Classical Political Economy (L3) Flashcards
What is the Labour Theory of Value, and how does it explain the determination of prices?
Answer:
Labour Theory of Value: The value of a good is determined by the amount of labor required to produce it.
Market Price: The actual selling price of goods, which fluctuates based on supply and demand.
Natural Price: Reflects full production costs, including wages, capital rents, and profits.
Mechanism: Competition adjusts market prices towards natural prices, equalizing profit rates across sectors.
Describe the concept of diminishing returns and its impact on agricultural production.
Answer:
Diminishing Returns: As more labor and capital are applied to less fertile land, productivity decreases, leading to rising costs.
Impact:
* Reduces profit rates in agriculture.
* Contributes to long-term stagnation and the stationary state as resources are exhausted.
What is Say’s Law, and how does it relate to classical economic thought?
Answer:
Say’s Law: “Supply creates its own demand,” meaning aggregate supply generates equal aggregate demand.
Implications:
* No overproduction or lack of demand is possible under equilibrium.
* Savings lead to investment, sustaining the economic balance.
Criticisms:
* Malthus: Savings reduce demand if not reinvested.
* Marx: Hoarding disrupts demand and balance.
* Keynes: Demand depends on anticipated future income, not production.
How did classical economists explain the determination of wages and rents?
Answer:
Wages: Determined by the reproducibility cost of labor.
Subsistence Wage: Minimum needed for workers to survive and reproduce. Linked by Smith and Ricardo to biological and institutional factors.
Rents: Determined by the cost of land reproducibility.
Increase as less fertile land is used, leading to higher production costs.
What role does surplus play in reproduction and capital accumulation in classical economic thought?
Answer:
Reproduction: Goods must sell at natural prices to cover production costs and sustain economic stability.
Surplus: Value generated above reproducibility costs, enabling profits and reinvestment.
Capital Accumulation: Surplus profits are reinvested, expanding production capacity and driving growth.
How does Ricardo’s theory of diminishing returns explain long-term economic stagnation?
Answer:
Theory: As agricultural production expands to less fertile land, costs rise due to reduced productivity.
Impact:
Profit rates fall, discouraging investment.
Leads to a stationary state where economic growth halts due to resource exhaustion.
Compare the Quantity Theory of Money (QTM) with the Real Bills Doctrine (RBD) in classical monetary debates.
Answer:
QTM:
Money supply controls price levels.
Inflation occurs with excessive money printing.
Supported by Bullionists (Currency School).
RBD:
Money supply is demand-driven, based on productive needs.
Banks issue loans backed by real assets, matching money supply to economic output.
Supported by Anti-Bullionists (Banking School).
What were the main points of contention in the Bullionist Controversy (1797–1821)?
Answer:
Bullionists (Currency School):
Argued inflation was caused by excessive money printing by the Bank of England.
Anti-Bullionists (Banking School):
Claimed inflation resulted from external factors, such as wars and blockades.
Money printing was seen as responsive to productive needs.
Legacy: Foreshadowed later Keynesian vs. monetarist debates on inflation and monetary control.
How do technological change and international trade contribute to economic growth in classical economics?
Answer:
Technological Change:
Labor-saving innovations reduce costs and increase productivity.
Example: Harrod-Neutral innovations boost output without additional labor input.
International Trade:
Expands market reach and addresses resource constraints.
- Smith: Promoted specialization and efficiency.
- Ricardo: Emphasized access to productive resources like land to enhance growth.
What is the classical concept of a stationary state, and what factors lead to it?
Answer:
Stationary State: Long-term economic stagnation where growth halts due to declining profit rates.
Causes:
Diminishing returns in agriculture as less fertile land is used.
Exhaustion of resources reduces profits, discouraging investment.
Compare the Labour Theory of Value with the Marginalist theory of value.
Answer:
Labour Theory of Value (Classical):
Value is determined by the amount of labor required to produce a good.
Includes direct and indirect labor costs.
Marginalist Theory of Value (Neoclassical):
Value is based on the utility derived from the last (marginal) unit consumed.
Focuses on individual preferences and scarcity.
Comparison:
Labour theory emphasizes production and costs, while marginalist theory emphasizes consumption and utility.
