History of economic thought

## Pre-history of PE

* Based on slave economy without wages and interest in the ancient world there could be no theory of prices; prices derive from production costs and production costs were not visible in the slave-owning household

### Mercantilism

* Mercantilism as a reaction to the power of the Catholic church and feudal system (which was against interest, loans, private property)
* Feudal system as not as centralized and hence there not being a notion of increasing "nation"/the King's power
* Mercantilism: from ~1550 - Adam Smith/Industrial Revolution; not a system but a product; public policy reflects interest of merchants
* Features of mercantilism: wealth no sin; government is principal economic agent; commercial wars; colonialism;
* Enlightenment came after mercantilism
* Discovery of America: flood of gold and silver 1531-1570 to Spain, to pay for wars (2/3 of state revenues at the time was for war) → this increased state's goal to hoard/conserve gold: military and national strenght become associated with policies that brought metals
* Rise of the modern nation-state
* Merchants diapproved of competition: Buy cheap, sell dear
* Limit export of gold/silver (largely ineffective); state intervention on behalf of industry; tariffs
* Modern corporation (with a monopoly of trad in an assigned area)
* Cameralists/bullionists: approach to economic issues as a counselor to the prince
* Bad money drives out good money (trade is done in silver)
* Antonio Serra 1613 in Italy for example
* Mun (manager at Dutch East India): argued that exporting gold increased national wealth - he exemplified the transition from bullionism to mercantilism
* For bullionists, more money = inflation whereas for mercantilists (QTM: Mass\*Velocity = Price\*Transaction; if money supply increase proportionally to the # of transactions, money is indeed neutral)
* Historians of thought argue that we cannot speak of a mercantilist school of thought
* Transition from self-consumption to producing commodities
* Positive balance of trade as a source of wealth vs. an indicator of wealth
* Absolutist states, predatory commercial wars, colonialism, piracy, rise of slave trade, state encroachment of liberty

### Physiocrats (1690-1800)

* France had retained a powerful agricultural interest (landed aristocracy conceded less to merchants)
* Class structure: landlords, the productive class who worked the soil, then merchants, manufacturers and artissans (unproductive class)
* Very reformist: advocating free trade; kings are legitmate only if they rule in line with "natural" liberties; laissez-faire
* "Fundamental prices" = price of production
* Only in agriculture surplus value (i.e. more than the cost) can be produced. While manufacture and trade might be necessary, they were still sterile and couldn't create surplus
* Physiocrats sought to reform (introduce tax) and defend the system at the same time
* 3 classes
	+ Farmers
	+ Artisans, manufacturers, workers, merchants
	+ Aristocratic/landlords: have the surplus

## Classical Political Economy

### Smith

* Smith rightly corrected Quesnay’s erroneous view that value could only be created in agricultural production. But, in so doing, he erroneously proposed a theory of value that amounted to adding up the revenues attached to each of the so-called basic factors of production—land, labor and capital—that Quesnay had identified
* Smith’s additive theory of value was later modified by the neoclassical move to establish prices by combining the marginal costs (rather than the absolute values) of these basic factors of production
* Method: combination of deductive, inductive and historical analysis
* Scientists ought to create or discover (active) rather than revealing (passive) theory
* Denied the mathematical structure of reality and very ecclectic; use rhetoric (notion of impartial spectator) as the guiding tool
* His take on human motivation: Complementarity between self-interest and sympathy (this is Skinner's interpretation, i.e. that his two books are no contradiction)
* Each person knows best their interest and among the interests of each there is a desire to be loved and hence respect for teh well-being of others
* Moral behavior as innate
* Smith replaced the religious justification of R, π, W with a secular, aka naturalistic, one
* Services don't create value
* Division of labor is limited by the size of the market - hence you should have free trade
* (Public) banks should not lend to entrepreneurs because they have inflated views of their business success (i.e. vanity) - hence he was against the limited liability company

