How did John Locke contribute to economics?
- 1 decade agoFavorite Answer
Theory of value and property
Locke uses the word property in both broad and narrow senses. In a broad sense, it covers a wide range of human interests and aspirations; more narrowly, it refers to material goods. He argues that property is a natural right and it is derived from labor.
Locke believed that ownership of property is created by the application of labor. In addition, property precedes government and government cannot "dispose of the estates of the subjects arbitrarily." Karl Marx later critiqued Locke's theory of property in his social theory.
Limits to accumulation
Labor creates property, but it also does contain limits to its accumulation: man’s capacity to produce and man’s capacity to consume. According to Locke, unused property is waste and an offense against nature. However, with the introduction of “durable” goods, men could exchange their excessive perishable goods for goods that would last longer and thus not offend the natural law. The introduction of money marks the culmination of this process. Money makes possible the unlimited accumulation of property without causing waste through spoilage. He also includes gold or silver as money because they may be “hoarded up without injury to anyone,” since they do not spoil or decay in the hands of the possessor. The introduction of money eliminates the limits of accumulation. Locke stresses that inequality has come about by tacit agreement on the use of money, not by the social contract establishing civil society or the law of land regulating property. Locke is aware of a problem posed by unlimited accumulation but does not consider it his task. He just implies that government would function to moderate the conflict between the unlimited accumulation of property and a more nearly equal distribution of wealth and does not say which principles that government should apply to solve this problem. However, not all elements of his thought form a consistent whole. For example, labor theory of value of the Two Treatises of Government stands side by side with the demand-and-supply theory developed in a letter he wrote titled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Moreover, Locke anchors property in labor but in the end upholds the unlimited accumulation of wealth.
Locke on price theory
Locke’s general theory of value and price is a supply and demand theory, which was set out in a letter to a Member of Parliament in 1691, titled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Supply is quantity and demand is rent. “The price of any commodity rises or falls by the proportion of the number of buyer and sellers.” and “that which regulates the price... [of goods] is nothing else but their quantity in proportion to their rent.” The quantity theory of money forms a special case of this general theory. His idea is based on “money answers all things” (Ecclesiastes) or “rent of money is always sufficient, or more than enough,” and “varies very little…” Regardless of whether the demand for money is unlimited or constant, Locke concludes that as far as money is concerned, the demand is exclusively regulated by its quantity. He also investigates the determinants of demand and supply. For supply, goods in general are considered valuable because they can be exchanged, consumed and they must be scarce. For demand, goods are in demand because they yield a flow of income. Locke develops an early theory of capitalization, such as land, which has value because “by its constant production of saleable commodities it brings in a certain yearly income.” Demand for money is almost the same as demand for goods or land; it depends on whether money is wanted as medium of exchange or as loanable funds. For medium of exchange “money is capable by exchange to procure us the necessaries or conveniences of life.” For loanable funds, “it comes to be of the same nature with land by yielding a certain yearly income … or interest.”
Locke distinguishes two functions of money, as a "counter" to measure value, and as a "pledge" to lay claim to goods. He believes that silver and gold, as opposed to paper money, are the appropriate currency for international transactions. Silver and gold, he says, are treated to have equal value by all of humanity and can thus be treated as a pledge by anyone, while the value of paper money is only valid under the government which issues it.
Locke argues that a country should seek a favorable balance of trade, lest it fall behind other countries and suffer a loss in its trade. Since the world money stock grows constantly, a country must constantly seek to enlarge its own stock. Locke develops his theory of foreign exchanges, in addition to commodity movements, there are also movements in country stock of money, and movements of capital determine exchange rates. The latter is less significant and
- ishmanLv 43 years ago
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