Notes on Smith, Ricardo and Marx

Question 1

What did Mercantilists believe in in terms of wealth?

Answer 1

that wealth (and hence national wealth and progress) was measured in terms of gold reserves

Question 2

(Mercantilisim) The aim of national governments therefore should be to facilitate the accumulation of gold. What would that have required?

Answer 2

Promoting exports (you would be paid in money/gold)
Restricting imports (money/gold would flow out of the country)

Question 3

What did Mercantilist policies advocate?

Answer 3

restricting trade, primarily food imports – using customs charges etc. An effect of this was to raise food prices. Subsidies to exporting manufacturers were also consistent with the Mercantilist view.

Question 4

From a Mercantilist viewpoint what was trade?

Answer 4

a zero-sum game: the exporter gained, the importer lost. There were not mutual gains.
The object of government policy was to increase state reserves of gold by maintaining a trade surplus (exports-imports)

Question 5

What did Physiocrats believe in in terms of wealth?

Answer 5

that the only real source of wealth was Agriculture – that’s where real, net, growth occurred. The emerging Manufacturing sector was just changing the form of objects, not creating anything new.

Question 6

What policies were consistent with the Physiorats’ view?

Answer 6

involved supporting the Agricultural sector and slowed down the growth of Manufacturing.

Question 7

What did Smith argue in favour of?

Answer 7

He argued in favour of specialisation and exchange and trade and the emergence of the new commercial and manufacturing sectors.

Question 8

For Smith what was trade?

Answer 8

trade is not a zero sum game – both parties can benefit. Self-interest underlies the propensity to trade but there is a mutual interest in specialisation and trade

Question 9

What is the ‘Labour Theory of Value’?

Answer 9

The value of a good depended on the amount of labour that has gone into its production: since only labour can add value (to inanimate objects like minerals or timber).

Question 10

What was a necessary prerequisite for a good to have value for Smith (and others)?

Answer 10

For Smith (and others) a necessary prerequisite for a good to have value was for it to be the product of Labour:

Question 11

What is the excange value of a commodity?

Answer 11

The Exchange Value of a commodity is the Quantity of Money to be exchanged for it. But money is something that fluctuates (gold, silver) so it was not considered to be a true measure of value.

Question 12

What is the Subjective Utility Theory of Value?

Answer 12

“[goods’] value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.” David Ricardo (1817)

Question 13

What became known as the Marginal Revolution?

Answer 13

The rejection of the LTV and its replacement with a Subjective Utility Theory of Value was part of what became known as the Marginal Revolution: in neoclassical economics marginal concepts (marginal product, marginal cost, marginal utility,…) were central.

Question 14

We can think of 3 classes when concerned ith the question of the distribution of wealth?

Answer 14

Workers provide Labour (L) and receive Wages (w)
Landlords provide Land (N) and receive Rents (r)
Firms/Capitalists provide Capital (K) and receive Profits (s)

Question 15

For Smith what is the market price?

Answer 15

For Smith the market price is whatever price operates at that time in the market.

Question 16

What did Smith regard as the Natural Prices of land, labour and capital?

Answer 16

Smith regarded the prices that are at the level that would provide just enough incentive to keep doing those things, just sufficient to keep workers, landlords and capitalists engaged in that activity, as the Natural Prices of land, labour and capital.

Question 17

What is the Natural Price of a good?

Answer 17

when the resources or factors going into production are all being paid at their natural rates (the rate just enough to keep them in that activity).

Question 18

the question: What happens to Rent as we add more labour + capital to increasingly less fertile land?

Answer 18

The result of the analysis that as land is the scarce, fixed resource, the share of national income going to land is always going to rise.

Question 19

The final equilibrium in Ricardos model (Ricardo did not use this term) is where:

Answer 19

wages are paid at subsistence rate
all the surplus above that wage cost is rent
profits are squeezed

Question 20

What is the central point of Ricardos model?

Answer 20

As land is the scarce, fixed, resource the share of national income going to land is always going to rise.
The dynamic class, that which was generating growth were having their profits squeezed out.
This he thought had major implications.

Question 21

What were the proposals that followed after Ricardos model?

Answer 21

The proposals which followed were to reduce rents - reducing trade barriers, such as import tariffs, which would lower price of grain and reduce rents and the share of national income going to Landlords.
This linked to the campaign for the abolition of the Corn Laws – politics and economics were intimately linked.

Question 22

Was Karl Marx a believer in the labour theory of value?

Answer 22

Yes

Question 23

What is the key concept of the Average Socially Necessary Labour Time (ASNLT)?

Answer 23

The meaning of “ labor ” here is the average amount of work needed to produce each commodity. The different skill levels of individual workers are averaged to determine what Marx called “ the socially necessary ” labor needed to produce each commodity. That average, not each individual worker ’ s productivity, is what determines each commodity’s value. (Wolff and Resnick, section 4.4.4)

Question 24

What are some key processes in the economy (Marxist Economics)?

Answer 24

Workers sell Labour Power (LP), as a Commodity in the labour market, receiving money (M) in the form of wages in return;
Capitalists buy that Labour Power (LP) and combine it with Raw Materials and Technology/Machines;
Capitalists thus create goods which they sell for money (M)

Question 25

What are the values associated with the 3 commodities from the key processes in the economy?

Answer 25

Raw Materials/Machinery
Their value comes from the labour it (typically) takes to extract or produce them: Average Socially Necessary Labour Time (ASNLT).
Goods Produced
Their value comes from the labour it (typically) takes to produce them: Average Socially Necessary Labour Time (ASNLT).
Labour Power
The value of labour power is regarded as the value of the goods and services needed to keep that worker selling their labour.
(i.e. the value of the commodities that the worker consumes and that keeps them able to work for a wage).

Question 26

What is value of the Labour power? (Marx)

Answer 26

That value is whatever the employer has to pay to keep the worker functioning and returning to work (their wage).

Question 27

Living Labour is…

Answer 27

…when a worker is employed for 12 hours

Question 28

Embodied Labour…

Answer 28

…when a worker is employed for 8 hours

Question 29

What did Marx define constant capital and variable capital as?

Answer 29

Marx defined the embodied labour of tools, equipment, raw materials etc. as constant capital (c) and the amount paid to living labour as variable capital (v).

Question 30

What is the surplus value? (Marx)

Answer 30

The excess of the value the workers create over what they are paid is defined as Surplus Value, which is the source of the profit the employer makes.

Question 31

Why does Surplus Value arise? (Marx)

Answer 31

There is a labour market: the employer can buy Labour Power

The value paid to Worker is less than the value they add.

Question 32

What is exploitation? (Marx)

Answer 32

The taking or appropriation of surplus value by the employer is referred to as Exploitation.

Question 33

What is the rate of exploitation?

Answer 33

The rate of exploitation = s/v.

Question 34

How is the rate of profit calculated?

Answer 34

r = s/(c + v)
This is the ratio of the profit (surplus value) to the amount paid to embodied and living labour: how much is the employer making in profits compared to the amount paid to capital and labour.

Question 35

How is the capital intensity(k) calculated?

Answer 35

=c /(c + v)

How capital intensive is the industry: the ratio of constant capital costs to all costs.

Question 36

How is the Average Cost calculated?

Answer 36

= (c + v) / q

The (capital + labour) costs per unit of output.

Question 37

What is the Average Socially Necessary Labour Time (ASNLT)?

Answer 37

This is how much labour does it take (on average) to produce something (extract some coal, produce a piston or a shovel).

Question 38

What does competition force firms to do?

Answer 38

Competition forces firms to invest more in new machinery and technology, and this creates a tendency for the rate of profit to fall.