University of Papua New Guinea Guest Lecture Lecture: Philosophy of Economics

The University of Papua New Guinea Slide 1 Guest Lecture: Philosophy of Economics Michael Cornish Ontology: What is economics? Opportunity cost A journey through history… –An aside: Economic analysis –An aside: Efficiency versus equity –An aside: Government versus market Models versus reality Overview

The University of Papua New Guinea Slide 2 Guest Lecture: Philosophy of Economics Michael Cornish Ontology: What is economics? The starting point in philosophical inquiry is ontology Ontology: the study of ‘the nature of being’ –I.e. the study of ‘what is…?’ »So… what is economics?

The University of Papua New Guinea Slide 3 Guest Lecture: Philosophy of Economics Michael Cornish Ontology: What is economics? One definition: –Economics is the study of how scarce resources are allocated in society The ‘economic problem’: –Unlimited wants v. limited resources Economics asks – »how do we solve this problem?

The University of Papua New Guinea Slide 4 Guest Lecture: Philosophy of Economics Michael Cornish Ontology: What is economics? Economics is not about money, it is about decision-making –I.e. economics ≠ capitalism!! –So it’s very different from accounting, finance, business management, etc… –In many ways, it is more closely related to public policy than to business! Economics is a social science!

The University of Papua New Guinea Slide 5 Guest Lecture: Philosophy of Economics Michael Cornish Opportunity cost Definition: [When using resources…] the value of the next best alternative foregone It’s a way of helping us to think of the full cost and value of resources –The concept really helps with decision- making!

The University of Papua New Guinea Slide 6 Guest Lecture: Philosophy of Economics Michael Cornish A journey through history... The Enlightenment (c.1650 – 1800) 2 major strands: 1.Politics and morality Liberalism and utilitarianism Distributive justice 2.Scientific Observation, experiments and models BUT these two strands were fused together!

The University of Papua New Guinea Slide 7 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 8 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 9 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 10 Guest Lecture: Philosophy of Economics Michael Cornish Utilitarianism Consequential ethics v. deontological ethics Consequential ethics: o Actions are only immoral if they lead to immoral outcomes Deontological ethics o Certain actions are always immoral, regardless of the outcomes

The University of Papua New Guinea Slide 11 Guest Lecture: Philosophy of Economics Michael Cornish Utilitarianism Utilitarianism is a way of doing accounting in consequential ethics –I.e., How do we work out if an action is immoral or not?

The University of Papua New Guinea Slide 12 Guest Lecture: Philosophy of Economics Michael Cornish Utilitarianism Jeremy Bentham says utility is: –Quantity of pleasure minus quantity of suffering John S. Mill says utility is: –Quantity of pleasure minus quantity of suffering, BOTH ADJUSTED FOR QUALITY

The University of Papua New Guinea Slide 13 Guest Lecture: Philosophy of Economics Michael Cornish Utilitarianism Michael Cornish says utility is: –Quantity of SATISFACTION minus quantity of suffering –BOTH ADJUSTED FOR QUALITY In simple terms? »Utility = satisfaction

The University of Papua New Guinea Slide 14 Guest Lecture: Philosophy of Economics Michael Cornish Utilitarianism Utility is critical to economics It’s how we derive the demand curve! Assumption is consumers seek to maximise utility

The University of Papua New Guinea Slide 15 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 16 Guest Lecture: Philosophy of Economics Michael Cornish Adam Smith Famous book, The Wealth of Nations (1776) He was more from the scientific strand of the Enlightenment Many consider him the father of economics Probably his greatest contribution was to write down, in a structured way a body of economic thought

The University of Papua New Guinea Slide 17 Guest Lecture: Philosophy of Economics Michael Cornish Adam Smith Just one idea I want to focus on: Specialisation, and gains from trade The idea that if people specialise, and then trade their surplus, they will be better off than if they tried to do every type of job themselves

The University of Papua New Guinea Slide 18 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 19 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 20 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 21 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 22 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 23 Guest Lecture: Philosophy of Economics Michael Cornish David Ricardo Who was Ricardo? British political economist Born: 1772, Died: 1823 Made his fortune speculating on the outcome of the Battle of Waterloo!! Mercantilism v. free trade Created the Theory of Comparative Advantage

The University of Papua New Guinea Slide 24 Guest Lecture: Philosophy of Economics Michael Cornish David Ricardo Absolute advantage –The ability to produce more of a product than other producers using the same amount of resources Comparative advantage –The ability to produce a product at a lower opportunity cost than other producers

The University of Papua New Guinea Slide 25 Guest Lecture: Philosophy of Economics Michael Cornish David Ricardo The Theory of Comparative Advantage Comparative advantage is what determines what you should specialise in producing for trade –NOT ABSOLUTE ADVANTAGE!! Just like with Adam Smith, this conclusion supports FREE TRADE, and is anti-protectionism

The University of Papua New Guinea Slide 26 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 27 Guest Lecture: Philosophy of Economics Michael Cornish

The University of Papua New Guinea Slide 28 Guest Lecture: Philosophy of Economics Michael Cornish Karl Marx Two most important works: –The Communist Manifesto –Das Kapital Marx provided the strongest criticism to the emerging mainstream economic thought –Described economic systems as systems of social control

The University of Papua New Guinea Slide 29 Guest Lecture: Philosophy of Economics Michael Cornish An aside: Economic analysis Positive: Value-free analysis –(can be argued with facts) »Scientific strand Normative: Value-laden analysis –(cannot be argued without referring to moral principles and opinions) »Politics / morality strand

The University of Papua New Guinea Slide 30 Guest Lecture: Philosophy of Economics Michael Cornish An aside: Efficiency versus equity There is often a trade-off! Is economics about efficiency or equity (fairness)? »It’s about BOTH

The University of Papua New Guinea Slide 31 Guest Lecture: Philosophy of Economics Michael Cornish An aside: Efficiency versus equity Two major types of efficiency Productive efficiency –A product is made using the least amount of resources Allocative efficiency –Resources are allocated according to their most productive social use

The University of Papua New Guinea Slide 32 Guest Lecture: Philosophy of Economics Michael Cornish An aside: Government versus market One of the huge debates in economics –When should the market be left alone (unregulated)? –When should the government intervene in the market (regulation)? The Economic spectrum: Central planning mixed economy laissez-faire capitalism

The University of Papua New Guinea Slide 33 Guest Lecture: Philosophy of Economics Michael Cornish John Rawls Talks about distributive justice –I.e. How should resources be distributed within society? –I.e. How do we create a just society?

The University of Papua New Guinea Slide 34 Guest Lecture: Philosophy of Economics Michael Cornish John Rawls Has two very useful ideas for thinking about this issue – –The ‘original position’, and; –The ‘veil of ignorance’ His conclusion: no-one should gain if it makes anyone else worse off

The University of Papua New Guinea Slide 35 Guest Lecture: Philosophy of Economics Michael Cornish Neoliberalism In the early 1980s, pro-market, anti- government interventionist thinking gained dominance in economic thought Called neoliberalism, because it was a new version of the old, pro-free-market liberalism –Western elites are often blamed for being too neoliberal