I. The Nature and Value of Economics

A. Some Definitions

l. Economics: the science that studies the production of wealth under a system of division of labor

2. The division of labor: the separation of the total labor required to serve human life and well-being into separate, distinct occupations. In a division of labor society, each person lives by producing or helping to produce just one or, at most, a very few things and is supplied by the labor of others for practically all of his wants.

B. The Need for Economics; Leading Applications of the Subject

The division of labor doesn't exist or function automatically—e.g., fall of Rome, rise of U.S. and Western World; it depends on human choices; thus knowledge of its nature and requirements is necessary

1. Survival of material civilization:
2. Understanding history and the present-day world
3. Solving current economic problems—e.g., unemployment, inflation, stagnation, shortages, international economic conflict
4. Business and financial applications—influence of anti-business ideas; defending the freedom of businessmen to make money
5. Personal, philosophical applications—understand own and others' role, not feel chronically victimized or regard self as victimizer because successful

II. Theme of Course: The Division of Labor Depends on the Institutions of Capitalism

1. Definitions

a. capitalism: a politico-economic system based on private ownership of the means of production and characterized by the pursuit of material self-interest under freedom
b. freedom: the absence of the initiation of physical force
c. freedom and the necessity of limited government

2. The philosophical foundations of capitalism and economic activity

a. secularism
b. acceptance of causality—influence on: science and technology; willingness to work hard; self-responsibility; saving and capital accumulation
c. acceptance of power of reason: consequent view of Man and the individual as valuable and competent—the base for the acceptance of the idea of individual rights and economic freedom; connection to great entrepreneurship

3. Capitalism: its nature and origin. The “spontaneous” emergence of capitalist institutions based on the rational pursuit of material self-interest under freedom: private property and private ownership of the means of production; saving and capital accumulation; economic inequality; the division of labor; exchange and money; financial self-interest and the profit motive; economic competition; the price system. The economic history of the U.S. as illustration.

4. The controversial character of economics and capitalism

a. the assault on economic activity and capitalism
b. economics versus unscientific personal observations
c. economics versus altruism
d. economics versus irrational self-interest
e. economics versus irrationalism

III. Wealth and the Economic Problem

A. The Wealth Centeredness of Economics

1. Wealth: material goods made by man

2. Goods (economic goods): things recognized as having the power to serve a human need or want, requiring the performance of labor or effort to be enjoyed, and over which we possess sufficient command gainfully to direct them to the satisfaction of our needs or wants. Examples of things that are not (economic) goods:

a. atmospheric air and sunlight

b. oil or uranium before their uses discovered

c. iron on Mars

d. desert land

e. “imaginary goods”—e.g., rabbit's feet, tarot cards

3. The service industries as almost entirely auxiliary to the production or distribution of wealth.

B. “Scarcity”

1. No matter how abundant, wealth is always “scarce” in the sense that the need and desire for wealth is still greater.

2. Scarcity in this sense operates against scarcity in the sense of scantiness, insofar as it leads people to increase production—e.g., increasing food production to provide meat safeguards against famines; to provide steak, safeguards against a scantiness of meat, and so on.

3. The ineradicability of “scarcity”

a. not eliminated by more workers—correspondingly more needs and desires

b. not eliminated by rise in the productivity of labor—new desires for products accompany the new methods of production

C. The Objective Basis of the Limitless Desire for Wealth

1. The scope of the need for wealth: not just food, clothing, and shelter, but:

a. art, science, music, athletics, human relationships—virtually every human activity without exception depends upon or is substantially facilitated by the use of wealth adapted to it. (Try to think of exceptions)

b. the psychological-aesthetic aspects of the satisfaction of physical needs; variety and novelty

2. The perfectibility of human need satisfactions and the use of human faculties: the wealth applicable to the needs for nutrition and health; to the use of our eyes, ears, limbs, and minds.

3. The fundamental bases of our limitless desire and need for wealth: the capacity of our imaginations exceeds the power of our arms; our possession of reason gives us the potential for a limitless range of knowledge and awareness, hence, of action and experience; wealth is the material means of action and experience—in the form of instrumentalities (e.g., tools and machines) and objects of contemplation (e.g., works of art, landscaped grounds); our desire for wealth exceeds our means of producing it because of the abstract nature of knowledge, which has no fixed limits, while our physical capacities are always strictly limited.

4. The “naturalness” and “necessity” of economic progress.

a. the result of the use of reason as a constant

b. our awareness of the future and its impact on our happiness in the present.

c. the need to offset the operation of the law of diminishing returns

5. The division of labor and capitalism the on-going solution to raising the productivity of labor in the face of a limitless need and desire for wealth.

D. The Law of Diminishing Marginal Utility and Its Reconciliation with the Limitless Need for Wealth

1. Statement of the law: the utility, importance, or subjective value that is attached to a unit of a good diminishes as the quantity of the good one consumes or possesses increases. The examples of successive glasses of water and Böhm-Bawerk's pioneer with the five sacks of grain.

