Development of Classical Political Economy
Introduction
Classical economics is considered the first modern economic school of thought. Its major proponents are Karl Marx, David Ricardo, J.S. Mill, and Adam Smith. Adam Smith’s Wealth of Nations marked the beginning of this school of thought. Classical economics was prominent in the mid 19th Century before it developed into neoclassical economics. Karl Marx used the term Classical Economics to refer to the economics of Ricardo, Mill, and their predecessors.
Classical economists propagated their ideas at a time when the ideological system was shifting from feudalism to capitalism. During this time, society was fast-changing as a result of the industrial revolution that swept through Europe. It became necessary for each individual to make his/her monetary gain (Smith, p. 246). This led to the emergence of free markets, which could regulate themselves.
Classical economists built their economic ideas on a nationalistic front rather than around the ruler’s wealth as had been previously the case (Smith, p. 8). Thus, wealth belonged to an entire nation; it was not limited to the king alone. According to Smith, the income was produced by three factors namely; land, labor, and capital. Land produced rents, labor translated into wages, and capital earned interests or profits.
Shared Elements
Adam Smith’s and David Ricardo’s economic ideas converged on the labor theory of value. The labor theory of value states that the value of a commodity is related to the labor needed to produce or obtain the commodity. This is a very prominent feature in the economics of Karl Marx. Karl Marx introduced the concept of marginal utility, which reflected the tastes and preferences among consumers. The same philosophy also applied to the producers who tend to substitute one commodity for another in the production of goods and services.
According to Smith, the amount of labor invested in producing a good determines its exchange value (p. 689). Exchange value is the amount of labor a given good can purchase. However, Smith argues that market price cannot be equal to the amount of labor employed in producing a good since it has to be expanded to allow for profits for the producers.
As for Ricardo, the value of a good is proportional to how much labor was used to produce it, including the labor needed to produce the raw materials and the machinery used in the process. Ricardo attempts to distinguish the amount of labor necessary to produce a good and the wages paid to the laborers for its production. But he noted with concern the disparity between the price of goods and the labor required to produce them. This was especially the case for luxury products like wine: the longer it stayed, the more expensive it became. He was consoled by the advent of capitalism, which he was convinced would iron out the discrepancy by adding only the cost of storage to such commodities.
Karl Marx introduced a social dimension to the labor theory of value. Whereas the other theorists focused on labor from an individual’s perspective, Marx places the entire society into the picture. The process of production involved a division of labor, but the individuals depended on each other for survival and growth.
Marx also raised the concept of what he called abstract labor. Abstract labor refers to the physical and mental capacity of a person to do work. It remains intangible until it is put into practice by actually applying it in the production process. When applied to the production process, abstract labor becomes physical labor as its effects are tangible, for example, workers become tired, weary, and fatigued.
Karl Marx used the labor theory of value to derive the theory of exploitation under capitalism. The workers, who are the majority, cannot survive except by working for this minority who enjoy the support of the state. In effect, there is a large number of unemployed workers who exert pressure on the employed, hence the employed have to work even harder to produce for the capitalists.
Another classical economist, J. S. Mill, added to the socialist approach presented by Marx. He promoted economic democracy in which laborers in a capitalist economy elect members of the management team (Mill, p 11).
He provided room for interventions in the economy such as taxations on the premise of sufficient utilitarian grounds. He further believed in the equality of taxation since progressive taxation penalized those who worked harder and, therefore, saved more. He considered this as a mild form of robbery. He agreed to the taxation of inheritance to maintain equality in a utilitarian society. This was because inheritance placed the beneficiary at a position above the others.
On the labor theory of value, Mill held that the rate of capital accumulation was a function of the proportion of the labor force employed productively. Unproductive labor did not generate any wealth or income. Any profit earned by employing unproductive income was merely a transfer of income. Only productive laborers engaged in productive consumption, which is maintaining and increasing the productive capacity of the community.
Refinement of the Theory
The labor theory of value has been improved over time. First, it developed into neoclassical economic theorists, which improved on the labor theory of value by including a few crucial determinants that the classical economists had failed to take into account. The inclusion of demand and supply forces is clear evidence of this. The price of a commodity was affected by its demand and the supply rather than the amount of labor put into it.
The labor theory of value was later replaced by the marginal utility theory of value on the demand side and the cost on the supply side. The modern understanding of economics further deviates from the labor theory of value as it states that the value of a commodity may depend on how much one is willing to give up for it.
