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Factors Of Production

Factors of production

Factors of production are resources used in the production of goods and services in economics. Classical economics distinguishes between three factors:
- Land or natural resources - naturally-occurring goods such as soil and minerals that are used in the creation of products. The payment for land is rent.
- Labor - human effort used in production which also includes technical and marketing expertise. The payment for labor is a wage.
- Capital goods - human-made goods (or means of production) which are used in the production of other goods. These include machinery, tools and buildings. In a general sense, the payment for capital is called interest. These were codified originally in the analyses of Adam Smith, 1776, David Ricardo, 1817, and the later contributions of Karl Marx and John Stuart Mill as part of one of the first coherent theories of production in political economy. Marx refers in Das Kapital to the three factors of production as the "holy trinity" of political economy. In the classical analysis, working capital was generally viewed as being a stock of physical items such as tools, buildings and machinery. This view was explicitly rejected by Marx. Modern economics has become increasingly uncertain about how to define and theorise capital (see capital controversy). With the emergence of the knowledge economy, more modern analysis often distinguishes this physical capital from other forms of capital such as "human capital" (economics jargon for education or training). Also, some economists mention enterprise, entrepreneurship, individual capital or just "leadership" as a fourth factor. However, this seems to be a form of labor or "human capital." When differentiated, the payment for this factor of production is called profit. This is when entrepreneurs think of ideas, organise the other three factors of production, and take risks with their own money and the financial capital of others. In a market economy, entrepreneurs combine land, labor, and capital to make a profit. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens. The classical theory, further developed, remains useful to the present day as a basis of microeconomics. Some more means that deal with factors of production are as follows:
- Entrepreneurs are people who organize other productive resources to make goods and services. The economists regard entrepreneurs as a specialist form of labor input. The success and/or failure of a business often depends on the quality of entrepreneurship.
- Capital has many meanings including the finance raised to operate a business. Normally though, capital means investment in goods that can produce other goods in the future. It can also be referred to as machines, roads, factories, schools, and office buildings in which humans produced in order to produce other goods and services. Investment is important if the economy is to achieve economic growth in the future.
- Human Capital is the quality of labor resources which can be improved through investments, education, and training.
- Fixed Capital this includes machinery, work plants, equipment, new technology, factories, buildings, and goods that are designed to increase the productive potential of the economy for future years.
- Working Capital this includes the stocks of finished and semi-finished goods that we be economically consumed in the near future or will be made into a finished consumer good in the near future.

Developments and Alternative views

Classical view as the base of microeconomic theory

Although it did not deal substantially with complex issues of a sophisticated modern economy, the classical theory remains useful to the present day as the basis of microeconomics, however many distinctions one cares to make or macro-theory or political economy one chooses to apply to trade them off or set their valuations in society at large. Land has become natural capital, imitative aspects of Labor have become instructional capital, creative or inspirational aspects or "Enterprise" have become individual capital (in some analyses), and social capital has become increasingly important. The classical relationship of financial capital and infrastructural capital is still recognized as central, but there is a wider debate on means of production and various means of protection, or "property rights", to secure their reliable use. When disputes arise regarding these fine distinctions, most economists will fall back to the three classical factors. While no major theory has yet substantially altered the foundation assumptions of either "left" (Marxist) or "right" (neoclassical) theory, Georgism is one syncretic system of thought incorporating both a nominally socialist moral basis (everyone has an equal right of access to nature) while strictly maintaining a solid "libertarian" philosophy on the absolute right of private ownership of the products of all human labor.

Economic rent

In economic theory, economic rent is an analytic term employed to distinguish the difference between the income earned by an input or factor of production, and the cost of the factor of production. A factor of production can be put to various and alternative economic uses; the income earned by (or price paid for) a factor in its current use may be more than what is minimally necessary to draw the factor into its current use; one can imagine the price paid for the factor falling to a level at which the factor would be transferred to its next best use -- that price, the income earned in its next best use, is the opportunity cost of the factor. The difference between the opportunity cost and the income earned in its present use is a rent. Economic rent is distinct from economic profit, which is the difference between the firm's costs and the firm's revenues. While the definition of "economic profit" is a strict one, with no clear relation to rents, the commonsense idea of profit often confounds rents with profits. Real business enterprises typically own some of the factors of production, which they use to produce goods and services for sale, meaning that the business enterprise receives the income due to those factors of production. While payments for the use the factors it owns could be imputed, in calculating profit, the commonsense idea of a highly profitable firm is typically a firm, which owns factors of production, which earn a high rent in the use to which the firm puts them -- a farm, which owns highly productive farmland or a merchant, who owns a highly productive retail location, might be thought "profitable" in the common sense of the term, profit, because the firm is receiving a large rent on the factor of production, which it owns. In classical economics, analysis focused on three factors of production -- land, labor and capital -- each of which earned a distinct type of income -- rent, wages and interest, respectively. These three categories or types were used to explore what determined the distribution of income. It was observed that higher wages or higher interest rates might be expected to draw additional labor or capital to market, but higher rents did not induce God to make any more land; the owners of land rented or made useful all the land they had, regardless of the going rent. Still, some land commanded considerably higher rents than other land. Since only a minimal rent was necessary to bring land into some kind of productive use, almost all of any rent earned must be attributed to market competition to determine how land was to be allocated to particular uses. Virtually all of rent -- the income earned by land -- could be assigned to the allocative function of market prices, while only a portion of wages (the income earned by labor) or interest (the income earned by capital) could be attributed to allocation, since wages and interest also serve to draw these factors into productive use. Johann Heinrich von Thünen was especially influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was high rents, which determined that land in a central city, for example, would not be allocated to farming, but would be allocated instead to high-value residential or commercial uses. Special attributes of a particular piece of land, which made it especially productive for a particular use, might also drive up the rent. Highly productive agricultural land might be highly productive because of its fertility, or special suitability to a particular crop, as well as being well-situated in relation to transportation and access to markets. Rent attributable to special variations in resource quality are sometimes called Ricardian rents. One implication of the classical analysis is that while a tax on wages or interest income would affect the quantity of labor or capital offered to productive use, almost the whole of land rent could be taxed away without affecting the quantity of land on offer. Henry George, seeing that a properly designed tax on land rent would have none of the efficiency-reducing distortive effects of other taxes, advocated a single-tax on land, as a way of financing government. To Karl Marx, this land-rent was seen as a form of exploitation. Land-owners were able to get "something for nothing" just because they controlled such important natural resources. To Marx, the land-owners received a part of capitalist society's surplus-value that was redistributed from the industrial sector, where workers produced it. Returns to sunk cost investments in specialized capital equipment have some of the same qualities as land rent, in that, once the sunk cost investment in specialized equipment is made, the price necessary to bring the captital equipment into the use for which it was designed may be much less than would be necessary to repay the original cost of investment. The difference between the amount necessary to bring a sunk cost investment into productive use and the amount actually earned has been termed a quasi-rent. It is not a true rent, because there would have to be an expectation of earning back the original investment in order to induce the original investment, and, if the original investment was not repaid, the specialized asset may be allowed to wear out, without repair or replenishment, in such use as could be obtained. Nevertheless, the existence of quasi-rents can create paradoxical situations. A railroad, for example, consists of large, sunk cost investments in right-of-way, rail and rolling stock, with the objective of being able to transport people or goods at a very low variable cost. The alternative uses of the specialized capital stock of a railroad, for other than railroading, are, typically, few and poor. Once the sunk cost investment is made, it is in the interest of the railroad to accept shipments at rates, which cover the low variable cost, even when the rate does not offer an adequate return on the sunk cost investment in right-of-way, rail and rolling stock. Modern neoclassical economics has generalized the concept of rent to suggest that the owner of any kind of input can receive income for that input, in excess of what is necessary to put the factor into a particular productive use. The rent, in this conception, is the difference between what is paid and the opportunity cost, represented by the income available in the next, best use of the factor. Rent can be viewed as an estimate of how much market prices for an input would have to change, before the allocation of that particular input would change. How much would the price of maize have to fall relative other crops, before a given field would be planted in rice or potatoes or alfalfa or some other crop instead of maize? A field particularly well-suited to maize, but not other crops, could be said to be earning a rent as a maize field, to the extent that the amount actually earned as a maize field exceeded the absolute minimum amount necessary to allocate the field to maize, as opposed to its next best use, i.e. its opportunity cost. As another example, an excellent professional basketball player typically earns much more income than is necessary to compensate him or her for the training, effort, practice, and the like needed to become a player. In the presence of the productivity enhancing effects of large arenas and television broadcasting, which allow team owners to sell the right to view games to very large numbers of customers, a few highly talented basketball players compete for a relatively few, highly compensated slots on pro teams. The difference between the minimum amount of money putatively needed to get a Michael Jordan to play basketball at all, and the amount actually paid Michael Jordan to play for the Chicago Bulls, may be termed a rent. The generalization of the concept of rent to include quasi-rents and returns above opportunity cost has served to highlight the role of barriers to competition in determining and creating rents. A person seeking to become a medical doctor makes a huge sunk cost investment in medical training and education, which has limited potential application outside of medical practice. In a competitive market for medical services, a doctor's wages would be bid down, until the expected net return on the sunk cost investment in training would be near zero, that is, barely enough to justify making the investment. In a sense, the required investment becomes a barrier to entry, discouraging would-be doctors from making the necessary investment in training to enter the competitive market for medical services, when the return on the necessary sunk cost investment is competed away. Restrictions on the numbers of people entering into the competitive market for medical services, however, would have the effect of raising the return on investments in medical training, without increasing the number of entrants to the market. Associations of doctors have been known to lobby government to limit, in various ways, the number of medical schools training medical doctors and the number of medical students at those institutions. This kind of political activity is sometimes termed, rent-seeking, though the returns realized from such political activities might be more akin to monopoly profits than rents, as generally conceived. Monopoly profits are sometimes called monopoly rents.

