Notesale: Turn your study into money

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The classical school began in the late 18th century and ended roughly in the late 19th century
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The
classical economic theory helped countries to migrate from monarch rule to capitalistic
democracies with self-regulation
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Wealth of Nations by Adam Smith in 1776
2
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Principles of Political Economy by John Stuart Mill in 1848
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The classical school was derived
from the economic ideas of the scholastics, physiocrats and mercantilists
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Hence, like the physiocrats the classicals favored free,
unregulated markets and maximum individual freedom
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Adam Smith is pretty much the father of capitalism and of modern economics
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Until the publication of Ricardo’s “On the Principles of Political Economy
and Taxation”, this book dominated the classical school
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He also assumed the same things about human nature as the
mercantilists: human beings are rational, self-interested and calculating
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However, he differed from them on his
assumption that a natural process at work in the economy can resolve conflicts more effectively
than any arrangements devised by human beings
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If left-alone, everyone will follow his or her own self-interest, and in
promoting self-interest promote the interest of society
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Smith advocated laissez-faire, although he conceded that markets often fail to produce ideal social
results, current reality convinced him that the results of government intervention were less
acceptable than those flowing from free markets
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He advocated not purely because he believed markets to be perfect but because, in the context of
history and the institutional structure of the England of his time, markets usually produced better
results than did government intervention
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In terms of competitive markets, given a few conditions, the self-interest of resource owners would
lead to long-run natural prices that would equalize the rates of profits, wages, and rents among the

various sectors of the economy
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As for the nature of wealth, he didn’t agree with the mercantilists’ view of measuring the nation’s
wealth in terms of accumulated bullion, nor did he agree with the physiocrats who claimed it was
land
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He also held a view that the major source of wealth was labor, again contradicting
the mercantilists (export) and the physiocrats (land/labor)
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He divided the causes of wealth of nations into two:
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He used
the pin example
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Productive and unproductive labor ratio: according to Smith, the larger the share of the
labor force involved in producing tangible real goods, the greater the wealth of the nation
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It determines
the extent of the market and the division of labor
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A limited market on the ahnd,
permits only limited division of labor
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As the division of labor increases, laborers no
longer produce goods for their own consumption, and a stock of consumer goods must exist to
maintain the laborers during the time-consuming production process
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Moreover, an unequal distribution of income in favor of the capitalists is of tremendous
importance
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Again, because economic growth is inhibited by government
spending for unproductive labor, it is better to have less government
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As for international trade, he advocated for unregulated foreign trade
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As for the meaning of value, he was rather ambiguous
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Because of this he couldn’t give a proper to the diamond-water paradox
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Because Smith was some what confused about the factors determining relative prices, he
developed three separate theories relating to them:
1
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But he refused to use just clock hours and from here his reasoning becomes
circular and doesn’t really provide any solution to the problem
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A labor command theory: According to Smith, under the labor command theory, the value
of a good “to those who possess it, and who want to exchange it for some new productions,
is precisely equal to the quantity of labor which it can enable them to purchase or
command”
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A cost of production theory of value: the value of a commodity depends on the payments
to all the factors of production: land, labor and capital
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Labor is the only factor of production owned by most
households; so a household’s income generally depends upon the wage rate and the number of
hours worked
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On the other hand, Karl Marx, identified numerous problems with capitalism:
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He holds a belief that work is one of the greatest joys of life
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But modern world
is specialized
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→ Alienation
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We could be replaced easily
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Workers get paid little, while capitalists get rich
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Profit is the fancy term for
exploitation
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Capitalism is very unstable
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Crises are endemic to
capitalism
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5
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Capitalist
system forces people to put economic interests at the heart of their lives, so that they can
no longer know deep, honest relationships
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 Commodity fetishism

In short, one of the biggest evils of capitalism is not that there are corrupt people at the top, but
that capitalist ideas teach all of us to be anxious, competitive and politically complacent
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With the fall of capitalism, a new set
of relations of production will emerge, which Marx called socialism; socialism, in turn, will finally
give way to communism
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According to this view, ethnic and
nationalistic feelings are a product of capitalism that will disappear under socialism
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Under socialism,
each person contributes to the economic process according to his or her ability and receives
an income according to his or her contribution; under communism, each contributes
according to his or her ability but consumes according to his or her needs
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