The Classical Political Economy, IPE Presentaton.pptx

The Classical Political Economy,

1. The Classical Political Economy This Photo by Unknown Author is licensed under CC BY

2. Introduction Classical political economy refers to the approach developed by economists in the 18th and 19th centuries from Adam Smith's "Wealth of Nations" in 1776 to John Stuart Mill's "Principles of Political Economy" in 1848 (or in broader view to the death of Karl Marx in 1883). Karl Marx coined the term "classical political economy." It is divided into two main areas: a). Market Self-Regulation; b). The theory of value and distribution

3. Core Concepts The separability of the economy and the primacy of the economic sphere. Smith's concept of the political economy involves a system of satisfying private wants through independent private agents, suggesting a shift from politics to economics. Adam Smith's metaphor of the "invisible hand" represents the idea that non-political group life can organize and sustain itself independently. Contrary to Smith, James Steuart , recognized the role of state in guiding society through changes.

4. Civil Society In societies where subsistence production occurs within families, economic activities must align with the goals and relationships of family life. The scale and composition of output are limited by the family's needs, labor capacity, and the appropriate division of labor. A family large enough for factory-like production would be too large to function traditionally, while a family with a factory-like organization would conflict with the nurturing and upbringing roles central to family life.

5. Civil society represents a system of private want- satisfaction regulated neither by family nor by the state but driven by self-interest. This concept closely associated with self-seeking, where individuals operate with self-interest as their primary guide. Disconnected from institutional loyalties, individuals act according to their enlightened self-interest, treating others as a means to achieve their goals. Concept of Civil Society

6. Division of Labor, Exchange and the Economy as Institution When economic activities are separated from family and other social institutions, they are connected by exchange contracts. As society moves kinship-based connections to contractual relations, it leads to the emergence of economy as a distinct institution. This transition fosters the idea of a pure private property system, where all persons are property owners, and relationships are governed by contracts for property exchange. Smith believed that division of labor led to increased productivity. Specialization allowed workers to become more skilled.

7. The Role of Self-Interest in Economic Theory The concept of civil society, characterized by self-interest, has become a focal point in economic theory. Economic theory has centered on exploring the logical implications of assuming that individuals act based on self-interest (profit-seeking, utility maximization, etc.).

8. The Self-Regulating Market Economists often assume that if the market successfully meets the private goals of participants, it achieves its human and social purpose. This equates achieving private ends with achieving public good. The market works effectively when individuals act as both buyers and sellers. This "circular" function facilitates property rearrangement according to owners' desires and ensures private wants are satisfied. If an individual seller or worker can't find demand for their goods or labor, they may struggle. Classical Economists viewed it as inevitable but necessary to incentivize adaptation. They argued, individual sellers might suffer from a lack of demand, market as a whole would not fail.

9. Continue… David Ricardo emphasized that if individuals produce without intending to consume or sell, they would struggle to find buyers. This led to the idea that the market could self-regulate and not generally fail. A central assumption in self-regulation is that seller would not hold money rather than buy goods. The market circulation would continue if people acted rationally. Problem with this assumption is that the satisfaction derived from the market depends on what property individuals bring to the market, not necessarily on their needs. This can reinforce existing inequalities and limit opportunities. Hegel highlighted that factors like physical conditions and external circumstances could reduce people to poverty, indicating that a purely self-regulating market might leave some individuals vulnerable. This observation supports the need for government intervention to create a safety net, addressing limitations of the self-regulating market.

10. Private Interest and Public Good Smith's idea of a self-regulating market suggests that by leaving decisions on the flow of labor and capital to individuals, the pursuit of profit will drive socially beneficial outcomes. This approach promotes private ownership and self-interest as mechanisms for investment, suggesting that public regulation might divert resources inefficiently. The classical approach to political economy equates public good with the growth of society's capital stock. Profitability becomes the guiding factor for the distribution of resources among different industries. Public guidance of investment is viewed skeptically, with self-interest and profit-seeking considered more reliable drivers for economic growth and development.

