Classical Economics

Common themes:

 Central figures: Adam Smith, Thomas Malthus, David

Ricardo, John Stuart Mill, Karl Marx

 Applied analysis to capitalism, rather than feudalism

Capitalism = private ownership of factors (L & K). Usually

combined with co-ordination through markets

 Class-based analysis (vs “methodological

individualism”)

As Physiocrats, but Quesnay’s {peasants, landlords, artisans}

under feudalism  Classicals’ {workers, capitalists, landlords}
under capitalism

An individual’s social class defines his/her behaviour:

Pluralistic account of motivations (vs U max): e.g.

landlords consume, capitalists accumulate, and there are
“moral sentiments”

 Distribution and growth: a dynamic analysis (vs static

allocation)

Wanted to discover “laws of motion” of capitalist economies

1
Classicals aimed to explain “factoral” distribution of
income…

“The produce of the earth—all that is derived from its

surface by the united application of labour, machinery, and
capital, is divided among three classes of the community;
namely, the proprietor of the land, the owner of the stock
or capital necessary for its cultivation, and the labourers
by whose industry it is cultivated.

“But in different stages of society, the proportions of the

whole produce of the earth which will be allotted to each of
these classes, under the names of rent, profit, and wages,
will be essentially different; depending mainly on the
actual fertility of the soil, on the accumulation of capital
and population, and on the skill, ingenuity, and
instruments employed in agriculture.

“To determine the laws which regulate this distribution, is

the principal problem in Political Economy.”

(Beginning of Preface to Ricardo’s Principles of Political

Economy and Taxation, 1817)

… and how it determined accumulation and growth:

“The whole annual produce of the land and labour of every

country, or what comes to the same thing, the whole price
of that annual produce, naturally divides itself… into three
parts: the rent of land, the wages of labour, and the profits
of stock; and constitutes a revenue to three different
orders of people.

“according to the different proportions in which [the whole

annual product] is annually divided between those…
different orders of people, its ordinary or average value

2
 must either annually increase, or diminish or continue the
same from one year to another.”

(Smith, Wealth of Nations, 1776)

Also considered how limitations on non-reproducible resources

(esp land) might eventually reduce growth, leading to a
“stationary state”

 Capital as an advanced “wage fund” and the

determination of “surplus”

The organisation through time of the production process

requires advances to workers – because wages must be paid
before sale of the product*

For Classicals, capital is a wage fund = commodities (“corn”)

commanded by capitalists to gain command over labour

“Wage fund” concept can be expanded to include non-L

inputs at the start of production (e.g. components, tools)

[Classicals tended to view L as the only fundamental agent of

production or creator of wealth. Machinery = embodiment of
past L. This view created analytical problems – e.g. attempt to
explain of prices via Labour Theory of Value]

*
The capitalist worker differs from the feudal peasant. The former is
propertyless with no means of self-support (after “enclosures” of
common land) and thus needs paid employment with a capitalist. The
latter (featured in the Physiocrats’ analyses) owned a stock of corn,
which was consumed during the year.
3
The surplus = volume of commodities produced above that
required to support the workers (= replenish the wage fund)†

 surplus = production – wages

where, for Classicals, the wage is exogenous, determined

by biological subsistence and cultural norms. [In contrast,
Neoclassicals view wage as endogenous, determined by
marginal productivity]

 Like the Physiocrats’ notion of “agricultural surplus” – but,

for Classicals, all industries create surplus, not just
agriculture

 In contrast to modern national income accounting,

deducting subsistence needs from “net output” might
make sense – on same basis that deduct depreciation of
physical K

Surplus is the physical manifestation of profit. Existence of

a physical surplus allows profit to be paid on capital invested

Surplus is divided between landlords’ rents (consumed)

and capitalists’ profits (reinvested)  division of surplus
matters for growth

†
i.e. above that required to ensure that the production process can be
repeated next year
4
 Adam Smith (1723-1790)

 Born Kirkcaldy, Fife, Scotland

 Educated at Glasgow and Oxford Universities

 Various jobs: Professor at Glasgow, private tutor,

Commissioner of Customs in Edinburgh

 Books: The Theory of Moral Sentiments (1759); An Inquiry

into the Nature and Causes of the Wealth of Nations
(1776)

