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Chapter 4
CLASSICAL ECONOMIC THOUGHT
2nd Semester, S.Y 2014 – 2015
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Chapter Outline
A.
B.
C.
D.
E.
F.
What is Classical Economics?
The Classical School of Economic Thought
Origin and Timeline of Classical Economic Thought
Legacy and Criticisms of Classical Economic Thought
Economic Ideas and Principles of Classical Economic Thought
The Classical Economic Thinkers and their Economic Thought
 Adam Smith
 David Ricardo
 Thomas Malthus
 John Stuart Mill
 Jean-Baptiste Say
 Jeremy Bentham
 Edmund Burke
 Alexander Hamilton
 Other Classical Economists
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Classical Economics
Classical economics is widely regarded as the first
modern school of economic thought. Its major
developers include Adam Smith, Jean-Baptiste Say,
David Ricardo, Thomas Malthus and John Stuart Mill.
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Classical Economics
Classical economics is widely regarded as the first modern
school of economic thought. It refers to work done by a group
of economists in the eighteenth and nineteenth centuries.
They developed theories about the way markets and market
economies work. The study was primarily concerned with the
dynamics of economic growth. It stressed economic freedom
and promoted ideas such as laissez-faire and free
competition. Economic thought until the late 1800’s. Adam
Smith’s Wealth of Nations, published in 1776 can be used as
the formal beginning of Classical Economics but it actually it
evolved over a period of time and was influenced by
Mercantilist doctrines, Physiocracy, the enlightenment,
classical liberalism and the early stages of the industrial
revolution.
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Classical Economics
Classical economics as the predominant school of
mainstream economics ends with the ‘Marginalist
Revolution’ and the rise of Neoclassical Economics in the
late 1800’s. Famous economists of this school of thought
included Adam Smith, David Ricardo, Thomas Malthus and
John Stuart Mill. While Adam Smith would be regarded as
the originator and leader of the school, David Ricardo
should be credited with establishing the form and methods
of the school.
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Classical Economic Thinkers
1. Edmund Burke (1729–1797)
2. Jeremy Bentham (1748–1832)
3. Henry Thornton (1760–1815)
4. Jean-Baptiste Say (1767–1832),
5. Charles Hall (1740-1825)
6. William Godwin (1756-1836)
7. Henry Thornton (1760–11815)
8. James Mill 1773–1836)
9. Jean Charles Léonard de Sismondi (1773–1842)
10.Robert Owen (1771–1858)
11.David Ricardo (1772–1823)
12.Alexander Hamilton (1755–1804)
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Classical Economic Thinkers
13. Henry Clay (1777–1852)
14. Mathew Carey (1760–1839)
15. Thomas Tooke 1774–1858)
16. Henry Charles Carey (1793–1879)
17. Johann Heinrich von Thünen (1783–1850)
18. Wilhelm Roscher (1817–1894)
19. Charles Gide (1847–1932)
20. Pierre-Joseph Proudhon (1809–1865)
21. John Stuart Mill (1806–1873
22. Frederic Bastiat (1801–1850)
23. George Wilhelm Friedrich Hegel (1770–1831)
24. Friedrich Engels (1820–1895)
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Adam Smith
FAST FACTS
Career
Scottish economist and social
philosopher
Born/Died
June 5, 1723 – July 17, 1790
School of
economic thought
Classical School
Notable Economic
Thought
Classical economics, modern free
market, division of labor, the "invisible
hand“, absolute advantage, paradox of
value
Magnum Opus
An Inquiry into the Nature and Causes
of the Wealth of Nations
Influenced by
Aristotle, Cantillon, Hobbes, Hume,
Hutcheson, Locke, Mandeville, Petty,
Quesnay
Influences
Engels, Friedman, Keynes, Malthus,
Marx, Menger, Mill, Ricardo
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Notable Economic Thought of Adam
Smith
 Division of Labor
 Paradox of
 Invisible Hands
 Free Market
 Absolute Advantage
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Adam Smith and The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of
Nations, usually abbreviated as The Wealth of Nations is
considered Adam Smith’s magnum opus and the first
modern work of economics.
It is a reflection on economics at the beginning of the
Industrial Revolution and argues that free market economies
are more productive and beneficial to their societies.
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Theory of Invisible Hands
Invisible Hand is a term coined by Adam Smith in his greatest
work, Wealth of Nations. He said that if the government doesn’t
do anything, there’s a controlling factor of people themselves
who can guide markets. The theory of the Invisible Hand
states that if each consumer is allowed to choose freely what to
buy and each producer is allowed to choose freely what to sell
and how to produce it, the market will settle on a product
distribution and prices that are beneficial to all the individual
members of a community, and hence to the community as a
whole. The reason for this is that self-interest drives actors to
beneficial behavior. Efficient methods of production are
adopted to maximize profits. Low prices are charged to
maximize revenue through gain in market share by
undercutting competitors
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Self-Interest
Adam Smith's famous statement on self-interest is given
below.