2. Basis of the law:

a. the progressive satisfaction of wants, so that each additional unit confronts a want that is already more and more satisfied

b. the rational choice to satisfy our more urgent wants ahead of our less urgent wants, leaving only wants of progressively less urgency to be satisfied by succeeding units

3. Observations:

a. the substitutability of units, with the result that the utility of each unit equals that of the marginal unit

b. the marginal unit serves the least important of the most important wants that the supply can serve

4. The reconciliation of diminishing marginal utility with the principle that our need for wealth is limitless (a reply to Galbraith's criticism):

a. so long as there is any marginal utility at all, the utility of a larger supply is always greater than the utility of a smaller supply

b. the availability of more wealth is caused by a process that at the same time raises the marginal utility of additional units of wealth—i.e., more efficient methods of production are accompanied by new types of consumers' goods, which represent new, more important uses for wealth, e.g., the electric motor and all the electrical appliances

c. with the availability of more wealth, the size of the marginal unit tends to increase: e.g., a house versus a hut, a car versus a horse and wagon, a hundred dollars or a thousand dollars versus one dollar or ten dollars; the marginal utility of the second house or car is less than that of the first house or car, but almost certainly greater than that of the second hut or horse. On the basis of such examples, it is mistaken to conclude that the utility of the marginal units actually under consideration in real life diminishes as wealth increases, or that the importance of the pursuit of additional wealth diminishes.

d. the ideal arrangement is for the marginal utility of any given sum of wealth to steadily diminish toward the vanishing point, while we deal with larger and larger sized units

5. Applications of the principle of diminishing marginal utility:

a. resolution of the value paradox of classical economics

b. recognition of the actual role of cost of production in price determination—Böhm-Bawerk's explanation

c. consumer spending patterns

d. Say's Law and relative overproduction and underproduction

E. The Assault on Wealth

1. The moralistic denigration; asceticism—the confusion of pleasure and pain.

2. The doctrines of conspicuous consumption and cultural relativism; why wealth deserves prestige; the objective advantages of an economically successful culture; socialism and non-material incentives

3. Wealth as the alleged cause of poverty: the overproduction and underconsumption doctrines (elaborated in MBA 674)

4. The ecology doctrine

IV. Natural Resources and the Environment

A. The Limitless Potential of Natural Resources

Matter and energy supplied by nature. Goods and wealth character supplied by man. Expandability of the supply of economically useable, accessible natural resources.

B. The Law of Diminishing Returns

1. Statement of the law: If increasing quantities of a factor of production (or a group of factors of production) are applied to the production of a product, while the quantity of all the other, complementary factors of production is held fixed, then, beyond a certain point, additional output will be less than proportional to the additional input.

2. Classic illustration of the law: the application of successive equal doses of labor and capital to a fixed quantity of land. The need for more land.

Ricardo and grades of land of decreasing quality.

3. Basis of the law:

a. physical: “quantitative definiteness”

b. rational self-interest: choose most productive uses of a factor of production first, leaving only less productive uses for later (this principle applies to Ricardo's grades of land case)

4. Reconciliation of the law with the limitless potential of natural resources: the law applies at any given time, not over time; improving technology and capital equipment can constantly raise the point from which returns diminish; the operation of quantitative definiteness can be offset by our ability to manipulate larger quantities of matter and by our ability to manipulate properties of pieces land (and other forms of matter) that we were unable to manipulate before (e.g., trace elements, new strains of seed, hydroponics, etc.); economic progress permits less labor to be employed in agriculture and mining.

5. Applications of the law of diminishing returns:

a. Why aren't pieces of land and mines exploited to the maximum possible extent?

b. Why production is not limited by a lack of natural resources even in the short run.

6. Diminishing returns and the need for economic progress

C. Implications for the Ecology Doctrine

1. Why the inherent tendency of production is to improve the environment.

2. How the populations of species and the quality of water and air support this proposition.

3. The ethical perspective of the ecology movement: the intrinsic-value doctrine and its implications.

4. Environmentalism, collectivism, and socialism. The alternative of individualism and capitalism as the means of solving alleged global problems.

V. The Gains from the Division of Labor

1. The multiplication of knowledge; the ability to produce products that would otherwise be
impossible
2. The benefit from geniuses and other rare talents
3. Concentration on all individual advantages—the Crusoe-Friday example of deer and salmon
4. Economies of learning and motion

a. ratio of application time to learning time—more learning
b. subconscious automatizing of motions
c. elimination of wasted motions in changing positions and operations
d. specialization in dissemination of knowledge

5. Geographical specialization
6. The gains from machinery attributable to division of labor

a. sufficient fund of knowledge and materials
b. science and invention as specializations
c. simplification of design
d makes use of machinery pay
Why the Industrial Revolution began in England

A. Some Implications of the Division of Labor

1. Appropriateness to Man's mind, body, and nature-given environment—accomplish more with the same
2. The individual and society
3. Self-interest and ethics: objective value of other people—their existence and freedom

B. Criticisms of the Division of Labor and Rebuttal

1. The alleged narrowness and one-sidedness of the worker
2. “Alienation” and boredom—rebuttal:

a. how the division of labor creates the opportunity for everyone to be a “Renaissance Man”
b. how it operates against alienation via providing wealth and leisure and thus education—the means to understand and control one's environment; anti-intellectuality of the alienation charge
c. anti-boredom: housewives and money motivation; how practically every job could be made challenging (piece-work and team competition), and what prevents it (i.e., unions: anti-piece-work, anti-worker competition, prevent firing bad workers—create split between work and worker's self-terest)