Class Summary #13 for 9/30/11

Today's class was filled with Prof. Rizzo presenting ideas from economic philosophers, specifically Adam Smith.

First, Prof. Rizzo summarized what he told us about the philosopher Hume in the previous class. Hume argued why mercantilist thinking (that prices will adjust) on trade was hurtful (because what matters is how much stuff you can consume). You should expect prices to be the same everywhere.

Then, we learned about Adam Smith, the great economic philosopher who lived from 1723-1790.

In 1776, Smith wrote Wealth of Nations. In this book, Smith argues that government doesn't need to control the economy. Rather, we should be free and good outcomes will follow. Some government is good (so as it is not an anarchy), but more freedom from government allows for us to prosper more.

Prof. Rizzo then explained three important things Smith thought regarding what the government SHOULD do:

1. Create/control a police and court system
2. National defense- to protect us from foreign bandits
3. Take care of public works (roads, bridges, things that private companies probably wouldn't do if no one else did)

In short, Adam Smith completely believed in laissez-faire, which was the belief that transactions between private parties should be free from state intervention, intervention that may include tariffs, force/seizure, enforced monopolies, etc. This makes sense as laissez-faire is french for "let do", but it also has been translated to mean "let it be"or "leave it alone".

Below are three more beliefs of Smith that Prof. Rizzo emphasized in class. They represent ways we can flourish in a society that has some governmental control and is not an anarchy. Thus, we as people to have a flourishing economic environment need to have:

1. Rights to property
2. Division of labor- this is vital. Poverty and chaos will occur if we don't have this. Division of labor increases our propensity to make our lives easier.
3. Exchange has to be peaceful and mutually agreed upon (voluntary trade, not forced by threats)- in other words, one can't kill, rob, defraud you or secure special privileges for the authority through exchange.
4. No special privilege for anyone

If these all exist, a society resembling capitalism will exist.

The source of wealth according to Smith= our ability to produce stuff and exchange stuff that people value. In other words:

WEALTH=Produce and Exchange. If you can't do this consistently, it is hard to be wealthy.

Also, Smith believed that the way to get rich and increase production is by making rational decisions that benefit one's self-interests and do not take other's self-interest into account as ones main worry.

For example: A potato farmer wakes up at 5am to farm. Does he do this for us, so we can eat? No, his incentive to do this is to make money. Without incentive to work, nothing in the world would consistently get done. Sure, maybe the potato farmer cares about us. But the bottom line is that he is doing this job because it makes sense for his own best interest.

Another example of this is Prof. Rizzo. Does he teach us economics because he wants us to learn? No, he teaches us economics so he can get a pay check. He may do some things extra for free because he is a good guy, but overall, he teaches us because doing so gets him money. One needs incentive or it is hard to be motivated.

Smith also argues that while it may mostly be about our self-interest, it is not completely: For example, helping out others is important, and in fact, doing so may benefit our self-interests as well.

Another Smith philosophy is that effective competition is important to promoting production. It doesn't guarantee a utopia, but having effective competition seems to bolster production that does have no competition.

Another important belief of Smith is that the government allows people to be able to buy and sell whenever, wherever and with whomever they want. The keys to this are as follows:

1. Parties should be able to set own prices
2. People should be free to sell and buy anything
3. Enter into trade freely, no restrictions or force to trade
4. Any attempt to control prices prevents competition

Smith worried about two things in England. He felt future wealth was threatened by two forces:

1. Prejudices of public may sabotage ourselves
2. Main worry: Power of the interests may cause governments to pass laws to prevent competition/being overthrown. This is very bad for the growth of people/societies.

After the days of Smith, some very interesting things happened that Prof. Rizzo shared with us in class.

In 1790, after Smith dies, Grain (which was the name of corn) prices quadruple in England. Thus, people start bringing in food from abroad because of the prices. Naturally, the landowners in England hated this as did the government, so what is known as The Corn Laws resulted.

The Corn Laws basically stated that France could charge all citizens whatever price they wanted on grain regardless of where people bought the grain. Grain was hard to grow in England because it wasn't flat like other countries, so prices were high in England. Thus if a person bought grain in one country cheap, they'd automatically have to pay a traiff of the difference to match the price in England.

For example, if a person went to France to buy grain for $2, and the price was set at $10 in England, the person would have to pay an $8 tariff, thus making them pay $10 for grain.

In 1820, as would be expected, British citizens became upset and fought against the law- AKA the Anti-Corn Laws. In 1846, the Corn Laws were repealed.

Three years later, English reduced all food tariffs and eventually, there were no tariff at all. England was the first nation to have free trade. This caused prices to fall and competition/growth was spurred.

Prof. Rizzo concluded class by sharing some facts:

1. Karl Marx believed that capitalism was production for the masses. He argued that capitalism produced too many goods for us to handle.
2. When economists refer to necessities, they mean the same necessities that were necessities in the past. So a refrigerator isn't a necessity but not dying from rotten food is a necessity (so having good food to eat).
3. Proof of our progress in the world: Freeing the masses and us being at the point where normal people now have the opportunities that only wealthy people used to have in the past.