PPR295: CLASSICAL AND NEOCLASSICAL ECONOMIC THEORIES

(CLASSICAL ECONOMIC THEORIES)

★ MAIN THINKERS

1) Adam Smith
- Main contributions to the political economy as a whole:

A) Three functional categories of income (wages, profits, rents)

B) Industrial Capital Profits vs. Commercial Capital Profits
C) Presence of class conflict but resolved by the “invisible hand” of the market
D) Types of property relations determining forms of government

- Adam Smith’s Labour Theory of Labour:

● Labour is the only creator of value

● H. Whiteside (2020):

➔ Innovation and mechanisation occur due to workers’ ingenuity and skill, and
not the enterprise of the capitalists

● The concept of the exchange value vs. use value

- Price under capitalist is the sum of wage, rent and profit

- Competition equalises the profits
- Main weaknesses of Adam Smith’s ideas:

A) The three components of prices are derived from other prices (thus, what are
the fundamental determinants of prices?)

B) The cost of production only shows us the general levels of all prices and the
purchasing power of money (How about the relative values of different
commodities?)

- The “Invisible Hand” of the market:

● Individual self-interest would benefit society as a whole

● An economy without much government interference would have a “natural progress
of opulence”
● The state should only handle issues of security, maintaining domestic order, and
provide public goods
● But also Adam Smith warned about the issue of the need for government
interference in the market due to the presence of unscrupulous enterprises
2) David Ricardo
- Two main contributions in terms of:

A) THE THEORY OF RENT

● Profits are determined by the determinants of the profit of the capitalists cultivating
the no-rent land
● Rent is determined by the price of the agricultural products
● Rent as a result of the conflicts between the capitalists and the landowners
● Hunt and Lautzenheiser (2011):

➔ The capitalists’ diminishing productivity in agriculture would cause profits to

be steadily squeezed out by higher and higher rents

B) LABOUR THEORY OF VALUE

● Value is determined by the quantity of labour needed to produce a commodity
● Every increase in the quantity of labour increases the value of a commodity on which
labour is exercised

C) COMPARATIVE ADVANTAGE
● Mutual trade can lead to mutual benefits for two or more trading agents
● The concepts of comparative and absolute advantages

- weaknesses:

★ Ricardo’s labour theory of value demonstrates the variations of relative prices

over different periods (and not the exact structure of relative prices at one
particular time)

3) John Stuart Mill

- Main contributions:

A) Private property is not scared

B) Exchange is not the fundamental law of the distribution of surplus product
C) International prices depend exclusively on supply and demand

- Tendency of profits to fall over the long run

(NEOCLASSICAL ECONOMIC THEORIES)

★ BASIC INTRODUCTION
- Focuses on the utilitarian perspective
- Rejects any element of the labour theory perspective in classical economics
- All actions in the market are based on utilitarian and utility maximising behaviour
- Invisible hand of the market as the source of universally beneficent harmony
- Main assumptions:

A) Two important focal points of economic process

B) Real and monetary flows
C) Rational, calculating, and maximising behaviour of households and
businesses

★ WELFARE ECONOMICS
- Utility of a consumer determine the value of a commodity
- Wage of a worker = value of the marginal contribution of their factors
- Opportunity costs reflect prices
- Utilise cost-benefit analysis to correct externalities

★ WEAKNESSES

1) Competition can bring about long-run equilibrium

● But capitalism is very war-like

2) The State as a shadow and state intervention to bring about balance

● But for whom, and how should the state intervene?

3) Rational market price connects the unpriced effect of an externality

● Very unrealistic, as politics, social and cultural issues will influence production and
consumption

4) Cost-benefit analysis for public finance and public policies

● “Rational” market decisions seemingly benefit only the rich
● Mass employment and social dissatisfaction occur
(SEMINAR DISCUSSIONS WEEK 2)

- The theories were not fully fledged during the 19th century
- The commodification of the workers (labour is just another item to be traded with, like
commodities)
- State intervention and classical economics:

● Classical economists hated state interventions unless if they are necessary

● Very different from what the neoliberals proposed in today’s world
● Creative destruction to ensure innovation
● But the human costs is way too high
● John Stuart Mill:

➢ Infant industries can be protected by the state

➢ Sunset industries can be protected by the state to reduce the human costs

● When should states intervene

● Did the harmony between actors in the market really happen + why did it not happen
now?:

➢ The capitalists and the workers are not working as synergetic as what the theorists
proposed
➢ The state must be needed to break up mergers and oligarchic capitalism

● What is value?:

★ The self-benefit gained from the inter-class interactions

● Class conflict:
➢ Class exists as a concept in both classical and neoclassical economics
➢ Gggggg

● What is the division of labour:

➢ The production line is separated into different phases and levels of production
➢ Workers will be specialised
➢ The capitalists own the means of production

● Where does the wealth come from:

★ For the workers, it would be their income

★ For the capitalists, it would be the profits
★ For the landowners, it would be rent

● Profits and exchange value:

➢ We sell something at a much greater price than the cost of that commodity
➢ Classical economists: Price and value are equal; price comes from the supply and
demand and the exchange value
➢ Neoclassical economists: the used value/utility

● How to decide price as a capitalist:

➢ Decide how many resources are needed to produce the goods, how much the
resources are in terms of the costs, and how high of a price do we wish to sell the
commodities
➢ For Adam Smith, price depends on adding up the wage, rent, and profits
➢ Wages are variable (we can pay them at any rate that we want, and at any rate the
workers would accept forcefully)
➢ Can this explain why the different pricing (assuming that the wages and resource
costs are the same) (according to Adam Smith):

➔ Prolly costs of transportation?

➔ Costs of processing?

● The classical economists believe that labour is the sole producer of value, but
in the neoclassical economists’ eye, capital is the sole producer of value
● The capital has the embedded value of the workers in their values (ricardo)
● Thus increasing the prices of the capital (Ricardo)