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Political Economy

The Classical Approach

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Political economy in the classical tradition The classical economists of the 18th and 19th

centuries where the first to use the term ‘political economy’.

The period covered by classical political economy cannot be stated exactly.

Major developers include William Petty, Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and Johann Heinrich von Thünen. It is seen by many as the first modern school of economic thought. Some authors, such as John Maynard Keynes expand the definition of classical economics to include Karl Marx.

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Cont.

A restricted definition would extend from Adam Smith’s Wealth of Nations in 1776 to John S. Mill’s Principles of Political Economy in 1848.

A more encompassing periodization would stretch from the work of the Physiocrats (重農論者 ) in the middle of the 18th century to the death in 1883 of Karl Marx, whom many saw as the last important classical political economist.

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Cont.

We will divide our consideration of classical political economy into two parts: the argument for market self-regulation and the theory of value and distribution.

The first part concerns the nature of the market system and its relation to the state.

The second concerns production and use of the economic surplus.

The classical economists played a major role in introducing and elaborating two core ideas: the separability of the economy and the primacy of the economic sphere.

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We shall now introduce

three developers of

Classical Economics –

Adam Smith, David Ricardo, and Thomas Malthus.

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Adam Smith (1723~ 1790) Adam Smith (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.

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Short Biography of Adam Smith

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 Roma people, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented ironically that he feared Smith would have made "a poor Gipsy."

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At the age of about fifteen, Smith proceeded to the University of Glasgow, studying moral philosophy. In 1740 he entered the Balliol College of the University of 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.

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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’.

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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.

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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. He had apparently devoted a considerable part of his income to numerous secret acts of charity.

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Adam Smith’s Work 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 （重商主義） (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.

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The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was tantamount, 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.

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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 incentive for its production, and eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost, the ‘natural price’. 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. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.

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Smith vigorously 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. However, Smith criticised a number of practices that later became associated with laissez-faire capitalism, such as the power and influence of Big Business and the emphasis on capital at the expense of labour.

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ADAM SMITH: 1723-1790

Here are deposited the remains of ADAM SMITH. Author of the Theory of Moral Sentiments and Wealth of Nations: He was born 5th June, 1723, and died 17th July, 1790.[Canongate Churchyard, Royal Mile, Edinburgh, Scotland.]

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David Ricardo (1772~ 1823) David Ricardo (April 18, 1772–

September 11, 1823), a British political economist, is often credited with systematising economics, and was one of the most influential of the classical economists. He was also a successful businessman, financier, and amassed a considerable fortune.

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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.

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Ricardo became interested in economics after reading Adam Smith’s The Wealth of Nations in 1799 on a boring 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.

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 ( 穀物管制法 ).

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Royal Crescent, Bath

Roman baths, Bath

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Ricardo was a close friend of James Mills, 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.

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Ideas Ricardo’s most famous work is his Iron Law of

Wages, a document which shows his capitalist tendencies. In this book Ricardo states that the wages of 19th century British should not be increased, though it was encouraged greatly by the masses. This was due to his observation of the direct link evident between money and population. An increase in income of workers equals an increase in children, resulting in a larger workforce. Such an increase means that employers will be combine to create a greater state of poverty that existed before wages were originally raised. Ultimately, he favoured employers far more than workers, in contrast to the philosophy adopted by Karl Marx.

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Also important was Ricardo’s work on the concept of comparative advantage. According to his theory, even if a country could produce everything more efficiently than another county, it would reap gains from specialising in what it was best at producing and trading with other nations. Comparative advantage forms the basis of modern trade theory.

