Comp. Eco : Smith & Ricardo

Classical Political Economy

A school of economic thought, primarily British, spanning from the publication of Adam Smith's The Wealth of Nations (1776) to John Stuart Mill's Principles of Political Economy (1848). Its three main representatives are Adam Smith, David Ricardo, and Thomas Robert Malthus.

How did Ricardo's, Malthus's, and Smith's defense of class interests differ?

Ricardo advocated for capitalists, Malthus for landowners, and Smith for workers.

How did Karl Marx categorize economic schools of thought?

He introduced the term "classical political economy" to describe scientific economics (primarily Ricardian) and distinguished it from "vulgar economics" (such as J.B. Say).

What is the core definition of CPE shared by classical economists despite their heterogeneity?

A science of wealth and social relations aiming to determine the conditions for capitalist accumulation. Its core objective is to explain how a nation's wealth grows by examining its nature (what constitutes it) and its causes (how it can be increased).

What are the two distinct objects of political economy according to Adam Smith?

To provide a plentiful revenue or subsistence for the people, and to supply the state with a revenue sufficient for public services (enrich both).

Wealth and Exchange value

• Wealth : Material wealth consisting of the abundance of useful commodities that satisfy human needs, rather than stocks of precious metals.

• Value/Exchange value : The proportion in which a commodity can be exchanged for another; a measure of purchasing power that depends on the difficulty or facility of production.

How does Classical Political Economy differ from Mercantilism regarding wealth and workers?

CPE views wealth as material commodities rather than precious metals (Bullionism). Furthermore, Smith treats improving workers' conditions as a primary objective, whereas mercantilists viewed people purely as tools for state/merchant enrichment and favored low wages.

According to Ricardo, what happens to wealth and value when production becomes more efficient?

National wealth (riches) increases because more commodities are produced, but total value does not increase because value depends strictly on the quantity of labor employed.

How does the analytical approach of CPE differ from microeconomics?

Microeconomics uses methodological individualism centered on isolated agents, whereas classical analysis is conducted in terms of social classes defined by their position in the production process.

Why is the classical conception of social relations described as antagonistic?

Because while classes must cooperate during production, their interests are diametrically opposite and conflict when sharing the distributed wealth.

Why is economic distribution important to future production in classical theory?

The profit rate must be high enough to incentivize capitalist investment, and wages must be sufficient to ensure worker survival and the reproduction of the future labor force.

What was the classical stance on material inequality?

Material inequality is seen as economically efficient to maximize wealth production, even if it is not morally justified.

Physiocracy

A mid-18th-century French school of thought centered around François Quesnay that believed in a natural order, held that agriculture is the only sector generating a net surplus, and labeled industry and commerce as "sterile".

Why is capital considered the decisive factor of production over land and labor?

Land is geographically fixed and cannot expand, and labor growth is ultimately dependent on demographic expansion stimulated by capital accumulation.

Capital (Classical Definition) and its types

A previously accumulated stock advanced to enable the execution of the production process.

• Fixed Capital : Capital items used over several production cycles, such as tools, machines, and buildings.

• Circulating Capital : Capital items consumed entirely within a single production cycle that must be renewed, including raw materials and the wage fund for workers.

Why does capital occupy a predominant place over labor if labor is the primary source of wealth?

Because capitalists must advance funds (fixed and circulating capital) to sustain production before the product is completed and sold.

What constitutes an enriching nation according to classical conclusions?

A nation that continuously accumulates capital and maintains a durably positive natural rate of profit.

Savage vs civilized nations (Smith)

• Savage nations paradox : Everyone works, but the society remains miserably poor.

• Civilized nations paradox : Only a portion of the population works, yet the entire society is abundantly supplied with wealth. The division of labour is the primary driver of this wealth.

Division of labor

• technical : breaking down a production process into a succession of simple, repetitive operations within a single production unit.

• social : The specialization of individuals into independent, decentralized professions and trades across a whole society.

Three advantages of dividing labour

Increased worker dexterity, saving idle time when moving tasks, and the invention of labor-saving machinery.