### Ricardo

* Political economy as the study of the laws regulating the distribution of the economy's produce among the three great classes of society
* "Natural" for Smith = social harmoney/liberty; for Ricardo, "natural" is conflict of interest
* Ricardo's context: War with France, following French Revolution; post-war unemployment, social unrest, Poor Laws, Corn Laws
* The war etc. raised corn prices so much that it became profitable again to cultivate more land (the marginal productivity increases)
* Subsistence as = corn
* High corn import tariffs because House of Lord was dominated by landed aristocracy and House of Commons largely dependent on aristocracy
* While Smith saw the proportions going to R, π and W as static, for Ricardo these were dynamic and changing
* For Ricardo, profits were squeezed
* Ideologue of Victorian virtues (industrious, frugal) vs. Malthus (defend landlords because they spend)
* Ricardo: Technologically induced unemployment, immiseration, declining profit rate, problems of circulation
* Theory of marginal fertility/productivity of rent: owners of more fertile land can charge a premium/differential rent
* Ricardo as the model for Marx & Engels: the rise of a new class that overthrows the prevailing power system and transforms society - Ricardian socialists
* Ricardo: utility is a condition but not a measure of value; in the short-term it is supply/demand, in the long term the labor cost of production

### Malthus

* Increase in prize is the cause of the change in the quantity of money not vice versa
* If wages don't remain at the subsistence level, population growth outgrows productivity

### Marx

* Aristotle: value in use and value in exchange
* Thomas D’Aquine: value of sth. Lies in labor costs
* The worker's claim to the surplus is not a moral issue (Marx attacking the Ricardian socialists)
* Marx has a different approach to Ricardo's theory. In particular, he rigorously distinguishes between the "dead" labour and the "living". He does so by making two innovations: firstly he distinguishes between surplus value and profit, and secondly instead of the categories of fixed and circulating capital he introduces the more fundamental ones of constant and variable capital. In Marx, fixed and circulating capital are simply varieties of constant capital, distinguished by their rate of circulation
	+ Fundamentally fixed and circulating capital were distinguished by the rate at which the capital circulated and was realised once again as money: fixed capital only slowly, and circulating capital relatively quickly. But Marx's constant and variable capital are distinguished by their relation to the production of surplus value

## Rationalistic Subjectivism

### Say

* Say's law of the market: he attacks the mercantilist doctrine that money creates demand - it is the production of goods and services that creates demand; not money shortage depresses sales but product shortages does; production is the cause of consumption/always ahead of consumption; demand deficiency is only a consequence, never a cause of crisis
* Denies general glut (criticizes state intervention to boost demand) but acknowledged that production can be misdirected (i.e. when goods are not produced in correct proportion to each other)
* France's first professor of industrial economics
* Subjective utility theory rather than LoV
* Critical of mathematical calculation, favoring deductive methodology but also connecting theory + empirics; emphasis on causality
* Say's equality: ES of goods and ED of money can be self-correcting

### Senior

* Wages fund doctrine: wages of labor were determined by the size of the fund that capitalists had set aside to pay wages and the number of workers among whom this fund had to be divided
* Senior used the wages fund doctrine to argue for the uselessness of labor combinations (unions)

## Political Economy of the Poor

### Thompson

* The three evils that galvanized the most worker resistance: low wages, bad working and living conditions, and economic insecurity.
* 1790s in England: widespread labor unrest and frequent attempts to form combinations. Wealthy Englishmen, the memory of the French Revolution fresh in their minds responded with the Combination Act of 1799 (forbidding labor unions)
* With a large reserve of unemployed laborers, any "arrogant" or recalcitrant worker could be immediately and easily replaced. Such a replacement would serve as an example to increase the insecurity
* Workers rebelled e.g. by the destruction of machinery
* Thompson believed that the distribution of wealth was the most important determinant of how much pleasure and happiness the various members of society could attain → the ordinary wants and comforts of society remain through the ages nearly the same (the food, and clothing, form and mode of constructing dwellings)
* Thompson denied the assertion that laborers freely sell their labor power (i.e., capacity to work) under capitalism. He maintained that when workers did not own the tools and materials with which to produce, they were unfree. The selling of their labor power was not a free exchange, but was coerced. The threat of starvation was as coercive as a threat of death by violent means
* Under capitalism the wealth of the capitalists "engenders positive vices in the possessors of these excessive shares of wealth," while at the same time it "excites the admiration and the imagination [of the poor], and in this way diffuses the practice of the vices of the rich, amongst the rest of the community."
* Thompson's 5 evils of competition:

