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Sophomore Economics Tutorial

History of Economic Thought

2011-2012 F 2-4 PM PAC 413


Professor Joyce Jacobsen
Office:
332 PAC
E-mail: jjacobsen@wesleyan.edu
Phone: 860-685-2357 (o), 860-344-8514 (h), 860-836-6022 (cell)
Office hours: walk-in whenever the door is open; also available by appointment
Preceptor: Aunchisa Tapanakornvut
E-mail: atapanakornv@wesleyan.edu
Phone: 202-744-1651 (cell)
Preceptorials: W 8-9ish PM PAC 411
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Introduction

Only eight weeks to devote to the study of economic thought!  This is a daunting prospect.  There are numerous ways in which to organize such a course, and way too many topics of potential interest.  I have chosen a number of operating themes to try to deal with this course.  One is to try to mirror the coverage in your other CSS tutorials in various constructive ways, including operating over roughly the same time frame and reflecting on some of the same issues.  Another is to try to focus on economists’ framing of and answers to the “big questions” of life that economics might be able to shed some light upon.  A third will be to attempt to individualize approaches to this material; in other words each student can decide for him or herself what the course should be.  The common core of readings and (relatively flexible) paper topics will allow us to maintain dialogue.

Regarding the first theme, I quote from longtime tutor Peter Kilby’s syllabus from the last time he taught this course:

       “Through an examination of a number of major works, this tutorial treats the development of economics since the time of Thomas Mun.  The emergence of successive analytical systems—mercantilism, classical economics, Marxism, neoclassical economics, and Keynesianism—both reflect and help to illuminate the economic and social problems that constitute the Western experience over the past three centuries.  This material will provide a fuller context for what you learn in Politics, History and Social Theory, and it will deepen your intuitive understanding of contemporary economic theory.”

Regarding the second theme, what are the “big questions”?  Roughly in the order of the course, rather than in any order of precedence (although some questions will be referenced in more than one week’s tutorial), here are what I see as (some of) the big questions:

      • Does international trade reduce well-being (for rich nations and/or for poor nations)?
      • Can work be both productive and rewarding?
      • Is the human race going to exceed the earth’s carrying capacity?
      • How should wages and prices be determined?
      • How can we make poor people better off? Are the rich too rich?
      • Do we buy the “right” things?
      • How can we avoid economic depression?
      • Can we maintain economic growth?  Is this desirable?

Note there is a mix of positive and normative herein:  Regarding some questions, what is going to happen; in some cases, what should happen.  On some questions, we want reassurance that things will turn out all right, while on other questions we look for guidance on how to do things.  Answers vary legitimately to the positive questions across economists either because they disagree about which analytical framework is applicable to the real world, or because they disagree about particular empirical values within a given analytical framework.  Much of the history of economic thought is a history of the development of a general analytical framework so that most disagreements between economists then become those of the latter variety.  In this general framework, all preceding analytical systems can be subsumed as special cases.  Although economics has proceeded much of the way along this path, there is still work to be done in developing this general theoretical framework, particularly regarding dynamics.


