Laissez-faire. Pursuit of self-interest. Invisible hand of competition. Division of Labour. Cannons of Taxation. Labour theory of value & wealth

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1 Laissez-faire Pursuit of self-interest Benefited individual therefore society No justification for government intervention except for defence/justice Division of Labour Splitting of tasks among workers to make them more productive. Eg. it takes 18 different operations to make a pin! Labour theory of value & wealth The value of an item is equal to the amount of labour that goes into producing it Cannons of Taxation Fair Tax System equity economy certainty convenience Invisible hand of competition An economy will work well if the government leaves people alone to buy and sell freely among themselves because an unobservable market force helps the demand and supply of goods in a free market to reach equilibrium automatically Free Trade With no tariffs/tax, markets operate effectively & trade to be spread between nations

2 Laissez-faire Pursuit of self-interest Division of Labour Invisible hand of competition Cannons of Taxation Labour theory of value & wealth Free Trade

3 Applied the Law of Diminishing Returns to Land Theory of Population & Food Population grows geometrically (2, 4, 8, 16, 32) Food grows arithmetically (1, 2, 3, 4, 5, 6) If population not kept in check famine & disease would result SOL did not fall in 19th century but his ideas were more relevant in the population explosion of the 20th century Best land taken up first, then next best, then inferior land At each stage the amount of food produced is less than before Iron Law of Wages An increase in wage above subsistence level = increase in population = increase in supply of labour = decrease in wage

4 Applied the Law of Diminishing Returns to Land Theory of Population & Food Iron Law of Wages

5 Economic Rent If population increases inferior land used For use of land rent was paid Cost of producing on the best land was lower Food produced on good land earned a surplus over that produced on inferior land This surplus led to an increased rent payable for the use of good land Accepted the Subsistence Wage Theory He agreed that an increase in wage above subsistence level = increase in population = decrease in wage Applied the Law of Diminishing Returns to Land Supported idea of free trade A country should specialise in the production of those goods in which it is relatively most efficient And trade for the remainder of its reqiuirements

6 Economic Rent Applied the Law of Diminishing Returns to Land Accepted the Subsistence Wage Theory

7 Predicted Growth of oligopolies Forecasted Emergence of trade cycles Labour Theory People required to work more hours than necessary to generate the income needed to pay their wages Social Revolution Where proletariat would take public ownership of the Factors of Production Profit Labour produces a surplus value which was profit for employers Profits invested in technology Reduced need for labour = unemployment Two tiered society = unequal distribution of wealth Capitalists (owners) Proletariat (workers)

8 Labour Theory Social Revolution Profit Profits invested in technology Two tiered society = unequal distribution of wealth )

9 Theory of Value The value of an item is determined in SR by utility and demand LR by cost of production Growth of monopolies could be prevented by Government regulation Consumer information More accountability Consumer Surplus Quasi Rent Economic rent earned by FOP in SR when D>S The difference between what a consumer actually pays for a good and the maximum which he/she would have been willing to pay rather than going without it Distribution of income/wealth The return to each FOP is determined by their marginal utility Price-elasticity of demand Quantified buyers sensitivity to price changes

10 Theory of Value Quasi Rent Consumer Surplus Growth of monopolies could be prevented by Distribution of income/wealth Price-elasticity of demand

11 Favored government intervention It is the job of the government to run the economy Government can use fiscal policy (any action taken by the government which alters current revenue & expenditure) to create full employment Eg. Decrease VAT to boost spending or increase government spending to increase demand and create jobs The Multiplier If Inv<Saving = Leakage Leads to a decrease in national income & employment Shows the relationship between an initial injection into the circular flow of income and the eventual total increase in national income The Paradox of Thrift Saving too much leads to reduced aggregate demand Liquidity Preference Theory 3 reasons (motives) for holding wealth in the money form Transaction motive Precautionary Speculative (See chapter on capital) Investment decisions Depends on expectations not rate of interest

12 Favored government intervention Liquidity Preference Theory If Inv<Saving = Leakage The Paradox of Thrift The Multiplier Investment decisions

13 Monetary policy Should be the main instrument used by the government to manage the economy. (Actions taken by the government/ecb which influences the money supply, interest rates and availability of credit). Reduction in inflation Leads to increases competitiveness, cheaper exports and job creation in the long run. Firms keep wage increases to a minimum to avoid cost-push inflation. Control of money supply Control inflation by strict control of money supply Restrict loans and increase interest rates Laissez-faire Minimum state intervention De-regulation of markets Privatisation Supply side policies Improve market efficiency, boost supply, reduce the power of trade unions.

14 Monetary policy Laissez-faire Supply side policies Reduction in inflation Control of money supply

History of Economic Thought

History of Economic Thought Mr Traynor Economics Pack 10, Ailesbury Rd 1) Short Ques+ons Outline four contributions of Adam Smith to economic thought. (i) (ii) (iii) (iv) (17 marks) 2) Outline THREE key