Classical Political Economy Essay Example for Free

Classical Political Economy Essay Publication of Adam Smiths The Wealth of Nations in 1776, has been described as the effective birth of economics as a separate discipline.[108] The book identified land, labor, and capital as the three factors of production and the major contributors to a nations wealth, as distinct from the Physiocratic idea that only agriculture was productive. Smith discusses potential benefits of specialization by division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries. [109] His theorem that the division of labor is limited by the extent of the market has been described as the core of a theory of the functions of firm and industry and a fundamental principle of economic organization.[110] To Smith has also been ascribed the most important substantive proposition in all of economics and foundation of resource-allocation theory – that, under competition, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).[111] In an argument that includes one of the most famous passages in all economics,[112] Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society,[113] and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce.[114] In this: He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that 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 effec tually than when he really intends to promote it.[115] Economists have linked Smiths invisible-hand concept to his concern for the common man and woman through economic growth and development,[116] enabling higher levels of consumption, which Smith describes as the sole end and purpose of all production.[117][118] He embeds the invisible hand in a framework that includes limiting restrictions on competition and foreign trade by government and industry in the same chapter[119] and elsewhere regulation of banking and the interest rate,[120] provision of a natural system of liberty — national defence, an egalitarian justice and legal system, and certain institutions and public works with general benefits to the whole society that might otherwise be unprofitable to produce, such as education[121] and roads, canals, and the like.[122][123] An influential introductory textbook includes parallel discussion and this assessment: Above all, it is Adam Smiths vision of a self-regulating invisible hand that is his enduring contribution to modern economics.[124] The Rev. Thomas Robert Malthus (1798) used the idea of diminishing returns to explain low living standards. Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.[125] Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economys tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s. While Adam Smith emphasized the production of income, David Ricardo (1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was the first to state and prove the principle of comparative advantage, according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production.[126] It has been termed a fundamental analytical explanation for gains from trade.[127] Coming at the end of the Classical tradition, John Stuart Mill (1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the markets two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.[128] Value theory was important in classical theory. Smith wrote that the real price of every thing is the toil and trouble of acquiring it as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[129] Other classical economists presented variations on Smith, termed the labour theory of value. Classical economics focused on the tendency of markets to move to long-run equilibrium.