Two types of factor rent

- Classical factor rent -- This is the return to a factor above and beyond the amount necessary to induce the supplier to offer the input to the market. This corresponds to the notion of a producers' surplus or "scarcity rent." This type of economic rent arises because of scarcity in the supply of inputs. If factor supply is perfectly elastic, there would be no producers' surplus and no economic rents.
- Paretian factor rent - This is the return to a factor above and beyond the amount that the factor supplier would receive in its next-best alternative use. This type of economic rent draws on the notion of opportunity costs. For example, if someone is earning $20,000 for a job, and the next best job pays $15,000, then the economic rent is the difference between the two: $5,000.

Labour economics

Labour economics seeks to understand the functioning of the market for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income. It is an important subject because unemployment is a problem that affects the public most directly and severely. Full employment (or reduced unemployment) is a goal of many modern governments.

Two ways of analysing labour markets

There are two sides to labour economics. Labour economics can generally be seen as the application of microeconomic or macroeconomic techniques to the labour market. Microeconomic techniques study the role of individuals in the labour market. Macroeconomic techniques look at the interrelations between the labour market, the goods market, the money market, and the foreign trade market. It looks at how these interactions influence macro variables such as employment levels, participation rates, aggregate income and Gross Domestic Product

The macroeconomics of labour markets

The labour force is defined as the number of people employed plus the number unemployed but seeking work. The participation rate is the number of people in the labour force divided by the size of the adult population (or by the population of working age). The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these statistics, self-employed people are counted as employed. Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements from the labour force. Changes in unemployment depend on: inflows made up of non-employed people starting to look for jobs and of employed people who lose their jobs and look for new ones; and outflows of people who find new employment and of people who stop looking for employment. When looking at the overall macroeconomy, several types of unemployment have been identified, including:
- Frictional unemployment — This reflects the fact that it takes time for people to find and settle into new jobs. If 12 individuals each take one month before they start a new job, the aggregate unemployment statistics will record this as a single unemployed worker. Technological change often reduces frictional unemployment, for example: the internet made job searches cheaper and more comprehensive.
- Structural unemployment — This reflects a mismatch between the skills and other attributes of the labour force and those demanded by employers. If 4 workers each take six months off to re-train before they start a new job, the aggregate unemployment statistics will record this as two unemployed workers. Technological change often increases structural unemployment, for example: technological change might require workers to re-train.
- Natural rate of unemployment — This is the summation of frictional and structural unemployment. It is the lowest rate of unemployment that a stable economy can expect to achieve, seeing as some frictional and structural unemployment is inevitable. Economists do not agree on the natural rate, with estimates ranging from 1% to 5%, or on its meaning — some associate it with "non-accelerating inflation". The estimated rate varies from country to country and from time to time.
- Demand deficient unemployment — In Keynesian economics, any level of unemployment beyond the natural rate is most likely due to insufficient demand in the overall economy. During a recession, aggregate expenditure is deficient causing the underutilization of inputs (including labour). Aggregate expenditure (AE) can be increased, according to Keynes, by increasing consumption spending (C), increasing investment spending (I), increasing government spending (G), or increasing the net of exports minus imports (X−M).

The classical microeconomics of labour markets

Economists see the labour market as similar to any other market in that the forces of supply and demand jointly determine price (in this case the wage rate) and quantity (in this case the number of people employed). However, the labour market differs from other markets (like the markets for goods or the money market) in several ways. Perhaps the most important of these differences is the function of supply and demand in setting price and quantity. In markets for goods, if the price is high there is a tendency in the long run for more goods to be produced until the demand is satisfied. With labour, overall supply cannot effectively be manufactured because people have a limited amount of time in the day, and people are not manufactured. A rise in overall wages will, in many situations, not result in more supply of labour: it may result in less supply of labour as workers take more time off to spend their increased wages, or it may result in no change in supply. Within the overall labour market, particular segments are thought to be subject to more normal rules of supply and demand as workers are likely to change job types in response to differing wage rates. Many economists have thought that, in the absence of laws or organizations such as unions or large multinational corporations, labour markets can be close to perfectly competitive in the economic sense — that is, there are many workers and employers both having perfect information about each other and there are no transaction costs. The competitive assumption leads to clear conclusions — workers earn their marginal product of labour. Other economists focus on deviations from perfectly competitive labour markets. These include job search, training and gaining-of-experience costs to switch between job types, efficiency wage models and oligopsony / monopsonistic competition.

