Cantillon and Smith

ECON 205W Summer 2006 Prof. Cunningham

Richard Cantillon (1680?-1734)

   Some proponents say that his was the first systematic treatise on economics.

Great influence on Smith?

He was an Irishman with a Spanish name who lived in France, but whose book was published in England.

His Treatise

      

Essays on the Nature of Commerce in General

Attempted to reduce economics to a few elementary principles.

Emphasis on monetary concerns.

Concept of equilibrium across markets.

Mechanical linkages across economic elements, driven by individuals pursuing self-interest.

Motivated by Newton’s writings on mechanics in physics.

Modern method.

Treatise (2)

  Land is the source of all material value.

Three parts:    I. Relates economic structure, wages, population, and value.

II. Money, exchange, interest, prices.

III. Foreign Exchange and equilibrium of money markets.

Adam Smith (1723-90)

      Born in Kirkcaldy, Scotland (near Edinburgh).

His nature and background.

Studied at Glasgow under Hutcheson, professor of moral philosophy and head of the Scottish Naturalist School.

Attended Oxford for 6 years.

1750, took the Chair of Logic at Glasgow College.

1752, took the better paying job of Chair of Moral Philosophy

Smith (2)

   1759, Theory of Moral Sentiments 1776, An Inquiry into the Nature

and Causes of the Wealth of Nations

1790, Died.

Theory of Moral Sentiments

  Moral philosopher looking at the total range of human conduct.

The sentiments       Self-love Sympathy Love of labor Propensity to “truck and barter” Sense of propriety Desire to be free

Wealth of Nations

 Five books:      1. Production and distribution with special reference to labor 2. Capital and Accumulation 3. Economic development and policies to aid it 4. Different systems of political economy 5. Public finance

Role of Government

  Government should only do what people cannot do individually:    Provide justice (protect property rights) Provide defense Maintain public works and institutions that would not be maintained for lack of a profit motive. (Public goods) Minimal intervention in the economic sphere.

Labor

    Productive vs. nonproductive labor  Nonproductive=producing services Division of labor (pin factory)    Arises because of the propensity to truck and barter Not due to any difference in human ability.

Limited only by the extent of the market.

Specialization and division of labor are necessary for productivity gains Specialization not only by skills.

Exchange

    Division of labor leads to exchange Real price, natural price, just price  Market price may deviate from the natural price. Adjustment processes.

Compares “values in exchange” with “values in use” Labor theory of value

Wages and Interest

   Wages related to wage fund concept.

Lending and interest   No problem with this.

Fails to recognize that savings may fail to be invested, or that there may be time lags.

Under conditions of perfect mobility, the balance of advantages and disadvantages of different jobs will become equal.

Foreign Trade

    Prefers domestic trade to foreign since it supports a greater quantity of domestic labor.

Foreign trade increases the extent of the market.

Absolute advantage.

Rejects several arguments for protectionism. Tends to favor free trade.