IDEAS AND THEORIES OF Chapter

ECONOMIC DEVELOPMENT 2
 INTRODUCTION

Economic ideas and theories are

generally products of existing
conditions.
Differences in time and place usually has
different situations, and therefore not the
same.
May be intended to change or improve
existing conditions.
 INTRODUCTION

Define:
Theory
Idea
 INTRODUCTION

 Example: Keynes become famous because he

was able to solve the Great Depression.
 Keynes
 Great Depression
 ANCIENT ECONOMIC IDEAS

Based on the Holy Scriptures and codes of

laws.
The Bible and the Holy Men regulated
economic practices and relationships.
Justice and mercy were encouraged.
Excessive wealth met so-called disapproval.
 ANCIENT ECONOMIC IDEAS

PLATO was also against the

accumulation of wealth through lucrative
trade or commerce.
To him, agriculture is very important and
favored specialization of production.
There is a need for diversity of
occupations since no person is self-
sufficient, and people have many wants.
 ANCIENT ECONOMIC IDEAS

Members are to be educated from childhood for

their responsibility.
 ANCIENT ECONOMIC IDEAS

ARISTOTLE likewise stressed the value of

management of agriculture.
 Not in favor of too much wealth
 Did not like usury and trade.
 Disagreed about communal property because
it destroys individual incentives.
 ANCIENT ECONOMIC IDEAS

XENOPHON, classmate of Plato when

they were students of Socrates, was in
favor of capitalism.
 Proposed that government should promote
trade ad shipping .
 Encouraged formation of more silver mining
companies to increase general wealth.
 In favor of joint-stock companies,
specialization, and division of labor.
MEDIEVAL ECONOMIC THOUGHTS

FEUDALISM reached its peak during the

Middle Ages in Europe.
Agriculture was the source of livelihood.
With the rebirth and growth of trade
and commerce in the Mediterranean
region, the merchant class became
wealthy and powerful.
Feudal lords lost their influences.
MEDIEVAL ECONOMIC THOUGHTS
Feudalism
MEDIEVAL ECONOMIC THOUGHTS

FEUDALISM reached its peak during the

Middle Ages in Europe.
Ideas of cooperation developed among
the merchants to protect their own
interests, and to attain their common
objectives.
MEDIEVAL ECONOMIC THOUGHTS

Guilds were formed and were in control

of many economic activities in Europe:
1. merchant
2. craftsmen
MEDIEVAL ECONOMIC THOUGHTS

Later part of the Medieval, the church

became very powerful:
 Active participant not only in religious
affairs but also in political and economic
activities.
 Most scholars and writers were churchmen.
 ST. THOMAS AQUINAS (the most admired)
– He preached distributive justice and
compensatory justice.
MEDIEVAL ECONOMIC THOUGHTS

 DISTRIBUTIVE JUSTICE – refers to fair

distribution goods among members of the
society.
 COMPENSATORY JUSTICE – means just
wage and price.
 THE ECONOMIC DOCTRINE OF
MERCANTILISM
Great thinkers of Europe influenced much
the growth of capitalism.
They include MACHIAVELLI, BODIN, and
SERRA.
Asserted the supremacy of state over all
other sources of powers including the
church.
It is the duty of the state to create and
accumulate wealth.
 THE ECONOMIC DOCTRINE OF
MERCANTILISM
Wealth came from gold and silver and
wealthy nations was considered powerful
and prestigious.
Countries without gold and silver could
acquire it through favorable trade and
establishments of colonies with gold and
silver mines.
 Resulted to fighting for colonies among
European nations.
THE ECONOMIC DOCTRINE OF
MERCANTILISM
THE ECONOMIC DOCTRINE OF
MERCANTILISM
 FRANCIS DRAKE (English), specialized in
capturing the ships of other countries loaded
with gold including one of the Manila-
Acapulco Galleon.
 THE ECONOMIC DOCTRINE OF
MERCANTILISM
To achieve the objectives of mercantilism,
manufacturing was given top priority.
 Agriculture was no longer appreciated
because of its shorcomings.
 Resulted to fighting for colonies among
European nations.
PHYSIOCRACY – RULE OF NATURE

The “Enlightenment” in England and

France
 Greatly stimulated thinkers and philosophers
to question the old doctrines and thoughts.
 Dependence on Greek philosophy and the
church dogma began to diminish.
 People started to rationalize human behavior
and the existence of institutions.
PHYSIOCRACY – RULE OF NATURE

Philosophers claimed that people are

poor because they violated the “laws of
nature”.
 When one is lazy, extravagant or a drunkard
will likely become miserable.
PHYSIOCRACY – RULE OF NATURE