 Prophet of the Industrial Revolution

 Amusingly absentminded

5
 Plan: Adam Smith

 The division of labour and economic growth

 Analysis of market competition

 Analysis of individual psychology

The Division of Labour (DoL) and Economic Growth

For Smith:

 DoL (= the division of work into ever-more minutely

specialised tasks) is the basis of economic growth through
new methods/techniques of production

 “the division of labour is limited by the extent of the

market” (title of Chapter 3 of Book 1 of WoN)

 DoL is supported by the human “propensity to truck,

barter, and exchange one thing for another”: “nobody ever
saw a dog make a fair exchange of one bone for another
with another dog” (both quotes from WoN)

 Promotion of DoL is main result – and virtue – of the

emerging factory system

6
Smith gave three reasons (in Chapter 1 of Book 1 of WoN) for
the productivity benefits of dividing tasks as finely as possible:

“[The] great increase of the quantity of work, which, in

consequence of the division of labour, the same number
of people are capable of performing, is owing to three
different circumstances; first, to the increase of dexterity in
every particular workman; secondly, to the saving of time
which is commonly lost in passing from one species of
work to another; and lastly, to the invention of a great
number of machines which facilitate and abridge labour,
and enable one man to do the work of many.”

Smith illustrated these claims with his famous example of the

pin factory, in which:

“One man draws out the wire, another straights it, a third
cuts it, a fourth points it, a fifth grinds it at the top for
receiving the head…”

and so on, so that

“the important business of making a pin is, in this manner,

divided into about 18 distinct operations.”

Mechanism (“virtuous circle”):

7
Some evaluation of Smith’s DoL arguments:

 Role of “effective demand” is ignored

 In effect, Smith’s vision of economic growth gave central

role to increasing returns to scale

e.g. economy’s L & K both double  Y (national income)

more than doubles

Doesn’t just replicate the initial situation, due to:

internal changes within the factory; and

macro developments: new industries emerge (e.g.

components that are more specialised/less generic)

 economic growth isn’t just “more of the same” but

involves new products and industries

8
 Was “factory system” (= centralisation of production, vs
solitary artisans) necessary for the DoL?

Solitary artisan pin maker could save “time which is

commonly lost in passing from one species of work to
another” by focussing on one task per day: e.g. could
draw out the wire all one day, spend the next day
straightening, etc.

Was working in factories necessary to learn the superior

manual skills (“increase of dexterity”) associated with the
DoL? Given that early factories used child labour,
presumably the skills weren’t that hard to acquire.
Perhaps the solitary artisan (above) could have done so

Some economists (e.g. Stephen Marglin, “What do bosses

do?”, 1974) have argued that the factory system
developed not because of its superior productive
efficiency but because of how it facilitated
control/monitoring (of workers by bosses) and
surplus/profit extraction

 Might the DoL undermine the skills that are required

to further the DoL?

“The man whose life is spent in performing a few simple

operations, of which the effects too are, perhaps, always
the same, or very nearly the same, has no occasion to
exert his understanding, or to exercise his invention in
finding out expedients for removing difficulties which never
occur.” (Chapter 1, Book 5, WoN)

Repetition and lack of challenge (“difficulties… never

occur”)  boredom  less “understanding” and
“invention” (inventiveness), where the latter are required to
think up new and better ways of organising production

9
 Nicholas Kaldor (1908-1986)

 Cambridge economist and follower of Keynes

 Applied Adam Smith’s ideas about growth to modern

economies

 “Kaldor used to joke that economics went wrong from

Chapter 4, Book 1, of the Wealth of Nations, when Smith
dropped the assumption of increasing returns.” (Thirlwall,
1987, p. 556)

 Thought that IRTS were empirically common (esp in

manufacturing) and that IRTS has fundamentally different
implications for economic growth (compared to C or
DRTS)

Kaldor’s ideas were developed (often without

acknowledgement) in 1990s “endogenous growth” models

 Argued that Neoclassical Economics had ignored IRTS

because it is incompatible with perfect competition

Sraffa (Economic Journal, 1926) showed this. Under

IRTS, AC falls with Q  a price-taking firm will grow
infinitely large, which is incompatible with “price-taking”!