David Ricardo felt that the labor theory of value had some assumptions, which needed to be revised. These included: the exclusive wage composition of production capital; equal production period for both goods; and the same wage rate and profit rate for both sectors. He modified the assumptions to allow for differing production periods for different goods. He also conceded that the two production processes may employ instruments and equipment as capital, and not just wages and in very different proportions.
Although he mentions that instruments and machines may add to the capital required for the production of goods, in addition to labor, the principle of the labor theory of value that Ricardo attributes to Smith does not change. Machines and equipment employed in the production process simply add to the factors that determine the value of goods thus produced.
Ricardo further implies that accumulation of capital leads to a proportionate increase in wealth, but does not reduce the value of a good to be traded. This puts the various economic players in a win-win situation. The growth of the value in use may lead to competition, but this problem can be addressed through sufficient economic growth. Adam Smith had imagined that on account of its effect on the value, the growth of wealth for the poor would impact negatively on national wealth.
Consequently, the wealth of the poor has to be controlled to maintain economic growth. However, a careful analysis of the growth of the value in use could help all parties chart a way forward, rather than controlling the wealth of the poor. Placing a limit on the wealth of the poor is exploitative and oppressive.
Karl Marx was able to refine Smith’s labor theory of value by distinguishing the exchange value and value in use. This is after Ricardo had grappled with the two terms in his earlier analysis and view of the labor theory of value. According to Marx, the exchange value of a commodity represents the number of other commodities it would trade for (Marx, Section 3: par 4). Thus, the exchange value is not necessarily equal to its price. This value is not necessarily expressed in monetary terms. On the other hand, the value in use is realized only during the consumption of a given good. Therefore, the two terms are distinctly different, as envisioned by Marx.
Marx went ahead to describe how the value in use is transformed into a commodity. This process is known as commodification. He stated that the process is neither automatic nor spontaneous, but required certain technical, social, and political preconditions. For example, it should be possible to transfer the goods from one person to another, and that there must be real market demand for the good.
Marx implied that goodwill has a value in use for its buyer, but did not quantify the aspect except in the number of units a buyer wants to acquire. But neoclassical economists maintain that the value in use of a commodity is subjectively determined by the buyer, and not objectively by the characteristics of the good itself.
On the other hand, the exchange value is expressed in monetary terms. Marx states:
We have seen that when commodities are about exchange, their exchange-value manifests itself as something independent of their use-value. But if we abstract from their use-value, there remains its value, as has just been defined. The common factor in exchange relation, or the exchange value of the commodity, is therefore its value. (Marx, Section 1: par. 12)
It is evident in this quotation that the value of commodities, expressed in monetary terms, is quite different from its value in use.
Marx had attempted to establish shared characteristics from the concrete differences among commodities. He concluded that all commodities have value, which he called the labor value denoting the abstract labor time needed to produce a given commodity. Therefore, the production of goods and services required labor, which was availed by a community through the societal division of labor (Marx, Section 4: par 7). Hence, Marx succeeded in establishing that the exchange values of all commodities had a characteristic value. Also, it was a competition that enforced uniform exchange values.
Marx further notes that the exchange value of a commodity is related to the owner’s purchasing power and their ability to obtain the required amount of labor. This principle is evident in the modern service economy and the market for physical goods. This is because when one purchases a good, one gains the results of the labor put into producing it and at the same time commanding the labor to produce more of it.
Conclusion
In essence, classical economic theories have developed over time and have been refined by each subsequent classical economist. Adam Smith introduced the labor theory of value in which he held that the exchange value of a given good was similar to the quantity of labor used to produce the same good. Ricardo identified weak points in this theory and attempted to refine it by working on the assumptions he had earlier made.
He included other factors that went into the production of goods, for example, the use of machines and equipment. These factors had to be taken into account too, not just the labor aspect alone. Karl Marx, on his part, distinguished between the exchange value and the value in the use of a product. He also introduced other aspects that go into the production of a good, most notably the societal division of labor.
The Differences between Classical Political Economy and Modern Economics
Introduction
Modern economics is considered a science since it analyzes the production, distribution, and consumption of goods using empirical data. It has been divided into micro and macro-economics. It is also a broad subject that covers a litany of disciplines such as finance, politics, education, crime, government, and health among others. It mainly focuses on explaining how economies work and how various economic agents interact.
On the other hand, classical political economy was built on abstractions, which are not easy to quantify. Aspects like the value in use of a product cannot be analyzed empirically because they are based on subjective factors. Although classical theories have been refined over time, some differences set them apart from modern economics.
