ECON 1110 Lecture Notes 02

ECON 1110 Lecture - ECON 1110 Lecture Notes 2 ECON 1110 Intermediate Macroeconomics James R Maloy Spring 2011 Lecture Notes for Topic 2 Classical

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ECON 1110 Lecture Notes 2 ECON 1110 Intermediate Macroeconomics James R. Maloy Spring 2011 Lecture Notes for Topic 2: Classical Macroeconomics (I) Readings: Froyen Ch. 3 I. The Classical Revolution Classical economics is the term given to the work of most capitalist economists who preceded John Maynard Keynes. Some of the most notable classical economists include Adam Smith, David Ricardo, John Stuart Mill, A. C. Pigou, Alfred Marshall and Irving Fisher. Classical economics was the prevalent economic doctrine from the end of the eighteenth century until Keynes’ General Theory in 1936. Classical economics emerged as a critique of an earlier economic doctrine, mercantilism. Mercantilism stressed that the wealth of a nation was dependent on the stock of precious metals in its possession (a line of thought known as bullionism), and that it was imperative to use government policy to increase gold reserves and achieve economic goals. Basically, mercantilist nations sought to ensure that they exported more than they imported, thus receiving payment in gold or silver for the excess exports. Colonies were developed to provide a cheap source of raw materials that had to be imported. Government action was needed to prohibit the export of gold and to develop human and natural resources. Consumption was unstable and needed to be directed by the government. Money was quite important to the mercantilists, and money (which, at this time, was almost always gold and silver, or certificates on gold and silver) was considered the key measure of a nation’s wealth. Classical economists could not have more completely opposed the two key tenets of mercantilism (bullionism and government activism). The wealth of a nation should not be determined by how much money it has, but rather by the quantity and quality of its production. They argued that money was significant only as a means of facilitating transactions. Money had no real effect on the economy, meaning that money was insignificant when determining output. Only real (i.e. non-monetary) factors could have real effects on output and the wealth of a nation—technology, productivity, labour, and capital 1
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ECON 1110 Lecture Notes 2 stocks. Furthermore, the classical economists argued that government activism is completely unnecessary and generally detrimental to economic activity. Mercantilists felt that consumption had to be directed and encouraged by the government. Classical economists stressed the self-correcting tendency of the economy, and argued that, assuming people were self-interested and behaved optimally individually, competition would ensure a socially optimal result . (Note that we are generally referring to Pareto optimality, which occurs when it is impossible to make someone better off without making anyone else worse off.) It was not necessary to encourage consumption. This idea was formally stated in Say’s Law, which states that supply creates its own demand. Essentially, the very act of production would
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This note was uploaded on 03/10/2012 for the course ECON 1110 taught by Professor Tedloch-temzelides during the Spring '08 term at Pittsburgh.

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ECON 1110 Lecture - ECON 1110 Lecture Notes 2 ECON 1110 Intermediate Macroeconomics James R Maloy Spring 2011 Lecture Notes for Topic 2 Classical

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