Sraffa’s paper helped to launch the “Imperfect Competition

Revolution” in Micro, the argument being that if a firm has
IRTS, then it must be a price-maker (i.e. have downward-
sloping demand).

10
 Decreasing vs Increasing Returns: Kaldor’s Insights

Highly simplified model of capital accumulation and growth:

 “Production of commodities by means of commodities.” All

output reinvested (as next period’s advanced wages and
material inputs):
inputt  outputt = inputt+1  outputt+1 = inputt+2  …

 Implicitly assumes unlimited LS (at fixed real wage)‡

Decreasing Returns to Scale§

 Growth slows down over time: e.g.**

Y  10%  input  10%  Y  7%  input  7%  Y  3%  …

Increasing Returns to Scale

 Growth speeds up over time

 Kaldor often quoted Allyn Young (Economic Journal,

1928): With increasing returns, “change becomes
progressive and propagates itself in a cumulative way”

 [To extent that real-world growth steady over time, both

DRTS and IRTS perspectives limited?]

‡
If LS fixed  growth constrained
§
If the economy produces a surplus (Y t > input t), output will be growing (
Y t > Y t−1) because input t =Y t −1. Given positive output growth, increasing
(decreasing) returns to scale  the growth rate of output rises (falls)
over time. For example, in an expanding, increasing-returns economy,
( Y t /Y t−1 ) > ( input t /input t−1 ) > 0, which implies that ( Y t /Y t−1 ) > ( Y t−1 /Y t−2 ) or
gY (t ) > gY ( t−1 ). (Note that, for any variable x, x t / x t −1=1+ g x ( t ) , where gx(t) is
the growth rate of x during t – e.g. g x ( t )=0.1 is 10% growth.)
**
Because this year’s output is next year’s input, input growth equals
past output growth
11
 Smith’s Analysis of Market Competition

 For Smith, “competition” meant free entry and exit (i.e. no

barriers to mobility)

 Smith showed that “free competition” or “perfect liberty”

(his terms in WoN) doesn’t lead to chaotic/arbitrary
outcomes

Rather, he showed competition’s systematic effects in

both positive and normative respects

An example of factor mobility (Smith’s study  Greggs)?

12
 Normative Analysis of Market Competition

Pursuit of self-interest  preference satisfaction:

“[M]an has almost constant occasion for the help of his

brethren, but it is in vain for him to expect it from their
benevolence only. He will be more likely to prevail if he
can interest their self-love in his favour, and show them
that it is for their own advantage to do for him what he
requires of them. Whoever offers to another a bargain of
any kind, proposes to do this. Give me that which I want,
and you shall have this which you want, is the meaning of
every such offer; and it is in this manner that we obtain
from one another the far greater part of those good offices
which we stand in need of. 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 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.”

(From Chapter 2, Book 1, WoN. Italics added)

13
The “invisible hand”:

“Every individual is continually exerting himself to find out

the most advantageous employment for whatever capital
he can command. It is his own advantage, indeed, and not
that of the society, which he has in view. But the study of
his own advantage naturally, or rather necessarily, leads
him to prefer that employment which is most
advantageous to the society…

“[B]y directing… industry in such a manner as its produce

may be of the greatest value, he intends only his own
gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it
was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually
than when he really intends to promote it. I have never
known much good done by those who affected to trade for
the public good. It is an affectation, indeed, not very
common among merchants, and very few words need be
employed in dissuading them from it.”

(From Chapter 2, Book 4, WoN. Italics added)

14
 Positive Analysis of Market Competition

1. Market Prices and “Natural Prices”

Importance of competition (= free mobility of factors) as an

organising concept (competition  regularity):

“Only through the principle of competition has political

economy any pretension to the character of a science. So
far as rents, profits, wages, prices, are determined by
competition, laws may be assigned for them. Assume
competition to be their exclusive regulator, and principles
of broad generality and scientific precision may be laid
down, according to which they will be regulated.”

(John Stuart Mill, Principles of Political Economy, 1848)

Definition of “natural prices”:††

“There is in every society… an ordinary or average rate of

both wages and profits… When the price of any
commodity is neither more nor less than what is sufficient
to pay the rent of land, the wages of labour, and the profits
of stock employed… according to their natural rates, the
commodity is then sold for what may be called its natural
price.”

