Classical Theorists Flashcards
Who are the classical theorists and what era did they come from?
Adam Smith, Karl Marx, Thomas Malthus and David Ricardo
Many of them lived through the early stages of the Industrial Revolution (18th and 19th century)
What was Smith’s theory?
Adam’s Smith theory is of competitive capitalism and growth
What is Smith’s concept of the ‘invisible hand’?
The forces of supply and demand at work in a perfectly or nearly competitive economy
What is a competitive economy?
An environment where the individualistic desires of consumers for goods and services, combined with the self-interested drive to maximize profits by the produces of these goods and services will tend toward levels of production and prices - the equilibrium- where the supply curve crosses the demand curve and both consumers and producers gain from the exchange
What is the guiding principle behind Smith’s theory?
Self-interest
What is the importance of competition in Smith’s theory?
Competition acts as a counter-weight to, and a brake on, the possible excesses that self-interested behavior might engender in its absence
What is the the importance of a legal framework in competition?
When competition is threatened by self-interested behaviour, the government must create a legal framework to put in place the appropriate enforcement mechanisms to reconstitute a competitive environment
What is the relation of Smith’s theory of the functioning of the market system to development?
Capitalism is a productive system with the potential to increase human well being
He stresses the importance of the division of labour and the law of accumulation as the primary factors contributing to capitalist economic progress
How did division of labour arise?
With the Industrial Revolution in Great Britain and the emergence of the factory system which caused the organization of production to change
Division of labour causes an increase in the productivity of labour
What does Smith believe to be the sources of expanding economic wealth?
The accumulation of physical capital, technological progress and the specalization of labour
What is Malthus’ theory?
Theory of population
What is Malthus’ assumption?
That population will grow whenever wages rise about the level necessary for subsistence
Why does Malthus believe population will grow at levels above subsistence?
There will be more food and other necessities to go around which means that additional children can survive
How does Malthus believe population grows?
In a geometric progression
What, for Malthus, is the limit for population expansion
The inability of land to produce sufficient food - agricultural output only increases at an arithmetic progression
What are the forces that slow population growth?
Preventitive checks - reduce birth rate through late marriage or abstinence
Positive checks - increase of the death rate through war, diseases and plagues and starvation
What did Malthus ignore in his population theory?
The importance of technological progress in increasing productivity and output over the long run
What was Ricardo’s theory?
His theories were of diminishing returns and comparative advantage
What is the law of eventually diminishing returns?
When economic growth (and thus population) occurs, land of lower productivity is brought into use (after farmers first use the most fertile lands)
As these marginal lands are used, the price of food will rise because it becomes more difficult to produce
The price will remain the same between the output from the less productive land and the fertile land
Economic profits will be positive on productive land
Growing economy will reach a maximum level of income per person then a decline in per capita income (when food prices continue to rise)
For Ricardo what could offset the adverse effects of the law of eventually diminishing returns?
Free trade and an open economy
What is Ricardo’s theory of comparative advantage
Unrestricted exchange between countries will increase the total amount of world output if each country specializes in the goods it can produce as a relatively low cost compared to potential trade partners
What is Marx’s theory?
Capitalist development
What was Marx’s criticism about capitalism?
The human cost involved in producing such wealth and the one-sided distribution of the profit
The working class (proletariat) created the wealth through their labour power but the capitalists appropriated a disproportionate share of society’s income
What is Barans theory of economic surplus?
Economic surplus is residual left over out of total income when society’s basic needs have been met - this surplus can be grossly misused
Baran argue’s that the source of poverty of less-developed regions under colonialism is in the extraction of this surplus
Colonialism blocked the potential for change
What does Baran think are the 3 forces that could increase economic surplus and use it for economic development?
National capital, foreign capital and the state
What did Cardoso (non-Marxist) think were the stages of economic history in less-developed countries?
- Agro-export state of the colonial period (prevalence of economic dualism)
- Developmentalist alliance - locus of this transformation was import substitution industrialization (ISI) - social structure of accumulation had been formed on the basis of common interests of industrial workers, industrialists, government workers etc
- Authoritarian- corporatist regime - curbs on democracy, unions etc - TNCs welcomed and accomodated
What is the new form of capitalist accumulation that arises out of the authoritarian state and presence of TNCs?
Associated dependent development
