6) Classical Theories (1)

8/18/2019 6) Classical Theories (1)

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Classical

Theories ofDevelopment

Sunny Jose


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Origins• Christianity: Work as a punishment to

virtue

• 16th cent Protestant: glorifying god towork

• Calvinist: God’s calling is gloried viaardent! sel"ess la#our

• $dlness is dishonour to God

• %hese new ideals were championed #yartisans! craftsmen & manufacturers


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Mercantilism

• 'asted for ( centuries! from 1)th cent

• $deas! institutions & economic

practices that supported a#solutiststate! monarchy & aristocratic classes

• *imed at increasing power of the state

• +tate’s power rests on economicmeans! not #ravery


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Mercantilism

• ,oney & precious metals are wealth

• Core of mercantilism: #alance of trade

• * country with a favoura#le #alance oftrade is prosperous & powerful

• -.port more than import! leading to

the in"ow of precious metals! esp/ gold

• %o achieve this! trade was controlled #ythe state


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Mercantilism

• Why0 %rade is a ero2sum game• ,anufacturing was protected

• -.port was promoted

• $mport was restricted

• 3ationalist: promotes rational thinking

• +cience 4not God5 as a solution tomaterial pro#lems


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Enlightenment

Philosophers advanced ideas againstthe politico2economic system

*gainst feudalism and landed no#ility

+upported the cause of smallproducers! artisans! small farmers

Whose toil formed the #asis of

mercantilist state power%homas 8o##es! 9ohn 'ocke! avid

8ume


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Enlightenment

$ntroduced the ideas of self2interest!natural rights! property rights

8o##es: +elf2interest as the #asis of

social morality! organisation of society'ocke: 8umans have the right to

preserve their lives and right to have

su#sistence derived from earth+uch products have to #e made from

earth through la#our! individuals have

natural rights over their person


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Enlightenment

3ights over one’s e;orts and products


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Classical economics

-merged from congruence of theseideas

3ationality and re=ection of

superstitions! religious #eliefsWork as a cherished value>virtue

3e=ection of feudal! hierarchical system

Promotion of self2interests! individualrights

?avoured the entrepreneurs the most


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Classical economics

*dam +mith to 9ohn +tuart ,ill+mith: 8umans possess an inherent

urge to trade

*s traders! humans are self2interested

?or what0: to make money

8arness self2interest as an economicmotive! key to wealth & prosperity


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Adam Smith

'a#our theory of value@alue originates from la#our! not utility

'a#our as the measure of

e.changea#le value of commodities

-arly society: physical la#our used toproduce goods determined the price

,oney from the sale went to la#ourer!savings of la#ourers created capital


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Adam Smith

Capital could #e used to hireadditional workers! who also producedvalue

Capitalists use the capital to employindustrious people

%hey take new initiatives! which also

involve risks

Prot had to #e given to risk taker 4thecapitalist employer5! not the la#ourer


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Adam Smith

Common land #ecomes privateproperty! rent to owner of land>factory

*dvanced society: natural price or

e.changea#le value should consist of:Wages 4la#ourers5! rent 4factory

owners5 and prot 4capitalists5

Competition determines the relation#etween natural and market prices


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Adam Smith

When market price is higher than naturalprice! capitalists convert capital & landinto more prota#le employment

-co growth: comes from capital viasavings from revenues through hard work

-G also reAuired a culture rooted in

morality* system of natural li#erty that

respected higher virtues


16/19

Adam Smith

%here should #e no articial impedimentto trade! markets and e.change


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Adam Smith

9ust economy also had to provide highwages for workers

+pecialisation! markets and trade are

the #ases of the prosperity of nations?ree trade and well functioning

markets will lead to eBcient allocation

of scarce resources


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Adam Smith

+pecialisation promotes eBciency! savestime! increases production

+ociety organised #y self2interest needs a

regulating mechanismCompetition! not the state! is the

regulating mechanism

'ong run: free markets & competitionwould drive prices towards natural orsocially =ust levels


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Adam Smith

%he we# of self2regulating markets is theinvisi#le hand which:

rganise the economy eBciently and

%ransform private self2interest into pu#licvirtue

,arkets as virtuous institutions of:

+ocial eBciency!rivers of invention and innovation and

3isk taking

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6) Classical Theories (1)