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比較利益法則 假設美國生產電腦和汽車的技術都優於台 美國一天生產一台電腦需 5 個人力，一天生產一輛汽車需 6 個人力；台灣一天生產一台電腦需 10個人力，一天生產一輛汽車需 20個人力

  Taiwan          USA Computer( 台 )    10 人 ( 天 )       5 人 ( 天 ) Automobile( 輛 )    20 人 ( 天 )       6 人 ( 天 )

依亞當斯密的理論，美國具有生產電腦和汽車的「絕對利益」，因為其人力成本皆比台灣低則依其理論，美國應該生產電腦和汽車銷往台灣

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依李嘉圖的「比較利益」法則：美國生產 1 輛汽車的成本是 1.2台電腦 ( 生產汽車的人力與生產電腦為 6 比 5)，而台灣生產1 輛汽車的成本是 2 台電腦。

反之美國生產 1 台電腦的成本是 5/6輛汽車，台灣生產 1 台電腦的成本是 1/2輛汽車。

因此美國有生產汽車的比較利益，台灣則具有生產電腦的比較利益。

故台灣應該生產電腦，美國應該生產汽車，兩國再透過國際貿易進行交易，則雙方都可因此獲利。

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獲利如何產生？ 假設台灣和美國都各有 120個工人 經過一天的生產，台灣可產出 12台電腦，美國可產出 20輛汽車，再透過國際貿易的交換 ( 假設交易價格為汽車 : 電腦 =1.5:1

則台灣可透過出售全部電腦取得 8 輛汽車，美國則可取得 12台電腦並保有自己生產 12輛汽車

再回頭看兩國的生產成本以台灣的生產技術而論，自行生產 8 輛汽車需花費20*8=160人 ( 天 )

而以美國的技術言，自行生產 12台電腦 +12輛汽車需花費 5*12+6*12=132人 ( 天 )

因此在比較利益法則下進行貿易，雙方都能以較低之成本 (120人 ) ，取得較多之財貨，彼此皆能得利

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Like Adam Smith, Ricardo was also an opponent of protectionism for national economies. He believed that protectionism led towards economic stagnation, and that protectionism by more economically productive counties doomed less developed countries to stagnation. He also influenced generations of later economists in the belief that protectionism is bad for the economy.

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Ricadro is also known for his opposition to the ‘corn laws’, which protected British landowners from foreign competition by guaranteeing them a high price for their products. Ricardo did not actually argue the case out of compassion to the peasants or general population (who were starving, due to insufficient production), but felt that this was unfairly diverting a lot of resources from the bourgeoisie (seen as a force of progress) towards the landowners. Unfortunately, he was unable to get Parliament to remove the law, which it later repealed in 1846.

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Other ideas associated with Ricardo: 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. Robert Barro is responsible for its modern prominence.

The iron law of wages, which asserted that real income of workers would remain near the subsistence level, despite any attempts to raise wages.

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Thomas Malthus (1776~1834) The Rev. Thomas Malthus (February,

1776– December 23, 1834), who is usually known as Thomas Malthus, although he preferred to be known as ‘Robert Malthus’, was an English demographer and political economist best known for his pessimistic but highly influential views. Although it is popularly assumed that it was these pessimistic views that gave economics the nickname Dismal Science, the phrase was actually coined by the historian Thomas Carlyle in reference to an anti-slavery essay written by John Stuart Mill.

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Life Malthus was born to a prosperous family. His

father was a personal friend of the philosopher and sceptic David Hume and an acquaintance of Jean-Jacques Rousseau. The young Malthus was educated at home until his admission to Jesus College, Cambridge in 1784. There he studied many subjects and took prizes in English declamation, Latin and Greek. His principal subject was mathematics. He earned a masters degree in 1791 and was elected a fellow in Jesus College two years later. In 1797, he was ordained and became an Anglican country parson.

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Malthus married in 1804; he and his wife had 3 children. In 1805 he became Britain‘s (and possibly the world’s) first professor in political economy at the East India Company College at Haileybury in Hertfordshire. Here, he developed a theory of demand supply mismatches which he called gluts (供過於求 ). Considered ridiculous at the time, his theory was later confirmed by the Great Depression and works of John Maynard Keynes.

Malthus refused to have his portrait done until 1833 because of embarrassment over a cleft palate (裂顎 ), a birth defect common in his family. The deformity was well hidden by the artist.

Malthus was buried at Bath Abbey in England.

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Demography Theory Malthus’s views were largely developed in

reaction to the optimistic views of his father associates, notably Rousseau and William Godwin. In An Essay on the Principle of Population, published in 1798, Malthus predicted population would outrun food supply, leading to a decrease in food per person. This prediction was based on the idea that population if unchecked increases at a geometric rate (i.e. 2, 4, 8, 16, 32, etc.) whereas the food supply grows at an arithmetic rate (i.e. 1, 2, 3, 4, 5, etc.).

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Only natural causes (accidents and old age), misery (war, pestilence and famine), moral restraint (late marriage and sexual abstinence) and vice (which for Malthus included contraception, infanticide, homosexuality and murder) could check excessive population growth.

Malthus favoured ‘moral restraint’ as a check on population growth. However, it is worth noting that Malthus proposed this only for the working and poor classes. Thus, the lower social classes took a great deal of responsibility for societal ills, according to his theory. Essentially what this resulted in was the promotion of legislation which degenerated the conditions of the poor in England, lowering their population but effectively decreasing poverty.

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The influences of Malthus The influence of Malthus's theory of population

was very great. Previously, high fertility had been considered an economic plus since it increased the number of workers available to the economy. Malthus, however, looked at fertility from a new perspective and convinced most economists that even though high fertility might increase the gross output it tended to reduce output per capita. Many 20th century economists, such as Julian Simon, have criticised such conclusions. They note that despite the predictions of Malthus and the Neo-Malthusians, massive geometric population growth in the 20th century has not resulted in a Malthusian catastrophe, largely due to the influence of technological advances (especially the green revolution).

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Eight major points regarding evolution subsistence severely limits population-level when the means of subsistence increases, population

increases population-pressures stimulate increases in productivity increases in productivity stimulate further population-growth since this productivity can not keep up with the potential of

population growth for long, population requires strong checks to keep it in line with carrying-capacity

individual cost/benefit decisions regarding sex, work, and children determine the expansion or contraction of population and production

checks will come into operation as population exceeds subsistence-level

the nature of these checks will have significant effect on the rest of the sociocultural system — Malthus points specifically to misery, vice, and poverty

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In the 1830s his writings strongly influenced Whig reforms which overturned Tory paternalism and brought in the Poor Law Amendment Act of 1834. Malthus's theory was also a key influence on both of the co-founders of modern evolutionary theory Charles Darwin and Alfred Russel Wallace. Darwin, in his book The Origin of Species, called his theory an application of the doctrines of Malthus in an area without the complicating factor of human intelligence. Wallace considered it ‘the most interesting coincidence’ that both he and Darwin were independently led to the theory of evolution through reading Malthus. Ironically, given Malthus's own opposition to contraception, his work was also a strong influence on Francis Place (1771–1854), whose Neo-Malthusian movement was the first to advocate contraception.

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Concerns about Malthus's theory also helped promote the idea of a national population Census in the UK. Government official John Rickman was instrumental in the first Census being conducted in 1801.

Recent research and significant empirical evidence have showed Malthus to be wrong. For example, the population has continued to grow, yet the prices of resources and foods relative to wages has decreased, indicating the supply of food (and resources) has grown relative to population size. This apparent paradox can be easily resolved because Malthus made two flawed assumptions. First, population growth is almost never exponential, but instead influenced by so many factors that no simple model can describe it. Second, the growth of food is also not linear (in particular, due to technological advances, such as the Green Revolution, food has outgrown the human population).

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Critics of Malthus Theoretical and political critiques of Malthus and

Malthusian thinking emerged soon after the publication of the first Essay on Population, most notably in the work of the reformist industrialist Robert Owen and the essayist William Hazlitt. The highpoint of opposition to Malthus's ideas in the middle of the nineteenth century was the writings of Karl Marx and Friedrich Engels who argued that what Malthus saw as the problem of the pressure of population on the means of production was, in fact, that of the pressure of the means of production on population. They thus viewed it in terms of their concept of the labour reserve army.

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In other words, the seeming excess of population that Malthus attributed to the seemingly innate disposition of the poor to reproduce beyond their means was actually a product of the very dynamic of capitalist economy. For a review of the historical development of Malthusian thinking and its role in the evolution of capitalist society through the course of the nineteenth and twentieth century, see Eric B. Ross's The Malthus Factor: Poverty, Politics and Population in Capitalist Development (1998).