Classic economic thinking Flashcards
How many characteristics are there in a classic economy
8
1.Economy obeys its own rules
Focus on measuring the economy as empirical and quantitative
2.Stratification into classes
Economy run by division of labour and private ownership of resources each with a role in maintaining interconnected markets without central guidance
The 3 classes of rule 2
Landlords
Workers
Capitalists
- Economy is organised into markets
Goods and services are traded in self-regulated homeostatic system (equilibrium) therefore government has reduced role in economy as incentives of market system will raise social wealth fastest
4.Self-regarding actions have unintended consequences
Due to the interdependence of humans some actions individuals make have positive and negative impacts on society therefore economists must create institutions to incentivise actions to incentivise and restrict certain activities
- Main source of wealth is labour which becomes more productive through greater social division
Power of economy now measured by ability of economy to reproduce itself (GDP) rather than accumulation of resources, gold or silver
- Competition imposes order on market and ensure price covers the costs of production
Labour theory of value discredited (value determined by difficulty of production) instead real wages vs profits used to determine natural prices
Also recognised role of free market in minimising individual costs of firms
- System tends towards uniform profit, rent and wages
Due to competition on the demand and supply side of the economy market imbalances will re-adjust in the LR so profits, rent and wages are uniform throughout the economy rewarding only the most efficient
- Prices gravitate towards natural levels
Market forces are temporary while natural/productions reflect permanent and systematic forces
Therefore progress can be measured by change in natural price levels