1. Labor sees a competitor, a rival in every other. Furthermore, many other professions could reap benefits by creating/inducing a strong need for their products/services even in cases where society would be better of without them
2. Systematic oppression of women
3. The economic instability caused by the anarchy of the market (e.g. everyone conceiling their success to decrease other changes of success)
4. No relief from the insecurities of capitalism (for the sick, old, accidents etc.)
5. Retards the advance and dissemination of knowledge by making the acquisition of knowledge subsidiary to greed and personal gain

* Thompson followed Owen's vision of a society that is composed of mutually coordinated, self-governing, cooperative communities, each having from 500 to 2,000 members. In such communities, people could freely get the necessities of life from a common store. Children would be cared for communally and sleep in common dormitories, while adults would live in small apartments. There would

be common kitchen facilities for everyone. There would be no sexual division of labor-cooking, child rearing, and other forms of women's drudgery would be shared by everyone on a rotational basis. All persons would become skilled in a variety of occupations and would regularly alternate employments to eliminate the monotony of work. Every adult member of each community would participate regularly in the necessary coordinating or governing bodies. The finest education would be freely available to everyone. Only in such a society would each and every child be spared from the insecurities of a competitive capitalism (which he acknowledged would be okay then)

### Utilitarianism

* Classical/action utilitarianism (i.e. consequentialism), rule utilitarianism (Gesinnungsethik)
	+ Utilitarianism doesn’t address how the greatest good is distributed (maximize average or total welfare?)
	+ Ex post/ex ante
	+ Prisoners dilemma
* Different agents need different amounts of resources for their given level of utility
* Two of the cardinal tenets of utilitarianism : the notion that all motives are reducible to self-interest and the notion that each individual's desires or pleasures are synonymous with his or her well-being ; that is, each individual is always the best judge of his or her own welfare
* Utilitarianism, as the philosophipcal underpinning of Utility theory of value(and thus neoclassical economics), proceeds from and intellectually reinforces a social harmony perspective → usually culminates in an ideological justification of the status quo of free market capitalism
* Utilitarianism is both a psychological theory of how people behave and an ethical theory of how they ought to behave
* The problem is that in utilitarianism, individuals ' pleasures and pains are the only moral criteria of good and bad. Pleasures and pains, however, are subjectively felt sensations. Although an individual might be able to compare or rank his own subjective pleasures, there is no direct means of comparing the intensity of one individual's pleasures with those of another individual. Moreover, the private, subjective, relative rankings of any individual's pleasures is likely to differ substantially from the rankings of other individuals. ' B ecause individual pleasures are the ultimate moral criteria in utilitarianism, there is no way one can make moral judgments between the pleasures of two individuals
* In a dispute between a capitalist vs. egalitarianist: Each would be correct for him or herself in both disputes, but neither would be correct in general. Utilitarianism offers no criterion higher than personal preferences by which one can judge among different preferences which is best. Since we cannot show that some people have greater capacities for pleasure than other people, we cannot defend a change from an initially equal distribution to an unequal distribution on utilitarian grounds.
* Just as we cannot demonstrate that people have unequal capacities for pleasures, so we cannot demonstrate that they have equal capacities. We cannot morally evaluate redistributions because we would have to quantitatively compare the pleasure lost by the persons losing wealth with the pleasure gained by the persons gaining wealth
* Utilitarianism will always support whatever the existing distribution of wealth actually is. No change from the status quo can be supported on utilitarian grounds alone.
* Within utilitarianism our inability to quantitatively compare different persons ' subjective states renders us unable to judge morally between any two situations where disagreement or conflict exists
* If one accepts the existing distribution of wealth and income, then market exchange is one of the only social situations where such unanimity exists. Both parties to an exchange desire what they are getting in the exchange more than what they are giving up in the exchange → utilitarianism thus connected to the exchange perspective in economic theory, and this is why the exchange perspective always sees capitalism as a system of social harmony
* When a penniless worker, for example, exchanges his labor power for a paltry wage and bad working conditions, the labor theory perspective focuses on the fact that only labor transforms nature into useful products to be consumed. The immediate focus is on the historically evolved property relations that force producers to live wretchedly while property owners, having no necessary part in the production process, amass great wealth. Conflict is at the center of the labor perspective. The utility perspective, however, takes the distribution of wealth (that is, the distribution of property rights) as given and focuses on the harmonious, mutually beneficial aspects of the same exchange: the worker prefers a low wage to starvation and the capitalist prefers more profits to less profits . Hence, both laborer and capitalist benefit from the exchange and harmony is seen to prevail.
* Utilitarianism provides no basis for judging two situations if the utility of one individual is decreased in the second situation,