Technical vs Social organization

Technical division is centralized, planned, and hierarchical; social division is decentralized and unplanned.

Propensity to truck, barter, and exchange (Smith)

The fundamental human driver of the division of labour, rooted in speech and reason.

Methods to expand market boundaries

Building public infrastructure and opening up international free trade.

Perverse side-effect of technical division

Workers performing simple operations lose intellectual habits, becoming stupid, ignorant, and socially detached.

Productive vs unproductive labor

• Productive labour : Work that fixes itself in a physical, vendible object, adding to the material's value and restoring advanced wages with profit.

• Unproductive labour : Work that yields immaterial services that perish instantly, adding to the value of absolutely nothing.

Three pillars of a society's material improvement

Capital accumulation, refinement of the division of labour, and a high proportion of productive to unproductive workers.

Ricardo’s value in use VU and value in exchange VE

• VU : The utility of a good linked to its intrinsic qualities.

• VE : The purchasing power over other commodities that ownership of a commodity conveys.

What are the two necessary conditions for a good to possess exchange value?

It must have utility (value in use) and it must be scarce.

What are non-reproducible goods and what determines their value?

Goods whose scarcity is absolute because human labor cannot increase their quantity. Their value is determined by supply-side scarcity and demand-side preferences (the wealth and tastes of buyers).

Embodied labour

The relative quantity of both direct (immediate) and indirect (past) labor necessary to produce a commodity, which determines its exchange value.

Ricardo’s Critique of Smith

Smith argued that the labor theory of value applies only to a primitive ("early and rude") state of society before capital accumulation and private land ownership. In Smith’s "advanced state," prices are determined by the sum of three component revenues: wages, profit, and rent.

natural vs market price

• natural : The ideal or theoretical price of a commodity determined solely by the quantity of labor embodied in its production.

• market : The actual price at which a commodity is sold in the market, which fluctuates based on supply and demand.

What triggers the convergence of market prices toward natural prices?

Capital transfers via financial intermediation, where capital flows away from sectors with low profit rates toward sectors with high profit rates until supply matches demand.

Why did Ricardo and Malthus oppose the Poor Laws?

They argued the laws had a perverse effect where providing aid increased birth rates among the poor, thereby creating more poverty.

Ricardo's primary objection to the Corn Laws

• Corn Law Act of 1815 mechanism : Banned cereal imports when the dom price of corn dropped below 80 shillings per quarter, benefiting landlords by increasing land rents.

They raise corn prices, forcing capitalists to pay higher wages to cover subsistence, which decreases profits, lowers capital accumulation, and risks a stationary state.

Smith and Ricardo’s theories of value and distribution relationship

• Smith : Value and distribution are connected, the formula is additive. A change in one income type mainly alters commodity prices rather than affecting other incomes (a priori independence of incomes).

• Ricardo : Value and distribution are dissociated, the method is deductive. A variation in one income logically alters the remaining incomes, they’re interdependent.

Difference between agricultural rent and agricultural profit

Rent pays for the natural powers of the soil, while profit remunerates invested capital assets like buildings and tools. This implicates that :

1. Rent exists only in agriculture (and mines).

2. Rent is relative and depends directly on land fertility

Law of diminishing returns in agriculture

The assumption that each additional unit of capital and labour applied to land yields less produce than the previous unit.

Determination of the natural price of corn

Regulated entirely by the quantity of labour embodied in its production on marginal land, which pays zero rent.

The long-run chain of events toward the stationary state

Capital accumulation > population grows > agricultural expansion hits diminishing returns > corn price rises > natural wages rise > residual profits fall until accumulation stops.

• Stationary state : The long-run economic condition where the rate of profit falls so low that capital accumulation and population growth stop entirely.

Ricardo's two proposed solutions to delay the stationary state

Technical progress (uncertain/contingent) and legislative action via repealing the Corn Laws. Allowing cheap foreign grain imports limits wage increases, protects capitalist profits, and postpones the stationary state.