(From Chapter 7 of Book 1 of WoN, entitled “Of the natural

and market price of commodities”. Italics added)

††
This is essentially the same concept as Marx’s “prices of production”
and Marshall’s “normal prices” (which were associated with “normal
profits”)
15
Natural prices as “centres of gravitation”: in LR, market prices
(of both goods and factors)  natural prices

“The natural price… is, as it were, the central price, to

which the prices of all commodities are continually
gravitating. Different accidents may sometimes keep them
suspended a good deal above it, and sometimes force
them down somewhat below it. But whatever may be the
obstacles which hinder them from settling in this center of
repose and continuance, they are continually tending
towards it.”

(Same source as previous quote. Italics added)

16
How “disequilibrium adjustment” to LR (“natural”) equilibrium
occurs:

“If… the quantity brought to market should at any time fall

short of the effectual demand, some of the component
parts of its price must rise above their natural rate. If it is
rent, the interest of all other landlords will naturally prompt
them to prepare more land for the raising of this
commodity; if it is wages or profit, the interest of all other
labourers and dealers will soon prompt them to employ
more labour and stock in preparing and bringing it to
market. The quantity brought thither will soon be sufficient
to supply the effectual demand. All the different parts of its
price will soon sink to their natural rate, and the whole
price to its natural price.”

(Same source as previous quote)

17
2. Relative Prices of Commodities: The Labour Theory of
Value

In addition to his “cost of production” theory of price, Smith also

advanced a Labour Theory of Value for relative commodity
prices

PX
LTV = claim that a good’s relative price ( P ) depends on
Y
lX
its relative labour input (l )
Y

“In that early and rude state of society which precedes

both the accumulation of stock and the appropriation of
land, the proportion between the quantities of labour
necessary for acquiring different objects seems to be the
only circumstance which can afford any rule for
exchanging them for one another. If among a nation of
hunters, for example, it usually costs twice the labour to
kill a beaver which it does to kill a deer, one beaver should
naturally exchange for or be worth two deer. It is natural
that what is usually the produce of two days’ or two hours’
labour, should be worth double of what is usually the
produce of one day’s or one hour’s labour.”
(Chapter 6, Book 1, WoN)

Eqm prices: PB =l B W and P D=l D W

where W = money wage (which must be same in both inds if

workers mobile)

P B lB
 = =2
P D lD in Smith’s example [i.e. PB =2 P D ]

PB
 Relative price ( P D ) reflects opportunity cost: Give up 2D for
1B

18
 [Like “autarky eqm” of Ricardian Model in Int Trade]

19
But:

“As soon as stock has accumulated in the hands of

particular persons, some of them will naturally employ it in
setting to work industrious people, whom they will supply
with materials and subsistence, in order to make a profit
by the sale of their work… In exchanging the complete
manufacture… for money,… over and above what may be
sufficient to pay the price of the materials, and the wages
of the workmen, something must be given for the profits of
the undertaker of the work who hazards his stock in this
adventure. The value which the workmen add to the
materials, therefore, resolves itself in this case into two
parts, of which the one pays their wages, the other the
profits of their employer upon the whole stock of materials
and wages which he advanced. He could have no interest
to employ them, unless he expected from the sale of their
work something more than what was sufficient to replace
his stock to him; and he could have no interest to employ
a great stock rather than a small one, unless his profits
were to bear some proportion to the extent of his stock.”

(Same source as previous quote)

Natural price of good X:

P X =( 1+ π ) ( l X W +m X P M )
⏟
Capital advanced

where  = profit rate (e.g. 0.1 = 10%); mX = qty of materials

required to produce 1X; and PM = price of materials

Therefore:

⏟ W + π ( l W +m P )
P −m P = l⏟
X X ⏟ M X X X M
Value added Wage cost Profits upon whole stock advanced

20
And, in general, the LTV will fail under capitalism:

“In this state of things, the whole produce of labour does

not always belong to the labourer. He must in most cases
share it with the owner of the stock which employs him.
Neither is the quantity of labour commonly employed in
acquiring or producing any commodity, the only
circumstance which can regulate the quantity which it
ought commonly to purchase, command, or exchange for.
An additional quantity, it is evident, must be due for the
profits of the stock which advanced the wages and
furnished the materials of that labour.”