even though the utility of all other persons increases

* Utilitarian economic theory reduces all economic, social and political interactions to acts of exchange: "All exchanges are mutually beneficial to all parties → All human interactions can be reduced to exchanges → Therefore, all human interactions are beneficial to all parties."
* Utilitarianism still leaves no room for us to hope that a government will institute reforms designed to maximize utility. There are two reasons for this : first, the government would have to restrict itself to those reforms that had the unanimous support of every person. If a minority opposed the reform, then the government would be left in the position of comparing the increased pleasures of some people with the decreased pleasures of others.

### Hodgskin

* Hodgskin would have agreed that property ownership was natural but would have asserted that capitalist property ownership was unnatural because it was the means by which the idle robbed the industrious
* His main goal was to refute the claim that profit was a return earned from the productivity of capital
* He criticised theories that treated buyers/sellers as a different sphere from the three classes (landlords, capitalists, labor) because. To him, the real natural price of things was determined by labor. Therefore, whatever diminishes the value of labour or makes a greater quantity necessary to obtain an equal quantity of any commodity enhances its price. Profit, by being a diminution to the labourer of the value of his produce, enhances the price of everything into which it enters to the labourer. In proportion therefore, as rent and profits increase the price the labourer must pay for commodities will increase
* He differentiated between the natural price (determined by labor) and the social price (determined by social regulations such as private property laws). These social regulations were the laws that yielded unearned income to landlords and idle capitalists. Social price therefore had to include rent and profit as well as wages. Hodgskin was absolutely clear about the fact that his "natural price" was a normative concept describing a situation that could obtain only if existing governments and laws, which Hodgskin saw as unnatural, were abolished
* Thus, for Hodgskin, legislation was very much a protection of wealth, i.e. of the privilges of the capitalists. Thus, the cure for social justice was the abolition of law and government
* Unlike Ricardo, Hodgskin did not believe that in contemporary capitalist society the labor embodied in the production of commodities determined their value. Rather, he asserted, following Adam Smith, that prices were determined by the summation of wages, rent, and profits
* Profit and rent were merely a tribute since they were not necessary to the production process. All machines were the produce of labor and no machine was of use without the application of labor: fixed capital does not represent an accumulation in the hands of capitalists but is perpetually being used up and recreated by coexisting labor
* Capital is merely so many different aspects of the process of laboring, the relations among laborers, and the products of labor. Capital was essentially a social relationship involving the coercive power of one class to expropriate the produce of another class
* Natural ownership of capital should fall to the laborer who both produces it and then produces with it. It was the ownership of capital by those who did not produce that Hodgskin believed to be unnatural and to lie at the heart of most social ills.
* The nature of capital as both the produced means of production and a coercive social relationship
* Hodgskin would have agreed that property ownership was natural but would have asserted that capitalist property ownership was unnatural because it was the means by which the idle robbed the industrious