"It is not from the benevolence of the butcher, the brewer or
the baker, that we expect our dinner, but from their regard to
their own self-interest. We address ourselves, not to their
humanity but to their self-love, and never talk to them of our
own necessities but of their advantages.“
Smith argued for a "system of natural liberty” where individual
effort was the producer of social good. Smith believed even
the selfish within society were kept under restraint and worked
for the good of all when acting in a competitive market. Prices
are often unrepresentative of the true value of goods and
services.
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Absolute Advantage: Examples
A. Labor Requirement per unit of Production
Country
Pineapple
Banana
Philippines
3 workers/ton
7 workers/ton
India
5 workers/ton
4 hours/ton
B. Output per Labor Hour
Country
United States
Wine
5 bottles
United Kingdom 15 bottles
Cloth
20 yards
10 yards
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David Ricardo
FAST FACTS
Career
English political economist and
businessman
Born/Died
April 18 1772 – September 11,
1823)
School of economic
thought
Classical School
Notable Economic
Thought
Comparative advantage, Law of
diminishing returns, Economic
rent,Ricardian equivalence,
Labour theory of value,
Magnum Opus
On the Principles of Political
Economy and Taxation
Influenced by
Adam Smith, Jeremy Bentham
Influences
Ricardian Socialists, John Stuart
Mill, Marx, Sraffa Barro
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Notable Economic Thought of David
Ricardo
 Labor Theory of Value
 Economic Rent
 Law of Diminishing Returns
 Ricardian Equivalence
 Law of Comparative Advantage
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Principles of Political Economy and
Taxation
Ricardo's best known work is his Principles of Political
Economy and Taxation (1817), which contains his
critique of barriers to international trade and a description
of the manner the income is distributed in the population.
The book concludes that land rent grows as population
increases. It also clearly lays out the theory of
comparative advantage, which shows that all nations can
benefit from free trade, even if a nation lacks an absolute
advantage in all sectors of its economy.
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Labor Theory of Value
Ricardo opens the first chapter in his Principles of Political
Economy and Taxation with a statement of the labor theory of
value. Later in this chapter, he demonstrates that prices do not
correspond to this value.
The labor theory of value states that the relative price of two
goods is determined by the ratio of the quantities of labor required
in their production. His labor theory of value has the following
several assumptions:
1. Both sectors have the same wage rate and the same profit
rate;
2. The capital employed in production is made up of wages only;
3. The period of production has the same length for both goods.
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Ricardian Equivalence
Ricardian equivalence is 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.
It is an economic theory holding that consumers internalize
the government's budget constraint: as a result, the timing of
any tax change does not affect their change in spending.
Consequently, Ricardian equivalence suggests that it does not
matter whether a government finances its spending with debt
or a tax increase, because the effect on the total level of
demand in the economy is the same.
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Ricardian Equivalence
Ricardian equivalence can be demonstrated in its simplest
terms: governments can raise money either through taxes or
by issuing bonds. Since bonds are loans, they must eventually
be repaid—presumably by raising taxes in the future. The
choice is therefore "tax now or tax later.“ Suppose that the
government finances some extra spending through deficits;
i.e. it chooses to tax later. This action might suggest to
taxpayers that they will have to pay higher tax in future.
Taxpayers would put aside savings to pay the future tax rise;
i.e. they would willingly buy the bonds issued by the
government, and would reduce their current consumption to
do so. The effect on aggregate demand would be the same as
if the government had chosen to tax now
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Ricardo’s Theory of Wages and Profits
Some credit Ricardo with the concepts behind the so-called Iron
Law of Wages, that wages naturally tend to a subsistence level.
Ricardo believed that in the long run, prices reflect the cost of
production, and referred to this long run price as a Natural price.
The natural price of labor was the cost of its production, that cost of
maintaining the laborer. If wages correspond to the natural price of
labor, then wages would be at subsistence level. However, due to
an improving economy, wages may remain indefinitely above
subsistence level:
In his Theory of Profit, Ricardo stated that as real wages increase,
real profits decrease because the revenue from the sale of
manufactured goods is split between profits and wages. He said in
his Essay on Profits, "Profits depend on high or low wages, wages
on the price of necessaries, and the price of necessaries chiefly on
the price of food."
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Comparative Advantage
Ricardian equivalence is 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.
It is an economic theory holding that consumers internalize
the government's budget constraint: as a result, the timing of
any tax change does not affect their change in spending.
