Feudalism

what:
Under the feudal system, the lords power were given by god thus allowed them to do as they
needed to in order for their manor to survive.
The church owned a lot of land and were influential under feudalism.
Who:
Lords were the land owners. Provided protection and land for the people within his land.
Serfs were the workers of the land.
The lords would collect the goods and taxes from the serfs.
Where:
Europe, but the book focuses on Western Europe.
When: 9th century to 16th century.
Why:
After the collapse of the Roman empire, Europe began to develop the feudal system.

Important Changes That Led to the End of the Manorial System

Commutation
Lords became absentee lords and moved to the city side. To fund their luxurious lifestyle
they began to rent out the land to the serfs.
Serfs became small business owners.
Famine and Epidemics:
Black Death and 100-year-war between England and France (1337-1453)
Wages increased = profits decreased.
Lords wanted to revolt commutation, but the serfs did not. This problem led to Peasant
Revolt.

Putting-Out System
When:
16th century.
Where:
Europe
Who:
Merchant-Capitalist: Traders and also wealthy owners of capital.
Craftsmen: These were independent businesses produced goods in the city.
What:
Merchant-Capitalists began to provide the necessary inputs to produce goods in return crafts-
men were paid wages. Through this, the merchant-capitalists would owned the product through-
out the whole process of production. Later on, the tools and capital required for production
was owned by merchant capitalists and they would hire the necessary labor to complete their
products.
Why:
The expansion of trade increased the demand for goods.

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 Factors Leading to Capitalism

1. Rapid growth in trade and commerce

2. Putting-out System

Craftsmen became laborers instead of individual business entities.

Merchant-capitalists earned high profits from the goods produced by craftsmen. They gained
more power overtime as they became more involved in the production process.

3. Enclosure movement:

Lords fenced off farming lands that were once communal.

Many farmers were forced to move to the city-side. So they became craftsmen which would
eventually led them to become workers under the putting-out system.

4. Great Price Inflation:

During the 16th century, there was a large influx of gold into Europe from the Americas and
Africa.
This cause a large inflation in price.
Winners: Capitalists earned greater profits and did not have to pay workers a lot because
wages were stagnant.
Losers: Landowners and workers income rose less rapidly than their expenses.

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 Mercantilism
When: 16th century to 18th century.
Where: Europe
What:
This was a trade and economic theory that was prominent during the expansion of international
trade in Europe.
Why:
Began with an acute shortage in gold and silver.
As trade grew countries were worried about the balance of trade. Such that, imports would
lead to a decline the countrys holding of gold.
Since the world operated on the pure gold standard, extreme protectionism was necessary to
maintain the countrys wealth and power.
State monopolies were protected by the government to ensure people would supply raw materials
to the monopolies and also buy domestic.
Maximizing, acquisitive and individualistic behaviors (very similar to that of Capitalism).
Christian Paternalistic Ethics: Justified the income dispersion between the rich and the poor.
Who:
Nicholas Barbon (1640-1698)
He was one of the early supporters of Mercantilism.
 Buy domestic and export goods.

 Natural value (demand and supply)

 Use Trade and Arbitrage. Buy silver in India and sell it in Portugal.

Gresham Law: Bad money drives good money out. People wanted to keep their gold and
use their silver.
John Locke (1632-1704)
Examined interest rent:
 Governments should not control interest rates.

Quantity Theory of Money

 M V = P Y

 Value of money is inversely proportional to the amount of money in circulation.

Wrongly believed that: England would fall into a depression if it had more gold. Later
corrected by David Hume, large inflow of gold into England would increase exports
because English goods would be relatively cheaper on the international market.
David Hume(1711-1776) Opponent of Mercantilism
Nations should not focus on accumulating gold because it would not relatively increase the
wealth of the nation.
 Specie-Flow Mechanism

Quantity of money determines price.

Volume of Export and Import depends on relative price.
The differences in international balance of payment among nations must be paid in
specie.
Benard Mandeville (1670-1773) Opponent of Mercantilism
Export is not bad in the long-run.
Self-Interest leads to greed.
Everyone has a role in society.
French Physiocrats Opponent of Mercantilism
 Three classes:

Productive: Those involved in agricultural production.

Sterile: Sellers
Idle: Landowners
Francois Quesnay (1694-1774)
 England is too focused on exchange only

 Beliefs of his:

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 Societies were governed by natural laws
Leaders failed to understand the natural laws
Production and commerce should be organized
 Advocated for:

Abolition of guilds
Removal of taxes and tariffs
No subsidies
No unfair advantages to monopolies
Reorganize agriculture
 Notable contribution:

Circular flow model: Credit for the first Macroeconomics model.

He showed the flow of income and expenditures between workers and firms.
Jacque Turgot (1727-1781) French Physiocrat
 Made a theory similar to Diminishing marginal return (but marginal was not yet de-

veloped until Calculus in 1870).

If inputs are applied to a fixed amount of capital then total output will increase but
at a diminishing rate.

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 Capitalism
Characteristics of capitalism
Market Oriented commodity production. (commodity money commodity)
Private Ownership of means of production ( a developed market is needed (Demand and Supply))
Ownership is the hand of few people.
A large proportion of the labor force are workers.
Workers commodities are their labor power sold to capitalists
People are motivated by:
Individualistic
acquisitive
Maximization behavior
Consumerism
Religion had to change for these ideas to work.

Events That Led to Adam Smith

Industrial Revolution
Change in the textile industry
Steam Engine and Assembly Line specialization and division of labor.