## Utilitarianism

### Bastiat

* Context in which Bastiat wrote:
	+ Socialist cooperatives were popularized in France by Charles Fourier in the 1830s.
	+ Proudhon's famous "Property is theft" and the state's primary function was to coerce. Whereas the amount of labor expended determined how much was produced in a capitalist society, ownership of property determined the division of the produce so that those who produced got almost nothing and those who owned property could use the laws of private ownership to "legally steal" from the workers . Proudhon's ideal society rejected not only capitalist property relations but industrialization as well. He envisioned a golden age of small-scale agriculture and handicraft production in which each farmer and worker owned individual capital and no one lived through property ownership alone.
* The combination of both the utility theory and labor theory perspectives, in the writings of Smith and Ricardo, seemed to lead to conclusions suggesting that capitalism was characterized both by social harmony and by class conflict. Say and Senior "sanitized" classical political economy by rejecting the labor theory perspective and arguing that a knowledge of the true principles of political economy would show that the interests of all classes were in harmony. Thompson and Hodgskin adopted the labor theory perspective. They believed that as long as the immediate producers of wealth-the workers-did not have any control over the means of production, class conflict would be inherent in capitalism.
* Two of the most influential books on economic theory were Mill's Principles of Political Economy (1848) & Bastiat's Economic Harmonies (1850)
* Bastiat tried to refute the notion that class conflict was inherent in capitalism
* He took the status quo distribution of wealth as given and from this "voluntary market exchanges are the paradigm of an instance in which total utility unambiguously increases between two situations."
* Bastiat set out to prove that "all men's impulses, when motivated by legitimate self-interest, fall into a harmonious social pattern
* Labor was only one type of service that was not qualitatively different from other productive services performed by landlords and capitalists
* His principal objective was to defend the private ownership of capital. In doing so, like Say and Senior, he desired to make the contribution of the capitalist and landlord to production appear similar to the contribution of the laborer. He insisted that the capitalist and landlord both provided services and thus both endured pain. But as we shall see, the services for which capitalists and landlords were paid frequently turned out simply to be allowing others to use the tools and land that were necessary for production
* For Bastiat, utility is the source of value and the value of products = the value of the services required to produce them
* Private property was created by God and "Property does not exist because there are laws, but laws exist because there is property."
* To Bastiat, the origion of capital was "intelligence, thrift, and foresight. The only sacrifice capitalists would have to make, the only pain they would have to endure, was twofold: first, they had to use their capital to make more profits rather than, for example, simply letting their factory stand idle ; and second, they could not become so extravagant and profligate that they killed the goose that laid their golden eggs-that is, they had to live off their profits, interest, and rents and not dissipate the inherited fortune that gave them their power. Such were the sufferings and privations that B astiat believed morally entitled capitalists to their profits, interests, and rents
* Government should be restricted to the protection of private property, maintenance of liberty, and individual rights
* Bastiat never asked himself why governments created conditions of monopoly and other impediments to free competition. If he had, he would have discovered that it was because a monopoly is more profitable than a competitive enterprise. Insofar as everyone was motivated by self-interest, it was more advantageous for government officials to take the bribes or campaign contributions from the wealthy than to follow Bastiat's prescription. The capitalists and the government officials merely engaged in an exchange: bribes for legislation protecting monopoly power

* Proponent of free trade (critic of protectionism) and the creative entrepreneur

### Mill

* While Bastiat was the precursor of the later Austrian and the contemporary Chicago schools, Mill was the precursor of the much more moderate Marshallian school of neoclassical economics-frequently advocates of liberal reform and government intervention
* "Unlike the laws of Production, those of Distribution are partly of human institution: since the manner in which wealth is distributed in any given society, depends on the statutes or usages therein obtaining" → i.e. the laws of property and other institutions that affected the distribution of wealth were human institutions and thus subject to change
* Exchange is not the fundamental law of the distribution of produce but merely a part of the machinery for effecting it
* Bentham's and Mill's utilitarianism differed fundamentally:
	+ Bentham: The two fundamental axioms of Benthamite utilitarianism are that ( 1 ) all motives can be reduced to the self-interested quest for pleasure, and (2) each person is the sole judge of his own pleasures, and, therefore, interpersonal comparisons of pleasure are impossible. The second axiom was epitomized in B entham's statement that if the quantity of pleasure was the same, pushpin was as good as poetry. B enthamite utilitarianism permits no invidious comparisons of qualitatively different sorts of pleasure.
	+ Mill: did not believe that all actions were motivated by self-interest. He believed only that most people whose personalities were molded by a competitive capitalist culture acted out of selfinterest in their economic behavior. He looked forward to a socialist society in the future, where people act out of nobler motives than self-interest. Mill also insisted that some pleasures could be judged as morally superior to other pleasures.
* Mill agreed ecclectically with the labor theory of value (value is congealed labor). However, labor was only the *principal* determinant of value
* To Mill, market price was determined by supply and demand. Over time, the market price would approximate the natural price, which was equal to the summation of the three components of cost: the price of land, the price of labor, and the price of capital. This view was antithetical to the labor theory because it assumed that profit was the natural price of capital, rather than a surplus or a residual. Furthermore, profit was a price paid in an exchange for some service of a capitalist. Thus, contrary to the above quotation from Mill, the adding-up cost-of-production theory saw profit originating because of exchange, not production.
* Borrowed from Senior's thesis, for Mill, the capitalist's remuneration was based on his abstinence from conuming the surplus. Thus, in this view profit did arise in exchange and not in production. Profit was the remuneration, through exchange, for abstinence, risk, and exertion
* Unlike Ricardo and Marx, he abandoned the notion that labor underlay the exchange value of a commodity. Value for Mill meant simply exchange value, or relative price. He had no notion of labor value.
* Mill's theory of the determination of international prices w as perhaps one of his most significant original contributions to economic theory: Within one country prices were equal to the costs of production because competition tended to equalize these costs (including an equalization of the rate of profit) and to force prices into equality with costs. The factors of production could not, however, move freely between countries. Therefore, competition would not equalize wage or profit rates between different countries;

