LECTURE TWO: ECONOMIC CONCEPTS
ECONOMIC THEORY FROM ENLIGHTENMENT NEOCLASSICISM TO MODERNISM
‘Economic Man’ – a non-metaphysical/non-psychological theory of human behaviour – rooted in the enlightenment philosophy of
EMPIRICISM
17th/18th CENTURY EMPIRICISM – an empirical idea is one that is rooted in direct experience (ie ‘I won’t believe it until I see it with my own two eyes’). It is a mania for producing evidence – and evidence that the evidence is reliable and so on.
Ideas not based on direct experience (eg religion, acts of faith, wishful thinking, assertion of moral right, most assertions of natural order, of ‘conventional wisdom’ or based on tradition, habit or priestly authority, common sense and so on) are not valid and must be rejected, the empiricist says. Extreme empiricism leads to solipsistic outlook (problematic – Descartes and cogito ergo sum).
A refinement (Hume) is that non-empirical objects such as the idea of an angel can be synthesised from observable phenomena (eg, a bird and a person – an angel is a person with wings like a bird). All valid knowledge must derive direct experience. This is philosophical materialism – ideas arise from matter and existence; and a rejection of Christian and Hegelian metaphysics – “love makes the world go round” and “in the beginning there was the world”. (problematic – how can non-corporeal ideas arise from stones and dust and so on. Surely ideas must come from a different realm – Plato on eternal realm of perfect/pure ideal forms/”spirits” eg).
Empiricism leads to the scientific method and empirical method leads to highly effective technological advance – partic in medicine for example. Berkley’s extreme anti-metaphysical stance on knowledge – objects ‘flash in and out of existence’ depending on whether perceived. Kant on empirical knowledge is worth knowing – noumenal and phenoumenal nature of objects. I am sorry to say that journalism tends to be a form of ultra-extreme super concentrated empiricism with knobs on. Eg Hume on billiard balls; or Keyes character in the movie Double Indemnity. http://www.youtube.com/watch?v=_86JyE5ldFY&feature=related - “you check the calander, then you check who printed the calander”
JOHN LOCKE – father of Empiricism, foundation of scientific method. “Essay Concerning Human Understanding” – 1689
http://www.youtube.com/watch?v=m5jwktbnrZY&feature=related
“Look at the facts, and think for yourself”.
Also a very good way to look at empiricism:
http://www.youtube.com/watch?v=tLcQziOfhxM&feature=related
Gallileo and Newton – A Priori it seems that the sun revolves around the earth and that the earth is the centre of the universe (this is assert A Priori in holy scripture, just on the traditional authority of the holy man/witch doctor). Empiricism contradicts. Gallileo waspersecuted. Pol conflict between empiricism and religion and DOGMA – ‘official truth’.
http://www.youtube.com/watch?v=gmIYZqCkKPg
Opposite of A-PRIORI reasoning (or “reason” – as “it stands to reason that there must be a railway station in Bristol, because it is a big city”). That knowledge by REASONING from A-PRIORI principle (first principles, or assumptions.) in this case the assertion ‘all big cities have railway stations’.
Reason and logic – Aristotle’s ‘synthetic’ logic.
All men are mortal (A priori)
Socrates is a man
Therefore Socrates is mortal
(the assertion that ‘socrates is mortal’ can not strictly be accepted as an empirical truth until he is actually dead)
A-priori reason is acceptable to empiricism if assumptions are stated as PROVISIONAL ideas (= scientific method) and not TRANSCENDENT (eg God exists, and has always existed before all else (literally A Priori).
Pure A Priori arguments (often) have internal logic, but they do not require evidence, and they are not susceptible to empirical critcism (eg if you take the view that the word is run by super intelligent lizards (David Icke) then there is no evidence that will defeat this view.
Homework for this week is BLOG an example of EMPIRICAL ARGUMENT and an example of A PRIORI thinking.
Explore this theme as much as you can, with examples from the newspapers. Link it back to your previous musing on the pol theory lecture – greeks, enlightenment, hobbes, rousseau, darwin, marx, neitszche, logical positivism, pol science, etc
I did not do much on liberalism and the anglo-american tradition of empiricist and materialist political theory because it can also be looked at as part of economic theory snce for the classical liberals of the 19th century (largely different to the contemporary use of the word ‘liberal’). ‘Political Economy’ . Look at:
You will need this week to get your head around the concept of empiricism and that is very hard work.