WEALTH CAME FROM THE LAND

PHYSIOCRACY is an economic theory
developed by a group of 18th century
Enlightenment French economists who
believed that the wealth of nations was
derived solely from the value of "land
agriculture" or "land development" and
that agricultural products should be
highly priced.
PHYSIOCRACY – RULE OF NATURE

WEALTH CAME FROM THE LAND

 People could not exist without food and
natural resources.
 The farmers therefore are the real producers.
 They fee and provide jobs to the
manufacturers, traders, and industrialists.
PHYSIOCRACY – RULE OF NATURE

WEALTH CAME FROM THE LAND

The ideas of Physiocrats were against
those of the Mercantilists:
 Physiocrats – real wealth is agriculture
 Mercantilists – real wealth is money.
 LAISSEZ FAIRE THEORY

LAISSEZ FAIRE is an economic system in

which transactions between private
parties are free from government
intervention such as regulation,
privileges, tariffs, and subsidies.
 It was introduced by the Physiocrats.
 Giving grants and subsidies to industries was
rejected by the Physiocrats because it was a
form of corruption and favoritism. Since the
industry is unproductive – unlike agriculture.
 THE CLASSICAL THEORIES

Adam Smith is the real founder of the

classical school of economics.
 His book Wealth of Nations” was published in
1776 and became the bible of economics.
 Believed in the merits of the free competition
concept.
 Free market mechanism could provide more
benefits to individuals and society.
 THE CLASSICAL THEORIES

PRODUCTION IS THE REAL WEALTH

According to Adam Smith:
 The only source of wealth is production
through labor and resources.
 Can be increased through division of labor
and the use of machinery.
 Improvements in transportation can promote
the growth of commerce and industry.
 THE CLASSICAL THEORIES

PRODUCTION IS THE REAL WEALTH

According to Adam Smith:
 He provided the conditions for increasing
wealth of nations such as:
1. Size of market
2. Labor efficiency
3. Total population
 INDIVIDUAL WELFARE depends on the ratio
of total production to total population
 THE CLASSICAL THEORIES

PRODUCTION IS THE REAL WEALTH

According to Adam Smith:
 Through free competition, only the best
producers survive, which means they are the
most efficient.
 THE CLASSICAL THEORIES

THEORY ON POPULATION
Thomas Malthus proposed the principle
that human populations grow
exponentially (i.e., doubling with each
cycle) while food production grows at an
arithmetic rate.
 THE CLASSICAL THEORIES

THEORY ON POPULATION
Thomas Malthus stated:
 Population explosion is the root cause of the
problems of society.
 Rate of population growth is higher than the
rate of food production.
 Proposed late marriage and abstinence to
control population growth.
 THE CLASSICAL THEORIES

THEORY ON POPULATION
The dismal prediction of Malthus did
not take place in “developed countries”
but among “less-developed countries.”
 Developed countries have successful family
planning program than less-developed
countries.
 THE CLASSICAL THEORIES

THEORY OF COMPARATIVE ADVANTAGE

Comparative advantage is when a
country produces a good or service for a
lower opportunity cost than other
countries.
 THE CLASSICAL THEORIES

THEORY OF COMPARATIVE ADVANTAGE

David Ricardo developed this theory.
Based on this theory, nations should
export the goods which they enjoy the
greatest advantage, and should import
the goods which they have the greatest
disadvantage.
 THE CLASSICAL THEORIES

THEORY OF COMPARATIVE ADVANTAGE

This simply means – do not produce the
product if it is cheaper to buy it.
 Lesser number of hours or days of
producing the product.
Countries Rice Calculator
Japan 120 days 10 days
Philippines 90 days 15 days
 THE CLASSICAL THEORIES
Davin Ricardo
 THE CLASSICAL THEORIES

THEORY OF KARL MARX

He maintained that the workers are the
real producers of goods.
And yet, the benefits of production go to
the capitalists and not to the workers.
 THE CLASSICAL THEORIES

THEORY OF KARL MARX

Using the process of “dialectics” of
Hegel, Marx stated that there is a class
conflict between workers and the
capitalists.
 The workers constitute the “THESIS”,
which is the positive, and the capitalists
the “ANTITHESIS” which is the negative.
 THE CLASSICAL THEORIES

THEORY OF KARL MARX

He developed his theory of scientific
social evolution by saying that in the
beginning – when it was still a primitive
society – there was social equilibrium.
However, when new ideas and tools of
doing things where introduced, the old
system was disturbed.
 THE CLASSICAL THEORIES
Karl Marx
 THE CLASSICAL THEORIES