price ratios would not b e equalized; and international prices would depend exclusively on supply and demand-not on costs of production

* Like Senior, Mill believe that wages would depend on the supply of labor, or the number of workers sharing this fund. Mill, like Malthus and most of the classical economists, believed that the most effective way of raising the wages of labor was through education, which would decrease the size of laborers' families
* Later, Mill argued that wages were not limited by the amount that capitalists had previously set aside to pay for labor. Rather, the limit was the total profits of capitalists minus what the capitalists needed "to maintain themselves and their families. Therefore, wages would not be determined by the wages fund but by a competitive struggle between laborers and capitalists. Thus, Mill came to see combinations and labor strikes as not only educational but also potentially important in redistributing income from profits to wages.
* Similar to Marx & Lenin, for Mill, the export of capital was one of the most important "...counter-forces which check the downward tendency of profits, in a country whose capital increases faster than that of its neighbours and whose profits are therefore nearer to the minimum. It is to the emigration of English capital, that we have chiefly to look for keeping up a supply of cheap food and cheap materials of clothing, proportional to the increase in our population"
* Mill also argued that capitalism would periodic business crises destroyed capital and stemmed the downward tendency of the rate of profit.
* Over-production/gluts, to Mill, was merely the wrong word given to "under-supply of money" and was just a temporary evil that would disappear in the long-run (Keynes countered with: "In the long-run we are all dead!")
* Moreover, Mill morally condemned the effects of the concentration of the ownership of nearly all of the means of production in the hands of a small capitalist class. He realized that this created a tiny parasitic class, living in luxury, whose income had no necessary connection to productive activity.
* The principal reform whereby Mill sought to diminish the extremes of wealth was a tax on inheritances

## Marginalist revolution

* Subjective theory of value and analytical notion of marginal utility
* Classicals saw system of production and consumption as a circular process while marginalists align a one-way avenue from factors from production to consumption goods
* Marginalist: optimal utilisation to satisfy the needs of economic agents - equilibrium as optimum utilisation of scarce resources, identified by set of values for all economic variables
* Income distribution: for marginalists about price theory
* Precursos: the Scholastics with discussions regarding just price, utility (as true source and cause of value) and scarcity
* Value-in-use decreasing function of the Q consumed - diminishing marginal utility
* Marginalists: Newtonian paradigm, closed system, endogenous factors
* Marginalism introduced the idea that supply and demand were related to price so that excess supply could not be said to exist in the abstract: all that could be said was that the supply exceeded the demand at such and such a price. It therefore only required a fall in price to remove the excess. From this it followed that an excess supply of any commodity or factor could alway be attributed, in the end, to an obstacle in the functioning of the price mechanism.
* What are the deductive implications of optimizing individuals with given, convex (diminishing) preference functions