Differences
One major difference between the two schools of economic thought lies in the use of empirical data. Whereas modern economics rely on empirical data to analyze situations and make conclusions, the classical political economy was based mostly on abstractions. Modern economic theories are frequently tested through the use of econometrics and economic data (Hashem, p. 8). This involves studying a broad spectrum of data to establish trends, which are useful in making decisions.
Currently, there is an increasing inclination towards natural experiments in the field of modern economics. In the classical political economy, the factors determining economics are largely intangible. These include the value in use of a given commodity and the societal division of labor as expressed by Karl Marx.
The concept of specialization is another difference between the classical political economy and modern economics. Modern economics relies on skilled specialized labor. This leads to the efficient production of goods and services, which are of high quality. Skilled labor requires training; hence, institutions have sprung up to enable the acquisition of the various necessary skills. In the classical political economy, most labor is unskilled.
Classical political economy vouched for free markets, as opposed to modern economics in which markets are closely controlled by the forces of demand and supply. Classical economists, led by Adam Smith, were against the impositions of tariffs and other duties levied by the government in the markets. In modern economics, the markets are controlled not only by the forces of demand and supply, but also duties, tariffs, and other levies imposed by the state. Another factor that hinders the free market in modern times is the existence of monopolies. The markets in modern economics are not free at all.
Classical political economists also held that labor was the source of all value and, by extension, profit. Most classical economists structured their theories around the issue of labor. Even the value of the finished product was dependent on the amount of labor channeled into it. In modern economics, the value of finished goods is determined by various factors including, but not limited to, labor. Such factors include supply and demand for the product, tastes, and preferences, the purchasing power of individuals, and the availability of complementary and substitute products.
Strengths and Weaknesses
The two schools of economic thought have their strengths and weaknesses. One of the strengths involves the enhanced process of production of better goods and services, as has been witnessed in modern times. This is attributed to the modern division of labor, which leads to the specialization of labor. This requires skilled labor; hence, it results in better goods and services.
The classical political economy strived to create equality among the people, especially for the producers, because it was against the restrictions placed on markets by the state or other forces present on the market. Its vision of the free-market would provide a level ground for all players in the field. This is because new and small-scale producers are critically disadvantaged in a market already monopolized by mega-producers. The large scale producers control markets by flooding them with products, hence influencing the buyers in their favor.
Control of the market has gone a long way in protecting the local industry from undue competition from international amalgamations. This is especially the case in developing countries whose economies are largely agricultural-based. In an attempt to protect and encourage the cottage industry, market protectionism has to be put into place.
Heilbroner (1999) also raised various ethical and political issues associated with the two schools of economic thought. He argues that the process of wealth accumulation, be it individual or national, has devastating side effects. This is because it eventually leads to inequality, poverty, government corruption, business collusion, and industrial concentration. These side effects have made some scholars demonize capitalism.
Heilbroner also takes issue with the fact that human behavior is dictated by utility rather than choice. According to him, this is rather tautological and too narrow in its exclusive emphasis on instrumental rationality. He contests this idea by arguing that human nature cannot be understood without “the concept of volition” (Heilbroner, p. 317).
However, the two schools of economic thought have opened my mind to new dimensions of economic theories. There is much more to economics than what is mostly covered by the syllabus and the texts provided for study.
This is because economic thought can shape worldly philosophies with the capacity to address future challenges by providing visionary guidance. A careful study of economic theories may just provide the much-needed solution to current economic problems such as widespread poverty, rampant corruption, and unemployment. Heilbroner states that “the end of the worldly philosophy should be to develop a new awareness of the need for and the possibilities of, socially as well as economically successful capitalisms” (Heilbroner, p. 320 – 321).
Conclusion
Despite the obvious differences that exist between classical political economics and modern economics, it is important to note that the two can be reconciled to form the most workable and beneficial economic dispensation. There is a lot that modern economics can borrow from classical economic theories.
Works Cited
Hashem, Pesaran M. “Econometrics”. The New Palgrave: A Dictionary of Economics, vol. 2 (1987): p. 8. Print.
Heilbroner, Robert. The Worldly Philosophers: The Life, Times and Ideas of the Great Economic Thinkers. 7th ed. New York: Simon and Schuster, 1999. Print.
Marx, Karl. Part I: Commodities and Money. Capital Volume one. n.p, 2005. Web.
Mill, John Stuart and Bentham, Jeremy. Utilitarianism and other essays. Ed. Alan Ryan. London: Penguin Books, 2004. Print.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Pennsylvania: Pennsylvania State University Electronic Classics Series, 2005. Print.