THEORY OF KARL MARX

Man became greedy for power and
wealth.
 Greatly concerned with material things.
 This led to class struggles between the
workers and the capitalists.
 Capitalists wanted to accumulate wealth
at the expense of the workers.
 THE CLASSICAL THEORIES

THEORY OF KARL MARX

Result of Theory of Karl Marx:.
 No revolutions happen in the industrial
countries.
 Capitalist continued to flourish and
become stronger.
 However in many parts of the world,
capitalists still exploit the workers.
 THE CLASSICAL THEORIES

PROMOTION OF HUMAN VALUES

Jean Sismondi, disagreed with
Adam Smith in many ways:
 Wealth should not be measured in terms
of material things but in terms of human
welfare.
 No nation can be considered prosperous
if the conditions of the poor have not
been improved.
 THE CLASSICAL THEORIES

PROMOTION OF HUMAN VALUES

Jean Sismondi, disagreed with
Adam Smith in many ways:
 Rejected laissez faire.
 Interested more in social justice rather
than in the accumulation of wealth.
 Proposed an active role for the
government in protecting human values.
 THE CLASSICAL THEORIES

FACTORS OF ECONOMIC DEVELOPMENT

Freidrich List:
 said the progress of nation is great not in
proportion to the accumulation of
wealth, but in proportion to the
development of the productive forces.
 THE CLASSICAL THEORIES

FACTORS OF ECONOMIC DEVELOPMENT

Freidrich List:
 Such forces refer to natural resources,
sciences, arts, government laws,
education, peace and order, morality,
and the harmonious relationships of
various industries and occupations.
 THE CLASSICAL THEORIES

THEORY OF PROGRESS & POVERTY

Henry George:
 He concluded that rent is the root cause
of poverty.
 Increase in value of land is not due to its
fertility, but due to the growth of
population in the community and the
progress of society.
 THE CLASSICAL THEORIES

THEORY OF PROGRESS & POVERTY

Henry George:
 RENT is an unearned income. During the
early days, land could be acquired free
through proper application from the
government. Other got their lands
through inheritance or by historical
accident.
 THE CLASSICAL THEORIES

THEORY OF PROGRESS & POVERTY

Henry George:
 Because of the sudden growth of
population, land rents have increased.
Thus, the landowners are beneficiaries of
unearned incomes.
 THE CLASSICAL THEORIES

THEORY OF PROGRESS & POVERTY

Henry George:
 Businessmen pay the rents. If rents
increase, they have to pay more. The cost
of production/business gets higher. But
such cost is paid ultimately by the
consumers when they buy the goods.
 THE CLASSICAL THEORIES

THEORY OF PROGRESS & POVERTY

Henry George:
 The buyers pay the rents in the form of
higher prices. This makes the economic
conditions of the poor more depressed.
 THE CLASSICAL THEORIES

Key to Progress
Henry George:
 Proposed that increase in rent and value
of land should be taken by the
government in the form of tax.
 All should be abolished except tax on
land.
 THE CLASSICAL THEORIES

Key to Progress
Henry George:
 However, improvements introduced by
landowners are not covered by the single
tax theory of George.
 Only unearned incomes from land should
be taxed.
 THE CLASSICAL THEORIES

Key to Progress
Henry George:
 Such revenues could finance all
government expenses, and there would
be no need for other taxes.
 This tax program stimulates trade and
commerce.
 THE CLASSICAL THEORIES

Key to Progress
Henry George:
 Workers would no longer bear the heavy
burden of paying taxes on production
and consumption.
 His crusade for a single tax scheme did
not succeed because landowners were
powerful.
 THE CLASSICAL THEORIES

MODERN THEORY OF EMPLOYMENT

 EMPLOYMENT is determined by supply
of and demand for labor. A decline in
employment means that wages are high
in relation to prices of goods.
 Producers are not willing to manufacture
goods if they know they are going to
lose.
 THE CLASSICAL THEORIES

MODERN THEORY OF EMPLOYMENT

 The main point of this theory is that THE
CAUSE OF UNEMPLOYMENT IS HIGH
WAGES.
 There is more employment when wages
are lower (Classical Theory of
Employment).
 THE CLASSICAL THEORIES

MODERN THEORY OF EMPLOYMENT

 However, during the Great Depression in
the USA in the 1930s, there was
widespread unemployment.
 Even if people were willing to accept
low wages, there was no demand for
jobs.
 THE CLASSICAL THEORIES

MODERN THEORY OF EMPLOYMENT

 Hence the validity of the Classical Theory
of Employment was tested, and it failed.
 It was JOHN MEYNARD KEYNES (English
economist) who found the answer to the
American problem.
 Keynes became the “father of modern
economics”.
 THE CLASSICAL THEORIES