11. Continue… Smith's "invisible hand" metaphor represents the idea that individual pursuits, even when driven by self-interest, can lead to broader social benefits. This concept has been used to argue against public regulation, emphasizing that the self-regulating market can achieve public good without direct government intervention. Both Smith and Marx saw capitalism's role in developing society's material and technical foundations, albeit from different perspectives. Smith viewed it as a transition from the "savage state of man" to "civilized society," while Marx saw it as a historical mission to develop "material forces of production" and create an "appropriate world market.”

12. Continue… The classical approach to political economy suggests that the public good is best achieved without state intervention. The self-regulating market can drive economic order without political agents' involvement. Political interference in the market may lead to unintended negative consequences, reinforcing the classical view that encourages the displacement of political society by civil society.

13. Role of the State in Classical Economics According to Adam Smith, the state's responsibilities are limited to three key duties: protection from external threats, administration of justice, and maintenance of public works and institutions. Public works refer to infrastructure facilitating commerce (e.g., roads, bridges, canals) and public institutions like education. Smith's concept of the state's role does not involve regulating private activities or providing social welfare. The state focuses on national defense, justice, and public works, with political deliberation restricted to these areas. This narrow definition of the state's role indicates that civil society gradually replaces political society, emphasizing administration over politics.

14. Differing Views on State's Role Smith favored the demotion of politics, while James Steuart believed that the state should play a role beyond public administration and national defense. Steuart suggested that the state could guide private interests, limit self-seeking, and educate individuals toward a public interest. Modern political economy tends to doubt the necessity and competence of the state to lead, viewing it as an agent serving private interests rather than a guardian of a public good irreducible to private interest.

15. Value and Distribution Classical economists like Smith, Ricardo, and Marx linked prices to the labor used in production, forming the labor theory of value. However, modern classical economists challenge this theory, grounding prices in the production structure and costs. The price of production aligns with a commodity's role in the production structure, ensuring it can act as both an input and an output. Surplus production leads to price variations, affecting how the surplus is distributed among producers.

16. Continue… In classical theory, wage levels are tied to workers' subsistence needs, with the cost of producing subsistence goods influencing wages. Surplus in capitalist systems typically results in profit, which goes to capital stock owners as income. Market prices are influenced by social institutions like property and contracts. Classical economics contends that societies must satisfy subsistence needs and distribute surplus according to their unique social structures.

17. Income Distribution The distribution of the product between labor and capital owners is not strictly determined by conditions of reproduction, suggesting that income distribution could be the outcome of a struggle between social classes. Identifying claimants as social classes based on their relationship to the means of production aligns with the classical tradition. This approach views income distribution as a struggle between social classes over the product of labor. This focus on class struggle alters the definition of political economy, shifting the emphasis from the economy as a distinct sphere to a broader concept of material reproduction of goods and the provisioning of needs.

18. Marx's Contribution to Political Economy Marx used the classical framework to derive radical conclusions about political economy, focusing on class struggle and the distribution of surplus as inherently political processes. Marx's approach contrasted with the classical economists' intent, as it treated political economy as a field where class relations and political struggle play a central role.

19. Mercantilism Smith was critical of mercantilism Mercantilism focused on accumulating gold and silver, rather than promoting trade and efficiency Smith argued that mercantilism was detrimental to economic growth

20. Laissez-Faire Smith was a proponent of laissez-faire economics Laissez-faire refers to the idea of minimal government intervention in the economy This idea has influenced economic policy around the world

21. Neo-Classical Economics Neo-classical economics developed in the late 19th and early 20th centuries It built on classical economic theory, including many of Smith's ideas Neo-classical economics is still the dominant economic theory today

22. Keynesian Economics Keynesian economics developed in response to the Great Depression It calls for government intervention in the economy to stimulate growth Keynesian economics represents a departure from classical economic theory

23. Impact on Economic Policy Classical Economic’s ideas have had a lasting impact on economic policy Free trade, deregulation, and privatization are all policies influenced by classical economic theory These policies have been implemented by governments around the world

24. Globalization Classical Economists’ ideas on international trade have contributed to the growth of globalization Globalization has led to increased economic growth and development, but also has its critics Many argue that globalization has led to increased inequality and exploitation in some parts of the world

25. Conclusion Classical Economist’ ideas continue to influence economic theories and policies today Their contributions to the field have had a lasting impact on the world economy As we move forward, it is important to reflect on Classical Economist ideas and their implications for the future