(Same source as previous quote)

Under capitalism with material inputs:

P X ( 1+π ) ( l X W +mX PM ) l X
Eqm = ≠ in general
PY ( 1+ π ) ( l Y W +mY P M ) l Y

PX
i.e. in general, LTV fails to predict eqm relative price ( P )
Y

mX mY
LTV works (so get = rather than  above) if lX
=
lY – i.e. if ratio
of materials:labour common across inds

 [Special case of common materials:labour ratio is m X =mY =0

– i.e. labour the only input]

21
3. Factor Prices

Smith treated “natural” factor prices (wages, profit rate, rents)

as independent, each subject to a separate explanation

David Ricardo would later (correctly) question the

“independence” of natural factor prices – in particular, of w
and 

 Real Wages

Real wages were assumed to be near subsistence, but they

weren’t necessarily regulated by a Malthusian (population-
change) mechanism:

“What are the common wages of labour depends every

where upon the contract usually made between those two
parties, whose interests are by no means the same. The
workmen desire to get as much, the masters to give as
little as possible. The former are disposed to combine in
order to raise, the latter in order to lower the wages of
labour.

“It is not, however, difficult to foresee which of the two

parties must, upon all ordinary occasions, have the
advantage in the dispute, and force the other into a
compliance with their terms. The masters, being fewer in
number, can combine much more easily; and the law,
besides, authorises, or at least does not prohibit their
combinations, while it prohibits those of the workmen… A
landlord, a farmer, a master manufacturer, or merchant…
could generally live a year or two upon the stocks which
they have already acquired. Many workmen could not
subsist a week… without employment. In the long-run the
workman may be as necessary to his master as his
master is to him; but the necessity is not so immediate…

22
 “Masters are always and every where in a sort of tacit, but
constant and uniform combination, not to raise the wages
of labour above their actual rate. To violate this
combination is every where a most unpopular action, and
a sort of reproach to a master among his neighbours and
equals. We seldom, indeed, hear of this combination,
because it is the usual, and one may say, the natural state
of things which nobody ever hears of.”

(Chapter 8, Book 1, WoN)

Blaug argues that, in WoN, Smith presents

“a compendium of wage theories. In the space of a half-

dozen pages, we meet the wages fund theory, the
subsistence theory, the bargaining theory… without any
recognition of the fact that these cannot all hold true on
the same level of analysis.”

(Economic Theory in Retrospect, p. 43)

“Wages fund theory”: Labour demand det’ed by wage fund:

d
w L =F

where w = real wage; Ld = labour demanded; F = “wage fund”

F
∴ Ld = (a rectangular hyperbola)
w

¿ F
If Ls fixed (¿ L), then eqm w is w = L , which might not = the
subsistence wage

23
  Relative Wages

Relative wages were assumed to reflect the modern notion of

“equalisation of net advantages”:

“The whole of the advantages and disadvantages of the

different employments of labour and stock must… be
either perfectly equal or continually tending to equality…

“The five following are the principal circumstances which…

make up for a small pecuniary gain in some employments,
and counterbalance a great one in others: first, the
agreeableness or disagreeableness of the employments
themselves; secondly, the easiness and cheapness, or the
difficulty and expense of learning them; thirdly, the
constancy or inconstancy of employment in them; fourthly,
the small or great trust which must be reposed in those
who exercise them; and fifthly, the probability or
improbability of success in them.”

(Chapter 10, Book 1, WoN)

 Rents

Land not regarded as a productive input (in contrast to the

Neoclassical marginal-productivity theory of distribution):

“As soon as the land of any country has all become

private property, the landlords, like all other men, love to
reap where they never sowed, and demand a rent even
for its natural produce.”