Readings

Please buy or otherwise obtain these nine books.  For your convenience, I have listed them in the cheapest reliable editions I could identify ( Click here to see the list of the editions ordered that I recommend as well as links to free online versions ).  Please note which edition you are using in your bibliographic references in your essays so that I don’t get confused about pagination and translations.  These are all in print; any unabridged edition is acceptable. Only two of them are still in copyright, and you do not need to purchase Barber as I have created a web version of it for this course; thus you only need to obtain a copy of Schumpeter's book:
William J. Barber, A History of Economic Thought (1967)
John Maynard Keynes, The General Theory of Employment, Interest and Money (1936)
Thomas Malthus, An Essay on the Principle of Population (1798)
Karl Marx, Capital, Volume I (1867)
David Ricardo, The Principles of Political Economy and Taxation (1817)
Joseph Schumpeter, Capitalism, Socialism, and Democracy (1942)
Adam Smith, The Wealth of Nations, Volumes I and II (1776)
Frederick Winslow Taylor, The Principles of Scientific Management (1911)
Thorstein Veblen, The Theory of the Leisure Class (1899)
In addition, the following readings (arranged here alphabetically by author, rather than in the order in which you will be reading them) will be made available, either through this webpage or through e-reserve:
Hugh G. J. Aitken, “Introduction,” “The Taylor System,” and “Consequences,” Taylorism at Watertown Arsenal: Scientific Management in Action 1908-1915 (1960)
Jeremy Bentham, Chapters I-IV, An Introduction to the Principles of Morals and Legislation (1789)
Mark Blaug, “Conclusions,” The Methodology of Economics (1980)
Gretchen C. Daily and Paul R. Ehrlich, “Population, Sustainability, and Earth’s Carrying Capacity,” BioScience (Nov. 1992)
Mike Daisey, excerpts from 21 Dog Years: Doing Time @ Amazon.com (2002)
Phyllis Deane, “The Demographic Revolution,” The First Industrial Revolution (1965)
John Kenneth Galbraith, “The Imperatives of Consumer Demand” and “The Dependence Effect,” The Affluent Society (1958)
George Grantham, “Agricultural Productivity Before the Green Revolution,” The State of Humanity, Julian Simon (ed.) (1995)
R. F. Harrod, “Scope and Method of Economics,” The Economic Journal (Sept. 1938)
Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review (Sept. 1945)
Friedrich A. Hayek, “Competition as a Discovery Procedure,” New Studies in Philosophy, Politics, Economics and the History of Ideas (1978)
J. R. Hicks, “Mr. Keynes’ Theory of Employment,” The Economic Journal (June 1936)
David Hume, “Of Money” and “Of the Balance of Trade,” Essays and Treatises (1777)
Joyce P. Jacobsen, “The Intrinsic Value Paradox,” The Economics of Gender (1998)
W. Stanley Jevons, Preface and Chapters II-IV, The Theory of Political Economy (1871)
Nicholas Kaldor, “Welfare Propositions of Economics and Interpersonal Comparisons of Utility,” The Economic Journal (Sept. 1939)
J. M. Keynes, “The General Theory of Employment,” Quarterly Journal of Economics (Feb. 1937)
Frank H. Knight, “Enterprise and Profit,” and “Uncertainty and Social Progress,” Risk, Uncertainty and Profit (1921)
Paul Krugman, “Does Third World Growth Hurt First World Prosperity?” and “What Do Undergrads Need to Know about Trade?” Pop Internationalism (1996)
Stanley Lebergott, “Consumers and Their Critics,” “Happiness and Economic Welfare,” and “Consumer Choice: Advertising,” Pursuing Happiness: American Consumers in the Twentieth Century (1993)
Bernard Mandeville, excerpts from The Fable of the Bees (1714)
J. S. Mill, “What Utilitarianism Is,” Utilitarianism (1863)
Thomas Mun, England’s Treasure by Forraign Trade (1664)
Bertil Ohlin, “A Condition of Interregional Trade” and “On Some Effects of Interregional Trade,” Interregional and International Trade (1933)
A. C. Pigou, excerpts from Economics of Welfare (1920)
Vilfredo Pareto, excerpts from Manual of Political Economy (1906)
John Rae, excerpts from New Principles of Political Economy (1834)
Lionel Robbins, “Interpersonal Comparisons of Utility: A Comment,” The Economic Journal (Dec. 1938)
Jean-Baptiste Say, “Of the Basis of Value; and of Supply and Demand,” A Treatise on Political Economy (1803)
Joseph Schumpeter, “Review of The General Theory of Employment, Interest and Money,” Journal of the American Statistical Association (Dec.1936)
Tibor Scitovsky, “Income and Happiness,” The Joyless Economy (1976)
Julian L. Simon, “Introduction” and “What Does the Future Hold? The Forecast in a Nutshell,” The State of Humanity , Julian Simon (ed.) (1995)
Adam Smith, excerpts from The Theory of Moral Sentiments (1759)
George J. Stigler, “The Development of Utility Theory,” The Journal of Political Economy (Aug. and Oct. 1950)
Joseph E. Stiglitz, “The Promise of Global Institutions,” Globalization and Its Discontents (2002)
John Tierney, “Betting on the Planet,” New York Times (Dec. 1990)
Hal R. Varian, “Exchange,” and “Welfare,” Intermediate Microeconomics: A Modern Approach (1999)
Jacob Viner, “Mr. Keynes on the Causes of Unemployment,” Quarterly Journal of Economics (Nov. 1936)
I may also occasionally direct your attention to a contemporary article in the news that picks up on a theme from the course.

Additional readings:  I do not discourage reading of related readings by contemporaries, of secondary sources regarding the course readings, or of biographical works on the authors.  Indeed, the website for the course provides several links to biographical sites and also to an archive of additional related primary texts. Robert Heilbroner’s The Worldly Philosophers provides biographical detail and work summaries for several of the authors and works covered in the course.  There are also several comprehensive overviews of economic thought available, including Joseph Schumpeter’s History of Economic Analysis and Mark Blaug’s Economic Theory in Retrospect. If such reading assists you in understanding the central concepts (and interrelationships between concepts and also with the work in your other tutorials), go right ahead (just be sure and provide full bibliographic reference to any sources you cite, whether print or electronic, that are not in the course syllabus).  If you prefer to interact directly with the primary texts without other guides or considerations, that’s ok too.  Indeed, you can skip reading Barber’s book if you want to forego such guidance.

Also, you may (if you are not of the latter type of personage) find it helpful to look up in a current economics textbook the discussion of various terms and topics in the readings to see how they have come into current usage.  An additional step in this direction would be to look up discussions of such terms and topics in past textbooks, the two most influential having been Alfred Marshall’s Principles of Economics (1890 and many subsequent editions), which introduced the standard diagrammatic treatments of microeconomics and Paul Samuelson’s Foundations of Economic Analysis (1947 and many subsequent editions), which introduced the standard mathematical treatments of microeconomics.


