Wrap-up Lecture in History of Economic Thought

The ancient world

Serious thought began in the ancient world – roughly 400 BC – with ideas on how to deal with what we know today as the “economic problem” (scarcity, and how society decides what to produce/consume, how to produce, and who will consume).

The background then was a stage in history when man had progressed from hunting/gathering to agriculture. We can imagine that the economic problem for hunter/gatherers was then mostly that of survival, but agriculture later brought some element of abundance beyond the most basic necessities of food and water.

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Conflate vs. confuse (re-blog)

I get confused when you conflate.

To confuse is to treat two different things the same.

To conflate is to combine two things to make up a third.

Where’s the fourth? At the firth?

Hat tip to Kate Porter.


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Forced Saving

Early in the history of the debate between Keynes and Hayek, the two struggled without success to clarify the meaning of something called “forced saving.”

It turns out that they didn’t really disagree; they just didn’t agree on definitions.

The following are notes based on excerpts of an article by Roger Garrison.

EXCERPTS FROM Garrison. http://www.auburn.edu/~garriro/strigl.htm

Hayek and Keynes:
The problem with Hayek’s “forced saving,” then, is that it presents itself syntactically as a kind of saving while referring contextually to a pattern of investment. Hayek himself was certainly alive to this point even as early as his Monetary Theory and the Trade Cycle. In a chapter titled “Unsettled Problems in Trade Cycle Theory,” Hayek ([1928] 1975, p. 220) referred to the term as a “rather unfortunate expression.” He preferred the phrase “artificially induced capital accumulation.” In his subsequent “Note on the Development,” Hayek ([1939] 1975, p. 197) mentions Keynes’s avoidance of the term in his Treatise on Money: “Keynes … rejects this terminology [forced saving] and prefers to speak simply of investment being in excess of saving; and there is much to be said in favor of this.” But despite Hayek’s and others’ dissatisfaction with using the term to refer to a pattern of investment rather than a kind of saving, forced saving (both the term and the concept) has come to be considered the sine qua non of Austrian business cycle theory and particularly of Hayek’s rendition of that theory.

Mises and Hayek:
There is an easy—though only partial—reconciliation between Mises’s and Hayek’s contrasting formulations. It comes from our recognition that Hayek’s “forced saving,” rather than being the antonym of “overconsumption,” is actually a synonym for “malinvestment.” With unduly favorable credit conditions, the business community is investing as if saving has increased when in fact saving has decreased. There is no contradiction here between Mises and Hayek but rather a contradiction recognized by both in the market forces associated with a credit-driven boom. It is this contradiction, if fact, that lies at the root of the boom’s unsustainability. A fuller resolution of the differences between Mises and Hayek requires a closer look at “forced saving” and “overconsumption” as used by each.

Hayek had a concept of “forced saving” that is equivalent to “malinvestment” or investment in excess of what is optimal (optimal being consistent with maximizing society’s welfare). Indeed, he accepted that he really meant it to mean “artificially induced capital accumulation.”

Keynes tried to wrestle with the idea, and used it, according to Hayek, to mean something else: the excess of (desired) aggregate investment by firms over (actual) saving of households (assuming that only firms invest and only households save). The term would then cover an unwanted and unexpected increase in business inventories (that might signal that producers are producing more than quantity demanded at the prevailing prices). The concept, in the language of Keynes, could easily have been named “forced investment.”

We can then reconcile Keynes with Hayek. In either of these two’s views, forced saving comes at the down-turn of the business cycle. But in Hayek’s views, forced saving also happens at the boom, when there is over-investment by firms who have a too-rosy projection of future demand; the forcing factor here is artificially low interest rates arising from too-easy monetary policy.

Garrison states that the concept of forced saving is central to Austrian business cycle theory.

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Recovery of the Soul

The theory seems plausible.

The idea is that consciousness consists of certain “perturbations” extant in our brains not contained in time/space that “migrate” to some other universe when humans die (what about plants and animals?).  This is a theory that the soul lives on, and by extension, can be infused into another body of matter that can hold consciousness.