(Chapter 6, Book 1, WoN)

24
  Rate of Profit on Capital (%)

Smith recognised that, in LR eqm, the rate of profit on capital

invested () must be equalised across industries and “near” the
interest rate on loans (r)

Rate of profit perhaps includes a “risk premium”

But (e.g.) if  too much greater than r, supply of loans will

dry up

But Smith lacked a theory (causal explanation) of . Instead, he

relied upon empirical observation:

Smith argued that “[t]he trend in the rate of profit… can be

roughly inferred from movements in the market rate of
interest. The rate of interest has been falling for centuries
and seems everywhere inversely related to the degree of
economic development of a country – a familiar piece of
casual empiricism, eighteenth-century style.”

(Blaug, Economic Theory in Retrospect, pp. 45-6)

A key later contribution by David Ricardo would be to

propose a theory of the rate of profit

25
Some evaluation of Smith’s price theory:

Smith got a very big call right:

Competition  in LR, market prices (of both goods and

factors)  “natural prices”

Essentially, he understood the LR “equilibrium conditions”

under free mobility of factors

and he provided an account of “disequilibrium dynamics”

But Smith’s specific theories of particular prices are open to

criticism:

 Cost-of-production (or “adding up”) theory of natural

commodity prices is really an accounting identity

It immediately begs the Q: What determines natural

factor prices?

Smith presents a separate theory to explain the

natural price of each factor…

(actually, he presents several theories of w and an

“empirical theory” of )

… which suggests that the natural prices of different

factors are independent

David Ricardo would later (correctly) question the

“independence” of natural factor prices – in particular,
of w and 

continued…

26
 Smith proposed LTV to explain the equilibrium relative
prices of commodities

But, in general, equilibrium relative prices differ from

the LTV’s predictions

(e.g. because the materials:labour ratio differs across

industries)

Smith was well aware of this problem (with the LTV),

but he didn’t manage to resolve it

David Ricardo also struggled (ultimately

unsuccessfully) with the LTV. (As we will see,
Ricardo knew that the LTV didn’t “work”, but he
couldn’t find a better theory of relative prices.)

LTV seen by Neoclassicals as a key weakness of

Classical Economics

27
 Smith’s Analysis of Individual Psychology

For Smith:

 One’s behaviour is determined partly by one’s class role –

e.g. workers and landlords consume, capitalists invest

 Individuals are not wholly selfish “economic men”‡‡ whose

utility depends only on own consumption and own leisure
time

Nevertheless, WoN does applaud the economic effects of self-

interest:

 Each person can best pursue their self-interest by serving

the interests of others

 The profit motive gives incentives for people to do good

even when they’re not trying to

 The market economy doesn’t rely on people being self-

interested: there is nothing to stop entrepreneurs
producing things from altruistic motives. The strength of
the market economy is that it “works” even if people are
self-interested

‡‡
The term “economic man” was introduced by critics of J S Mill
28
 The Theory of Moral Sentiments (1759)

Opens thus:

“How selfish soever man may be supposed, there are

evidently some principles in his nature, which interest him
in the fortune of others, and render their happiness
necessary to him, though he derives nothing from it except
the pleasure of seeing it. Of this kind is pity or
compassion, the emotion which we feel for the misery of
others, when we either see it, or are made to conceive it in
a very lively manner. That we often derive sorrow from the
sorrow of others, is a matter of fact too obvious to require
any instances to prove it…

“That… the source of our fellow-feeling for the misery of

others… is by changing places in fancy with the sufferer,
[so] that we come either to conceive or to be affected by
what he feels, may be demonstrated by many obvious
observations… The mob, when they are gazing at a
dancer on the slack rope, naturally writhe and twist and
balance their own bodies, as they see him do, and as they
feel that they themselves must do if in his situation…

“Pity and compassion are words appropriated to signify

our fellow-feeling with the sorrow of others. Sympathy,
though its meaning was, perhaps, originally the same,
may now, however, without much impropriety, be made
use of to denote our fellow-feeling with any passion
whatever.”

(From Chapter 1 of Part 1 of TMS, entitled “Of Sympathy”.

Italics added)

29
For Smith,
“sympathy”  “benevolence”

 “Sympathy” = an awareness of (or “fellow-feeling with”)

another’s welfare. It is enabled by our capacity for
“imagination” (“changing places in fancy with the sufferer”)

 “Benevolence” = an act: helping others

 What causes us to act upon our sympathetic feelings?

