A Primer in Classical Economics

1. A Primer in Classical Economics To fully understand the sociological perspectives we will learn about in this course, we should know classical economic thought and its influence on sociology. Therefore, this presentation provides an overview of the philosophical perspectives of three classical economists: Adam Smith, David Ricardo, and Vilfredo Pareto.

2. The Invisible Hand of the Marketplace Adam Smith(1723-1790) • An Inquiry into the Nature and • Causes of the Wealth of • Nations. • A strong economy and society • is achieved through individuals’ seeking to maximize their self-interest. Source: Helen Joyce: Adam Smith and the Invisible Hand.Millennium Mathematics Project, University of Cambridge.

3. The Invisible Hand of the Marketplace Adam Smith(1723-1790) • Smith described the mechanism by which economic society operates. • Each individual seeks to become wealthy. • To do so, individuals must exchange with others. • The public interest is advanced by each person pursing their self-interest. • This “invisible hand” improves the well-being of all.

4. The Invisible Hand of the Marketplace Adam Smith(1723-1790) • The modern “invisible hand” has a broader meaning. • Economic outcomes are achieved through a decentralized system of supply and demand, with no explicit agreements among the acting agents. • The maximization of well-being is not intentional. Rather, it is the byproduct of individuals pursing their own aims.

5. The Invisible Hand of the Marketplace Adam Smith(1723-1790) • The invisible hand and the market economy: • The invisible hand works as part of a free market. • Consumers select equal products at the lowest price. • Producers create quality products at the lowest cost possible. • The market sets the price.

6. The Invisible Hand of the Marketplace Adam Smith(1723-1790) • The invisible hand and society: • People must think about what other people want. • This serving society through serving oneself is what is seen as “moral” about the invisible hand. • Trading with others depends upon goodwill and trust in the exchange relationship. • This goodwill is achieved by knowing that the other person will act in their self-interest.

7. Comparative Advantage David Ricardo(1772-1823) • On the Principles of Political • Economy and Taxation. • All nations benefit by producing • according to their relative ratio of efficiency and trading with one another. Source: The Concise Encyclopedia of Economics.

8. Comparative Advantage David Ricardo(1772-1823) • Today, the principle of comparative advantage is used to organize 151 nations within a global capitalist economy. • The rules of trade for these 151 nations are written and administered by the World Trade Organization. • Further reading: Globalization.

9. Causes of Inflation David Ricardo(1772-1823) • The “bullion controversy” of England in the early 1800’s. • Ricardo stated that inflation was the result of the Bank of England’s propensity to issue an excess number of bank notes to repay national debt. • This principle is used today to control inflation.

10. Law of Diminishing Returns David Ricardo(1772-1823) • As more resources are used in production, with fixed resources, the additional amount to output will diminish. • Today, this law is used as a key principle of industrial relations and in the planning and administration of production.

11. Theory of Rents David Ricardo(1772-1823) • As more land is cultivated, farmers increasingly will use less productive land and pay more in rent for more productive land. • But the prices of commodities remain the same, regardless of the rent paid for the land because the price of a commodity is set by the market, not by the amount of input.

12. Theory of Rents David Ricardo(1772-1823) • Thus, with greater production and higher rents for land, land owners, not farmers, benefit. • Today, this principle is used to understand why agricultural price supports benefit land owners (who more and more live off the farm) rather than farmers.

13. The Political Economy Vilfredo Pareto(1848-1923) • Manual of Political Economy. • Trattato di sociologia generale. • Pareto Principle. • Pareto Efficiency. • Residues and Derivations. Source: Wikipedia: The Free Encyclopedia.

14. The Pareto Principle Vilfredo Pareto(1848-1923) • The Pareto principle, or index, is used to calculate the extent of income inequality within a social system. • Pareto found that, in advanced societies, approximately 20% of the population earns about 80% of the income. • This ratio varies somewhat, but highlights the need to monitor income inequality.

15. Pareto Efficiency Vilfredo Pareto(1848-1923) • Given a set of alternative resources, a shift from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto Improvement. • The principle of Pareto efficiency is used to evaluate the quality of economic systems.

16. Residues and Derivations Vilfredo Pareto(1848-1923) • Pareto agreed with Marx’s assessment of the limitations of a capitalist economy, but rejected Marx’s solution of communism as just another form of rule by the elites. • For Pareto, class struggle is inherent and eternal. There would be no “classless” society because new rulers would emerge.

17. Residues and Derivations Vilfredo Pareto(1848-1923) • In criticizing Marxism, Pareto realized that the principles of economics depend upon persons acting logically, with perfect knowledge and their utilitarian goals in mind. • Because much of human activity is non-logical, however, Pareto saw the need to integrate economic and sociological thought.

18. Residues and Derivations Vilfredo Pareto(1848-1923) • Pareto posited that people act upon non-logical sentiments (i.e., residues) and invent justifications for these actions afterwards (i.e., derivations). • The derivations represent “moral” or “rational” explanations of actions that are undertaken for non-logical reasons.

19. Residues and Derivations Vilfredo Pareto(1848-1923) • Pareto posited society tended toward an equilibrium of Class I and Class II persons. • Class I persons rule by guile and are calculating, materialistic, and innovating. • Class II persons rule by force and are more bureaucratic, idealistic, and conservative.

20. Residues and Derivations Vilfredo Pareto(1848-1923) • If Class I persons gain too much power, then they inevitably ruin society by too much cunning and corruption. • If Class II persons gain too much power, then they inevitably ruin society by creating an overly bureaucratic, inefficient, and reactionary mess.