How do the Quantity Theory of Money (QTM) and Real Bills Doctrine (RBD) differ in their explanations of monetary control?
Answer:
QTM (Classical):
Money supply is exogenously controlled by monetary authorities.
Inflation is caused by excessive money supply.
RBD:
Money supply is demand-driven and determined by productive needs.
Banks issue loans based on real assets, ensuring money matches productive output.
Comparison:
QTM sees money supply as independent of production, while RBD ties it to real economic activity.
Compare the classical view of diminishing returns with the neoclassical production function.
Answer:
Classical View (Ricardo):
Diminishing returns occur in agriculture as less fertile land is used, raising production costs.
Leads to falling profits and stagnation.
Neoclassical Production Function:
Marginal productivity decreases as more of a factor (e.g., labor or capital) is added, holding others constant.
Emphasizes flexibility and substitutability among inputs.
Comparison:
Classical diminishing returns focus on resource limitations (land), while neoclassical models are broader and emphasize optimization.
Compare the roles of agriculture in Ricardo’s economic model and Physiocratic thought.
Answer:
Ricardo (Classical):
Agriculture is subject to diminishing returns, leading to rising costs and falling profits.
Critical for economic growth but contributes to stagnation in the long term.
Physiocrats:
Agriculture is the sole source of wealth, generating surplus that circulates through the economy.
Advocated for minimal intervention to support agricultural production.
Comparison:
Ricardo sees agriculture as a limiting factor, while Physiocrats view it as the foundation of economic prosperity.
Compare the concepts of surplus in classical economics and Marxist thought.
Answer:
Classical Economics (Ricardo, Smith):
Surplus arises when goods are sold above production costs.
Surplus is reinvested to drive capital accumulation and growth.
Marxist Economics:
Surplus value is extracted from labor, representing the difference between the value created by workers and their wages.
Critiques surplus distribution as exploitative under capitalism.
Comparison:
Classical economists emphasize surplus as a growth driver, while Marx focuses on its role in labor exploitation.
How do classical and Keynesian economists differ in their views on savings and investment?
Answer:
Classical Economics:
Savings automatically lead to investment through market mechanisms.
Say’s Law: “Supply creates its own demand,” ensuring equilibrium.
Keynesian Economics:
Savings can disrupt demand if not reinvested.
Investment depends on expectations and aggregate demand, not automatic mechanisms.
Comparison:
Classical economists view savings as productive, while Keynesians see excess savings as potentially harmful to demand.
Compare the classical and neoclassical approaches to wages.
Answer:
Classical Economics:
Wages are determined by the cost of labor reproducibility (subsistence level).
Linked to biological and institutional factors (e.g., cost of food, shelter).
Neoclassical Economics:
Wages are determined by marginal productivity of labor.
Reflects the additional value generated by hiring one more worker.
Comparison:
Classical view emphasizes minimum survival costs, while neoclassical focuses on productivity and market demand.
How do the classical and neoclassical views differ on the role of technological change in economic growth?
Answer:
Classical Economics:
Technological change is crucial for offsetting diminishing returns in agriculture.
Reduces costs and increases productivity, sustaining profit rates.
Neoclassical Economics:
Technological progress shifts the production function, enhancing output without increasing inputs.
Viewed as an exogenous factor in driving long-term growth.
Comparison:
Both emphasize technology as a growth driver, but neoclassical models formalize it in production functions.
Compare the concepts of profit rates in classical and Marxian economics.
Answer:
Classical Economics:
Profit rates depend on the distribution of surplus among wages, rents, and capital.
Falling profit rates are linked to diminishing returns in agriculture.
Marxian Economics:
Profit rates depend on surplus value extracted from labor.
Falling profit rates result from increased mechanization (organic composition of capital).
Comparison:
Both see profit rates as central to economic dynamics but attribute declines to different factors (resources vs. labor exploitation).
Compare the classical view of monetary policy with that of Keynesian economics.
Answer:
Classical Economics:
Money supply affects price levels but not long-term real economic activity.
Advocated Quantity Theory of Money (QTM).
Keynesian Economics:
Money supply affects aggregate demand, influencing both output and employment.
Emphasized active monetary policy to stabilize the economy.
Comparison:
Classical theory treats money as neutral in the long term, while Keynesians see it as a critical policy tool.