Locke
David Hume
Adam Smith – more on him later
Jeremy Bentham (utilitarianism)
J S Mill (political liberalism and intrinsic rights – eg rights even for women)
Utilitarianism – each person blindly pursuing their own interests/desires will create good for all (metaphor of the beehive). Thus economic freedom.
ECONOMIC HISTORY/HISTORY OF ECONOMIC THEORY
Economic History, social progress, technology, mass production, trade
Wealth and capital accumulation - the pre-modern state, tribute, feudalism. Stability of tribute, custom. Limits of trade in the pre-modern world.
Feudal economics, localism, parochialism
Urbanisation – the city states (point of contact with previous lecture – the renaissance/the enlightment) – the necessity of trade.
The expansion of the European mind because of trade – Marco Polo, voyages of discovery, the spice trade, the silk trade, sugar, ivory, slaves
Crisis of the French mercantile system – state monopolies, customs duties, selling of state monopolies to fund the state – corrupt.
“Let them eat cake”
French revolution – triumph of “Reason” over metaphysics. French revolution as the triumph of rationality – eg Contract Theory of the state, against divine right of kings – an extreme form of official state atheism promulgated.
Months renamed, metric measures imposed (good example of reason)
Physiocrats / Encyclopedists – “a rational explanation for everything”.
Physiocrats – now it comes to economics – Why is this object (eg a sailing ship) worth exactly the same as 1,000,000 loaves of bread?
What is the essence of value that causes exchange? Is there a universal force of value, such as the universal force of gravity. The search for natural and universal laws.
Physiocratic theory of “displaced rent”. These are A priori arguments by means of reason.
SCARICITY – human wants will always exceed the ability to supply those wants – this is THE ECONOMIC PROBLEM – and why economics is called The Dismal Science.
As an academic discipline it all about studying how individuals (microeconomics) or nations (macro economics) can MAXIMISE/OPTIMISE their WELFARE by forms of rationing and distribution. This is EMPIRICISM GOLD because behaviour can be measured very exactly through the price system to detect how people will make decisions with their limited pot of money (exchangeable value) to bring themselves the most contentment.
Economists are fellow empiricists along with journalists. They both want facts, evidence. They are both widely seen as cynics (Oscar Wilde – they know the price of everything and the value of nothing) and they are often blamed for the stupidity they report upon or study (‘shoot the messenger’).
Richardo – Labour Theory of Value – that any object contains an element of ‘embodied labour’ and this determines values.
Then the fist genuinely empirical approach
ADAM SMITH – The Wealth of Nations
Q: Why is one country wealthier than another?
A: Because its rulers allow the population to develop a COMPARATIVE ADVANTAGE and then allows FREE TRADE (with no state monopolies).
COUNTRY A (near the sea) COUNTRY B (with iron ore but with no coast)
In Labour Value Terms
A ton of fish costs 10LV A ton of fish costs 100 LV
A ton of iron costs 100LV A ton of Iron costs 10 LV
Thus there are 2 tons of fish to be consumed; and 2 tons of iron
BUT if each country SPECIALISES and then trades –
COUNTRY A COUNTRY B
11 Tons of Fish 11 Iron Tons of Iron
This is FREE TRADE – and leads to greater wealth for all if trade is allowed to be free.
Smith believes people will naturally specialize in what they can make most effectively (using any ‘comparative advantage’ they just happen to have) and they will sell this to buy what they have a ‘comparative disadvantage’ in producing.
He gives the example of a pin factory – everyone specialized in one part of the process and far more pins are produced, than if each one produces their own pins.
This is the ‘HIDDEN HAND OF THE MARKET’. The role of the state is to do nothing (other than actively promote ‘specialisation’ through education for example, and to protect trade (eg with a navy to suppress pirates) and with laws to prevent MONOPOLISTIC BEHAVIOUR.
In this way Smith each person pursuing their own individual benefit will create the greatest benefit for all – “UTILITARIANISM:.
That’s about it for ‘classical economics’ also known as ‘classical liberalism”.