Neoclassical microeconomic model — Supply

Households are suppliers of labour. In microeconomics theory, people are assumed rational and seeking to maximize their utility function. In this labour market model, their utility function is determined by the choice between income and leisure. However, they are constrained by the waking hours available to them. Let w denote hourly wage. Let k denote total waking hours. Let L denote working hours. Let π denote other incomes or benefits. Let A denote leisure hours. The utility function and budget constraint can be expressed as following: :max U(w L + π, A) such that L + A ≤ k. This can be shown in a diagram (below) that illustrates the trade-off between allocating your time between leisure activities and income generating activities. The linear constraint line indicates that there are only 24 hours in a day, and individuals must choose how much of this time to allocate to leisure activities and how much to working. (If multiple days are being considered the maximum number of hours that could be allocated towards leisure or work is about 16 — Everyone has to sleep eventually!) This allocation decision is informed by the curved indifference curve labelled IC. The curve indicates the combinations of leisure and work that will give the individual a specific level of utility. The point where the highest indifference curve is just tangent to the constraint line (point A), illustrates the short-run equilibrium for this supplier of labour services.

Income/Leisure trade-off in the short run
The Income/Leisure trade-off in the short run

If the preference for consumption is measured by the value of income obtained, rather than work hours, this diagram can be used to show a variety of interesting effects. This is because the slope of the budget constraint becomes the wage rate. The point of optimization (point A) reflects the equivalency between the wage rate and the marginal rate of substitution, leisure for income (the slope of the indifference curve). Because the marginal rate of substitution, leisure for income, is also the ratio of the marginal utility of leisure (MU^L) to the marginal utility of income (MU^Y), one can conclude: :

=

Effects of a wage increase
Effects of a wage increase

If wages increase, this individual's constraint line pivots up from X,Y₁ to X,Y₂. He/she can now purchase more goods and services. His/her utility will increase from point A on IC₁ to point B on IC₂. To understand what effect this might have on the decision of how many hours to work, you must look at the income effect and substitution effect. The wage increase shown in the previous diagram can be decompiled into two separate effects. The pure income effect is shown as the movement from point A to point C in the next diagram. Consumption increases from Y_A to Y_C and — assuming leisure is a normal good — leisure time increases from X_A to X_C (employment time decreases by the same amount; X_A to X_C).

The Income and Substitution effects of a wage increase
The Income and Substitution effects of a wage increase

But that is only part of the picture. As the wage rate rises, the worker will substitute work hours for leisure hours, that is, will work more hours to take advantage of the higher wage rate, or in other words substitute away from leisure because of its higher opportunity cost. This substitution effect is represented by the shift from point C to point B. The net impact of these two effects is shown by the shift from point A to point B. The relative magnitude of the two effects depends on the circumstances. In some cases the substitution effect is greater than the income effect (in which case more time will be allocated to working), but in other cases the income effect will be greater than the substitution effect (in which case less time is allocated to working). The intuition behind this latter case is that the worker has reached the point where his marginal utility of leisure outweighs his marginal utility of income. To put it in less formal (and less accurate) terms: there is no point in earning more money if you don't have the time to spend it.

The Labour Supply curve
The Labour Supply curve

If the substitution effect is greater than the income effect, the supply of labour curve (diagram to the left) will slope upwards to the right, as it does at point E for example. This individual will continue to increase his supply of labour services as the wage rate increases up to point F where he is working H_F hours (each period of time). Beyond this point he will start to reduce the amount of labour hours he supplies (for example at point G he has reduced his work hours to H_G). Where the supply curve is sloping upwards to the right (positive wage elasticity of labour supply), the substitution effect is greater than the income effect. Where it slopes upwards to the left (negative elasticity), the income effect is greater than the substitution effect. The direction of slope may change more than once for some individuals, and the labour supply curve is likely to be different for different individuals. Other variables that affect this decision include taxation, welfare, and work environment.

Neoclassical microeconomic model — Demand

This article has examined the labour supply curve which illustrates at every wage rate the maximum quantity of hours a worker will be willing to supply to the economy per period of time. Economists also need to know the maximum quantity of hours an employer will demand at every wage rate. To understand the quantity of hours demanded per period of time it is necessary to look at product production. That is, labour demand is a derived demand: it is derived from the output levels in the goods market. A firm's labour demand is based on its marginal physical product of labour (MPL). This is defined as the additional output (or physical product) that results from an increase of one unit of labour (or from an infinitesimally small increase in labour). If you are not familiar with these concepts, you might want to look at production theory basics before continuing with this article.

The Marginal Physical Product of Labour
The Marginal Physical Product of Labour

In most industries, and over the relevant range of outputs, the marginal physical product of labour is declining. That is, as more and more units of labour are employed, their additional output begins to decline. This is reflected by the slope of the MPP_L curve in the diagram to the right. If the marginal physical product of labour is multiplied by the value of the output that it produces, we obtain the Value of marginal physical product of labour: :MPP_L
- P_Q = VMPP_L The value of marginal physical product of labour (VMPP_L) is the value of the additional output produced by an additional unit of labour. This is illustrated in the diagram by the VMPP_L curve that is above the MPP_L. In competitive industries, the VMPP_L is in identity with the marginal revenue product of labour (MRP_L). This is because in competitive markets price is equal to marginal revenue, and marginal revenue product is defined as the marginal physical product times the marginal revenue from the output (MRP = MPP
- MR).

A Firm's Labour Demand in the Short Run
A Firm's Labour Demand in the Short Run

The marginal revenue product of labour can be used as the demand for labour curve for this firm in the short run. In competitive markets, a firm faces a perfectly elastic supply of labour which corresponds with the wage rate and the marginal resource cost of labour (W = S_L = MFC_L). In imperfect markets, the diagram would have to be adjusted because MFC_L would then be equal to the wage rate divided by marginal costs. Because optimum resource allocation requires that marginal factor costs equal marginal revenue product, this firm would demand L units of labour as shown in the diagram.

Neoclassical microeconomic model — Equilibrium

The demand for labour of this firm can be summed with the demand for labour of all other firms in the economy to obtain the aggregate demand for labour. Likewise, the supply curves of all the individual workers (mentioned above) can be summed to obtain the aggregate supply of labour. These supply and demand curves can be analysed in the same way as any other industry demand and supply curves to determine equilibrium wage and employment levels.

Information Approaches

Since the 1970s some attention has shifted to the information characteristics of the labour market. In the classical model it is assumed that both sides know how much work effort and marginal product the employee contributes. In many real-life situations this is far from the case. The firm does not necessarily know how hard a worker is working or how productive they are. This provides an incentive for workers to shirk from providing their full effort — since it is difficult for the employer to identify the hard-working and the shirking employees, there is no incentive to work hard and productivity falls overall. The methods used to overcome this type of problem have been studied by modern labour economists. One solution used recently (stock options) grants employees the chance to benefit directly from the firm's success. However, this solution has attracted criticism as executives with large stock option packages have been suspected of acting to over-inflate share values to the detriment of the long-run welfare of the firm.

Search models

One of the major research achievements of the last 20 years has been the development of a framework with dynamic search, match and bargaining. Work started in the early 1980s with contributions from Peter Diamond, Dale T. Mortensen and others which characterized equilibrium in such model economies. Later, this framework was tailored to the labour market. More recently, Mortensen and Christopher A. Pissarides have extended the framework to include labour market institutions such as unemployment insurance and employment protection.

Criticisms of labour economics

One critique of standard economic analysis of labour markets is that it does not account for the importance of social networks in the employment process. This view holds that personal connections are key for both workers and employees. Hence, employees are more likely to apply for jobs where they have a personal connection, and are more likely to be hired if they apply. More generally sociologists and political economists claim that labour economics tends to lose sight of the complexity of individual employment decisions. These decisions, particularly on the supply side, are often loaded with considerable emotional baggage and a purely numerical analysis can miss important dimensions of the process. Also missing from most labour market analysis is the role of unpaid labour. Even though this type of labour is unpaid it can nevertheless play an important part in society. The most dramatic example is child raising. Unpaid work is typically ignored because it is difficult to measure and there is no agreed upon method of incorporating it into standard analysis. When the unpaid labour variable is ignored, the model’s conclusions might be biased.