Doing so might be pleasurable

A desire to conform to social norms (and thereby earn

praise/avoid punishment)

We are guided by an “impartial spectator” (= conscience):

PTO

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The “impartial spectator”:

“When we are always so much more deeply affected by

whatever concerns ourselves, than by whatever concerns
other men; what is it which prompts the generous, upon all
occasions, and the mean upon many, to sacrifice their
own interests to the greater interests of others?...

“It is… conscience, the inhabitant of the breast, the man

within, the great judge and arbiter of our conduct. It is he
who, whenever we are about to act so as to affect the
happiness of others, calls to us… that we are but one of
the multitude, in no respect better than any other in it; and
that when we prefer ourselves so shamefully and so
blindly to others, we become the proper objects of
resentment, abhorrence, and execration. It is from him
only that we learn the real littleness of ourselves, and of
whatever relates to ourselves, and the natural
misrepresentations of self-love can be corrected only by
the eye of this impartial spectator.”

(From Chapter 3 of Part 2 of TMS. Italics added)

 The C20th American political philosopher John Rawls

(1921 – 2002) defined “fairness” as acting impartially – i.e.
attaching an equal weight to the welfare of every member
of society. His famous thought experiment of the “original
position”, where we imagine making choices (e.g. over
gov’t policies) behind a “veil of ignorance” (unaware of
which individual position within society we will end up
occupying), was designed to get us to recognise the
demands of fairness.

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 Benevolence and the Market

 Benevolence supports the successful working of a market

economy:

Parental love  prepared to make sacrifices for the

education/training of their children

Honouring of agreements supports co-operation – e.g. on

a production line (under the DoL), or as an alternative to
costly legal contracts

Successful economies depend on “give and take”,

which is very hard to codify and enforce contractually
 “working to rule” is a damaging action

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 Benevolence and the market complement each other

Benevolence works best at close range and can fail over

long distances…

“Let us suppose that the great empire of China, with all its
myriads of inhabitants, was suddenly swallowed up by an
earthquake, and let us consider how a man of humanity in
Europe, who had no sort of connexion with that part of the
world, would be affected upon receiving intelligence of this
dreadful calamity. He would, I imagine, first of all, express
very strongly his sorrow for the misfortune of that unhappy
people, he would make many melancholy reflections upon
the precariousness of human life, and the vanity of all the
labours of man, which could thus be annihilated in a
moment. He would too, perhaps, if he was a man of
speculation, enter into many reasonings concerning the
effects which this disaster might produce upon the
commerce of Europe, and the trade and business of the
world in general. And when all this fine philosophy was
over, when all these humane sentiments had been once
fairly expressed, he would pursue his business or his
pleasure, take his repose or his diversion, with the same
ease and tranquillity, as if no such accident had
happened.”

(From Chapter 3 of Part 2 of TMS)

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 … while the “invisible hand” of the market ensures that all
receive benefits:§§

“The rich only select from the heap what is most precious
and agreeable. They consume little more than the poor,
and in spite of their natural selfishness and rapacity,
though they mean only their own conveniency, though the
sole end which they propose from the labours of all the
thousands whom they employ, be the gratification of their
own vain and insatiable desires, they divide with the poor
the produce of all their improvements. They are led by an
invisible hand to make nearly the same distribution of the
necessaries of life, which would have been made, had the
earth been divided into equal portions among all its
inhabitants, and thus without intending it, without knowing
it, advance the interest of the society… In ease of body
and peace of mind, all the different ranks of life are nearly
upon a level, and the beggar, who suns himself by the
side of the highway, possesses that security which kings
are fighting for.”
(From Chapter 1 of Part 4 of TMS. Italics added)

Smith (perhaps) in more realistic mood concerning income

distribution in market economies:***

“[T]he accommodation of a European prince does not

always so much exceed that of an industrious and frugal
peasant as the accommodation of the latter exceeds that
of many an African king, the absolute master of the lives
and liberties of ten thousand naked savages.”
(From Chapter 1 of Book 1 of WoN)

§§
The implicit claim in the following quote – that market economies are
associated with equal distributions of the “necessaries of life” – seems
very strong! Certainly, market economies usually feature income
inequality.
***
Essentially, the weaker claim here is that market economies “lift all
boats” but don’t necessarily produce equality
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