Friedman on Adam Smith
http://www.youtube.com/watch?v=DrZGT89ht-g&feature=related
‘The Invisible Hand’ of the market.
http://www.youtube.com/watch?v=4FHxpoQqPTU&feature=related
FREE TRADE and SPECIALISATION results in Empire and the factory system –
It turns out that Africa has a ‘comparative advantage’ in producing slaves and raw materials.
Horrors of the factory system and the downward pressure on costs because of competition between suppliers (free market).
The boredom and alienation of modern economic life – eg working in a shop or a call centre – at one time in a shop you had varied work like in a butcher’s shop actually making some thing. But now in a supermarket or call centre, you specialize in just one thing and the sausages etc are all made in a factory somewhere by an equally very bored and lowly paid person.
Then a free market in capital itself – investment – ultimately on a worldwide scale – so that the most efficient, the most specialized and cheapest (factory, call centre) attracts all investment.
Similar to the Darwinian idea – survival of the fittest – so Woolworth’s goes because Asda is minutely more profitable and thus attracts shareholders, greater profit returns. DEFLATIONARY CYCLE caused by reducing costs to increase profits – deflation and ruin particularly of agriculture effect of globalization in the 19th century (the first wave of ‘globalisation’ had a different name - it was called ‘The British Empire’). Recently defltionaqry effect of American led globalization.
Utilitarianism and liberalism
19th century industrial capitalism – Liverpool/Manchester/Glasgow the slave trade - The 2nd British Empire.
Dickens
Luddites
The Irish
Urban poverty – gin alley, the East End, disease, urbanization and emigration. The mass circulation Press
Anti-liberalism – the backlash
Reaction in France/Russia/Prussia – Hegelianism (divine mission of Europeans). Nationalism, Romanticism – Victorians, German cultural nationalism, Dreyfus, anti-semitism, racism, ‘The White Man’s Burden’… Neo-Mercantilism, Empire Tarif protection.
More anti-liberalism: Karl Marx
Attacks liberalism as non-rational and too ‘mechanistic’ view of human nature.
The manifesto of the communist party 1848 – ‘the contradiction of overproduction’ – occurs because of the profit motive means that the producer of the goods can never afford to buy them. But producers are consumers… Profit is re-invested as a sort term solution to the problem of ‘surplus value’ – but this is like putting out the fire with petrol, says Marx.
Karl Marx’s contradiction of capitalism (it produces its own grave-digger)
WORKER GETS PAID £1 TO PRODUCE A WIDGET
WIDGET SELLS FOR £2 (THE ‘MARKET PRICE’ – ADAM SMITH)
CAPITALIST MAKES £1 PROFIT
CAPITALIST SPENDS THIS ON THE STATE
CAPITALIST WASTES SOME ON PLATED WIDGETS, TOP HATS, ETC
CAPITALIST INVESTS SOME IN ANOTHER WIDEGET FACTORY
WORKER GOES TO SHOP TO TRY AND BUY A WIDGET
OH DEAR – WIDGETS COST £2. WORKER ONLY GOT £1 (SEE LINE ONE)
WIDGET REMAINS UNSOLD – IT’S A WIDGET CRUNCH
MASS PANIC
WIDGET FACTORY CLOSES – WIDGET WORKER EVEN MORE ALIENATED
WIDGET WORKER THROWS OFF DELUSIONS
VIOLENT REVOLUTION LED BY LOCAL PSYCHOPATH
CAPITALISTS SHOT DEAD, ETC
END OF CAPITALIST SYSTEM
MASSIVE BOOZE UP/TEMPORARY MOMENT OF MISPLACED OPTIMISM
UNFORTUNATE ANIMAL FARM TYPE SITUATION ENDS BOOZE UP
CAPITALIST SYSTEM RE-ESTABLISHED UNDER ANOTHER NAME
(above is Iron Law of History repeat ad infinitum until utopia/heaven on earth finally established– History repeats itself – first time tragic, second time comedy, etc)
Marx’s view of the state. He is very down on Hobbes. The state is made of people, it is a convenient arrangement of affair – state must be servant of a particular class, not as master. Contract theory he is withering about that – for Marx the state is the suppression of one class by another (Freeman and Slave; Bourgoie and Proletarian). Marx calls for ‘the withering away of the state’ and the substitution of voluntary and natural relationships, very much like Rousseau (and also the Garden of Eden, because Marx is neo-Hegelian and has a linear view of historical development from a paradise lost in the The Fall of Man through a turbulent history to regain paradise. For Hegel this is god and sin and metaphysics – for Marx it is the facts of history – “I have turned Hegel on his head”.