External links

- [http://www.nber.org/%7Efreeman/ Richard Freeman]
- [http://www.law.harvard.edu/programs/lwp/LWPclmp.html Labor & Worklife Program at Harvard Law School, Changing Labor Markets Project] Category:Labor ja:労働経済学

Capital (economics)

Capital has a number of related meanings in economics, finance and accounting. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. Initially, it is assumed here that other styles of capital, e.g. physical capital, can be acquired with money or financial capital, so there is little need here for any further analysis of the latter. So below, the word "capital" is short-hand for "real capital" or "capital goods" or means of production. Also to be ignored will be the problems of aggregating capital and the capital controversy.

Capital in classical economic theory

In classical economics, capital is one of three factors of production, the others being land and labour. Goods with the following features are capital:
- It can be used in the production of other goods (this is what makes it a factor of production).
- It is human-made, in contrast to "land," which refers to naturally occurring resources such as geographical locations and minerals.
- It is not used up immediately in the process of production, unlike raw materials or intermediate goods. The third part of the definition was not always used by classical economists. The classical economist extraordinaire David Ricardo would use the above definition for the term fixed capital while including raw materials and intermediate products are part of his circulating capital. For him, both were kinds of capital. Karl Marx adds a distinction that is often confused with Ricardo's. In Marxian theory, variable capital refers to a capitalist's investment in labor-power, seen as the only source of surplus-value. It is called "variable" since the amount of value it can produce varies from the amount it consumes, ie, it creates new value. On the other hand, constant capital refers to investment in non-human factors of production, such as plant and machinery, which Marx takes to contribute only its own replacement value to the commodities it is used to produce. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant. Investment or capital accumulation in classical economic theory is the act of producing increased capital. In order to invest, goods must be produced which are not to be immediately consumed, but instead used to produce other goods as a means of production. Investment is closely related to saving, though it is not the same. As Keynes pointed out, saving involves not spending all of income on current goods or services, while investment refers to spending on a specific type of goods, i.e., capital goods. The Austrian economist Eugen von Böhm-Bawerk maintained that capital intensity was measured by the roundaboutness of production processes.

Broadening the definition of capital

Traditional economic theory generally viewed capital as physical items, such as tools, buildings and vehicles that are used in the production process. Other economists have focussed on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital. Some theories use the terms intellectual capital or knowledge capital which lead to certain questions and controversies discussed in those articles. In general, intellectual capital is that which produces new " intellectual property rights", and that in turn is "whatever one can get paid royalties for". Further, one can create intellectual property rights simply by taking someone else's ideas and then patenting them. So intellectual capital need not be used. Classifications of capital that have been used in various economic theories include:
- Financial capital which represents obligations, and is liquidated as money for trade, and owned by legal entities.
- Natural capital which is inherent in ecologies and protected by communities to support life, e.g. a river which provides farms with water.
- Infrastructural capital is non-natural support systems (e.g. clothing, shelter, roads, PCs) that minimize need for new social trust, instruction, and natural resources. (Almost all of this is manufactured, leading to the older term manufactured capital, but some arises from interactions with natural capital, and so it makes more sense to describe it in terms of its appreciation/depreciation process, rather than its origin: much of natural capital grows back, infrastructural capital must be built and installed.)
- Human capital, arising from investment in skills and education. Human development theory recognizes it as being composed of clear and distinctive social, imitative and creative elements:
- Social capital is the value of trusting relationships between individuals in an economy.
- Individual capital which is inherent in persons, protected by societies, and trades labor for trust or money . Close parallel concepts are 'talent', 'ingenuity', 'leadership', 'trained bodies', or 'innate skills' that cannot reliably be reproduced by using any combination of any of the others above. In traditional economic analysis individual capital is more usually called labor. Although it is still possible to calculate the macro economic idea of "human capital" as payments (like salary), it is rarely or not used when discussing the process of planning investment: for this it is broken down into the more specific styles, which are distinct when one considers the means of identifying them, investing in, and exploiting them. The term "human capital" may thus do more harm than good. In part as a result, separate literatures have developed to describe both natural capital and social capital. Such terms reflect a wide consensus that nature and society both function in such a similar manner as traditional industrial infrastructural capital, that it is entirely appropriate to refer to them as different types of capital in themselves. In particular, they can be used in the production of other goods, are not used up immediately in the process of production, and can be enhanced (if not created) by human effort. There is also a literature of intellectual capital and intellectual property law. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for patent, copyright (creative or individual capital), and trademark (social trust or social capital) instruments.

Means of production

The means of production are physical, non-human, inputs used in production. This includes factories, machines, tools and materials, along with both infrastructural capital and natural capital - in other words, the classical factors of production minus financial capital and minus human capital or labor. When used in contemporary terms, "means of production" usually applies to land or commons being converted to natural resources, and to that infrastructural capital which is not owned strictly in common but is applied to make "goods". Marx's analysis (see below) does not distinguish between infrastructural and natural means of production, but this distinction could be introduced.

Marxist concept

The analysis of people's relationships with the means of production is one element that stands at the basis of Marxism. Karl Marx focused on labor questions. He considered it a reification to treat labor as just another "factor" in production; it implied an inversion of means and ends, so that people were effectively used as things. The working classes are the principal productive forces of society, since their labor creates and conserves material wealth. The bourgeoisie, meanwhile, comprises people who own and trade in means of production as capital assets, and who hire workers to work for them, using those means of production. The bourgeois as property owner can obtain a profit from the work of his employees because the value of output exceeds the outlay on wages and materials. Therefore, the bourgeois obtains a surplus value from the work of his employees. In the Marxist view, this constitutes exploitation of the workers. Marx's terms are often employed in economic analysis by socialists who advocate public ownership of some (or all) means of production. The affinity between labor movement causes and this advocacy is very strong - and often shared by social democrats, socialists, communists and greens. Marx's analysis in particular helped to make clear the key differences between human capital and "labor" or "human resources" - which earlier political economy favoring labor value (e.g. that of David Ricardo) had not done. Marxists define economic systems in terms of how the means of production are used, and which social class controls them. Thus, in capitalism, the means of production are controlled by the bourgeoisie (the "capitalists" - the owners of capital), while in socialism they are controlled by the people's elected representatives and in communism they are controlled collectively by the people themselves.

Green economics

Some green economists, notably Brian Milani, draw parallels between Marx's treatment of labor and natural capital, accepting Marx's view that land is a means, but not a simple factor, of production. Others go further to argue that land, more fully regarded as natural capital must be seen as a sort of "lumpenproletariat" performing ecological work. Still others, including many following neoclassical economics, argue that nothing that is alive (land, labor) and therefore negentropic can be counted as a "means" for anything else that is alive and negentropic - and reject the Marxist terms of reference entirely. There is thus a dispute on convergence between the idea of "means of production" and the modern general notion of capital; Marx's analysis has been important in refining the factors of production wherein individual and natural (alive, natural, creative) actors are kept separate from instructional, social, infrastructural and financial (unliving, entropic, imitative "means") "factors", at least to some degree - notably in the analyses of Natural Capitalism and some macro-economics which study the choice (by people) to do work, or take recreation.

