Student Number: 2020-09411-MN-0 Date: November 22, 2021

Name: Salazar, Mary Rose C. Section: BAPE 2-2

Lesson 4: Classical Political Economy

I. Draw a table explaining the essence of the following as defined under classical political
economy:

CLASSICAL POLITICAL ECONOMY

CIVIL SOCIETY • It serves as the location of subsistence production
→ In the classical political economy, civil society acts as
the setting for subsistence production. This form of
civilization only produces enough to meet basic needs
without any economic surplus.

• Sphere of universal egoism

→ According to Shlomo Avineri's summation, civil
society serves as the arena of universal egoism. The
study of the logical repercussions of the assumption
that people act in their own self-interest has been
associated with the development of economic
analysis. Much of economic theory has focused on the
logical characteristics of a system of independent and
autonomous property owners, each pursuing their
own self-interest and limited solely by the obligation to
respect the property rights of others.

• System of justice
→ Within civil society, there is a system of justice that
establishes it. It may be just or unequal, but it is not
political.

• Framework of relationships
→ People are pitted against one other in civil society,
which is defined as a system of private relationships
between legally autonomous persons.

• Working class
→ Civil society creates, recreates, and extends the
working class, but it is never allowed access to
its advantages.

PRIVATE INTEREST AND • Increase the general industry of society

PUBLIC GOOD → Profit determines the evolution of industry by allowing
individuals to choose the direction of labor and capital
flow. It guarantees that sales and the sector will
expand as quickly as possible. Investing money in
private hands and subjecting it to self-interested
decisions is the only way to ensure that profit drives
investment. Profit is the greatest method to satisfy
one's self-interest, hence this strategy works. Profit
seeking is a private rather than a public incentive,
hence this viewpoint argues against government
investment direction. Public regulation, according to
 classical economics, means that something other
than profitability will influence investment.

• Society’s capital stock is fully utilized

→ In accordance with the classical view of the
relationship between private interests and the public
good, in the absence of external control, the market
will ensure the full utilization of society's capital stock
because profitability reflects the contribution each
business can make to the size of social revenue and
the growth of social wealth, and the proportions
committed to different industries should be
determined by the overall quantity of capital and labor
available to a society. Profit seeking is a private rather
than a public incentive. Hence, this approach argues
against public investment direction. Public regulation,
according to classical economists, means that factors
other than profitability will affect investment. The
unregulated yet self-ordering market will support the
growth of society's capital stock while also
accomplishing the public good. According to the
classical method, the public good as defined will be
best served without the involvement of a government
agent.
STATE AND SOCIETY • Smith’s Three Governmental Functions
→ Public works and public institutions: It involve the
creation and maintenance of institutions that fostered
profitable production and exchange such as stable
and uniform and currency, standard weights and
measures, and physical means necessarily for
conducting business like roads, harbors, and other
form of communication.
→ Justice: This gives protection to citizens from
injustices committed by other individuals on their
private property, enforcement of contracts, and
preservation of internal order.
→ Protection from violence and invasion of other
independent societies: The government protect the
country from external threats like enlargement of
foreign markets through armed coercion.

• Steuart’s idea of change

→ The idea that change is driven by forces and
processes that exist inside society rather than by the
state.
→ The state playing a critical role in identifying the need
for those changes and guiding society through them.

• Key role in Private sectors

→ According to Steuart, the state plays a key role in the
private sector, molding private interests, constraining
self-interest, and teaching people to a higher
perspective.
II. Explain how prices in production is determined under the classical political economy
concept.

According to the labor theory of value, the price of economic commodities is determined
by the quantity of labor required to manufacture them. By arguing that prices are determined
by the relative quantities of social labor required in the production of commodities, Smith,
Ricardo, and Marx drew a straight line between the division of labor and price. The division of
a pool of social work and the trade of commodities are directly linked under the labor theory
of value. However, the theory encounters a number of analytical difficulties, leading modern
economists working in the classical tradition to conclude that the best way to build a materialist
basis for exchange is to use a different starting point, which is also present in classical
theories: the price of production. Instead of basing the price on the division of a pool of social
labor, these scholars base it on the technical specifications of a production system.