Week 1:  Trade
Readings

William J. Barber, A History of Economic Thought , Prefatory Note, Prologue, Introduction to Part One, and Introduction to Chapter 1 (optional)
Thomas Mun, England’s Treasure by Forraign Trade (skim)
Adam Smith, The Wealth of Nations , Book IV: Chapters 1-8 (emphasis on 1 and 8); Book I: Chapters 1-3
David Hume, “ Of Money ” and “ Of the Balance of Trade
John Maynard Keynes, The General Theory of Employment, Interest and Money , Chapter 23
David Ricardo, The Principles of Political Economy and Taxation , Chapters 2, 3, 7, 19, 22, 28, 30
Bertil Ohlin, “A Condition of Interregional Trade” and “On Some Effects of Interregional Trade
Paul Krugman, “Does Third World Growth Hurt First World Prosperity?” and “ What Do Undergrads Need to Know about Trade?
Joseph E. Stiglitz, “The Promise of Global Institutions

Perspective

Barber (1925-) provides an overview of both the study of economic thought and a short introduction to this week’s topic, Smith in particular.  From now on, read parts of Barber’s book as you see fit to supplement future weeks’ readings; I will not explicitly reference it in the following weeks’ readings, but it will generally be obvious which parts of his book are relevant.

Mercantilism is often considered the precursor school of economic thought to classical economic thought.  As developed throughout the sixteenth through eighteenth centuries by a number of pamphleteers in England (and the U.S.) and the Continent, mercantilism has a practical focus in advocating a set of government policies (bullionism, trade restrictions, sumptuary laws) meant to increase both national economic growth and political power, as well as encouraging particular types of business and colonial relationships. Mun (1571-1641), an officer of the East India company as well as a prominent mercantilist thinker, will serve as the representative mercantilist for our readings.  Skim over parts of his treatise that appear less relevant.

While mercantilists believed that trade was a zero-sum game in which one nation's gain was another nation's loss, many others challenged this world view.  Smith (1723-1790) and Hume (1711-1776) react strongly against mercantilism, and in the process end up sketching out many of the arguments that begin to constitute the classical school of economics, including the perspective of trade as leading to mutual gains, the quantity theory of money, and the importance of division of labor in economic growth, both within and between nations.  In particular, they develop a detailed argument based on specialization and division of labor as to how trading would increase the total amount of production.  This argument, along with related arguments relating to the role of money in trade and production, the discussion of how land rent is determined, and the development of the theory of short-run and long-run supply, comprise perhaps the central tenets of the classical school of economic thought.

Keynes (1883-1946) provides a more sympathetic view of mercantilist concepts.  Both mercantilism and antimercantilism live on in current policy debates, although mercantilist principles appear under different names such as “industrial policy” and “surplus-led growth,” and antimercantilism now takes Keynesian considerations into account.

Ricardo (1772-1823) and Robert Torrens (1780-1864) independently worked out a major refinement of Smith’s argument regarding division of labor between countries, namely the principle of comparative advantage.  Chapter 7 of Ricardo’s book presents the famous example of Portugal and England’s exchange of wine and cloth in which Portugal is better at producing both goods, yet there are still grounds for trade.  Both writers were very interested in the policy implications of this “model,” with particular application to how trade in agricultural products was regulated by countries by use of subsidies on exports and taxes or bans on imports.

Ricardo is perhaps even better known for his discussion of how land rent is determined (also co-discovered by Torrens) and how short-run and long-run effects of changes in demand on quantity supplied will differ.  However, Ricardo’s model, while providing great insight regarding these two phenomena, was limited in its explanatory power by his assumption of differences in labor productivity without exploring where these differences might come from.  Ohlin (1899-1979) considered the forces leading to these differences, namely differences in regional resource endowments and how this affects the production technology used in different regions.  His book, from which we will read the first two chapters, explicates what is now commonly known as the Heckscher-Ohlin model (as Ohlin’s teacher Eli Heckscher 1879-1952 first worked out the fundamental argument in a 1919 article).

Krugman (1953- ) is an eloquent contemporary advocate of economic principles in international trade discussions as well as a leading trade theorist.  His essays consider the relevance of classical school principles in current times when talk of the effects of globalization dominate international discourse in this area.  Stiglitz (1942- ) provides a counterweight to Krugman on some counts, in his argument that institutions and political structures matter in determining the effects of globalization.


Essay assignment

Is globalization a new, fundamentally different phenomenon from previous patterns of international trade and migration?  If yes, consider whether the classical economic arguments are relevant to understanding this phenomenon and advocating particular policies related to it.  If no, consider whether the classical economic arguments nonetheless require modification or elaboration in order to discuss the phenomenon and its effects adequately.

In writing your essay, consider whether you have defined globalization sufficiently (at least for the purposes of the essay, you need to come up with a working definition), and whether you have demonstrated sufficient knowledge of the assigned readings (or some substantial relevant subset of them that serves the purposes of your particular essay).  Consider whether you have presented different viewpoints in a balanced fashion and also consider whether you have made your bottom-line views clear by the time the essay has reached its conclusion.  In addition, make sure you demonstrate at some point in your essay a clear and concise understanding of comparative advantage.  Consider whether you can explicate the difference between absolute and comparative advantage clearly, and whether you understand Ohlin’s points regarding the factors determining comparative advantage.

