ECN 3111

1. ECN 3111 History of Economic Thought THE CLASSICAL SCHOOL – FORERUNNERS

2. Introduction • It began in 1776 when Adam Smith published the Wealth of Nations • It ended in 1871 when W. Stanley Jevons, Carl Menger and Leon Walras published their works expounding/detailing on the classical theories.

3. Forerunners • Sir Dudley North (1641 – 1691) • Richard Cantillon (1680? – 1734) • David Hume (1711 – 1776)

4. Classical School • Coincides with the industrial revolution which is said to begin in 1950s. • Prior to which Isaac Newton published his great work, ”Mathematical Principles of Natural Philosophy” in 1687. – initial intellectual stimulus for the scientific and industrial revolution.

5. Overview • The classical thoughts was stimulated by two revolutions : • The scientific revolution • The Industrial revolution

6. Overview - continue • The Scientific Revolution its contribution to the classical school. • Isaac Newton (1642 – 1727) in 1687 he advanced the Kepler’s Law of Planetary motion and Galilleo’s mathematical laws of the movement of bodies on earth in his book the Mathematical Principles of Natural Philosophy- explains the motion of the planets.

7. Overview - continue • The revolution in science associated with Newton and friends had three major aspects the are worth mentioning • Scientist relied heavily on experimental evidence – Newton and his contemporaries did not believe in just innate knowledge derived from reasoning alone without experiments. • Newton popularized the already existing ideas that the universe is governed by natural law. • Newton’s systems was the static view of the universe: space, time, and matter are interdependent. Nothing changes over time; the motion and relationships in the universe continues in endless repetition.

8. Overview - continue • The impact on the classical school is that, the “….lingering feudal institutions and the restrictive control of the mercantilism were no longer necessary.” • Newton science had provide them with the idea that if the Devine Will had created a mechanism that worked harmoniously and automatically without interference, then Laissez faire was the highest form of wisdom in social affairs. • In other words the natural law will guide the economic systems and the action of the people.

9. Overview - continue • The ides was revolutionary in their time. • Society would be best served if people are free to follow the natural law of self interest. • Newtonian thinking provide the classical economist the ideology of justified property income. • i.e. the natural law is best left unobstructed • Private thrift and prudence contribute to the good of the society. Rent, interest and profit are just rewards for the ownership and productive use of wealth.

10. Overview - continue • The Industrial Revolution – beginning in 1776. • England indulged into commerce after Holland. • It also lagged behind France into manufacturing • Middle of the 18th century England gained supremacy in both commerce and industry.

11. Overview - continue • By 1776 England became most industrially efficient and powerful country in the world. • English entrepreneurship became stronger. • They no longer relied on government subsidies, monopoly privileges, and tariff protection. • Mercantilist practices broke down under the upsurge of business activities.

12. Overview - continue • The revolution saw • Free, mobile, low-paid and hardworking labor force emerging – when initially labor had been regulated and so also their working conditions. Local justices of peace regulated wages in England for centuries and imposing wage ceilings. • In 1762, such practices died out because of the conditions of labor supply and demand were dictating the low market demand wages.

13. Overview - continue • Enclosure acts passed by parliament – encouraged large scale farming and more capital intensive agriculture. – this raised productivity of farm labor and turned them into wage labors who seek employment from landlords, merchants and manufacturers. • Handicrafts tended to lose their competitive advantage as the factory system developed driving workers to become wage earners in the labor markets. • Hence making it easier for businessman to subscribe to the doctrine of laissez faire.

14. Classical School • Classical doctrine frequently called as the economic liberalism. • In historical context classical ideas were liberal in contrast to the feudal and mercantilist restrictions e.g. on the choice of occupations, land transfers, trade, etc.

15. Major Tenets/principles of the Classical School • Minimal government involvement – “best government governs the least” • The economy was held to be self-adjusting and tending toward full employment without government intervention. • Government activities should be confined to enforcing property rights, providing for national defense, and providing public education.

16. Major Tenets/principles of the Classical School - continue • Self-interested economic behavior . • This is basic to human nature. • E.g. producers and merchants provided goods and services out of the desire to make profits; workers offered their labor services to earn wages; and consumers purchased products as a way to satisfy their wants.

17. Major Tenets/principles of the Classical School - continue • Harmony of interest. • Except Ricardo, the classicists emphasized the natural harmony of interest in the market economy. • i.e. by pursuing their own individual interests, people serves the society best.

18. Major Tenets/principles of the Classical School - continue • Importance of all economic resources and activities. • All economic resources – land, labor, capital and entrepreneurial ability – as well as economic activities – agriculture, commerce, production and international exchange - contribute to the nation’s wealth.