Consequently, Ricardian equivalence suggests that it does not
matter whether a government finances its spending with debt
or a tax increase, because the effect on the total level of
demand in the economy is the same.
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Ricardian Distribution Theory
Ricardo made a distinction between the workers, who
received a wage fixed to a level at which they can survive, the
landowners, who earn a rent, and capitalists, who own capital
and receive a profit, a residual part of the income.
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Ricardian Distribution Theory
One of the first models of Ricardo used in Economics is aimed
at explaining how income is distributed in society. This has the
following assumptions:
 There is only one industry, agriculture; only one good, grain;
 There are three kinds of people or three factors of
production.
1. Capitalists. They start the economic growth process by
saving and investing. In return, they receive profits (P), which
is what is left once wages and rents have been subtracted
from the gross revenue. Capital can be divided into fixed
capital (machines, for example) and working capital (wage
fund, WF).
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Ricardian Distribution Theory
2. Workers. They represent the labor force, in return for
wages (w).
3. Landlords. They allow production(y) to take place in
their lands in return for rent (R).
 Law of diminishing returns: affects labor (variable
factor of production) and land (fixed factor).
 Principle of margin: marginal product of labor, which,
along with the average product of land, is decreasing.
 Principle of economic surplus: profits are determined
as a surplus of production.
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Steady State
Real wages will stagnate at subsistence level, the interest
rate of capital will stay at 0 and rents will reach its maximum
level. Ricardo explains how this steady state is painful,
especially for the working class. However, this steady state
can be delayed with technological progress or international
trade, as is shown in Ricardian trade theory.
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Comparative Advantage
According to Ricardo's theory, even if a country could produce
everything more efficiently than another country, it would reap
gains from specializing in what it was best at producing and
trading with other nations. Ricardo believed that wages should
be left to free competition, so there should be no restrictions
on the importation of agricultural products from abroad.
The benefits of comparative advantage are both distributional
and related to improved real income. Within Ricardo's theory,
distributional effects implied that foreign trade could not
directly affect profits, because profits change only in response
to the level of wages. The effects on income are always
beneficial because foreign trade does not affect value.
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Comparative Advantage
Ricardo argued that mutually gainful trade is possible even
if one nation has an absolute disadvantage in the
production of both commodities compared with the other
nation. The less productive nation should specialize in the
production and export of the commodity in which it has a
comparative advantage. In comparative advantage, two
countries will both gain from trade if, in the absence of
trade, they have different relative costs for producing the
same goods. Even if one country is more efficient in the
production of all goods (absolute advantage) than the
other, both countries will still gain by trading with each
other, as long as they have different relative efficiencies
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Assumptions of Comparative Advantage
1. The world consists of two nations, each using a
single input to produce two commodities.
2. In each nation, labor is the only input (the labor
theory of value). Each nation has a fixed endowment
of labor, and labor is fully employed and
homogeneous.
3. Labor can move freely among industries within a
nation but is incapable of moving between nations.
4. The level of technology is fixed for both nations.
Different nations may use different technologies, but
all firms within each nation utilize a common
production method for each commodity.
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Assumptions of Comparative Advantage
5. Costs do not vary with the level of production and are
proportional to the amount of labor used.
6. Perfect competition prevails in all markets. Because no
single producer or consumer is large enough to
influence the market, all are price takers. Product
quality does not vary among nations, implying that all
units of each product are identical There is free entry
to and exit from an industry, and the price of each
product equals the product’s marginal cost of
production.
7. Free trade occurs between nations; that is, no
government barriers to trade exist.
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Assumptions of Comparative Advantage
8. Transportation costs are zero. Consumers will thus be
indifferent between domestically produced and
imported versions of a product if the domestic prices of
the two products are identical.
9. Firms make production decisions in an attempt to
maximize profits, whereas consumers maximize
satisfaction through their consumption decisions.
10. There is no money illusion; that is, when consumers
make their consumption choices and firms make their
production decisions, they take into account the
behavior of all prices.
11. Trade is balanced (exports must pay for imports), thus
ruling out flows of money between nations.
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Comparative Advantage: An Analysis
Suppose there are two countries of equal size, Country A
and Country B, that both produce and consume two goods,
food and clothes. The productive capacities and efficiencies
of the countries are such that if both countries devoted all
their resources to food and clothes production, output would
be as follows:
Country
Country A
Country B
Food
Production
100
400
Clothes
Production
100
200
 Country A has a comparative advantage in food production.
 Country B has a comparative advantage in clothing production
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Let’s Check Your Understanding!
Use the following information to answer the questions below.
