PPE3003 Neoclassical and Classical Economists

Adam Smith (1723-1790)

CLASSICAL

Invisible hand: metaphor that describes how individuals’ self interested actions can lead to beneficial social and economic outcomes

Impartial spectator: ideal person who praises and blames the right things, necessary to regulate individual behavior and achieve social harmony

Prudence: natural tendency for people to look after themselves

David Ricardo (1772-1823)

CLASSICAL

Free trade, nongovernment intervention

Comparative costs: all countries have the potential to offer something of economic value to themselves and the rest of the world 

Diminishing marginal returns / marginalism: increasing single factor of production will result in decrease in marginal output

• More factors of production will result in smaller increases in output

Iron law of wages: wages will naturally fall to the minimum level required to sustain a worker in a given society 

• Argued that workers should only make enough to survive 

Jeremy Bentham (1748-1832)

CLASSICAL

Moral and political philosopher and “father of Utilitarianism” 

• Utilitarianism: greatest happiness for the most people should be the basis of morals and laws

• Consequentialism: actions, policies, rules should be judged on the basis of their outcomes

Thomas Malthus (1766-1834)

CLASSICAL

Malthusianism / Malthusian trap: population growth is exponential while growth of food supply is linear 

• Predicted population growth would overcome food supply and lead to mass starvation 

• Not true due to technological advances (Green Revolution)

Recognized important role of incentives

• People will respond to material incentives in their economic behavior

Jean Baptiste Say (1767-1832)

CLASSICAL

• Say’s law: supply will create its own demand 

  • Production of a product creates demand for another product by providing something of value which can be exchanged for that other product

    • Factory workers producing pins will use their wages to purchase other goods 

  • Disputed by John Maynard Keynes and others

    • Keynes: general gluts (when supply outstrips demand) can occur during recessions and depressions 

John Stuart Mill (1806-1873)

CLASSICAL

• English moral philosopher and political economist, proponent of utilitarianism 

• Principles of Political Economy (1848): 

  • Discussed descriptive and normative issues of political economy 

  • Utility in society is maximized by allowing people to make their own free choices

  • We should only interfere with the liberty of others for self-protection

• Developed idea of opportunity costs and argued for Ricardo’s comparative cost advantage

William Stanley Jevons (1835-1882)

NEOCLASSICAL

English economist and logician, contributed to development of marginal utility

• Marginal utility: utility decreases with each additional unit of a commodity 

The Coal Question

• Observed how technological improvements increased the efficiency of coal led to increased consumption of coal 

• Argued that improvements in fuel efficiency tend to increase rather than decrease fuel use 

• Rebound effect

  • Fuel efficient cars → more people drive → higher demand for fuel

• Jevons paradox: occurs when rebound effect is greater than 100%, exceeding original efficiency gains 

Alfred Marshall (1842-1924)

NEOCLASSICAL

• English economist and founder of neoclassical economics

• Principles of Economics

1. Rationality

2. Preferences

3. Utility maximization 

• Takes personal, selfish utility maximization as a normative criterion

  • People should act as selfish maximizers 

Milton Friedman (1912-2006)

NEOCLASSICAL

• Proponent of free market and efficient market hypothesis 

• Popularized rational choice theory 

• Driver of neoliberalism

  • Supported laissez-faire market approach that emphasizes free trade, deregulation, globalization, reduction in government spending

Thorstein Veblen (1857-1929)

NEOCLASSICAL CRITIC

• American Marxist, economist and sociologist 

• Theory of the Leisure Class (1899)

  • Conspicuous consumption: practice of buying and using goods of a higher quality, price or in greater quantity than what is practical 

    • Drives a large portion of consumer spending

  • Economic life serves social ends; utility is socially defined

  • Recognized importance of social-psychological motivations 

• Argued neoclassical principles may lead to inequality and concentration of utility 

John Maynard Keynes (1883-1946)

NEOCLASSICAL CRITIC

• English economist and philosopher 

• Animal spirits: term to describe how economic decisions are influenced by psychological factors (instincts and emotions) 

• Keynesian economics 

  • Aggregate demand is volatile and unstable and consequently, markets can be inefficient 

  • Free markets lack self-balancing mechanisms 

  • Government intervention can help stabilize the economy 

  • Advocated for increased government expenditures and lower taxes 

  • Heavily influenced the New Deal

John Kenneth Galbraith (1908-2006)

NEOCLASSICAL CRITIC

• Consumer sovereignty: desires and needs of consumers control the output of producers. Consumers are the best judge of their own welfare

  • Challenged sovereignty, argued firms may engage in anticompetitive practices such as colluding to the detriment of the consumer

    • When left to market forces, economic system is prone to periodic crises