Style notes regarding essay format

Essays are to be between five and eight pages in length.  Use a 12-point font, double-space with one-inch margins all around, and number the pages.  Title the essay, and make sure your name and some identifying feature regarding which assignment it is is at the top of the first page.  Avoid footnotes as much as possible, using in-text citations of bibliographic information when possible.  Pick a standard citation style and stay with it throughout the essay.

Don’t worry much about how this first essay turns out; consider it a warm-up writing exercise.  I will provide feedback early in the term regarding essay formatting and ongoing feedback during the term regarding development of your personal writing style.

The economics preceptor will be giving you a short handout at the first preceptorial meeting, containing her tips for doing the reading and essay writing for this tutorial.


Week 2:  Division of labor and labor value
Readings
Karl Marx, Capital , Chapters 13, 14, 10, 15 (skip sections 2, 6, and 10 in Ch. 15)
Frederick Winslow Taylor, The Principles of Scientific Management
Hugh G. J. Aitken, “The Taylor System,” and “Consequences
Mike Daisey, 21 Dog Years: Doing Time @ Amazon.com , pp. 73-85, 113-120

Perspective

While Smith saw the division of labor in production as a benign beneficial process, subsequent commentators have focussed upon its negative aspects regarding workers’ experiences with implementation of more specialized and routinized production processes.  While productivity can increase, at least in the short run, concerns over who gets the gains from greater productivity have dominated much of the subsequent discussion.  These concerns include the differentiation of short-run gains from long-run potential losses (including ill health and low morale) for at least some groups of workers.  

Marx (1818-1883) draws upon governmental reports to discuss many of the working world horrors that spurred social reformers in nineteenth (and early twentieth) century Britain.  These factual writings form an empirical backdrop to the theoretical framework he develops in Capital regarding the quest of capitalists to extract surplus labor (and thereby surplus value) from workers.  By increasing productivity per hour and/or having workers work more hours, additional surplus can be generated.

But where Marx and many others saw worker exploitation through division of labor, others saw gains for workers.  If workers are more productive, then they could earn more per hour and working hours could fall.  Hence both workers and capitalists can gain through increasing productivity, and additional scientific research effort, devoted to understanding how further productivity gains could be achieved, is to the benefit of all.  Taylor (1856-1915) is the “father” of scientific management, which basically involved understanding how fast work could be done through time and motion studies of workers, and then setting standards and pay rates so as to increase the average pace of work.  While many of the principles of scientific management may seem dated by today’s human resource and labor management standards, one can nonetheless trace much of modern organizational management theory and practice, including personnel management, to Taylor’s precepts.

One might wonder what happened when Taylorist principles were first put into practice.  Economic historian Aitken (1922-1994) has written an instructive case study of what happened when Taylorist principles were implemented in the Watertown Arsenal in the early twentieth century.  Finally, Daisey (1973-) provides a humorous yet telling recent perspective that illustrates how Taylorist principles continue to operate in many modern operations, even in nonmanufacturing settings.


Essay Assignment

This week I want you to put on your futurist hats and do some prognosticating.  Imagine you are writing a short piece on working conditions to be published on International Labour Day at the end of the twenty-first century, on Sept. 5, 2101, to be exact.  Spend part of the piece looking back over the preceding three centuries, part of the piece describing the current situation, and part of the piece looking forward towards the twenty-second century.  Attempt to be both entertaining and serious (either simultaneously, or at various points in your essay).


Week 3:  The population question
Readings
Thomas Malthus, An Essay on the Principle of Population , Chapters 1-8, 16, 18
David Ricardo, The Principles of Political Economy and Taxation , Chapter 5
Phyllis Deane, “The Demographic Revolution
George Grantham, “Agricultural Productivity Before the Green Revolution
Gretchen C. Daily and Paul R. Ehrlich, “ Population, Sustainability, and Earth’s Carrying Capacity
Julian L. Simon, “Introduction ” and “What Does the Future Hold? The Forecast in a Nutshell
John Tierney, “ Betting on the Planet

Perspective

Malthus (1766-1834) provides the argument regarding another dark side to economic growth, namely the view that population growth will outstrip agricultural productivity and lead to continued low living standards for the majority of the populace.  Thanks to Malthus’s model and its depressing implications, economics is considered “the dismal science.”  You may want to read the introduction to the Penguin edition of Malthus and/or some other secondary text on Malthus to put his life and work into perspective, as he often gets a bad rap.

Ricardo, who was a close friend of Malthus, agreed with him on many points of the argument, and developed his own ideas regarding natural levels of wages.  You may also want to review Ricardo’s chapter 2 on rent as well, as it states Malthus’s technical argument regarding diminishing returns with greater precision.  You may also want to consider how Marx’s discussion of working class life relates to Malthus’s model.

Economic historian Deane’s chapter (1918-) provides some twentieth-century background on the demographic transition that was occurring along with the industrial revolution.  Economic historian Grantham (1941-) also provides a more recent perspective on what was happening during this period in agriculture, as well as a more broad perspective on agricultural yields and productive capacity relative to population.

