investment in education/health.

  • While markets allocate resources efficiently, government policy choices also shape outcomes and inequality through tax policies, social services, R&D spending, and other interventions. This shows inequality is partly a policy decision rather than purely market-driven.

In summary, Piketty argues wealth inequality tends to rise when returns exceed growth, and governments have some ability to influence this trajectory through fiscal and economic policy choices.

Here are summaries of the key points from the passage on the balance between equality and efficiency:

  • There is a common perception that redistributive policies aimed at greater equality necessarily reduce economic efficiency and incentives to work. However, this is not always the case.

  • Moderate redistribution through taxes and transfers may not significantly reduce efficiency or incentives, especially if designed properly. Higher taxes on the wealthy do not necessarily discourage work or business activity substantially.

  • Inequality itself can undermine efficiency over time if it becomes excessive. Greater equality can boost aggregate demand as more income is distributed to lower-income groups who spend a higher proportion of additional income.

  • Inequality is as much a policy issue and value judgment as an economic one. There are reasonable perspectives on both sides, and different societies prioritize equality versus efficiency differently based on cultural and political factors.

  • Overall, there is no clear consensus on the optimal level of redistribution. The relationship between equality and efficiency is complex, context-dependent, and ultimately involves balancing economic and social considerations. Moderate moves toward redistribution may have limited negative impacts.

So in summary, the passage argues that moderate redistribution need not reduce efficiency significantly, that inequality can become inefficient in its own right if extreme, and that balancing equality and efficiency involves both economic analysis and value judgments about the ideal society. It is a complex policy issue rather than one with a definitively right or wrong answer.

Here is a summary of the key economic terms provided:

(i) Productivity - Output per unit of inputs, commonly measured as output per hour worked. Improving productivity drives long-run economic growth and development.

(ii) Profit - The return earned by business owners or shareholders, calculated as total revenue minus total costs. A key motive and incentive in capitalist systems.

(iii) Capitalism - An economic system characterized by private ownership, profit motive, and competitive markets. Profit provides incentives central to capitalism.

(iv) Proletariat - The working class that must sell their labor under capitalism, as analyzed by Karl Marx.

(v) Private property - Private ownership over assets or means of production, which is considered essential to capitalism but criticized by socialists.

(vi) Communism - A Marxist-Leninist system aimed at establishing state or social ownership over productive assets through abolishing private property via proletarian revolution, as criticized for lack of individual rights and economic inefficiency.

Here are the key points of the summaries:

(i) Rosenstein-Rodan - Development economist who promoted "big push" industrialization strategies for poor countries, arguing coordinated investments were needed across multiple sectors to achieve economies of scale and kick-start self-sustaining growth.

(i), (ii) Roth - American economist and game theorist who developed the concept of stable matching that greatly impacted industries requiring stable one-to-one matching, and received the Nobel Prize for this work.

(i) rule by nature - Early thought systems viewed social and economic outcomes as determined by natural forces rather than human reason/choice, which was questioned by utilitarianism and philosophies valuing freedom.

(i) rules of the game - Institutions that structure economic and political incentives within a society according to North, guiding interactions rather than dictating outcomes.

(i) Sachs - Economist who advised on "shock therapy" reforms advocating rapid deregulation and privatization to induce transition in developing nations in the 1990s.

(i) Saint-Simon - Early French socialist who advocated an industrial meritocratic system managed by engineers/scientists for societal benefit over capitalism.

(i), (ii) Samuelson - Nobel-winning American economist who pioneered the neoclassical synthesis integrating Keynesian and neoclassical thought still guiding policy.

(i), (ii) savings - Postponing consumption to build assets for later investment, increasing capital per capita, and playing a key growth role.

(i) and Say’s Law - Say's Law that supply creates its own demand, so production spent on others ensures full employment equilibrium without need for additional demand.

(i) Say’s Law - The theory that supply creates its own demand, meaning goods and services can only have value if they lead to the production of other goods and services.

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