History of Economic Thought

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A school known as “Physiocracy” emerged on the European continent, in France, in the mid 18th Century. Physiocrazy posits that the earth generates surplus. More specifically, Physiocrats purport that agriculture – and only agriculture – generates outputs greater than its inputs. That is, one seed of grain planted in the earth yields many more seeds. Through this the Physiocrats conclude that the earth and agriculture is the source of economic "surplus." Francois Quesnay is noted as the main exponent of Physiocracy. Quesnay is also known for creating his famous Tableau Economique. In his Tableau, Quesnay charts how surplus produced in agricultural is allocated between and among three classes. In the France of his day, Quesnay suggests three social classes: landlords, agriculturalists, and those artisans making handicrafts, noted as Class Sterile. Mark Blaug (1986, pp. 233-4) teaches us that Adam Smith resigned from his professorship at the University of Glasgow in 1763. Serving as tutor to the Duke of Buccleuch, Smith visited France where he is noted to have come into contact with Quesnay and other Physiocrats. There exists little if any evidence that Smith was indeed influenced by Quesnay's school. In his notable contribution An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith clearly departs from Physiocratic principles by noting the importance of a "division of labour." Rather than noting the importance of agriculture, Smith's purports that the division of labour serves as the way for greatly increasing material output. In his inquiry (Heilbroner, 1986, pp. 61-62) Smith describes production in a pin factory. He mentions that every worker gets his own process, e.g. a worker does only drawing the wire or cutting them. That means the reducing of every workers business to some simple operations and by making this operation the sole employment of his life, the dexterity of a workman rises at this operation. Capacity and productivity increase through this specialisation of labour. Smith argues that labour is the source of value at the right employment. Furthermore, Smith elaborates the “theory of value”. His theory is based on the fundamentals of John Locke. He says that property is created by labour. Smith takes this corner stone to distinguish value in two different categories. On the one hand he identifies “value in use” and on the other he realizes “value in exchange”. Both are completely different. A commodity can have an enormous value in use as does air, which is necessary for every human being but has no value in exchange. No one wants to pay for this. Other commodities, like diamonds or gold, possess no value in use. However, many people see a huge value in exchange and pay a lot of money for these commodities. But what makes the difference? The labour costs for producing a commodity determine the value in exchange, e.g. a hunter needs one day for catching two beavers and one day for catching a deer. Smith explains that we pay for the labour cost. The huntsman decides to catch one kind of animal, e.g. beavers. At the end of a day he meets another hunter who catches a deer. They can barter their animal, two beavers against one deer. Adam Smith is famous for recognizing the mutual benefits of trade – the fact that both parties can benefit from trading with each other without causing each other any kind of disadvantage. The market mechanism in a free and independent economic system drives a society to create wealth. Heilbroner (1986, pp.63-66) suggests in his book The Worldly Philosophers that Smith sees the market as cause of innovation, expanding and taking risk. The market system is being governed by two laws of behaviour. These are the “Law of Accumulation” and the “Law of Population”. The first one explains that almost everybody tries to accumulate their savings. Smith sees in the accumulation process benefit for the whole society. The second one describes...
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