Adam Smith
Invisible Hand

1. Individuals are driven by their own self-interest .

2. Market is a great regular of competition.

Laissez Faire
Only 3 possible roles for the government

Justice

National Defense

Certain Public Work

Distinguished from other economists because he was the first to develop:

Value theory
Exchange value or price = Profit + Rent + Wages
Exchange value of a commodity = amount of labor embodied in it (both indirect and direct)
 Problem with this:

Capital to Labor Ratio was not proportionate throughout the process so the value
would not add up.
Value of capital to labor was different throughout the different sectors of the econ-
omy.
He could not see anyway of showing how the labor embodied in production deter-
mined exchange value in these circumstances
Price Theory
 Natural Price: This is the social average prices of profit + rent + wages.

 Market Price: Daily prices of profit + rent + wages.

 IF MP<NP: This will attract people into the market and increase MP until MP=NP.

 IF MP>NP: People will leave the market until MP=NP.

Weakness of this theory: A theory that explains prices on the basis of other prices
cannot explain prices in general.
Theory of Distribution of Income
Ownership of land: separates the wealthy and the poor.
Ownership of capital: separates the strong and the weak.

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 Growth Theory
Growth in labor force and stock of capital: Over the long-run the growth in these will lead
to the natural level of growth.
Improvement in efficiency through technological advancement: Increasing return to scale,
no diminishing marginal productivity.
Absolute advantage.
Comprehensive View of Economy as a whole.
Policy Recommendation.
Wanted to change:
 Mercantilism, Feudalism and monopolies capitalism

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1 Thomas Malthus (1766-1834)
Poverty and Class
Poverty and class division is the natural law.
Increase in wealth of these people would then cause an increase in the population (more sex).
Consequently, the poor will be poor again.
If the government redistribute wealth to the poor then this would lead to the deaths of a grown
person.
Do not try to change it because it would only make it worse.
Population Theory
The population of the Earth would double by every generation (25 years).
Preventative checks:
Abstinence
Birth Control
No premarital sex
Positive checks:
Famine
Disease
War
Relationship between wealth and sex
Increase in wealth increase in sex.
Exchange and Class Conflict
Only believed in two stages of society:
The rude, uncivilized state of society
The civilized society
Only examined the exchange and circulation of money and not the production process.
He knew that the production process would lead to conflicts
 But, he saw that class conflicts were due to ignorance and not the distribution of surplus.

Problem with this

 By seeing no class conflicts all parties are seen mutually beneficial.

Differences with Smith

He saw Rent, Labor, Profit as equally necessary.
 lottery, god made people landowners, capitalists, and workers.

Defending Agricultural Products

Rent was natures gift to mankind therefore it is not the creation of artificial return.
Increase in rent = more people fed which is an aspect that profit does not have.
Theory of Gluts
This goes against the common Classical Economics thinking, since it says the market will not
clear. Such that, an excess supply of goods will not be met with an increase in demands during
economic downturns.
Case #1 : If Technological advancement did not occur and investments in capital increase.
K
This will but not enough labor to utilize all of the capital so production halts.
L
 Contradtion to population theory: Why would there be a sudden increase in K that

would have a rate that greater than the population growth rate.
Case #2 : If Technological advancement was to increase productivity of laborers.
This will output per worker and lead to excessive production when theres no demand.
This will cause unemployment.
His Proposal: Pressing for the Corn Law to pass.
Create policies that would limit the profits of capitalists and give that amount to the
landowners.
 Give the benefits of the doubt to the landlords because they will hire servants (unproduc-

tive laborers) that would expend their lords money without producing any unnecessary
goods.

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2 David Ricardo (1772-1823
Ricardo VS. Malthus
Similarities Differences
Theory of Value:

saw that rent differed with fertility. However, the introduction

of more lands that may be less fertile than the previous will
Population Theory create inefficiency.

Rent was not a component of costs that determine prices, but

a residual determined by prices.

Theory of Glut: Glut is impossible because of Says Law. The

Causes of Laborers and
proposal made by Thomas Malthus is equivalent to a capitalist
Poverty
setting his warehouse on fire.
Labor Theory of Value
Two Main assumptions:
Can not combined different levels of skills of laborers into one.
Does not account productivity from natural resources and capital.
The value of labor can not be derived in the ways as other commodities.
Tools and Machineries were intermediate goods that have labor embodied within them.
How he got past the Differences in the ratio
Time dimension of production matters.
Differences with Smith
 An in wages does not always = prices. If output and technological progress remains

the same then will decrease.

K
> 0 = products with high will have a higher price
L

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3 Jeremy Bentham (1748-1832
Utilitarianism
A persons pursuit in happiness is driven by their self-interest.
No interpersonal comparison in utility between two individuals.
He thought economics was Pain & Pleasure
Smith rejected the notion that utility should be used to measure exchange value.
Two stages of his life:
Strong advocate for total Laissez Faire.
Realized that the market will not always clear (Just like Thomas Malthus)
Advocated against complete Laissez Faire. The government needed to step in when savings
are lacking.
redistribution of income
Diminishing marginal utility of income: Government should redistribute wealth by taking
from the rich and giving it to the poor.
Realized that the government must have no self-interest which contradicts with Utilitar-
ianism

4 John Mill (1806-1873

Influenced by Jeremy Bentham (Utilitarianism) and David Ricardo (Labor Theory of Value)
However, he contradicted both Jeremy Bentham and David Ricardos theories through his work.
Reverted back to Adding-UP to determine price.
Compared the pleasure of the rich between the poor.
Two of his most notable contributions
Competition would not equalize prices across borders. It solely depends on supply and demand
and not cost of production.
Wage:
Wages depend on the rate of wages which depend on the class struggle between capitalists and
workers.
Similarities with Malthus, education is important in raising wage.
Ricardian Socialist:
Believed that Socialism is only fit for an elevated society.
Laissez Faire: not full, because it is sometimes necessary for the government to modify adverse
effects of capitalism.
Advocated against harsh conditions of work.