Ehrlich (1932-) is the best-known of those who currently argue that we are outpopulating the Earth’s ability to support us.  His 1968 book The Population Bomb, sold a huge number of copies and sparked the “zero population growth” movement.  Daily (1965-) and Ehrlich have recently extended this argument into a sustainability and carrying capacity measurement system that continues to undergo refinement.  Simon (1932-1998) argued the opposite viewpoint, namely that problems spur solutions and that the overall trend has been towards improvement in quality of life because rather than in spite of economic and demographic growth.  One of the most interesting debates of the twentieth century took place between Ehrlich and Simon regarding whether conditions are improving or degenerating, culminating in a formal bet over the easily observable level of prices on a number of metals.  Tierney documents this bet and the outcome.  A similar later bet between Simon and Forestry Professor David South regarding timber prices ended prematurely.  Please feel free to look for evidence of more recent such bets in a similar vein that others may have made.


Essay Assignment

Are environmentalists Malthusians?  If yes, then aren’t they wrong?  If no, then aren’t they wrong?


Week 4:  Value, utility, and the marginalist revolution
Readings
Adam Smith, The Wealth of Nations , Book I: Chapters 4-9; Chapter 10, Part I
David Ricardo, The Principles of Political Economy and Taxation , Chapters 1, 20
Karl Marx, Capital , Chapter 1
Jeremy Bentham, An Introduction to the Principles of Morals and Legislation , Chapters I-IV
J. S. Mill, “ What Utilitarianism Is
W. Stanley Jevons, The Theory of Political Economy , Preface and Chapters II-IV
George J. Stigler, “The Development of Utility Theory” Part I and Part II
Joyce P. Jacobsen, “ The Intrinsic Value Paradox: Are Diamonds and Water Like Lawyers and Child Care Workers?

Perspective

While John Law (1671-1729) is credited with first mention of the diamond-water paradox, many other thinkers before and after wrestled with the problem of why diamonds trade at a higher price than does water.  Smith, Ricardo, and Marx all propound variations of a labor theory of value, but none of these thinkers are able to resolve the paradox using this theory.

Concurrently, philosophers, including political economists, were developing a potential basis for societal decisionmaking that would explicitly consider individual valuations of actions.  This would contrast, for example, with a morality-based system of societal decisionmaking.  Bentham (1748-1832) is the name most often identified with utilitarianism.  Mill (1806-1873) provides a statement that provides additional explication of this philosophical movement.  This system implies that value is determined by individual reactions to particular actions or commodities, and that individual reactions are based on whether or not the action or commodity will increase one’s utility and by how much.  However the final link between utility and price remained to be made.

It took the marginalist revolution in economic theory to clarify the diamond-water paradox as relating to marginal rather than total valuations and to clarify the roles of both cost conditions (through the supply curve) and demand, and thereby relate the concept of value to the concept of utility in a systematic and coherent fashion.  Jevons (1835-1882),  Carl Menger (1841-1921), and Leon Walras (1834-1910) all independently developed the marginalist framework.  We will read some of Jevons’s work as the easiest to follow of the three (less wordy than Menger, less mathematical than Walras).  This framework forms the basis for what we now refer to broadly as the neoclassical school in economics.  Subbranches of marginalism emphasizing different points developed following each man’s lead: the Radical English marginalists, the Austrian school, and the Lausanne school.  Dominant now in economic thinking is the Cambridge neoclassical school which developed under Alfred Marshall’s (1842-1924) consolidation.  Stigler (1911-1991) provides a systematic overview of the history of the development of the marginalist framework in utility theory along with its main theoretical points.


Essay Assignment

For this week’s essay, consider labor market outcomes and whether they yield “appropriate” prices and quantities.  You can read the box from my book to see how the diamond-water paradox is easily extendable to labor market situations.  As centerpiece for the essay, develop one or more examples of two different jobs or occupations, one of which is both more highly compensated than the other and apparently of less value to society.  Explain in each case how this situation has arisen and whether this requires some type of policy intervention.  If it does require a policy intervention, explain what type of intervention.  If it does not require a policy intervention, explain why not.

In writing your essay, consider whether you have defined value and utility sufficiently (at least for the purposes of the essay), and whether each example is sufficiently explicated and sufficiently compelling.

Much of the reading this week provides historical background for the marginalist revolution and as such need not all be reflected in your essay.  Smith’s Ch. 10, Part 1 is of particular relevance to this assignment, as he develops a set of reasons why wages might vary between occupations, much of which serves as a continuing basis for inquiry in the field of labor economics.  Depending on how your essay unfolds, you may find some of the readings from week 2 on division of labor useful.


Week 5:  Welfare economics
Readings
Vilfredo Pareto, Manual of Political Economy , Chapter III, paragraphs 14-37, 116; Chapter VI, paragraphs 32-37
A. C. Pigou, Economics of Welfare , Part I: Chapters VII-VIII
R. F. Harrod, “ Scope and Method of Economics
Lionel Robbins, “ Interpersonal Comparisons of Utility: A Comment
Nicholas Kaldor, “Welfare Propositions of Economics and Interpersonal Comparisons of Utility
Hal Varian, “Exchange” and “Welfare
 
Perspective

Smith is perhaps best known for his use of the “invisible hand” metaphor (see Book IV, Chapter 2, paragraph 9), arguing that selfish actions in pursuance of one’s own interest can lead to promotion of society’s interest, potentially more effectively than if one had intended to promote it. Pareto (1848-1923) formulated a workable definition of actions that unambiguously improve social welfare, namely Pareto efficient actions (ones that make at least one person better off without making anyone else worse off). In addition, if society is at a point where no action can be taken without making at least one person worse off, then the point (usually described as an allocation of goods) is termed Pareto optimal. The set of all such points (relative to a given starting point) can be shown in an Edgeworth box diagram (note that Pareto, not F. Y. Edgeworth, first drew this diagram).