19. Major Tenets/principles of the Classical School - continue • Economic laws – Explicit economic theories of “laws” e.g. • Law of comparative advantage, • Law of diminishing returns, • The Malthusian population • Law of markets (Say’s Law) • Ricardian theory of rent • Quantity theory of money • Labor theory of value. • The classicalist believe that he laws of economics are universal and immutable.

20. Whom Did the Classical School Benefit or Seek to Benefit. • Merchants and industrialist achieve new status and dignity as promoters on the nation’s wealth. • Entrepreneurs were assured the by making profit they can serve the society. • The doctrine led to more material benefits for owners and managers of business because the ideas help promote political, social and economic climate to encourage industry, trade and profit.

21. Whom Did the Classical School Benefit or Seek to Benefit - continue • However, there are costs that come along with the benefits of industrialization. • In Great Britain the wage earners had to bare the burden of long hours work at low pay. But the ultimate progress in the economy they were able to enjoy the fruit of their hard work. So the classicalist ideas had benefit them too. • In the long run the classical economist served all society through the application of their theories that promoted capital accumulation and economic growth.

22. How was the Classical Ideas Valid, Useful, or Correct in Its Time? • It was justify to overthrow the mercantilist restriction because of the growing competitive phenomena • Reliance upon the competition as the great regulator of the economy was tenable viewpoint. • Government during that time was wasteful and corrupt. • Removing the feudal system classical economist promoted business enterprise. e.g. when feudal land law was abolished land was used as security for credit and land owners could raise large sum for investment in agriculture and industry.

23. How was the Classical Ideas Valid, Useful, or Correct in Its Time?- continue • When industrialization began resources need to be used on maximum possible expansion of production. • There was the elevation of the private sector over private sector which served the end admirably. • Consumers were generally poor but investment opportunities seemed to be unlimited. Therefore the capitalist had strong incentive to invest. The outcome was rapid expansion of output. • Hence, continued growth of the public sector was through taxation.

24. How was the Classical Ideas Valid, Useful, or Correct in Its Time?- continue • Market was enlarged through freer international trade and the enlargement of the urban labor force. • Agriculture entered more directly into the monetary sector of the economy. • Hence, merchant and processors found a niche between the farmer and the consumer.

25. The Lasting Contribution of the Tenets • The classical economists laid the foundation of modern economics as a social science and the generations who followed built upon their insights and achievements. • Several classical “laws” are now taught as principles of economics.

26. The Lasting Contribution of the Tenets –continue. • Tenets of lasting contributions include: • The law of diminishing returns • The law of comparative advantage • The notion of consumer sovereignty • The importance of capital accumulation to economic growth • Market as the mechanism for reconciling the interest of individuals with those of society.

27. Weakness and Errors • History and some economic theorists showed that laissez-faire was in adequate as a public policy to deal with economic depression, monopolies, monopsony power, external effects of private actions and public goods (which are largely indivisible.

28. Weakness and Errors- continue • Overemphasis on laissez-faire the classical economist was ambiguous, deficient or wrong in certain area of economic analysis. • E.g. According to classical prediction rental income would rise and profits would fall as the economy advanced – they fail to consider the role of technological change and the relationship of rising productiviy and wages.

29. Weakness and Errors- continue • Secondly they fail to fully incorporate the role of utililty and demand in establishing product value.

30. Forerunners of the Classical school • Sir Dudley North (1641-1691) – living during the height of the mercantilist period. • He was a wealthy merchant in the Turkish trade • Later became commissioner of customs • Treasury officials. • Famous as first prominent free trader

31. Forerunners of the Classical school- continue • Richard Cantillon (1680?-1734) was born in Ireland. • He spent many years in Paris • Wealthy banker and a successful speculator in stocks and foreign currencies. • He died in 1734 –robbed and murdered and his house was set on fire. Suspected that it was done by his cook whom he dismissed ten days earlier. • His book Essai sur la Nature du Commerce en Général – written between 1730 and 1734 published in France in 1755 – believed that it was translated from and English transcript.

32. Forerunners of the Classical school- continue • David Hume (1711-1776) –was born in Scotland, twelve years before his fellow national and friend, Adam Smith. • Entered the University of Edinburgh at the age of twelve and left at fifteen without taking a degree. • Later he became an eminent philosopher, but was twice refused a chair in philosophy at Edinburgh because of his skeptical spirit and unorthodox thinking.

33. David Hume • Adam Smith was very much his follower – Smith was nearly expelled from Oxford University because he possess a copy of Hume’s A Treatise of Human Nature.