Professor Rizzo started todays lecture by telling us that expenditures= (C-T) + I + G +NX. In this equation C= consumer goods(clothes ect.), I= Invest, T= Taxes, G= government purchases, and NX=your spending on certain products. He then said that we a re a crafts oriented society. We divide the economy into 2 groups. Individuals(people) and business. Business get factors from us. People send stuff to business and business will pay them for something. The flow of activity states that every dollar spent is income to someone else, but by us spending more, it doesn't guarantee that we are going to get paid more. If Rizzo spend more money on food, U of R will not increase his salary.
Some economists say that food is the basis of all wealth, but we can't get rich in a self sufficient world. In early America, all people of a family worked on the farm. This changed when there was a surplus of food. This freed kids to spend more time in crafts. Kids made their dad more productive by doing this. They developed farming tools to help their dad on the farm which ended up freeing another family member to help make crafts. Sharing of craft production is good. Physiocrats states that the first source of wealth is production. Mercantilists source of wealth- gold in treasury, wealth that king had, and positive balance of trade. This is equivalent today to how much money the treasury prints, how much the government makes in taxes, and how much is being bought and sold.
After physiocrats came the Scottish moral philosophers who believed that wealth is from aesthetics. Economics is more than prudence. To be proud, we need other stuff.
Hume who is a respected economist said that previous claims that the source of wealth is agriculture is not true. There is more to it than this. He said that commerce is the source of economic growth. Misuse of money and credit were the biggest threat to this.
The mercantilists believed that trade is zero sum (wealth fixed), money is wealth, gold was scarce (when you get gold, some one loses it. There is no free trade. They believed that the king should control trade to be on winning side of zero sum trade. Thought that the king was supposed to make trade balance positive. this means that he tried to restrict imports and promote exports.
We learned that private interest isn't in harmony with social interest. One thing that used to happen many years ago was that the banks would lend the king money to spend. As the king spent money, prices would go up. This is because there was more money going around. Gold and silver are the only things that are traded world wide. This raised prices in France and made prices fall in England (supply and demand).
The law of price states that prices should be the same around the world. Goods and services you can purchase are important. This doesn't happen because prices will adjust across boarders as you travel. 3 things that happen that help with growth are
1. Competition (sorts out weak and strong) lights fire under people to work harder.
2. learning and innovation- and example of this is Toyota giving workers input.
3. division of labor- people divide tasks when a lot has to be produced.
The economics of scale states that we make what is needed. Hume's essay's conclusion- are countries that we trade with more of a threat than countries we don't trade with.
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