10/08 Neoclassical Economics

Main Points of Monday’s Lecture

  • Value of Labor:

    • Adam Smith's stance was inconsistent and unclear regarding the establishment of labor's value.

    • David Ricardo addressed this inconsistency by defining the value of labor similarly to all other commodities:

    • Natural Price of Labor: Defined as the cost of producing a laborer and maintaining their survival, without accounting for anything beyond this basic necessity.

  • Market Forces:

    • Thomas Malthus further explained that the natural price of labor would be influenced by market dynamics:

    • In cases of oversupply of labor, external factors (e.g., famine and disease) would serve to decrease the population, thus keeping labor prices at the natural price.

  • Closed System of Supply and Demand:

    • Jean Baptiste Say illustrated how these principles interact within a closed economic system where supply and demand inherently balance each other.

    • The consensus among these political economists was that attempts to improve living standards would disrupt this equilibrium.

  • Emergence of Laissez-Faire:

    • This led to the formation of the laissez-faire ideology, advocating minimal government intervention in economic affairs.

Main Points of Today’s Lecture

  • Grim Vision of Liberal Political Economists:

    • Thinkers such as Ricardo, Malthus, and Say painted a bleak picture without a path toward better living conditions for the working class.

  • Concept of Evolution in Economics:

    • A possible escape from this stagnation was perceived in the idea of evolution.

    • Herbert Spencer proposed the idea of a "struggle for survival":

      • Viewing the competitive market as an evolutionary arena where the fittest succeed and the less capable fail.

      • This mindset allowed for optimistic future projections without deviating from political economy principles.

  • Neoclassical Economists' Resolution:

    • They dealt with the ethical conundrum by detaching ethics from economics, treating economics as a deductive science founded on mathematical principles.

Key Figures and Their Contributions

  • David Ricardo:

    • Stressed that labor, like other commodities, has a natural price necessary for laborers to subsist and maintain their population without increase or decrease.

    • Asserted that in a normal societal progression, wages would tend to decline due to an increasing labor supply outpacing demand.

  • Thomas Malthus:

    • One of his key quotes reflects the harsh reality for those unable to provide for themselves:

    • “If a child cannot get subsistence from his parents…has no claim of right to the smallest portion of food…”

    • Explained how, when demand fails to keep up with labor supply, it leads to lower earnings and eventually to a decline in family numbers, perpetuating a cycle of wage decreases.

  • Jean-Baptiste Say:

    • Emphasized the persistent nature of the natural price of labor influenced by supply and demand forces.

Concepts Related to Evolution and Neoclassical Economics

  • Struggle for Survival:

    • Herbert Spencer's contributions highlighted the competitive aspect of existence where the economic worldview and evolutionary principles collide.

  • Economic Independence from Ethics:

    • Neoclassical economists took a stark turn towards mathematical models, proposing that economics could function as a science devoid of moral or political influences.

Neoclassical Economics Foundations

  • Methodological Approaches:

    • Deductive Reasoning:

    • Begins with established principles and moves to conclusions through reason.

    • Inductive Reasoning:

    • Observations are made to identify patterns before forming general conclusions.

  • Walras and Jevons:

    • Léon Walras highlighted the pure pursuit of truth in economics, emphasizing its independence from social consequences.

    • William Stanley Jevons insisted economics must be treated as a mathematically rigorous field.

Connection to Classical Political Economy

  • Market Dynamics:

    • Classical economists like Adam Smith noted that the market price gravitates toward the natural price in the absence of power imbalances and competition.

  • Invisible Hand Theory:

    • The concept that competition helps pull prices toward the natural resting point, suggesting efficiency through self-regulation in economies.

Conclusion

  • The transition from classical political economy to neoclassical economics indicates a significant ideological shift, particularly in the detachment of ethical considerations from economic science, leaving a legacy of utilitarian perspectives on human welfare and market function.