Country
South Korea
Taiwan
Smartphones
(in millions)
180
Digital Cameras
(in millions)
60
60
30
1. Who has absolute advantage in producing smartphones?
2. Who has absolute advantage in producing digital cameras?
3. What is the opportunity cost for each country producing
smartphones?
4. What is the opportunity cost for each country producing digital
cameras?
5. If these two countries were to engage in trade, which country
should produce smartphones and who should produce digital
cameras and why?
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Ricardian Equivalence
Ricardian equivalence is 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.
It is an economic theory holding that consumers internalize
the government's budget constraint: as a result, the timing of
any tax change does not affect their change in spending.
Consequently, Ricardian equivalence suggests that it does not
matter whether a government finances its spending with debt
or a tax increase, because the effect on the total level of
demand in the economy is the same.
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Thomas Robert Malthus
FAST FACTS
Career
English scholar and
economist
Born/Died
February 14, 1766 –
December 23, 1834
School of economic
thought
Classical School
Notable Economic
Thought
Population theory
Magnum Opus
An Essay on the Principle of
Population
Influenced by
David Ricardo, Jean Charles
Léonard de Sismondi
Influences
John Maynard Keynes,
Alfred Russel Wallace, Karl
Marx
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Economic Thought of Thomas
Malthus
 Malthus argued that the human sex drive causes faster
and faster expansion of the populace. Food production
would not keep up because of the law of diminishing
returns: as more people work on a fixed amount of land,
less and less output is added. The result is an everwidening imbalance between the number of people and
the supply of food. However, there is a counteracting force.
Malthus saw that malnutrition and disease caused by a
more limited food supply would lead to increased mortality
and stop the imbalance from getting out of control. Less
food to go around would also mean fewer children could be
supported, and the birth rate would fall. This would lessen
the pressure on land, restoring living standards.
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Population Theory
Malthus is best known for his hugely influential theories on
population growth. Malthus was the first economist to
propose a systematic theory of population. He argued that
all government intervention would ultimately prove futile
because of two factors, population growth and limited
resources.
He articulated his views regarding population in his famous
book, Essay on the Principle of Population (1798), for which
he collected empirical data to support his thesis. Malthus
took into account two main assumptions:
 Food is an essential component for human existence.
 Humans have the basic urge to multiply.
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Population Theory
Malthus’ theory was based on the assumption that the power
of population to multiply is much greater than the power of
the earth to provide subsistence for man. In his own words
‘passion between the sexes is an inevitable phenomenon’,
hence, when unchecked, population would grow at such a
high rate that it would outstrip food supply. Malthus argued
that because of the natural human urge to reproduce human
population increases geometrically (1, 2, 4, 16, 32, 64, 128,
256, etc.). However, food supply, at most, can only increase
arithmetically (1, 2, 3, 4, 5, 6, 7, 8, etc.). Therefore, since
food is an essential component to human life, population
growth in any area or on the planet, if unchecked, would lead
to starvation.
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Positive Checks
This method results in increase in death rate. He described
this as God’s way of restoring the Natural Order. Positive
checks are those that increase the death rate. These include
disease, war, disaster, and finally, when other checks don’t
reduce population, famine. Malthus felt that the fear of famine
or the development of famine was also a major impetus to
reduce the birth rate. He indicates that potential parents are
less likely to have children when they know that their children
are likely to starve. Although positive Checks help in
controlling the population growth, it brings with it widespread
misery and pain. Hence, it is not regarded as an ideal
solution to population problem.
.
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Preventive Checks
This method refers to human effort in reducing the birth rate.
It is more practically and logically applicable. Abortion,
prostitution, postponement of marriage, birth control and
celibacy are few measures that were advised to be strictly
followed in order to help solve the problem. In his second
edition of the same essay, Malthus laid more emphasis on
moral restraint which is
regarded as a universally
applicable solution keeping up with the ideologies of virtue,
economic gain and social improvement. According to this
principle, one should refrain from marriage till the time he is
capable of supporting a family with food, clothing and shelter.
Until then he should follow strict celibacy.
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Malthusian Trap
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Jean-Baptiste Say
FAST FACTS
Career
French economist and
businessman
Born/Died
January 5, 1767 – November
15, 1832
School of economic
thought
Classical School
Notable Economic
Thought
Say’s Law
Magnum Opus
A Treatise on Political
Economy
Influenced by
David Ricardo, Adam Smith
Influences
John Maynard Keynes,
Friedman Milton
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Say’s Law
Jean-Baptiste Say’s book, A Treatise on Political Economy
contained a brief passage, now known as Say's Law of markets.
Say argued that there could never be a general deficiency of
demand or a general glut of commodities in the whole economy.