As Yazzy quoted the Rousseau discourse on inequality Marx gives private property a` role similar to original sin in causing the fall of man from paradise into the horrors of objectified, alienated historical existence. In a way Darwin+Rousseau = Marx.
Marx wrote much about the state and human nature and philosophy but we are dealing with him as an economist and very much a man who builds upon Adam Smith and picks up on a key trend in modernism – that behaviour that happens at the micro level (Smith’s hidden hand) can have very different consequences at the macro level – The Widget Crisis.
Das Capital (1867) – rejection of liberal utilitarianism, synthesis with Hegelian/German idealism
Dynamics of capitalism
Capitalism defined (not ‘greed’).
‘base and superstructure’ – class domination of the state
Alienation – the ‘bond of naked self interest’
‘Free Trade’ as imperialism and war - cf globalization/anti globalization.
Destruction of national state
Inevitability of capitalist collapse and proletarian revolution.
http://www.youtube.com/watch?v=B1IME451NDY - The Communist Manifesto
Late 19th century was contrary to Marx’s predictions a time of economic stability and prosperity and social peace (in most of Europe). This is the Belle Epoch in France and Edwardian Golden age in England, and the rapid economic development of USA – New York, Boston, Chicago.
Marxian crisis did not happen because:
- Expansion into new markets – unsold widgets could be exported to Empire.
- Emigration – unemployed widget workers/farmers go to Canada/Australia
- Monopolies prevented by legislation (anti-trust laws)
- Social reform and trade unions to prevent reduction of wages/deflation
- Origins of welfare state – partic in Germany
- Reforms to laws on share ownership – more widely dispersed wealth
- Banking reform, allowing much wider credit and lending
- Arms race – huge expansion of European Armies
- Spending on science, education, culture, leisure
First world war is political catastrophe but economic boom time – hyper inflation in Germany; general inflation around the world ‘the roaring twenties’ – free trade and cheap credit, high profitability on replacing capacity destroyed in WW1. Technology spur of first world war leading to mechanization, Ford, mass production, first mkass consumer goods, 1920s.
1930s – stock market crash. A bubble like now – very rapid deflation first caused by over extension of un secured credit which was used for speculation on assets – the stock market. The crash happens, the banks close, there is literally no money – they literally close their doors - trade ceases, factories close, downward cycle – no money to buy anything, therefore no money to make anything.
Keynes answer – the general theory – is essentially to ‘print money’ – public spending. Now called ‘monetary easement’.
World War Two – ‘military Keynesianism’ – post war large scale spending by the state throughout the developed world – the arms race – billions and billions, health care, space race, public education, roads, etc, etc to ensure full employment. No reliance – neoliberal style – on ‘the hidden hand of the market’.
Princeton University lecture on Keynes
http://www.youtube.com/watch?v=CVHWlnbJsC4&feature=related
Keynesian – Golden Age of 50s/60s – then runs into crisis of inflation in the 70s/80s – Friedman and monetarism (rejection of Keynes). Reaganomics, Thatcherism, etc 0 rhetoric of neo-classical liberalism – in the US ‘neo-cons’ –
Lead to another 20s style asset inflation bubble and banking crisis – credit crunch and recession. Welcome back Keynes – we are printing money again and pretty much handing it out at bus stops. But the money won’t in the end buy anything…
… that gets us to macroeconomics, the treasury, the budget, taxation, UK monetary policy and the mechanics of the money markets, the bond market, the public sector borrowing requirement and economic policy which is something we will pick up in the talk about the city and whitehall.
Well… that concludes the theoretical part of this module and for me at least very, very, very much the interesting and stimulating bit. I love talking about this kind of stuff and for me the attraction of lecturing undergraduates is the chance to discuss with you hese kinds of themes – because they are not the sort of thing you generally talk about with everyday people in everyday situations which is why we have universities in the first place so we can argue about this kind of way out stuff. From here on – though - we are loading up on a lot of detail about the structure of state and economic institutions that you really have to know well if you want to be a reporter, or even if you want to follow the broadsheet-type news in an informed way.