Keynesian Theory of Employment

Based on the Keynesian Theory of
Employment which is a modern
theory:
 Employment determines the necessity of
equating the aggregate supply of goods
with the aggregate demand for goods.
 THE CLASSICAL THEORIES

Keynesian Theory of Employment

 When people buy more goods, it means
there is more expenditure or
consumption.
 This condition stimulates more
investments which also increases
employment and production
 THE CLASSICAL THEORIES

INNOVATION THEORY
Joseph Schumpeter:
 Placed emphasis on the role of the
innovator in economic development.
 The innovator is the economic leader or
the entrepreneur who has the courage
and imagination to handle old systems,
and be able to transform theory into
practice.
 THE CLASSICAL THEORIES

INNOVATION THEORY
Joseph Schumpeter:
 An INNOVATION can be any change
initiated by the entrepreneur which leads
to a faster and better development of an
industry.
1. an invention
2. method of production
3. marketing strategy
 THE CLASSICAL THEORIES

INNOVATION THEORY
Joseph Schumpeter:
 Because of innovation, the industry
became profitable and attracts more
innovators.
 There is more business expansion –
employment and production.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

Economic models:
 Can be simple or sophisticated.
 Depends on the architect or the situation
which the model tries to improve.
 Shows relation of inputs and outputs.
 Most were made by USA and Western
Europe.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Ricardian Growth Model:
 Derived from the LAW OF DIMINISHING
RETURNS of DAVID RICARDO.
 Stressed the limits of economic growth
brought about by the scarcity of land, its
being a fixed input, and its diminishing
productivity.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Ricardian Growth Model:
 To reduce the constraints of economic
growth, he proposed the discovery of
more land for cultivation or more food at
lower prices should be imported.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Ricardian Growth Model:
 The key factor in the growth model is
LAND.
a. Many agricultural countries have
been able to increase their farm
production through the cultivation of
more farm lands – not through
efficiency.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Ricardian Growth Model:
b. Among highly developed countries,
productivity greatly increased though
the use of technology and machinery.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Harrod-Domar Model:
 Develop by Sir Harrod and Professor
Domar.
 The key factor is PHYSICAL CAPITAL like
machinery, building, equipment, etc.
 THE CLASSICAL THEORIES

Harrod-Domar
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Harrod-Domar Model:
 It shows the relationship between the
input, which is the capital, and its
efficiency is reflected in its output.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Harrod-Domar Model:
 For example, a certain amount of capital
stock or physical capital has been
invested; if the outputs have been
substantial in terms of employment,
production and income, then the capital
has been used efficiently.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Harrod-Domar Model:
 The efficiency of capital in relation to
economic growth depends on several
factors:
1. Values of workers
2. Skills
3. Technology
4. Government policies
SOME GROWTH MODELS
The Harrod-Domar Model:
 Poor nations are deficient in capital but it
is more on human and institutional
developments.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Kaldor Model:
 The author is Nicholas Kaldor.
 The key factor is technology which is
embodied in physical capital.
 Technical progress comes from
investment.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Kaldor Model:
 Examples are:
1. modern machines
2. tools
3. equipment
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Kaldor Model:
 These are symbols of technical progress,
and they are products of investments.
 THE CLASSICAL THEORIES

SOME GROWTH MODELS

The Kaldor Model:
 A very good example economic growth
due to technical progress is Japan. A big
slice of its national budget has been
invested for research and technology.
 It is now number one in the use of robots
in factories, hospitals, and in offices.
 QUESTIONS FOR REVIEW AND
DISCUSSION
1. Explain some economic ideas during the
ancient times. Which idea do you like
best? Justify your answer.
2. Briefly discuss the concepts of justice of
Aquinas. Do we have this kind of justice at
present in the Philippines? Explain your
answer.
3. In your opinion, how do you improve
foreign trade?
 QUESTIONS FOR REVIEW AND
DISCUSSION
4. Define Physiocracy. Do you agree with
them? Justify your answer.
5. Explain laissez faire in economics. Is it
good for developing countries? Explain
your answer.
6. State the economic ideas of Smith. Do you
agree with him? Why? Explain the
Malthusian theory.
 QUESTIONS FOR REVIEW AND
DISCUSSION
7. Define the law of comparative advantage.
Is this feasible in the real international
trade? Why?
8. State the ideas of Marx. Do you agree
with him? Why?
9. Explain the ideas of Sismondi and List. Are
these good for our own economic
development? Why?
 QUESTIONS FOR REVIEW AND
DISCUSSION
10. Explain the ideas of George on rent.
Give specific examples of problems on
rent in the Philippines.
11. How do you create employment?
12. Discuss one growth model.