People produce things, to fulfill their own wants, rather than those
of others, therefore production is not a question of supply, but an
indication of producers demanding goods. Say agreed that a part
of the income is saved by the households, but in the long term,
savings are invested. Investment and consumption are the two
elements of demand, so that production is demand, so it is
impossible for production to outrun demand, or for there to be a
"general glut" of supply. Say also argued that money was neutral,
because its sole role is to facilitate exchanges, therefore, people
demand money only to buy commodities; "money is a veil".
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Say’s Law
To sum up these two ideas, Say said "products are
exchanged for products". At most, there will be different
economic sectors whose demands are not fulfilled. But
over time supplies will shift, businesses will retool for
different production and the market will correct itself. An
example of a "general glut" could be unemployment, in
other words, too great a supply of workers, and too few
jobs. Say's Law advocates would suggest that this
necessarily means there is an excess demand for other
products that will correct itself.
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Say’s Law of Market
Say’s law is commonly summarized as ‘supply creates its
own demand.’ This law, also referred to as Say’s ‘theory of
markets’ or ‘law of markets,’ indicates that the act of producing
aggregate output generates a sufficient amount of aggregate
income to purchase all of the output produced. This principle
indicated that excess production or insufficient demand for
production was unlikely to occur, at least for any extended
period. When combined with flexible prices and saving
investment equality, Say’s law further implied that an economy
would achieve and maintain full employment of resources.
This law was singled out by John Maynard Keynes in his
critique of classical economics, but remains relevant in current
macroeconomic analysis, reflected in the circular flow model.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Supply Creates its Own Demand
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Edmund Burke
FAST FACTS
Career
Irish statesman, political theorist
and philosopher
Born/Died
January 12, 1729 – July 9, 1797
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
A Thoughts and Details on
Scarcity
Influenced by
Aristotle, Cicero, Richard Hooker,
Edward Coke, William
Blackstone
Influences
Robert Peel, Immanuel Kant,
Lord Acton
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Economic Thought of Edmund Burke
Burke in his Thoughts and Details on Scarcity, he expounded
"some of the doctrines of political economists bearing upon
agriculture as a trade". Burke criticized policies such as
maximum prices and state regulation of wages, and set out what
the limits of government should be:
That the State ought to confine itself to what regards the State,
or the creatures of the State, namely, the exterior establishment
of its religion; its magistracy; its revenue; its military force by sea
and land; the corporations that owe their existence to its fiat; in a
word, to every thing that is truly and properly public, to the public
peace, to the public safety, to the public order, to the public
prosperity.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Frederick Bastiat
FAST FACTS
Career
French classical theorist,
political economist
Born/Died
June 29,1801– December
24, 1850)
School of economic
thought
Classical School
Notable Economic
Thought
Opportunity cost
Magnum Opus
Capital and Interest and
Economic Harmonies
Influenced by
Richard Cobden, Adam
Smith
Influences
Ludwig von Mises
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Economic Thought of Frederick Bastiat
 Bastiat is notable for developing the important economic
concept of opportunity cost. His 1850 essay "That Which
is Seen and That Which is Unseen" contains the
famous Parable of the broken window. This demonstrates
how opportunity costs, as well as the law of unintende
consequences, affect economic activity in ways that are
"unseen" or ignore.
 Bastiat asserted that the sole purpose of government is
to defend and protect the right of an individual to life,
liberty and property (statism). From this definition, Bastiat
concluded that the law cannot defend life, liberty and
property if it promotes socialist policies, which are
inherently opposed to these very things.
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Georg Wilhelm Friedrich Hegel
FAST FACTS
Career
German philosopher
Born/Died
August 27, 1770 –
November 14, 1831
School of economic
thought
Classical School
Notable Economic
Thought
Absolute idealism
Magnum Opus
Influenced by
Aristotle, Plato, Heraclitus,
Neoplatonism, Anselm,
Descartes, Goethe, Spinoza,
Influences
Adorno, Vygotsky, Bakunin,
Barth, Bataille, Bauer
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Henry Charles Carey
Career
American economist
Born/Died
December 15, 1793 –
October 13, 1879
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
The Harmony of Interests:
Agricultural, Manufacturing,
and Commercial
Influenced by
Adam Smith, John Stuart Mill
Influences
Alexander Hamilton
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Economic Thought of Henry Charles
Carey
 Henry Charles Carey is best known for the book The
Harmony of Interests, to compare and contrast what he
called the "British System" of laissez faire free trade
capitalism with the "American System" of developmental
capitalism, through tariff protection and government
intervention to encourage production.
 Carey, who had set out as an earnest advocate of free
trade, accordingly arrived at the doctrine of protection: the
coordinating power in society must intervene to prevent
private advantage from working public mischief. He
attributed his conversion on this question to his observation
of the effects of liberal and protective tariffs respectively on
American prosperity.