Baldassari and Acquisti

In the analysis of Baldassari and Acquisti, any living actor may choose to use or not use a "means", but an unliving "factor" can only take orders from above, robotically, without any capacity to question. Or, indeed, any capacity to take or choose to do harm. There is thus a clear distinction between a "means", including autonomous intellectual capital, and a "factor" whose detailed choices are defined by passive instructional capital and limits of infrastructural capital. This analysis avoids however the problem of individual capital or "enterprise" or "ingenuity", and how choices to act or not act work in the large to define roles or rules. Some theorists emphasize the "driving down" of decision-making power "closer to the customer" as making the roles of bourgeois and proletarian more alike. Whether true or false, however, this would not affect the basic idea of means of production; rather, it would simply render it ambiguous where means begin and factors end. In particular, the role of those who employ only financial capital and do not directly use the other factors of production remains distinct. The most significant feature of capitalism, in the Marxist analysis, is the fact that the ruling class monopolizes the means of protection, thus of property law enforcement, which keeps the financial capital valuable and convertible into the means of production (all other forms of capital).

Feminist analysis

There are parallels in analysis by modern feminist economists, notably Marilyn Waring who argues that women's work has been systematically devalued and undervalued, while education and training sufficient to use the "means" deemed most valuable by society have traditionally gone to men. She sarcastically parallels two very different ideas of "value" by focusing on village women in a developing nation whose day is defined by the search for clean water and dry firewood, and a man in a U.S. missile silo, whose day is defined by waiting for orders to destroy the Soviet Union. She argues, in general, that woman is to man as lumpen is to proletariat, but does not use those terms herself, evidently to avoid offending the Marxists.

Interest

In finance, interest has three general definitions.
- Interest is a surcharge on the repayment of debt (borrowed money).
- Interest is the return derived from an investment.
- Interest is the right to one's claim in a corporation, such as that of an owner or creditor. In economics, interest is the return to capital This article covers the "financial" use of the term. In common use the term "interest" is seen as rent paid for the use of money. As with any rental, the market price (or rate) is subject to change to reflect market conditions. The fraction by which the balances grow is called the interest rate. The original balance is called the principal. Interest rates are very closely watched market indicators, and have a dramatic effect on finance and economics. The fact that lenders demand interest for loans can be attributed to the following reasons:
- Time value of money or time preference
- (TVM: Having money now is more valuable than having it at some future time because interest is earnt)
- (TP: Interest is the value borrowers place on having money now)
- Opportunity cost
- (OC: The cost in terms of options no longer available once one particular option is chosen)

History

Historical documents dating back to the Sumerian civilization, circa 3000 B.C., reveal that the ancient world had developed a formalized system of credit based on two major commodities, grain and silver. Before there were coins, metal loans were based on weight. Archaeologists have uncovered pieces of metal that were used in trade in Troy, Minoan and Mycenaean civilizations, Babylonia, Assyria, Egypt and Persia. Before money loans came into existence, loans of grain and silver served to facilitate trade. Silver was used in town economies, while grain was used in the country. The collection of interest was restricted by Jewish, Christian and other religions under laws of usury. This is still the case with Islam, which results in a special type of Islamic banking. Silvio Gesell researched the destabilizing effect of interest (an asset will increase beyond any limit over time) in his Freiwirtschaft theory, which includes negative interest rates.

Types of compounding

The method by which interest accrues (accumulates) generally falls in one of the following two categories:

Simple interest

Simple interest is interest that accrues linearly. In other words, it grows by a certain fraction of the principal per time period. Calculation of accrued interest of most debt uses simple interest. Once an interest payment is made, the lender can reinvest it elsewhere. In case he reinvests it in the original investment, interest will start accruing on this interest. In this case, he can calculate the growth of his investment using the compound interest method.

A(t) = k \cdot (1 + t \cdot r)\,

A(t)

= Amount after

t

years
-

k

= Principal (start amount)
-

r

= Interest rate
-

t

= Time in years

Compound interest

Compound interest is interest which is regularly added to the debt (compounded). Interest is then calculated not only over the principal, but also over the interest that has been added to the debt before--in other words, it is calculated over the total amount owed. With compound interest, the frequency of compounding influences the total amount of interest paid over the life of the loan. The amount function for compound interest is an exponential function in terms of time.

A(t) = k \left(1 + \frac  \right) ^

n

= Number of compounding periods per year (note that the total number of compounding periods is

n \cdot t

) If the American Indian tribe that accepted goods worth 60 guilders for the sale of Manhattan in 1626 had invested the money in a Dutch bank at 6 1/2 % interest, compounded annually, their investment would today (2005) be worth over € 700 billion (around US$ 820 billion), more than the assessed value of the real estate in all five boroughs of New York City.

Types of interest rate

Interest rates can be divided into two types:
- Fixed. The interest rate stays fixed throughout the life of the debt. Most bonds are fixed rate bonds.
- Variable. The interest rate is usually determined by a reference rate, such as LIBOR or a consumer price index. Examples are floating rate notes. Sometimes interest rates depend directly on financial ratios or the credit rating of the borrowing company. It is common for firms to swap between the two types of interest rate. These contractual agreements are derivatives called interest rate swaps.

Analysis of interest-rate risks

Interest involves the future, which is uncertain. Some interest bearing investments are riskier than others are. The greater the risk of the security, the more interest the investors will expect to receive. The fundamental determinants of interest rate of a debt instrument are these risks. The following is a list of risks commonly associated with interest rates:
- Nonsystematic risks
- Credit risk – the risk of default on the loan due to bankruptcy
- Maturity/Term risk – the risk involved in a long-term investment
- Liquidity risk – the need of compensating the illiquidity of the debt
- Systematic risks
- Inflation risk – macroeconomic price changes
- Exchange rate risk – currency fluctuation Interest rate has been analyzed in almost every way possible. All the above listed risks have been scrutinized to test their effects on the interest rate.

Credit risk

The credit risk is the most commonly associated risk. It determines the different amount individuals or firms pay based on their credit-worthiness. Different parties will be offered different rates on debt obligations (such as loans). The measure of credit worthiness of an individual is called a credit rating or credit score. Other entities (such as governments and companies) will acquire a bond rating if they are active in bond markets. The credit spread between an instrument and its risk-free equivalent is called the risk premium.

Maturity/term risk

:See term structure of interest rates

Liquidity risk

Liquidity risk is the risk that the lender might not be able to liquidate the debt on short notice. The difference in interest rate due to liquidity risk is called liquidity spread. Instruments such as bonds have an active secondary market. Other instruments such as savings deposits are easily transferable to cash. On the other hand 30-year US Government Savings Bond is non-transferable. It can only be redeemed at half price before maturity. The savings bond will obviously offer a higher return. Another interesting phenomenon observed from liquidity spread is that on-the-run securities (primary market) have lower interest rates compare to the off-the-run securities (secondary market). This implies that there is a higher demand for on-the-run securities.

Inflation and exchange-rate risks

Majority of the inflation and exchange rate risk come from loans to developing countries. Therefore, loans offered by banks in developed countries usually denominate the loan contract in stable currencies such as the US Dollar, Pound Sterling, or Euro. This has led to unfavorable consequences for the borrowers of developing countries because the economies of developing countries often have high inflation and an unstable exchange rate.

