Class Summary #12 for 9/28/11

Today, Prof. Rizzo began class with the Factor Market/Goods Market diagram with which he ended last class.

Basically, the Factor Market is the top of the diagram, where people send stuff (their labor, machines, etc.) to businesses, and in exchange, people receive payments (money or anything else) from the businesses. Therefore, the flow of money in this instance is from the businesses to the people.

In short, the Fact Market is when businesses receive the input they need from people to make products.

The Goods Market is the lower part of the diagram and in short, it is anything you purchase. Basically, you as the person send any form of payment to the business to receive the stuff you desire.

Another important less was that all money spent by people becomes income for others.

Prof. Rizzo also presented us with a formula: (C-T) + I + G +NX

C= consume consumer goods
I= invest (purchasing financial assets for a company)
T= taxes
G= government purchases (like a bridge and its material, highway streets, etc.)
N= your spending on certain products.

Then Prof. Rizzo went on to speaking about the French Physiocrats, a group that he talked about last class as well.

The Physiocrats believed that food/production was the source of all income and wealth because we need food to live. Their model was that if farmers produce a surplus of food for their family, less people in the family need to work. Their idea was that these nonworking, "free" people can work on other crafts to improve farming productivity. Thus, it allows people to work on crafts, instead of working on the farm, to make farm production more productive.

One problem with this theory, however, was that the Physiocrats thought the craft making was a leisurely activity and not a necessary practice, but for the production of our world, it was completely necessary and un-leisurely.

Then, we move on to the Mercantilists, who didn't agree with the Physiocrats- they didn't think this was the source of wealth.


Rather, the Mercantilists believed the following were sources of wealth:

1. Gold in treasury (modern day equivalent= making of dollar bills)
2. Wealth/finances of king (modern day equivalent= tax revenues)
3. Positive balance of trade (modern day equivalent= still trade)

Then there was another group called the Scottish Moral Philosophers. The most prominent moral philosopher was Hume, who was mostly known for doing two things:

1. took modern approach to a lot of things, unlike physiocrats, he believed that the laws of economics could stand on their own. He also rejects mercantilistic doctrine and physiocrat doctrine (food is source of income).
2. Commerce was the source of economic growth

Another important idea is that of the Law of One Price, which stated that, for example:

• When British spend money in France or other countries, there is more gold in France, so prices increase in France because people have more money there, and prices in England decrease because people have less money. That is one of the reason why the kings of countries didn't want people spending money outside their own country- they didn't want to lose wealth.
• The belief, however, is that prices around world should be the same. Money is neutral, so the amount of money/gold in a certain country shouldn't alter the price of something.

Below are some other important notes from class:

1. Mercantilists believed trade has a zero sum and net effect of 0, and that money is wealth. At this time, the king controls trade because he had to make sure that gold kept coming in to stay wealthy.
1. Reason why this was the case was because there was a fixed amount of gold in production during this time period, which means as one country got richer, others had to get poorer. And of course, the richer you are, the better opportunity you have to engage in war more and win war, which is important to gain more land and defend yourself.
2. In result of all of this, the king restricts imports because then one country will get more gold and take away from country's wealth when their country pays for the import. It is, of course, ok to import from within country, but not from outside.
3. Kings of course would promote exports so they could get/take away money from other countries.

The end conclusion of all of this: Trade cannot be free. The mercantilists supported this in their doctrine.

The reason why its so imperative to keep gold in country and not encourage outside trade: Trade promotes individual gain in this time, and at this time, it is in social/community interest to have gold. Not about the individual, more about society as a whole, so its important to keep gold in country and not trade for personal gain at expense of country.

Hume continued IMPORTANT:

Prices across border will adjust

If money goes into other countries, three positive things happen:

1. Competition- lights fire under native population that you might otherwise never see. Without competition, production would not improve. Kodak film cameras would still be in use today.
2. Learning and Innovation comes from trade, learn new techniques/ideas
3. Without a lot of trade, there is no DIVISION OF LABOR, which is dividing up tasks for different people to do different things, thus being more productive by getting more stuff done. Also, this leads to more wealth as with new technologies, wealth is a result.