This formulation provides little guidance for government policy regarding redistribution and economic form. Policies that increase total available output from further productive efficiency (e.g., being able to exploit comparative advantage more thoroughly through increasing trade between countries) will in general lead to one or more persons being worse off and hence cannot be justified by Pareto efficiency. And while the First Welfare Theorem, which states that a competitive equilibrium (carefully defined) is Pareto efficient, provides a basis for arguing that a competitive equilibrium may be preferable to a number of other forms that an economy might take (e.g., an economy in which monopolists dominate), it does not preclude other potential organizational structures from also being Pareto efficient. It also does not prescribe a particular Pareto efficient point as preferable to other Pareto efficient points. Indeed, the Second Welfare Theorem states that any Pareto efficient allocation can be generated/supported by competitive equilibrium, for some unique set of prices, if endowments/starting points are appropriately set (e.g., redistributed by a social planner). Hence competition is compatible with multiple final allocations for society.

Pigou (1877-1959) and others, including Harrod (1900-1978) and Robbins (1898-1984), turned to consideration of the “law” of diminishing marginal utility as a basis for making policy decisions regarding redistribution. Then actions involving transfers from richer to poorer people would be potentially justifiable. However, actions that did not lead to direct transfers from rich to poor still lacked justification. Kaldor (1908-1986) proposed a way out of this dilemma. He suggested that more extensive welfare comparisons are possible through replacing the strict criterion of Pareto efficiency with the weaker requirement of productive efficiency. Hence the alternative Kaldor criterion would be to make changes that lead to the possibility that everyone could be better off if redistribution occurred, even if redistribution does not actually occur.

An alternative approach is to formalize utility comparisons between individuals by creating a social welfare function of the form W(U1(x1), U2(x2), ..., Un(xn)), with Ui(xi) being individual i’s utility from consuming bundle of goods xi. Choice of the form of W allows for different potential preferences of the society for how utility would be allocated among its n members. Under this approach, the society would decide what social welfare function to use based on noneconomic criteria and then use economic decisionmaking to guide its maximization. It can be shown that the principal of social welfare maximization applied to different special cases of W yields different outcomes that correspond to different philosophies regarding optimal outcomes for society.


Essay Assignment

This week I am giving you a more structured assignment rather than a creative assignment in order to give you practice in explicating complicated and profound concepts. The goal is to be as clear as possible. Assume your reading audience as someone who has had an introductory course in economics but has not covered this material in that course. Your essay will explain to this reader how economists operationalized utilitarian concepts so as to arrive at a set of analytical tools for discussing social welfare issues. In so doing they made it clear what the issues were and why they advocated particular approaches to resolving these issues.

Explain what problem Pareto was addressing in formulating the concept of Pareto efficiency. Explain how in a simple society (e.g., two individuals, two goods to be allocated between them) one could identify the set of trades to be made that would make each person better off relative to an initial allocation. Explain why equal allocations are not necessarily Pareto optimal. Then explain how in a simple society you could identify the set of all Pareto optimal points. Explain the relationship between envy, fairness, and Pareto optimality. Once you have identified this set, consider what criteria could be used to choose which point in this set to have the society settle at. Then consider what method might be used to arrive at this point. Finally, explicate the Kaldor criterion including, if you can, showing how it might affect the choice between two points.

Use diagrams as needed, but always explicate your diagram fully in the text (at least one Edgeworth box and/or at least one drawing incorporating both a utility possibility frontier and a set of isowelfare curves would probably be helpful). The sections from the chapters “Exchange” and “Welfare” from Varian’s (1947- ) Intermediate Microeconomics: A Modern Approach (any edition) will be helpful in preparing your assignment. The preceptor will go over the relevant technical material in his session this week.



Week 6:  Critiques and defenses of the neoclassical framework
Readings
Adam Smith, The Theory of Moral Sentiments , Part I: Section I; Section III, Chapter II, paragraph 1; Part IV: Chapter 1
John Rae, New Principles of Political Economy, Chapter XI, Part I; Chapter XII, 2d. and 3d.
Thorstein Veblen, The Theory of the Leisure Class
John Kenneth Galbraith, “The Imperatives of Consumer Demand” and “The Dependence Effect
Tibor Scitovsky, “Income and Happiness
Stanley Lebergott, “Consumers and Their Critics,” “Happiness and Economic Welfare,” and “Consumer Choice: Advertising
Perspective

The marginalists, in assuming preferences as “given” rather than as responsive to prices, other people’s actions, or anything else occurring within the economic system, sidetracked a line of social inquiry and critique that dated back to at least Roman times. While mainstream economists more recently have turned back to questions of how to endogenize preferences, this line of thought remained marginalized for the next century. However, a series of writers maintained a running objection to this assumption, and developed a number of alternative approaches to preference analysis.

