Ideas and Theories of Economic

Development Chapter 2
 Ancient Economic Ideas

1. Was based on the Holy Scripture

a) Holy Men regulated economics
practices and relationships
b) Justice and mercy were
encouraged
c) greed and extortion were despised
d) pursuit of excessive wealth met
social disapproval
2. Plato

- against the accumulation of wealth thru

lucrative trade or commerce
- to him, agriculture is very important, and
favor specialization of production
- He wants diversity of occupation since no
person is self-sufficient, because
people have many wants
- There is no gap between the rulers and
the ruled
3. Xenophon
- a classmate of Plato, was in favor of
capitalism
- He proposed that the government should
promote trade and shipping
- Encourage more silver mining companies
to increase wealth:
a. joint-stock companies
b. division of labor
 Medieval Economic Thoughts

1. After the powerful feudal lords lost their

influences, ideas were developed among the
merchants:
- merchant guilds and craftsman were
organized
- guilds were in full control of many
economic activities in Europe at that
time
- constructed public works, churches,
cathedrals of Medieval Europe
- Then church became powerful by
actively participating in political
and economic activities.

- Most of the scholars and writers

were churchmen
How did the church become powerful?

1. People gave the church 1/10th of

their earnings in tithes
2. the church owned about one third of
the land in Western Europe
3. church was considered
independent,, they did not have to
pay the king any tax for their land.
• All Medieval people believed
that God, Heaven and Hell all
existed.
• From the very earliest of ages,
the people were taught that the
only way they could get to
Heaven was if the
Roman Catholic Church let
them.
 Roman Catholic Church Grew Importance

1. grew in importance after Roman Empire

declined.
2. It became the unifying force in western
Europe.
3. During the Middle Ages:
- the Pope anointed the Emperors
- missionaries carried Christianity to
the Germanic tribes,
- and the Church served the social,
political, and religious needs of the
people.
• Church condemned usury and other
unfair practices of capitalism
• Despite the opposition of the church,
trade and commerce grew
• and the power of the church and feudal
lords were threatened and started to
fall as capitalism began to rise.
 - Great thinkers demanded the
Merchantilism supremacy of the state over all
powers including the church.
- They were focused on the vital
role of the state in economic
development.
- They claimed that the duty of
the state is to create and
accumulate wealth.
- Wealth came from gold and
silver, thus colonizing awaken.
Serra
Mercantilism
- The birth of manufacturing:
by which government augments their
state power at the expense of other
countries to ensure that exports
exceeded imports and to accumulate
wealth in the form of bullion (mostly
gold and silver).
1. Agriculture has it’s natural
shortcomings because it’s
perishable, bulky, and its
weather conditions.
2. Manufactured products could
be sold readily abroad
3. Mercantilism contributes the
idea of export and import
4. And the idea of foreign trades
 Physiocracy – Rule of Nature

- It greatly stimulates thinkers and philosophers to

questions old doctrines and thoughts.
- Dependence on ancient philosophy and church
dogma began to diminish.
- Philosopher claimed that “people are poor
because they violated the law of nature”
ex. Drunkard, lazy, extravagant = miserable life
Neglected health = sick
Society that conform laws = success
 Wealth came from the Land

- Physiocracy which means the rule of nature,

stressed the importance of agriculture.
- Physiocrats claimed that people cannot exist
without food and natural resources because
agriculture can double more goods.
- Farmers are the backbone of the whole
national economy.
- Physiocrats believes the real wealth of the
nation is agriculture not money (gold & silver)
 Laissez Faire Theory
-It means the government should not
intervene in economic affairs, just
let the flow of market interact
one another.
“Leave us Alone”
- Individual believes businessmen,
consumers, and the whole society
would be better-off in economic
freedom.
- Individual should be free to choose
their economic occupation or
interest.
 The Classical Theory

- Adam Smith believes of the free

competition concept that a free market
mechanism could provide more benefits
to individuals and society than a
economy run by the government.

- He wrote “Wealth of Nations” in 1776

which explains how wealth of the nation
is created and distributed.
 The Classical Theory

- According to Smith, the only source of

wealth is production through labor and
resources.
- He added that wealth can be increased
through division of labor and the use of
machinery
- The improvement in transportation to
promote growth
- Individual welfare depends on the ratio of
total production to total population.
 The Classical Theory
- He also added that through free competition
only the best producers survive.
- The wages and interest are both determined by
demand and supply Ex. If the demand for labor
is greater than the supply of labor, then wages
increases.
- He differed from the other earlier thinkers who
favored agricultural development because he
prefers industrial.
- The basic principle of taxation came from Adam
Smith.
 Theory on Population

- There was a great influx of rural people

in the urban communities looking for job.
- It created both social and economic
problems thus the capitalist took
advantage of the situation.
- They gave very low wages to their worker
- Force them to work 17 hours
- The government did nothing to help the
workers
- Poverty and squalor became widespread
among the workers.
 Theory of Comparative Advantage

- David Ricardo, based on his theory, “nation

should export the goods they enjoy with greatest
advantage and should import the goods which
they have the greatest disadvantage”.
- The theory explained the comparative
advantage of two countries: “ The theory refer
to lesser number of hours or days of producing
the products.”
Countries Rice Calculator
Japan 120 days 10 days
Philippines 90 days 15 days
Theory of Karl Marx
Karl Marx Theory
Theory of Karl Marx
Theory on Poverty

“Businessmen pay the

rents. If rent is
increase, they have to
pay more…..but such
cost was paid
ultimately by the
consumers when they
buy the goods.”
 Modern Theory of Employment
First theory-
“A decline in employment means that wages
are high in relation to the prices of goods. They
will not willing to manufacture goods if they will
be going to lose, so they get more workers if they
are willing to accept lower wages.”
Second Theory-
Modern theory acknowledge that, “employment
determines the necessity of equating the
aggregate supply of goods with the aggregate
demand for goods.”
 Innovation Theory

Joseph Schumpeter author of the

innovation theory emphasized the
role of innovator in economic
development, saying….”an
innovation can be any change
initiated by the entrepreneur
which leads to a faster and better
development – employment and
production.”