Smith, Ricardo, Marx and the Birth of Modern Political Economy – Week 3

Question 1

Key Thinkers:

Answer 1

Adam Smith, 1723-1790, The Wealth of Nations, 1776

David Ricardo, 1772-1823, The Principles of Political Economy and Taxation, 1817

Marx, 1818-1863, Capital, 1867, 1885, 1894 + Modern Political Economy

Question 2

History of Economic Thought:

Answer 2

• Capital
• Nation
• Science
• Empire

Question 3

Key Points:

Answer 3

The rise of political economy is an important part of the making of modern society, as opposed to feudal society or other examples of traditional society

The work of political economists created new styles of reasoning and thinking about the economic system in relation to other social systems, such as law, politics, education etc.

Can it be argued that the economic system dominates the other social systems in modern society?

Question 4

Adam Smith (1723-1790)

Answer 4

Born in Kirkcaldy, Scotland
Education: Ballie College, Oxford
Chair of logic and of Moral Philosophy, University of Glasgow

Question 5

Smiths’ Main Writings:

Answer 5

The Theory of Moral Sentiments (1759)
An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Essays on Philosophical Subjects (1795)

Question 6

Smith as a ‘modern’ thinker – Newtonian Physics

Answer 6

1. The ‘Newton’ of political economy

2. Search for few, simple causal laws that could explain many different phenomena

Question 7

Smith as a ‘modern’ thinker – Enlightenment

Answer 7

1. Idea of ‘progress’ and man striving for improvement
2. Fascination for human nature, and idea that it remains the same everywhere
3. Slightly critical attitude towards religion

Question 8

Economic thought before Smith:

Answer 8

The Bible
Plato, Aristotle and the Greek roots of ‘economics’
Medieval Economic Thought
Mercantilism and Physiocracy

Question 9

Mercantilism (16th + 17th century):

Answer 9

Interested in how to make their nations rich and powerful

Two basic prescriptions: accumulate gold, and precious metals, keep a positive balance of trade (exports > imports)

Question 10

Physiocracy (18th century)

Answer 10

They thought agriculture was the only productive activity

Did not study in detail the connection between international trade and the national economy

Question 11

Smith as a ‘modern’ economist:

Answer 11

Systematic attempt to discover the ‘Natural’ laws leading to the creation of wealth

Integrated analysis of: Production, Distribution, Trade – based on a theory of value – interconnectedness

An Inquiry into the nature and causes of the Wealth of Nations

Question 12

Wealth of Nations – ‘Nature and the Causes of the Wealth of Nations’

Answer 12

1. Labour Productivity

2. Composition of production vs. non-productive labour

Question 13

Labour Productivity

Answer 13

Division of Labour

Question 14

Specialisation

Answer 14

Exchange

Question 15

Division of Labour:

Answer 15

‘The Division of Labour is limited by the extent of the market’

Question 16

Theory of Value:

Answer 16

Value of use vs. value of exchange

Question 17

What determines the value of exchange:

Answer 17

1. Labour
2. Natural Price established by market exchange
   * Cost of production theory

Question 18

The ‘Invisible Hand’ and the ‘Adam Smith problem’

Answer 18

Principle of Self-Interest
Inconsistency between TMS (1759) and WN (1776)
Self-interest vs. sympathy and the idea of the impartial spectator
In the 6th edition of WN Smith explicitly acknowledges the complementarity of the perspectives from TMS + WN
The great lesson of both the TMS and WN relies in the analysis of the unintended social consequences of individual actions

Question 19

Smith in a nutshell:

Answer 19

The first ‘modern’ economist
Division of labour – markets and exchange
Different theories of value
‘Self-interest’ and ‘sympathy’
Precious insights on the social consequences of individual actions

Question 20

Thomas Robert Malthus (1766 – 1834)

Answer 20

Another great economist
1798: An Essay on the Principle of Population
1805: First ‘Professor in History and Political Economy’ – East India College
Had a crucial impact on the development of Ricardo’s ideas

Question 21

David Ricardo (1772 – 1823)

Answer 21

Born into a family of Dutch traders who moved to Britain
Forced to abandon formal education at 14 years old
Established his own business at 22
In 1799, he reads Adam Smith’s Wealth of Nations
1819-1823 in the House of Commons

Question 22

Ricardo’s Main Writings:

Answer 22

The High Price of Bullion, a proof of the Depreciation of Bank Notes (1810)
Essay on the influence of the Low Price of Corn on the Profits of Stock (1815)
The Principles of Political Economy and Taxation (1817)
Exchange value and use value (1823)

Question 23

Ricardo as a ‘modern’ thinker:

Answer 23

Ricardo’s emphasis on abstract theorising and deductive methods – political economy as a science of ‘verbal mathematics’

“Another of Malthus’ great mistakes are I think this: political economy, he says, is not a strict science like mathematics, and therefore he thinks that he can use words in a vague way, sometimes attaching one meaning to them, sometimes another and quite different. No proposition can surely be more absurd” – Letter of Ricardo to James Mill, Jan 1821

Question 24

Rents, Profits, Wages:

Answer 24

Assumption: wages cannot go below the subsistence level
It is the interaction of rents and profits to determine wages
Theory of rent: at a given time (t1) there is a certain area. A under cultivation. Population pressure – cultivation of less fertile land – productivity
Policy implications: since wages cannot go down below the subsistence level, the final aim should be to keep profits expanding but without leading to the rise in rents

Question 25

Theory of Value and Trade: the principle of comparative advantage

Answer 25

Theory of value:

• Like Smith – exchange (rather than use) values
• Unlike Smith – Labour embodied

Question 26

‘On Machinery’:

Answer 26

Three editions of the Principles in Ricardo’s lifetime (1817, 1819, 1821)
Most important innovation in the 3rd edition – addition of a chapter (ch. 31) ‘On Machinery’

Question 27

Ricardo in a nutshell:

Answer 27

Political economy as the science of distribution, of the produce between landowners, capitalists and workers

Profits should keep expanding, and rents keep in check

Labour – theory of value

Machinery Problem

Question 28

Representation of Smith and Ricardo:

Answer 28

• A critical defence of business interests and privileges, individualism, anti-government stance

Question 29

Women and the Popularisation of political economy:

Answer 29

Marcet’s Conversations in Political Economy (1816)

Martineau’s Illustrations in Political Economy (1832-1834)

Question 30

Smith the pro-capitalist?

Answer 30

Before his death Smith saw Wealth of Nations translated into Danish, French, German, Italian and Spanish by 1800 nine English editions had already been printed

Question 31

Who understood Smith?

Answer 31

1. In Parliament, Wealth of Nations, was mentioned for the 1st time in 1800 by someone who hadn’t read it
2. Businessmen (and many contemporary economists) just got the ‘free market’ part of it
3. Smith and the French Revolution: yet another tale of misunderstanding