Smith’s earlier work, The Theory of Moral Sentiments, is less often read, but contains many aspects of his thinking regarding human motivation that Wealth of Nations is often critiqued for lacking. In particular, he wrestles with notions of preference formation, development of consumption patterns, and the relative nature of wants and “needs.”

Rae (1796-1872) has not been as widely read as either Smith or Veblen, but he developed an analysis of luxury goods that expands upon Smith’s analysis and anticipates many of Veblen’s points.

Veblen (1857-1929) is the most notorious of the critiquers of the bloodless version of economics that has descended to us via the marginalists. Rather than taking preferences as given, he develops a full-fledged theory regarding social roles and behaviors associated with these roles that stands as a striking alternative view of how the society.

A number of economists may be thought of loosely as descendents of the Veblenian frame of thought. Galbraith (1908-2006) was widely read in the 1960s, his popular works excoriating what he saw as the excesses of the corporate capitalist structure that had developed in America. The readings herein focus on firms’ ability to manipulate demand. Scitovsky (1910-2002) was less well-known outside of economics, but his late work, The Joyless Economy, presents a world-view that he had been developing for some years that questioned the equation of social welfare with increasing happiness. For both writers, increases in production do not necessarily translate into greater well-being, and the types of goods produced cannot be assumed to be the ones that would yield greatest well-being.

However, many other contemporary economists have defended the marginalists’ strategy and have in some cases extended it from a technical convenience in model-building to a tenet for noninterference in markets. Lebergott (1918-2009) provides a provocative counterpoint to Veblen, Galbraith, and Scitovsky.


Essay Assignment

Characterize the views of the dissenters. Be sure to explain what they are dissenting from as well as what constitutes the main points of the dissent. Evaluate their critique point by point, indicating what aspects (if any) of their arguments you find compelling and what aspects (if any) you find problematic. In this assignment, encompass points from all of the readings.



Week 7:  Short-term fluctuations
Readings
Jean-Baptiste Say, “Of the Basis of Value; and of Supply and Demand
Bernard Mandeville, The Fable of the Bees, The Moral; Remark F; Remark G (first three paragraphs)
John Maynard Keynes, The General Theory of Employment, Interest and Money , Chapters 1-3, 8-14, 17-19,21,24
Joseph Schumpeter, “Review of The General Theory of Employment, Interest and Money
J. R. Hicks, “ Mr. Keynes’ Theory of Employment
Jacob Viner, “ Mr. Keynes on the Causes of Unemployment
J. M. Keynes, “ The General Theory of Employment
Perspective

Up until this point in the course we have been discussing equilibrium situations and comparing different possible points at which the economy/society might persist. Hence discussions about transitions from equilibrium to equilibrium have been underplayed, as has the possibility of persistent disequilibrium positions, where for instance an oversupply of labor might persist for year after year. Say (1767-1832) is credited as the originator of the classical assumption that supply (in particular, labor supply) creates its own demand, making it impossible for such a disequilibrium to persist. In this model, involuntary unemployment will not exist. While shocks can move the economy away from equilibrium and their effects may persist for awhile, the economy will adjust to equilibrium without need for state intervention. The neoclassicists carried this assumption forwards in building theories of the business cycle that discussed propagation of shocks through various mechanisms such as the bank credit channel, but they did not view such effects as persisting indefinitely.

Note that there were always dissenters from these views. We can, for instance, trace back to Mandeville (1670-1733) in his Fable of the Bees (1714) the position that consumption, even in a form that one might disapprove of, can provide a stimulatory impetus to the economy.

Keynes provided a radical counterpoint to this model of the world. In his worldview, expectations are a key element and investment can be relatively nonresponsive to interest rate changes. Hence the economy can persist in a situation where aggregate demand does not rise sufficiently to clear the labor market. The Keynesian revolution hinged on doubt in the ability of a market economy to adjust to the effect of an initial shock in a reasonable amount of time (if ever), has had wide-ranging repercussions through its making a case for state intervention at the macroeconomic level (rather than for state intervention in regulating particular markets that were subject to various forms of market failure) through stimulating aggregate demand. Later debate regarding whether monetary or fiscal policy is the preferred tool for manipulating aggregate demand is couched in a context in which state actions have significant and desirable effects.

Many distinguished contemporaries of Keynes, including Schumpeter (1883-1950), Hicks (1904-1989), and Viner (1892-1970), weighed in on The General Theory through book reviews and other fora. Keynes then provided a follow-up piece to a number of reviews of his book which serves as a useful distilled statement of his theory.

The reviewers were in many cases open to persuasion, although they also wanted to see how the neoclassical theory could be extended to incorporate Keynes’s insights. Indeed, Hicks led the way to the neoclassical synthesis, which incorporated Keynesian ideas into the neoclassical framework. This was very successful with the mainstream of the profession, but also controversial as the Neo-Keynesians essentially couched the Keynesian framework as a short-run outcome and posited the classical model as describing the long-run outcome. Alternative schools developed, with a number of groups, including the Cambridge Keynesians in England and the post-Keynesians in America, framing their analyses as closer to Keynes’s original intent in viewing his framework as a long-run outcome.