## Formalist revolution

* The claim to be more scientific is problematic: science is highly inductive
* What are the conditions under which we can have a stable Pareto-efficient GE - well, we'll just assume that those condition hold
* Utility functions have nothing to do with individuals or markets although you can apply them to these

## Economics imperialism

* Cliometrics: slavery as optimizing individuals
* Public choice à la Buchanan: the difference between war and peace is the same as the difference between an apple and a pear
* Solow growth theory: we can treat a country's production by a simple function

## Institutionalists

### Old institutionalists

* Veblen
	+ Human nature should not be taken as given, it is an endogenous variable
* What is the significance of the emergence of large corporations and trade unions

### New institutionalists

* Institutionalists view the economy from a broad perspective wherein markets are perceived as social institutions

## Kalecki

* Output and employment are determined by I (not flexibility of prices and wages in GE). Under perfect competition, lowering wages also lowers prices (for wage goods), hence real wages don't change
* Prices and wages determine distribution of profits and wage income, not income itself, which is determined by expenditure
* Profits = Investment + Consumption of capitalists
* Price system divides profits up between firms
* There might be demand for your goods but if there is no money behind it, it's not effective
* Principle of effective demand already to be found in Hobson and Hawtrey (1913)
* Uncertainty/expectations were also not specific to Keynes but were already investigated by Frank Knight and Hayek
* In Neoclassical, Marginal Productivity of Labor is assumed to be downward sloping with increasing N
* In Marx & Kalecki, the representative (vertically integrated) firm can get back what it spends on wages through workers consumption of wage goods. Their profit then stems from investment and capitalists' consumption
* Why was Say's law maintained: Because of the apparent corroboration of the law by individual experience.

## Austrians

### History & methodology

* Schmoller: Classical and neoclassical economics erred in postulating universal laws, preferred induction to mathematical deduction, and found naive the notion that people were motivated entirely by self-interest
* Menger: founder of the Austrian school; collectives do not exist—only individuals motivated by ideas they hold individually; subjective valuation instead of labor theory of value
	+ Von Mises: praexology - axiom of human action (human action is purposeful); rejects Popperian approach; egoism is the basic law of society; All social phenomena are spontaneous, unplanned outcomes of choices made by rational individuals
* Rothbard
* Hayek

* Aristotelian: Insistence on real/empirical laws; action derives from experience
* Kant: action is prior to experience

* Methodological holism is not only methodologically fallacious but also dangerous (Popper)
* Hayek
	+ Knowledge as information
	+ Social facts are too complex to be studied with the same methods as the natural sciences
	+ Economics as qualitative study of essences (Aristotelian)
	+ Unpredictability of future (danger of overconfidence in forecasts)
* Scientism: imitation of methods of science in fields in which they are not appropriate; uncritical use of mechanical science
* Institutions important in protecting private property
* Markets as spontaneous order

### Subjectivism & value

* Private experience of individual as source of knowledge
* Neoclassicals falsely divide price into supply and demand
* Difference between use-value and utility: Utility need not derive from something that has use-value (e.g. love or even utility from pain or utility from unmodified land - you gain utility by just breathing the fresh air)

### Cost theory

* Ricardo: Costs determined by the factors of production (mainly labor)
* Austrians: Costs are subjectively determined
* Prices are knowledge surrogates; prices are knowledge wrapped in incentives (buy less when expensive)

## Keynesian revolution

* Savings determined by incomened and not by interest rates and prices (Classicals)
* In the boom, investment is bigger than planned savings and in the recession vice versa
* Keynes includes what is nowadays often referred to as neoclassical economic in classical economics, because it did not fundamentally question Say's Law

### Probability

* Frequentist can only work with repetition (which in practice is not possible)
* Probable is that which is rational for us to believe
* Events that can be attached a numerical probability to
* Events where we have a knowledge basis to form a relative judgements

## Walras: Demand & Supply EQ

* Comparative static analysis is timeless (shift in curve)
* Arrow: if everyone is price-taker who sets prices? Auctioneer
* No account of how adjustment to EQ comes about
* Conditions of economic equilibrium: existence, uniqueness, stability vs. multiple equilibria (non-uniqueness of EQ, self-fulfilling prophecies)