But why can’t we remember our past incarnations? And if we can’t remember, isn’t it the same as having “died” in the sense of the consciousness going elsewhere that we can’t recover? Or is the secret to immortality the discovery of how we can recover that consciousness, the way we move “trash” in a Mac back to regular memory?


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Econ 12 – 5th Assignment – due by email on February 17, 2015

Prepare, individually, short written answers to the following questions, and submit them to me by e-mail (oroncesval@gmail.com) on or before February 17, 2015. Most of the answers can be found in Chapters 8, 11, 12 and 13 of the Backhouse textbook. You should also do some independent research using other sources.

Please bring hard copies for your classmates and me when we discuss the answers in class on February 18.

1.Summarize the ideas of Austrian economics. Who are the main figures of Austrian economics? Is Austrian economics more or less useful for the Philippine economy?
2.Where is Hayek in the context of Austrian economics? What did he propound? In his debate in the 1930s with Keynes, what diametrically opposed conclusions did Hayek and Keynes have? Explain why they disagreed with each other.
3.What are the main theories of economic growth in ‘development economics’? What is the ‘Washington Consensus’? Would the Washington Consensus be applicable or relevant to the Philippines? Why or why not?
4.Where would you locate Schumpeter’s work in the history of economic thought? Is it a better alternative to Keynesian economics?
5.[extra credit only] What is game theory? Is it a good alternative to general equilibrium theory? Why or why not?

USEFUL REFERENCES (apart from Backhouse):

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Econ 12 – Assignment No. 4 due Feb. 10, 2015

Prepare, individually, short written answers to the following questions, and submit them to me by e-mail (oroncesval@gmail.com) on or before February 10, 2015. Most of the answers can be found in Chs. 8, 9, 10, and part of Ch. 13 of the Backhouse textbook. You should also do some independent research using other sources.

1.Summarize the ideas and theories in institutional economics. Include the economic thought of Veblen, Commons, Wesley Mitchell, and Galbraith.
2.What is the Tragedy of the Commons? Explain. (Here, you may consult: http://www.sciencemag.org/site/feature/misc/webfeat/sotp/pdfs/162-3859-1243.pdf.)
3.What is Keynesian economics? What is the role of ‘animal spirits’ in Keynesian economics?
4.What is the so-called neoclassical synthesis between neoclassical economics and Keynesian economics?
5.What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?
6.What is general equilibrium theory, and what’s wrong with it?

Please bring hard copies of your submissions for giving out to me and your classmates when we meet again on February 11.

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Econ 12 – Assignments Nos. 2 and 3

Read Chapters 5 and 6 of Backhouse. Answer briefly the following questions (using also other material you can find from the references in the Syllabus).

Answers to questions 1-6 are due January 6.

1.What did Cantillon think about the problem of population? (2 pts.)

2.Turgot contributed to the modern economics definition of what constitutes wealth. What did he say? Re-state his thought in your own words. (2 pts.)

3.Quesnay, among the Physiocrats, argued that agriculture was fundamental. Was he right or wrong? Explain. (5 pts.)

4.Discuss how Quesnay and Turgot influenced Adam Smith. (4 pts.)

5.Summarize, in your own words, the evolutionary theory of social organization in the writings of the Scottish Enlightenment. (4 pts.)

6.Summarize Mandeville’s “Fable of the Bees.” (3 pts.)

Answers to questions 7-10 are due January 13.

7.What is the “invisible hand” in the work of Adam Smith? Quote the paragraphs in which these words appear in his writings. Explain in your own words, preferably in Taglish or Cebuano, how the invisible hand works. (20 pts.)

8.Would Adam Smith agree that ‘greed is good’? Why or why not? (5 pts.)

9.Did Smith, in arguing for free markets, also argue for only a limited role for government? Explain your answer. (5 pts.)

10.Did Smith see a role for government to maintain full employment? Why or why not? (4 pts.)

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