Essay Assignment

Organize your essay around addressing the question: What, if anything, is analytically “revolutionary” about the argument advanced in The General Theory?

It may help you organize your thoughts to see if you can answer the following questions:

      • What role does Says’s Law play in Keynes’s attack on classical economics?
      • What is distinctive about Keynes’s analysis of the determination of consumption, savings, and investment?
      • Within the Keynesian framework, how is the rate of interest determined, and what is determined by it?
      • What is the role of money in the Keynesian system, and what is the nature of the demand for money?
      • In Keynes’s perspective, why is wage-cutting an ineffective remedy for unemployment?
      • What underlies Keynes’s sympathetic views towards mercantilism?
      • What are Schumpeter’s and Viner’s principal complaints against Keynes?
You may want to review your introductory economics textbook to refresh your memory with the basic precepts of macroeconomic modelling. You may want to read the relevant sections in Barber’s book or turn to other secondary sources. You may want to review Chapter 23 in Keynes, which you read in Week 1 of the course. You may want to use diagrams in the course of your paper; if you do so, be sure and refer to them fully in the text of the paper.



Week 8:  Long-run systemic stability
Readings
John Maynard Keynes, The General Theory of Employment, Interest and Money , Chapter 22
Karl Marx, Capital , Chapters 23, 25 (skip section 5), 32
Joseph Schumpeter, Capitalism, Socialism, and Democracy, Chapter 3 and Part II
Frank H. Knight, “ Enterprise and Profit ,” and “ Uncertainty and Social Progress
Friedrich A. Hayek, “ The Use of Knowledge in Society ” and “Competition as a Discovery Procedure
Mark Blaug, “Conclusions
Perspective

Much of economic analysis has concerned the operation and viability of the capitalist system. Writers have attempted to distinguish capitalism from precapitalist systems such as feudalism, but also from potential postcapitalist systems such as socialism. In so doing, they have considered, among other things, the stability of the capitalist system, the role of the business cycle in capitalism, and capitalism’s ability to sustain economic growth.

Keynes directly addresses the business cycle in his chapter in The General Theory, “Notes on the Trade Cycle.” He is sympathetic to earlier theories of what causes the cycle and makes some attempt to differentiate cyclical forces in the economy from those leading to prolonged (i.e., noncyclical) depressions. In this view, there are fluctuations around a path of continued growth in the capitalistic system-but Keynes does not see business cycles as leading to the end of the capitalism.

Marx, most famously, does. We will read the sections of Capital in which he explicitly develops his theory of capital reproduction, accumulation, and expropriation. In Marx’s view, the succeeding cycles within the capitalist economy bring the moment nearer when capitalism must give way to socialism.

Schumpeter both critiques Marx and offers an alternative vision of the evolution of capitalism into- probably, but not necessarily-socialism. In his model, the business cycle is part of the process of “creative destruction” and oligopoly arises naturally over time through industry consolidation.

While Schumpeter did consider the entreprenuer as the driving force in this process, Knight (1885-1972) makes clearer the critical role of the entrepreneur as separate from the role of the provider-of-capital. By explicating the unavoidable aspect of uncertainty rather than assuming it away, Knight provides insight into how uncertainty is dealt with in the capitalist system.

Hayek (1889-1992) goes further in arguing that capitalism is indeed the optimal system for dealing with the inherently uncertain nature of the world. He regards the market, which produces spontaneous order, as distinct from the economy, and competition as an ongoing process of discovery within which prices play the critical role in conditioning decisionmaking. Interference with this process, such as socialistic price-setting, will lead to inefficiency.

The course has now brought us up through the pre-World War II debates extant in the economics profession. This leaves us on the cusp of two major developments in economics, both of which occur mainly post-World War II. One is the increased availability of regularly-collected economics statistics, so that formal statistical testing of various hypotheses stemming from economic theory could be undertaken. The second is the systematic mathematical description of the fundamental theory for both neoclassical microeconomics and neoKeynesian macroeconomics, as exemplified by Paul Samuelson’s (1915-2009) Foundations of Economic Analysis. While many economists raised their objections against the intrusion of mathematics (basically algebra, calculus, and probability/statistics) into both the theoretical and empirical sides of economics, these techniques nonetheless rapidly became standard analytical tools for economists and much of graduate school in economics consists of instruction in their application to analyzing economics topics. Blaug (1927- ) will be allowed the final word as we read the concluding chapter of The Methodology of Economics, in which he airs a number of lines of complaint regarding the potential irrelevance of modern economics in being able to address society’s problems.


Essay Assignment

In what sense is capitalism evolutionary? Discuss with respect to specific quotes from the readings.



Links

  • The History of Economic Thought website has collected information on the history of economic thought, including an alphabetical index of ecomomists, pages of school of thought, and essays and surveys on various topics.
  • The EH.net website has information about the field of economic history, including a number of useful short articles on various topics in the area
  • WebEc is a comprehensive guide to methodology and history of economic thought, which contains related information and other useful websites