The set of outputs generated must be appropriate in form and adequate in volume to offer the
inputs required for their own production in order for reproduction to occur. If the output set is
entirely accurate in this sense of replacing the inputs used in its production, the economy is
said to create a surplus equal to the excess of the set of products over the reproduction inputs.
Each price must meet the criterion of being adequate to meet production expenses while also
being consistent with the prices of items that use that output as a productive input. In this
sense, price of production refers to a price that is commensurate with the commodity's
placement in the reproduction system. The price determines whether a commodity may be
used as both an input and an output. The first and most important determinant of the pricing
system is the production structure, which is a material technical definition of the needs for
reproducing the commodity system.

The classical technique contrasts with the neoclassical method in its analysis of
consumption, particularly that of workers. The application of the classical model to wage
determination has resulted in the concept of labor as a commodity whose price is decided in
proportion to production costs. Otherwise, technological procedures for translating inputs into
outputs will not be able to calculate the pricing of items that use labor as an input in a unique
way. The classical method solves this difficulty by determining the composition and amount of
employees' consumption based on principles that are independent of individual workers'
wishes and decisions.

The simplest process of subsistence is to appeal to the cost of reproducing employees.

This method, which is based on Ricardo and Marx's work, directly applies the cost of
production concept to labor input. Subsistence consumption generates work, which generates
production, including subsistence. Reproduction now necessitates that the wage be equal to
the total of the prices of the subsistence items, given the quantities of each required and the
output of subsistence goods being at least enough to reproduce the labor required for their
creation.

The concept of subsistence has evolved beyond the simple concept of production costs.
Workers' consumption is regarded as a given in today's classical models. Subsistence
indicates that the demands that the market must meet are independent of the market and do
not change in response to commodity prices. Consumers have acquired needs that are
acquired in the market to meet their wants. Regardless of how such demands are identified,
they do not involve trade-offs and do not fluctuate with price in the short term. Consumers who
make decisions based on preferences, on the other hand, will adjust the mix of their
consumption in response to changes in the relative pricing of their components.

As discussed in the classical framework, workers' subsistence demands may fall short of
the quantity of subsistence that those same employees, together with the necessary inputs,
can generate in a given period. More broadly, it is technically possible that using current output
as inputs into production would yield an amount of output greater than that required to maintain
present production levels. The question then becomes what to do with the surplus. This means
that society must distribute surplus funds to certain activities such as consumption and
production in accordance with a set of rules.

In a capitalist society, surplus is typically expressed as profit, which is the difference

between the value of output and its production costs. The profit is distributed to the capital
stock owners as private income. As discussed, when society creates a surplus, production
costs, including the subsistence wage, are insufficient to fully set prices. The excess,
measured in value and assigned to the producer as profit or revenue, is the margin between
price and cost. In contrast, commodity prices are determined by both their costs, which is the
use of other commodities as inputs, and the profit that accrues to their producer, which is
generally proportional to those costs. A commodity's price is equal to the sum of its production
costs and the excess that accrues to the producer as profit.

To sum it up, market pricing, which is linked to social institutions like property and
contracts, indicates a deeper reality that is shared by nonmarket allocation and distribution.
According to the classical perspective, all societies must reproduce themselves by replicating
their workers' subsistence, and they must also divide their surplus in line with the requirements
of their own social structures. What differs amongst civilizations is the shape in which these
processes take. The market is one of several social systems for addressing basic human
needs. This indicates that whether or not the market exists, the economy in the sense of
material provisioning occurs, and so whether or not our economic actions take place in a
distinct area, we would term it an economy.
 References
Caporaso, J. A., & Levine, D. P. (1992). Theories of Political Economy. Cambridge.