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Charles Guide
FAST FACTS
Career
French economist and
historian
Born/Died
1847 -1932
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
Revue d'économie
politique
Influenced by
Leon Walras, David Ricardo
Influences
John Maynard Keynes
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Economic Thought of Charles Guide
 Gide was a tireless champion of the cooperative
movement: both agricultural and consumers' cooperatives
during the first third of the 20th century. His book,
Consumers' Co-operative Societies, which first appeared in
French in 1904, and in English in 1921, is a classic in the
field of co-operative economics, in the tradition of Cooperative Federalism.
 A founder of the Revue d'économie politique in 1887,
Gide was a proponent of the French historical approach to
economics. Gide was one of the few supporters of Leon
Walras, as they shared a social philosophy, social activism,
and disdain for the "Manchester-style" economics of the
journalistes. Gide later resisted the influence of Keynesian
economics in France
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James Mill
FAST FACTS
Career
Scottish historian,
economist, and political
theorist
Born/Died
April 6, 1773 – June 23,1836
School of economic
thought
Classical School
Notable Economic
Thought
Unearned increment of land
Magnum Opus
Elements of Political
Economy
Influenced by
Dugald Stewart, Jeremy
Bentham
Influences
John Stuart Mill
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Economic Thought of James Mill
 In 1814 he wrote a number of articles, containing an
exposition of utilitarianism, for the supplement to the fifth
edition of the Encyclopædia Britannica, the most important
being
those
on
"Jurisprudence,"
"Prisons"
and
"Government.“
 His Elements of Political Economy followed up the views of
Ricardo, with whom Mill was always on terms of intimacy.
Among the more important of its theses are: that the chief
problem of practical reformers is to limit the increase of
population, on the assumption that capital does not
naturally increase at the same rate; that the value of a thing
depends entirely on the quantity of labor put into it; and that
what is now known as the "unearned increment" of land is
a proper object for taxation.
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Jean Charles Léonard de Sismondi
FAST FACTS
Career
Swish writer and economist
Born/Died
May 19, 1773 – June 25,
1842
School of economic
thought
Classical School
Notable Economic
Thought
Economic cycle/business
cycle
Magnum Opus
New Principles of Political
Economy
Influenced by
Adam Smith
Influences
Robert Owen, John Maynard
Keynes
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Economic Thought of Jean Charles
Léonard de Sismondi
 He published New Principles of Economic Philosophy,
breaking ranks with Adam Smith by predicting that so-called
general equilibrium would be marred by periodic economic
crises, and calling for the state "to regulate the progress of
wealth".
 he insisted on the fact that economic science studied the
means of increasing wealth too much, and the use of
wealth for producing happiness, too little. For the science of
economics, his most important contribution was probably
his discovery of economic cycles. Sismondi challenged
the idea that economic equilibrium leading to full
employment would be immediately and spontaneously
achieved
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Business Cycle
The term business cycle (or economic cycle) refers to
economy-wide fluctuations in production or economic
activity over several months or years. These fluctuations
occur around a long-term growth trend, and typically
involve shifts over time between periods of relatively rapid
economic growth (an expansion or boom), and periods of
relative stagnation or decline (a contraction or recession)
Business cycles are usually measured by considering the
growth rate of real gross domestic product. Despite being
termed cycles, these fluctuations in economic activity do
not follow a mechanical or predictable periodic pattern.
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The Economy is a Yo-Yo (Boom and Bust)
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Jeremy Bentham
FAST FACTS
Career
English jurist, philosopher,
and legal and social reformer
Born/Died
February 15, 1748 – June 6,
1832
School of economic
thought
Classical School
Notable Economic
Thought
Utility or greatest happiness
principle
Magnum Opus
Fragment on Government
Influenced by
John Locke, David Hume,
Hobbes
Influences
John Stuart Mill, Henry
Sidgwick, John Austin,
Robert Owen
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Economic Thought of Jeremy Bentham
 Bentham stated that pleasures and pains can be ranked
according to their value or "dimension" such as intensity,
duration, certainty of a pleasure or a pain. He was concerned
with maxima and minima of pleasures and pains; and they set a
precedent for the future employment of the maximization principle
in the economics of the consumer, the firm and the search for an
optimum in welfare economics.
 Bentham rejected modern ideas of GDP and other metrics
representing good measures of wellbeing or happiness, saying
that money was not a good metric of people’s happiness. He
called on politicians and moralists to discover a new metric of
well-being, for the hopes of making morality an exact science
were progressive. Bentham introduced the idea of compensation
for labor being simply payment for the fact labor is ‘painful.’