Mathematics of interest rates

The amount functions for simple and compound interest are defined as the following: :

A(t)=k(1+t \cdot r)\,

A(t)=k(1+r)^t\,

A(t) = amount at time t k = principal t = compounding periods r = interest rate n = number of compounding periods per year To use these functions, simply substitute the values into the appropriate variable and solve. Since the principal k is simply a coefficient, it is often dropped for simplicity. The accumulation function is the resulting function. Accumulation functions for simple and compound interest are listed below: :

a(t)=1+t r\,

a(t)=(1+r)^t\,

Note: A(t) is the amount function and a(t) is the accumulation function.

Force of interest

In mathematics, the accumulation function are often expressed in terms of e, the base of the natural logarithm. This facilitates the use of calculus methods in manipulation of interest formulas. This is called the force of interest. The force of interest is defined as the following: :

\delta_=\frac\,

a(n)=e^\,

When the above formula is written in differential equation format, the force of interest is simply the coefficient of amount of change. :

da(t)=\delta_a(t)\,dt\,

The force of interest for compound interest is a constant for a given i, and the accumulation function of compounding interest in terms of force of interest is a simple power of e: :

\delta=\ln(1+r)\,

a(t)=e^\,

Continuous compounding

For interest compounded a certain number of times, n, per year, such as monthly or quarterly, the formula is: :

a(t)=\left(1+\frac\right)^\,

Continuous compounding can be thought as making the compounding period infinitely small; therefore achieved by taking the limit of n to infinity. One should consult definitions of the exponential function for the mathematical proof of this limit. :

a(t)=\lim_\left(1+\frac\right)^

a(t)=e^

The amount function is simply :

A(t)=k e^

Finding related topics

- Exponential growth
- Finance
- Accounting
- Management
- Human resources
- Marketing
- Economics
- IT management
- Production
- Business law
- Business ethics & philosophy, and political economy
- Business theorists
- Economists
- Corporate leaders
- Companies

External links

- [http://www.mortgagesaver.org/albert-einstein's-compound-interest-rule-of-72.htm Compound Interest] Albert Einstein and the Compound Interest Rule of 72
- [http://www.easycalculation.com/compound-interest.php Online Compound Interest Calculator]
- [http://www.moneynoesis.co.uk/article.asp?a=Compound-Interest Compound Interest Calculation]
- [http://www.financialsense.com/series4/part1.html FSO Perspectives "The Great Inflation, Part 1 The Nature of Money" by Jim Puplava 09/23/2004] (see "history of interest rates") Category:Basic financial concepts Category:Exponentials Category:Mathematical finance ko:이자 ja:利子

Adam Smith

Adam Smith, FRS (Baptised June 5, 1723 – July 17, 1790) was a Scottish political economist and moral philosopher. His Inquiry into the Nature and Causes of the Wealth of Nations was one of the earliest attempts to study the historical development of industry and commerce in Europe. That work helped to create the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade and capitalism.

Biography

Smith was the son of the controller of the customs at Kirkcaldy, Fife, Scotland. The exact date of his birth is unknown, but he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At around the age of 4, he was kidnapped by a band of Gypsies, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented wryly that he feared Smith would have made "a poor Gypsy." At the age of fourteen, Smith proceeded to the University of Glasgow, studying moral philosophy under "the never-to-be-forgotten" (as Smith called him) Francis Hutcheson. Here Smith developed his strong passion for liberty, reason and free speech. In 1740 he entered Balliol College, Oxford, but as William Robert Scott has said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In 1748 he began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then, in his middle or late 20s, that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he was later to proclaim to the world in his Inquiry into the Nature and Causes of the Wealth of Nations. About 1750 he met David Hume, who became one of the closest of his many friends. In 1751 Smith was appointed professor on logic at the University of Glasgow, transferring in 1752 to the chair of moral philosophy. His lectures covered the fields of ethics, rhetoric, jurisprudence, political economy, and "police and revenue." In 1759 he published his The Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith's reputation in his day, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society). His capacity for fluent, persuasive, if rather rhetorical argument is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special "moral sense", nor (like Hume) on utility, but on sympathy. Smith now began to give more attention to jurisprudence and economics in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by E. Cannan (Lectures on Justice, Police, Revenue and Arms, 1896), and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. At the end of 1763 Smith obtained a lucrative post as tutor to the young Duke of Buccleuch and resigned his professorship. From 1764-66 he traveled with his pupil, mostly in France, where he came to know such intellectual leaders as Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he much respected. On returning home to Kirkcaldy he devoted much of the next ten years to his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, which appeared in 1776. It was very well-received and popular, and Smith became famous. In 1778 he was appointed to a comfortable post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. He died there on July 17, 1790, after a painful illness and was buried in Canongate Churchyard, Royal Mile, Edinburgh. He had apparently devoted a considerable part of his income to numerous secret acts of charity.

Works

Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise. The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come. The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. (Modern economics evolved from this.) Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" — that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today. One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dipped below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. Smith vigourously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire", influenced government legislation in later years, especially during the 19th century. Two of the most famous and oft-quoted passages in The Wealth of Nations are: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

The "Adam Smith-Problem"

There has been considerable controversy as to whether there is a contradiction between Smith's emphasis on sympathy in his Theory of Moral Sentiments and the key role of self-interest in The Wealth of Nations. Economist Joseph Schumpeter referred to this in German as das 'Adam Smith-Problem'.[http://de.wikipedia.org/wiki/Adam-Smith-Problem] In his Moral Sentiments Smith seems to emphasize the broad synchronization of human intention and behaviour under a beneficent Providence, while in The Wealth of Nations, in spite of the general theme of "the invisible hand" creating harmony out of conflicting self-interests, he finds many more occasions for pointing out cases of conflict and of the narrow selfishness of human motives. Yet it would be inaccurate to describe the Adam Smith of the Moral Sentiments as disbelieving of an essential selfishness of most human motives, for he writes that: :Thus self-preservation, and the propagation of the species, are the great ends which Nature seems to have proposed in the formation of all animals. Mankind are endowed with a desire of those ends, and an aversion to the contrary; with a love of life, and a dread of dissolution; with a desire of the continuance and perpetuity of the species, and with an aversion to the thoughts of its entire extinction. But though we are in this manner endowed with a very strong desire of those ends, it has not been entrusted to the slow and uncertain determinations of our reason, to find out the proper means of bringing them about. Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, the love of pleasure, and the dread of pain, prompt us to apply those means for their own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them.

Influence

The Wealth of Nations, and to a lesser extent The Theory of Moral Sentiments, have become the starting point for any defence or critique of forms of capitalism, most influentially in the writings of Marx and Humanist economists. Because capitalism is so often associated with unbridled selfishness, there is a recent movement to emphasize the moral philosophy of Smith, with its focus on sympathy with one's fellows. There has been some controversy over the extent of Smith's originality in The Wealth of Nations; some argue that the work added modestly to the already established ideas of thinkers such as Anders Chydenius, David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith sets out simply describe historical trends away from mercantilism, towards free-trade, that had been developing for many decades, and had already had significant influence on governmental policy. Nevertheless, it organizes their ideas comprehensively, and remains one of the most influential and important books in the field today. Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history.

