Classical Political Economy: Key Words and Concepts Flashcards
Labour Theory of Value
Definition: The value of a good is determined by the amount of labor required to produce it.
Types of Prices:
Market Price: Actual selling price of goods.
Natural Price: Full production costs, including wages, capital rents, and profits.
Importance: Explains price adjustments and competition.
Natural Price
Definition: Reflects the full production cost of a good, including wages, rents, and profits.
Mechanism: Prices adjust to natural levels via competition, ensuring equality of profit rates across sectors.
Subsistence Wage
Definition: The minimum wage necessary for workers to sustain themselves and continue working.
Thinkers:
* Smith and Ricardo: Linked wages to biological minimum.
* Marx: Expanded to include social and institutional factors.
Diminishing Returns
Definition: As additional units of a factor (e.g., land) are used, productivity decreases, leading to rising production costs.
Example: In agriculture, using less fertile land raises costs and reduces profit rates.
Reproduction and Surplus
Definition:
Reproduction: Goods must sell at natural prices to cover production costs.
Surplus: Excess value beyond costs; reinvested for capital accumulation and growth.
Accumulation and Distribution
Definition:
Accumulation: Surplus reinvested to expand production capacity.
Distribution: Distribution of surplus among classes (wages, rents, profits) impacts economic growth.
Say’s Law
Definition: “Supply creates its own demand”; aggregate supply equals aggregate demand under equilibrium.
Implication: No overproduction or lack of demand.
Criticisms:
* Malthus: Savings can reduce demand.
* Marx: Hoarding disrupts economic balance.
* Keynes: Demand depends on anticipated income.
Quantity Theory of Money (QTM)
Definition: Money supply controls price levels; inflation occurs with excessive money supply growth.
Advocated by: Bullionists (Currency School).
Real Bills Doctrine (RBD)
Definition: Money supply is demand-driven and determined by productive needs (e.g., loans backed by real goods).
Advocated by: Anti-Bullionists (Banking School).
Technological Change
Definition: Innovations (e.g., labor-saving technology) that reduce costs, increase surpluses, and drive growth.
Example: Harrod-Neutral innovations boosting productivity.
Division of Labour
Definition: Increases productivity by breaking tasks into smaller, specialized roles.
Thinker: Adam Smith.
Ricardo’s Theory of Diminishing Returns in Agriculture
Definition:
Increased use of less fertile land raises production costs.
Impact: Reduces profit rates and leads to stagnation in the long term.
Bullionist Controversy (1797–1821)
Definition: Debate on the causes of inflation.
Bullionists: Blamed excessive money printing.
Anti-Bullionists: Attributed inflation to external factors like wars and blockades.
Legacy: Precursor to Keynesian vs. monetarist debates.
Stationary State
Definition: A long-term economic state where diminishing returns halt growth due to exhaustion of resources and declining profit rates.
Wages and Rents
Definition:
Wages: Determined by the cost of labor reproducibility (subsistence level).
Rents: Determined by the cost of land reproducibility, increasing as less fertile land is used.