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Jeremy Bentham and Utilitarianism
Bentham’s main contribution to the fields of philosophy and
economics was that of Utilitarianism. Utilitarianism was the
principle that the greatest happiness or utility was the most
important, most valuable, etc., furthermore, such a belief led
that people would strive to maximize their net pleasure (or,
spoken alternatively: maximize their pleasure while
minimizing their pain) - a strong origin for the theories of
maximization. Utilitarianism is heavily studied in the field of
ethical philosophy striving to answer the question somewhat
addressed by Adam Smith: if everyone strives to maximize
their personal utility, will the general benefit be maximized?
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Jeremy Bentham and Utilitarianism
Utilitarianism is mainly characterized by two elements:
happiness and consequentialism. Utilitarian happiness is the
biggest happiness which every human being looks for. In
utilitarianism everything useful to happiness is good. Therefore,
the name of the doctrine is utilitarianism, based on the principle
of utility. Utility is found in everything which contributes to the
happiness of every rational being. The criterion of good and evil
is balanced between individual’s happiness and the happiness of
the community, ‘each counting in an equal way’.
Consequentialism in utilitarianism is in the fact that an action
must be judged for its consequences on the happiness of the
largest number. That is: my search for happiness stops when it
decreases the happiness of another individual or the happiness
of the largest number, of the society or the community.
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John Stuart Mill
FAST FACTS
Career
British philosopher, political
economist
Born/Died
May 20, 1806 – May 8, 1873
School of economic
thought
Classical School
Notable Economic
Thought
Public/private sphere, hierarchy of
pleasures in Utilitarianism,
liberalism, early liberal feminism,
harm principle, Mill's Methods,
wage fund docrine
Magnum Opus
Principles of Political Economy
Influenced by
Aristotle, Locke, Hobbes, Smith,
Ricardo
Influences
William James, John Rawls,
Robert Nozick, Bertrand Russell
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Economic Thought of John Stuart
Mill
 Mill's famous formulation of utilitarianism is known as the
"greatest-happiness principle".
 Mill is also credited with being the first person to speak of
supply and demand as a relationship rather than mere
quantities of goods on markets, reciprocal demand and the
rejection of the wage fund doctrine.
 Mill promoted economic democracy in the capitalist economy
whereby laborers would elect members of management.
 According to Mill, the ultimate tendency in an economy is for
the rate of profit to decline due to diminishing returns in
agriculture and increase in population at a Malthusian rate.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
John Stuart Mill and Utilitarianism
Mill's famous formulation of utilitarianism is known as the
"greatest-happiness principle". It holds that one must
always act so as to produce the greatest aggregate
happiness among all sentient beings, within reason. Mill's
major contribution to utilitarianism is his argument for the
qualitative separation of pleasures. Bentham treats all forms
of happiness as equal, whereas Mill argues that intellectual
and moral pleasures are superior to more physical forms of
pleasure. Mill distinguishes between happiness and
contentment, claiming that the former is of higher value than
the latter.
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John Stuart Mill and Reciprocal
Demand
Ricardo expounded the theory of comparative advantage without
explaining the ratios at which commodities would exchange for one
another. It was J. S. Mill who discussed the problem of ratios in
detail in term of his theory of ‘Reciprocal Demand’. The term
‘reciprocal demand’ was introduced by Mill to explain the
determination of the equilibrium terms of trade. It is used to
indicate a country’s demand for one commodity in terms of the
quantities of other commodities it is prepared to give up in
exchange. It is reciprocal demand that determines the terms of
trade which in turn determine the relative share of each country.
Equilibrium would be established at that ratio of exchange between
the two commodities at which quantities demanded by each
country of the commodity which it imports from the other should be
exactly sufficient to pay for another.
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Mill’s Theory of Economic Development
Mill regarded economic development as a function of land, labor
and capital. While land and labor are the two original factors of
production, capital is "a stock, previously accumulated of the
products of former labor." Increase in wealth is possible only if
land and capital help to increase production faster than the labor
force. It is productive labor that is productive of wealth and
capital accumulation. "The rate of capital accumulation is the
function of the proportion of the labor force employed '
productively. Profits earned by employing unproductive labors
are merely transfers of income; unproductive labor does not
generate wealth or income" . It is productive laborers who do
productive consumption. Productive consumption is that "which
maintains and increase the productive capacity of the
community."