Major Works

- The Theory of Moral Sentiments (1759)
- The Wealth of Nations (1776)
- Essays on Philosophical Subjects

Quotations

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.
-Wealth of Nations "The best way to encourage economic growth is to unleash individuals to persue their own selfish economic interests."
See also

- Liberalism
- Contributions to liberal theory
- Adam Smith rule
- Capitalism
- History of economic thought
- Anders Chydenius
- The National Gain
External links
;General
-
- [http://www.econlib.org/library/Enc/bios/Smith.html Biography] at the Concise Encyclopedia of Economics
- [http://www.econlib.org/library/YPDBooks/Rae/raeLS.html Life of Adam Smith] by John Rae, at the Library of Economics and Liberty
- [http://cepa.newschool.edu/het/profiles/smith.htm Smith's works]
- [http://econ161.berkeley.edu/Economists/smith.html Brad deLong's Adam Smith page]
- [http://www.adamsmith.org The Adam Smith Institute]
- [http://www.libertyforums.com/ LibertyForums] - Classical Liberal, Libertarian & Objectivist Discussion Board.
- [http://www.boomerbible.com/adam20.html Excerpt from "The Book of the VIP Adam"]
- [http://web.uvic.ca/~rutherfo/a_smith.html Grave of Adam Smith] on the [http://web.uvic.ca/~rutherfo/mr_grvs.html Famous Economists Grave Sites]
- [http://www.npg.org.uk/live/search/ Images at the National Portrait Gallery] ;Works
- [http://www.econlib.org/library/Smith/smWN.html The Wealth of Nations] at the [http://www.econlib.org/index.html Library of Economics and Liberty]. Cannan edition. Definitive, fully searchable, free online.
-
- [http://www.mondopolitico.com/library/wealthofnations/toc.htm The Wealth of Nations] from [http://www.mondopolitico.com/library/ Mondo Politico Library] - full text; formatted for easy on-screen reading.
- [http://www.adamsmith.org/smith/won-intro.htm The Wealth of Nations] from the [http://www.adamsmith.org/ Adam Smith Institute] - elegantly formatted for on-screen reading
- [http://oll.libertyfund.org/Home3/BookSetToCPage.php?recordID=0141 Works and Correspondence of Adam Smith]. Glasgow edition, 7 volumes at the [http://oll.libertyfund.org/ Online Library of Liberty]. Definitive, free online.
- [http://www.econlib.org/library/Smith/smMS.html The Theory of Moral Sentiments] at the [http://www.econlib.org/index.html Library of Economics and Liberty] Smith, Adam Smith, Adam Category:Adam Smith Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith, Adam Smith Smith, Adam Smith, Adam ko:애덤 스미스 ms:Adam Smith ja:アダム・スミス simple:Adam Smith th:แอดัม สมิท

David Ricardo

David Ricardo (April 18, 1772 – September 11, 1823), a British political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists. He was also a successful businessman, financier and speculator, and amassed a considerable fortune.

Personal life

Born in London, Ricardo was the third of seventeen children in a Sephardic Jewish family (from Portugal) that emigrated from The Netherlands to England just prior to his birth. At age 14 Ricardo joined his father at the London Stock Exchange, where he began to learn about the workings of finance. This beginning set the stage for Ricardo's later success in the stock market and real estate. Ricardo rejected the orthodox Jewish beliefs of his family and eloped with a Quakeress, Priscilla Anne Wilkinson, when he was 21, leading to estrangement from his close family. It seems likely, for example, that his mother never spoke to him again. This was around the same time Ricardo became a Unitarian. Ricardo became interested in economics after reading Adam Smith's The Wealth of Nations in 1799 on a vacation to the English resort of Bath. Ricardo's work with the stock exchange made him quite wealthy, which allowed him to retire from business in 1814 at the age of 42. He then purchased and moved to Gatcombe Park, an estate in Gloucestershire. In 1819, Ricardo purchased a seat in the British parliament as a representative of Portarlington, a borough of Ireland. He held the post until the year of his death in 1823. As an MP, Ricardo advocated free trade and the repeal of the Corn Laws. Ricardo was a close friend of James Mill, who encouraged him in his political ambitions and writings about economics. Other notable friends included Jeremy Bentham and Thomas Malthus, with whom Ricardo had a considerable debate (in correspondence) over such things as the role of land owners in a society. He also was a member of London's intellectuals, later becoming a member of Malthus' Political Economy Club, and a member of the King of Clubs. He died at Gatcombe Park at 51 years of age.

Ideas

Ricardo's most famous work is his Principles of Political Economy and Taxation. This book contained Ricardo's theory of comparative advantage. According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations. (Case & Fair, 1999: 812–818). Comparative advantage forms the basis of modern trade theory, reformulated as the Heckscher-Ohlin theorem, which states that a country has a comparative advantage in the production of a product if the country is relatively well-endowed with inputs that are used intensively in producing the product. (Case & Fair, 1999: 822). Like Adam Smith, Ricardo was also an opponent of protectionism for national economies, especially for agriculture. He believed that the British "Corn Laws" — tariffs on agriculture products — ensured that less productive domestic land would be harvested and rents would be driven up. (Case & Fair, 1999: 812, 813). Thus, the surplus would be directed more toward feudal landlords and away from the emerging industrial capitalists. Since he believe landlords tended to squander their wealth on luxuries, rather than investments, Ricardo believed that the Corn Laws were leading to the economic stagnation of the British economy. Parliament repealed the Corn Laws in 1846. Another idea associated with Ricardo was Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy. Ironically, while the proposition bears his name, he does not seem to have believed it. Economist Robert Barro is responsible for its modern prominence.

Publications

Ricardo's publications included:
- The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1810), which advocated the adoption of a metallic currency
- Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), which argued that repealing the Corn Laws would distribute more wealth to the productive members of society
- Principles of Political Economy and Taxation (1817), an analysis that concluded that land rent grows as population increases. It also clearly laid out the theory of comparative advantage, which showed that all nations could benefit from free trade, even if a nation was less efficient at producing all kinds of goods than its trading partners. .

References

- Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.

External links

- [http://www.econlib.org/library/Ricardo/ricP.html On the Principles of Political Economy and Taxation], by David Ricardo. Complete, fully-searchable text at the Library of Economics and Liberty.
- [http://www.econlib.org/library/Enc/bios/Ricardo.html Biography], at the Concise Encyclopedia of Economics
- [http://cepa.newschool.edu/het/profiles/ricardo.htm Biography] at New School University
- [http://www.tutor2u.net/newsmanager/templates/?a=722&z=58 Biography on Ricardo for A level students] on tutor2u Ricardo, David Ricardo, David Ricardo, David Ricardo, David Category:International trade category:International economics ja:デヴィッド・リカード

Karl Marx

:This article is about the German political philosopher Karl Marx, for other uses of Marx, see Marx (disambiguation) Karl Heinrich Marx (May 5, 1818 Trier, Germany – March 14, 1883 London, England) was an influential philosopher, political economist, and revolutionary organizer of the International Workingmen's Association. While Marx addressed a wide range of issues, he is most famous for his analysis of history in terms of class struggles, summed up in the opening line of the introduction to the Communist Manifesto: "The history of all hitherto existing society is the history of class struggle."

Biography

Early life

Karl Marx was born into a progressive and wealthy Jewish family in Trier, Prussia. His father Herschel, descending from a long line of rabbis, although harboring many deistic tendencies, converted to the Christian religion, joining the relatively liberal Lutheran denomination, in order to become a lawyer. The Marx household hosted many visiting intellectuals and artists during Karl's early life.

Education

In 1835 Marx enrolled in the University of Bonn to study law, where he joined the Trier Tavern Club and at one point served as its president; his grades suffered as a result. The following year, his father forced him to transfer to the far more serious and academically oriented Friedrich-Wilhelms-Universität in Berlin. During his stead, Marx wrote much poetry and essays concerning life, using the theological language acquired from his liberal, deistic father, such as "the Deity." It was during this period that he absorbed the atheistic philosophy of the left-Hegelians.

Marx and the Young Hegelians

In Berlin, Marx's interests turned to philosophy, and he joined the circle of students and young professors known as the "Young Hegelians". For many of them, the so-called left-Hegelians, Hegel's dialectical method, separated from its theological content, provided a powerful weapon for the critique of established religion and politics. Some members of this circle drew an analogy between post-Aristotelian philosophy and post-Hegelian philosophy. Another Young Hegelian, Max Stirner, applied Hegelian criticism and argued that stopping anywhere short of nihilistic egoism was mysticism. His views were not accepted by most of his colleages; nevertheless, Stirner's book was the main reason Marx abandoned the Feuerbachian view and developed the basic concept of historical materialism.

Career

When his mentor, Bruno Bauer, was dismissed from Friedrich-Wilhelms' philosophy faculty in 1842, Marx abandoned philosophy for journalism and went on to edit the Rheinische Zeitung, a radical Cologne newspaper. After the newspaper was shut in 1843, in part due to Marx's conflicts with government censors, Marx returned to philosophy, turned to political activism, and made his living as a freelance journalist. Marx was soon forced to move, something he would do often as a result of his views. Marx first moved to France, where he re-evaluated his relationship with Bauer and the Young Hegelians, and wrote On the Jewish Question, mostly a critique of current notions of civil rights and political emancipation that also includes several offensive references to Judaism and Jewish culture. It was in Paris that he met and began working with his life-long close friend and collaborator Friedrich Engels, a committed Communist, who kindled Marx's interest in the situation of the working class and guided Marx's interest in economics. After he was forced to leave Paris for his writings, Marx and Engels moved to Brussels, Belgium. There they co-wrote The German Ideology, a scathing criticism of the philosophy of Bruno Bauer, Hegel and the Young Hegelians. Marx next wrote The Poverty of Philosophy (1847), a critique of French socialist thought. These works laid the foundation for Marx and Engels' most famous work, The Communist Manifesto, first published on February 21, 1848, which was commissioned by the Communist League (formerly, the League of the Just), an organization of German émigrés whom Marx had converted in London. That year Europe experienced revolutionary upheaval; a working-class movement seized power from King Louis Philippe in France and invited Marx to return to Paris. When this government collapsed in 1849, Marx moved back to Cologne and restarted the Neue Rheinische Zeitung, only to be swiftly expelled again. In 1864 Marx organized the International Workingmen's Association, later called the First International, as a base for continued political activism. In his inaugural address, he purported to quote Gladstone's speech, to the effect that, "This intoxicating augmentation of wealth and power is entirely confined to classes of property." He repeated the citation in Volume 1 of Capital. The discrepancy between Marx's quote and the Hansard version of the speech (which was well-known) was soon employed in an attempt to discredit the International. Marx attempted to rebut the accusations of dishonesty, but the allegation continued to resurface. Marx later gave as his source the newspaper The Morning Star. Engels devoted a good deal of attention to the affair in the preface to the fourth edition of Capital — which, likewise, did not put the matter to rest. Engels claimed that it was not The Morning Star but The Times that Marx was following. Indeed, modern critics of Marx continue to invoke Marx's supposed misquotation as evidence of general dishonesty.

Family life

Karl Marx's engagement to Jenny von Westphalen, an aristocrat, was kept secret at first, and for several years was opposed by both the Marxes and Westphalens. Jenny and Karl had many children, several of whom died young. Their daughter Eleanor (1855-1898), who was born in London, was a committed socialist who helped edit her father's works.

Later life

Marx was generally impoverished during the later period of his life, depending on financial contributions from close friend and fellow author, Friedrich Engels, to help with his family's living expenses and debts. Following the death of his wife Jenny in 1881, Marx died in London in 1883, and is buried in Highgate Cemetery, London. The message carved on Marx's tombstone – a monument built in 1954 by the British Communist Party – is: "Workers of all lands, unite". Marx's original tomb was humbly adorned.

Influences on Marx's thought

Marx's thought was strongly influenced by:
- The dialectical historicism of Georg Wilhelm Friedrich Hegel;
- The classical political economy of Adam Smith and David Ricardo;
- French socialist and sociological thought, in particular the thought of Jean-Jacques Rousseau. Marx believed that he could study history and society scientifically and discern tendencies of history and the resulting outcome of social conflicts. Some followers of Marx concluded, therefore, that a communist revolution is inevitable. However, Marx famously asserted that "philosophers have only interpreted the world, in various ways; the point however is to change it", and he clearly dedicated himself to trying to alter the world. Consequently, most followers of Marx are not fatalists, but activists who believe that revolutionaries must organize social change. social change Marx's view of history, which came to be called the materialist interpretation of history (and which was developed further as the philosophy of dialectical materialism) is certainly influenced by Hegel's claim that reality (and history) should be viewed dialectically, through a clash of opposing forces. Hegel believed that the direction of human history is characterized in the movement from the fragmentary toward the complete and the real (which was also a movement towards greater and greater rationality). Sometimes, Hegel explained, this progressive unfolding of the Absolute involves gradual, evolutionary accretion but at other times requires discontinuous, revolutionary leaps — episodal upheavals against the existing status quo. For example, Hegel strongly opposed the ancient institution of legal slavery that was practiced in the United States during his lifetime, and he envisioned a time when Christian nations would radically eliminate it from their civilization. While Marx accepted this broad conception of history, Hegel was an idealist, and Marx sought to rewrite dialectics in materialist terms. He wrote that Hegelianism stood the movement of reality on its head, and that it was necessary to set it upon its feet. (Hegel's philosophy remained and remains in direct opposition to Marxism on this key point.) Marx's acceptance of this notion of materialist dialectics which rejected Hegel's idealism was greatly influenced by Ludwig Feuerbach. In The Essence of Christianity, Feuerbach argued that God is really a creation of man and that the qualities people attribute to God are really qualities of humanity. Accordingly, Marx argued that it is the material world that is real and that our ideas of it are consequences, not causes, of the world. Thus, like Hegel and other philosophers, Marx distin

Factors of production

Developments and Alternative views

Classical view as the base of microeconomic theory

See also

Economic rent

Two types of factor rent

See also

Labour economics

Two ways of analysing labour markets

The macroeconomics of labour markets

The classical microeconomics of labour markets

Neoclassical microeconomic model — Supply

Neoclassical microeconomic model — Demand

Neoclassical microeconomic model — Equilibrium

Information Approaches

Search models

Criticisms of labour economics

See also:

External links

Capital (economics)

Capital in classical economic theory

Broadening the definition of capital

See also

Lists

Means of production

Marxist concept

Green economics

Baldassari and Acquisti

Feminist analysis

See also

Interest

History

Types of compounding

Simple interest

Compound interest

Types of interest rate

Analysis of interest-rate risks

Credit risk

Maturity/term risk

Liquidity risk

Inflation and exchange-rate risks

Mathematics of interest rates

Force of interest

Continuous compounding

See also

Finding related topics

External links

Adam Smith

Biography

Works

The "Adam Smith-Problem"

Influence

Major Works

Quotations

See also

External links

David Ricardo

Personal life

Ideas

Publications

References

External links

Karl Marx

Biography

Early life

Education

Marx and the Young Hegelians

Career

Family life

Later life

Influences on Marx's thought