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Mill’s Theory of Wage Fund
According to Mill, the elasticity of supply is very high in response to
high in wages. Wages generally exceed the minimum subsistence
level. Wages are paid out of capital. Hence they are limited by
existing fund of capital meant for paying wages. Thus wage per
head can be derived at by dividing the total circulating capital by
working population. Wages can increase by an increase in the
aggregate fund of capital employed in hiring labor or by decrease
in the number of the worker. If wages rise, supply of labor will be
high. Competition among workers will not only bring down wages
but also keep some laborers out of employment. This is based on
Mill's notion that" Demand for commodities is not demand for
laborers." It means income invested as advances of wages to
labor creates employment and not income spent on consumer
goods.
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Mill’s Theory of Rate of Capital
Accumulation
Acccording to Mill the rate of capital accumulation depends
upon: (1) "the amount of fund from which saving can be
made" or" the size of the net produce of the industry "and (2)
"the strength of disposition to save. "Capital is the result of
savings, and the savings come from the "abstinence from
present consumption for the sake of future goods". Although
capital is the result of saving, it is nevertheless consumed.
This means savings is spending. Since saving depends on
the net produce of the industry, they increase with an
increase in profits and rent which goes into making the net
produce.
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Pierre-Joseph Proudhon
FAST FACTS
Career
French politician, philosopher
and socialist
Born/Died
January 15,1809 – January
19, 1865
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
What is Property? Or, an
Inquiry into the Principle of
Right and Government
Influenced by
Hegel, Saint Simon, Charles
Fourier, Victor Cousin,
Rousseau, Cicero, Grotius
Influences
Karl Marx, Mikhail Bakunin,
Déjacque, Édouard Depreux
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Economic Thought Pierre-Joseph
Proudhon
 Proudhon strenuously rejected the ownership of the products of
labor by society or the state, arguing in What is Property? He
argued that while society owned the means of production or land,
users would control and run them (under supervision from
society), with the "organizing of regulating societies" in order to
"regulate the market".
 In the posthumously published Theory of Property, he argued
that "property is the only power that can act as a counterweight to
the State." Hence, "Proudhon could retain the idea of property as
theft, and at the same time offer a new definition of it as liberty.
There is the constant possibility of abuse, exploitation, which
spells theft. At the same time property is a spontaneous creation
of society and a bulwark against the ever-encroaching power of
the State."
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Thomas Tooke
FAST FACTS
Career
English economist
Born/Died
February 28, 1774–February
26, 1858
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
History of Prices and of the
State of the Circulation
during the Years
Influenced by
David Ricardo, Robert
Malthus, James Mill
Influences
John Fullarton and James
Wilson, Robert Peel
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Economic Thought Pierre-Joseph
Proudhon
Tooke is best known for his History of Prices and of the State of
the Circulation during the Years 1703-1856. In the first four
volumes he treats (a) of the prices of corn, and the
circumstances affecting prices; (b) the prices of produce other
than corn; and (c) the state of the circulation. The two final
volumes, written with William Newmarch, deal with railways,
free trade, banking in Europe and the effects of new
discoveries of gold. The first two volumes dealt with the period
from 1793 to 1837, and were published in 1838. His
conclusions were that the high prices which, speaking
generally, ruled between 1793 and 1814 were due to a
relatively large number of unfavourable seasons, coupled with
the obstructions to trade.
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Wilhelm Roscher
FAST FACTS
Career
German economist
Born/Died
October 21, 1817 – June 4,
1894
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
System der Volkswirthschaft
Influenced by
Georg Wilhelm Friedrich
Hegel
Influences
Subsequent German
economists
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Economic Thought Wilhelm Roscher
 The main origins of the historical school of political
economy may be traced to Roscher. Its fundamental
principles are dated to his Grundriss zu Vorlesungen über
die Staatswirtschaft nach geschichtlicher Methode (1843).
 Roscher tried to establish the laws of economic
development by using the historical method from the
investigation of histories legal, political, cultural and other
aspects.
 Roscher developed a cyclical theory where nations and
their economies pass through youth, manhood and senile
decay.
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William Godwin
FAST FACTS
Career
English journalist, political
philosopher and novelist
Born/Died
March 3, 1756 – April 7,
1836
School of economic
thought
Classical School
Notable Economic
Thought
Magnum Opus
Enquiry concerning Political
Justice, and its Influence on
General Virtue and
Happiness
Influenced by
Edmund Burke
Influences
Robert Owen, Oscar Wilde,
Peter Kropotkin
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Economic Thought Wilhelm Roscher
 The main origins of the historical school of political
economy may be traced to Roscher. Its fundamental
principles are dated to his Grundriss zu Vorlesungen über
die Staatswirtschaft nach geschichtlicher Methode (1843).
 Roscher tried to establish the laws of economic
development by using the historical method from the
investigation of histories legal, political, cultural and other
aspects.
 Roscher developed a cyclical theory where nations and
their economies pass through youth, manhood and senile
decay.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT