Political Economy
The Classical Approach
1
Political economy in the classical tradition
The classical economists of the 18th and 19th
centuries where the first to use the term ‘political
economy’.
The period covered by classical political economy
cannot be stated exactly.
Major developers include William Petty, Adam Smith,
David Ricardo, Thomas Malthus, and John Stuart Mill,
and Johann Heinrich von Thünen. It is seen by many
as the first modern school of economic thought.
Some authors, such as John Maynard Keynes
expand the definition of classical economics to
include Karl Marx. 2
Cont.
A restricted definition would extend from
Adam Smith’s Wealth of Nations in 1776 to
John S. Mill’s Principles of Political
Economy in 1848.
A more encompassing periodization would
stretch from the work of the Physiocrats (重農
論者) in the middle of the 18th century to the
death in 1883 of Karl Marx, whom many saw
as the last important classical political
economist.
3
Cont.
We will divide our consideration of classical
political economy into two parts: the
argument for market self-regulation and the
theory of value and distribution.
The first part concerns the nature of the
market system and its relation to the state.
The second concerns production and use of
the economic surplus.
The classical economists played a major
role in introducing and elaborating two core
ideas: the separability of the economy and
the primacy of the economic sphere.
4
We shall now introduce
three developers of
Classical Economics –
Adam Smith, David Ricardo,
and Thomas Malthus.
5
Adam Smith (1723~ 1790)
Adam Smith (Baptised June 5,
1723 – July 17, 1790) was a Scottish
political economist and moral
philosopher. His Inquiry into the
Nature and Causes of the Wealth of
Nations was one of the earliest
attempts to study the historical
development of industry and
commerce in Europe. That work
helped to create the modern academic
discipline of economics and provided
one of the best-known intellectual
rationales for free trade and capitalism. 6
Short Biography of Adam Smith
Smith was the son of the controller of the
customs at Kirkcaldy, Fife, Scotland. The
exact date of his birth is unknown, but he was
baptized at Kirkcaldy on June 5, 1723, his
father having died some six months
previously. At around the age of 4, he was
kidnapped by a band of Roma people, but he
was quickly rescued by his uncle and returned
to his mother. Smith's biographer, John Rae,
commented ironically that he feared Smith
would have made "a poor Gipsy." 7
8
At the age of about fifteen, Smith proceeded
to the University of Glasgow, studying moral
philosophy. In 1740 he entered the Balliol
College of the University of Oxford, but as
William Robert Scott has said, ‘the Oxford of
his time gave little if any help towards what
was to be his lifework’, and he left the
university in 1746. In 1748 he began
delivering public lectures in Edinburgh under
the patronage of Lord Kames.
9
10
In 1751 Smith was appointed professor on
logic at the University of Glasgow,
transferring in 1752 to the chair of moral
philosophy. His lectures covered the fields
of ethics, rhetoric, jurisprudence, political
economy, and ‘police and revenue’.
11
Smith now began to give more attention to
jurisprudence and economics in his lecture
and less to his theories of morals. An
impression can be obtained as to the
development of his ideas on political
economy from the notes of his lectures
taken down by a student in about 1763
which were later edited by E. Cannan
(Lectures on Justice, Police, Revenue and
Arms, 1896), and from what Scott, its
discoverer and publisher, describes as "An
Early Draft of Part of The Wealth of Nations",
which he dates about 1763.
12
On returning home to Kirkcaldy he devoted
much of the next ten years to his magnum opus,
An Inquiry into the Nature and Causes of the
Wealth of Nations, which appeared in 1776. It
was very well-received and popular, and Smith
became famous. In 1778 he was appointed to a
comfortable post as commissioner of customs
in Scotland and went to live with his mother in
Edinburgh. He died there on July 17, 1790,
after a painful illness. He had apparently
devoted a considerable part of his income to
numerous secret acts of charity.
13
Adam Smith’s Work
The Wealth of Nations was influential since it did so
much to create the field of economics and develop it
into an autonomous systematic discipline. In the
Western world, it is arguably the most influential book
on the subject ever published. When the book, which
has become a classic manifesto against mercantilism
（重商主義） (the theory that large reserves of bullion
are essential for economic success), appeared in
1776, there was a strong sentiment for free trade in
both Britain and America. This new feeling had been
born out of the economic hardships and poverty
caused by the war. However, at the time of publication,
not everybody was immediately convinced of the
advantages of free trade: the British public and
Parliament still clung to mercantilism for many years to
come. 14
The Wealth of Nations also rejects the Physiocratic
school's emphasis on the importance of land; instead,
Smith believed labour was tantamount, and that a
division of labour would effect a great increase in
production. Nations was so successful, in fact, that it
led to the abandonment of earlier economic schools,
and later economists, such as Thomas Malthus and
David Ricardo, focused on refining Smith's theory into
what is now known as classical economics. (Modern
economics evolved from this.) Malthus expanded
Smith's ruminations on overpopulation, while Ricardo
believed in the ‘iron law of wages’ — that
overpopulation would prevent wages from topping the
subsistence level. Smith postulated an increase of
wages with an increase in production, a view
considered more accurate today.
15
One of the main points of The Wealth of Nations is
that the free market, while appearing chaotic and
unrestrained, is actually guided to produce the right
amount and variety of goods by a so-called
‘invisible hand’. If a product shortage occurs, for
instance, its price rises, creating incentive for its
production, and eventually curing the shortage. The
increased competition among manufacturers and
increased supply would also lower the price of the
product to its production cost, the ‘natural price’.
Smith believed that while human motives are often
selfish and greedy, the competition in the free
market would tend to benefit society as a whole.
Nevertheless, he was wary of businessmen and
argued against the formation of monopolies. 16
Smith vigorously attacked the antiquated government
restrictions which he thought were hindering
industrial expansion. In fact, he attacked most forms
of government interference in the economic process,
including tariffs, arguing that this creates inefficiency
and high prices in the long run. This theory, now
referred to as ‘laissez-faire’, influenced government
legislation in later years, especially during the 19th
century. However, Smith criticised a number of
practices that later became associated with laissez-
faire capitalism, such as the power and influence of
Big Business and the emphasis on capital at the
expense of labour.
17
ADAM SMITH: 1723-1790
Here are deposited the remains of ADAM SMITH. Author of the Theory of
Moral Sentiments and Wealth of Nations: He was born 5th June, 1723, and
died 17th July, 1790. 18
[Canongate Churchyard, Royal Mile, Edinburgh, Scotland.]
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20
21
David Ricardo (1772~ 1823)
David Ricardo (April 18, 1772–
September 11, 1823), a British
political economist, is often
credited with systematising
economics, and was one of
the most influential of the
classical economists. He was
also a successful
businessman, financier, and
amassed a considerable
fortune.
22
Personal Life
Born in London, Ricardo was the third of
seventeen children in a Sephardic Jewish
family (from Portugal) that emigrated from
the Netherlands to England just prior to his
birth. At age 14 Ricardo joined his father at
the London Stock Exchange, where he
began to learn about the workings of finance.
This beginning set the stage for Ricardo’s
later success in the stock market and real
estate.
23
Ricardo became interested in economics after
reading Adam Smith’s The Wealth of Nations in
1799 on a boring vacation to the English resort of
Bath.
Ricardo’s work with the stock exchange made him
quite wealthy, which allowed him to retire from
business in 1814 at the age of 42.
In 1819, Ricardo purchased a seat in the British
parliament as a representative of Portarlington, a
borough of Ireland. He held the post until the year
of his death in 1823. As an MP, Ricardo
advocated free trade and the repeal of the Corn
Laws (穀物管制法).
24
Royal Crescent, Bath
Roman
baths,
Bath
25
Ricardo was a close friend of James Mills,
who encouraged him in his political
ambitions and writings about economics.
Other notable friends included Jeremy
Bentham and Thomas Malthus, with whom
Ricardo had a considerable debate (in
correspondence) over such things as the
role of land owners in a society. He also was
a member of London’s intellectuals, later
becoming a member of Malthus’ Political
Economy Club, and a member of the King of
Clubs. 26
Ideas
Ricardo’s most famous work is his Iron Law of
Wages, a document which shows his capitalist
tendencies. In this book Ricardo states that the
wages of 19th century British should not be
increased, though it was encouraged greatly by
the masses. This was due to his observation of the
direct link evident between money and population.
An increase in income of workers equals an
increase in children, resulting in a larger workforce.
Such an increase means that employers will be
combine to create a greater state of poverty that
existed before wages were originally raised.
Ultimately, he favoured employers far more than
workers, in contrast to the philosophy adopted by
Karl Marx.
27
Also important was Ricardo’s work on the
concept of comparative advantage.
According to his theory, even if a country
could produce everything more efficiently
than another county, it would reap gains
from specialising in what it was best at
producing and trading with other nations.
Comparative advantage forms the basis of
modern trade theory.
28
比較利益法則
假設美國生產電腦和汽車的技術都優於台
美國一天生產一台電腦需5個人力，一天生產一輛汽
車需6個人力；台灣一天生產一台電腦需10個人力，
一天生產一輛汽車需20個人力
Taiwan USA
Computer(台) 10人(天) 5人(天)
Automobile(輛) 20人(天) 6人(天)
依亞當斯密的理論，美國具有生產電腦和汽車的
「絕對利益」，因為其人力成本皆比台灣低
則依其理論，美國應該生產電腦和汽車銷往台灣
29
依李嘉圖的「比較利益」法則：
美國生產1輛汽車的成本是1.2台電腦(生產汽車
的人力與生產電腦為6比5)，而台灣生產1輛汽車
的成本是2台電腦。
反之美國生產1台電腦的成本是5/6輛汽車，台灣
生產1台電腦的成本是1/2輛汽車。
因此美國有生產汽車的比較利益，台灣則具有生
產電腦的比較利益。
故台灣應該生產電腦，美國應該生產汽車，兩國
再透過國際貿易進行交易，則雙方都可因此獲利。
30
獲利如何產生？
假設台灣和美國都各有120個工人
經過一天的生產，台灣可產出12台電腦，美國可產
出20輛汽車，再透過國際貿易的交換(假設交易價格
為汽車:電腦=1.5:1
則台灣可透過出售全部電腦取得8輛汽車，美國則可
取得12台電腦並保有自己生產12輛汽車
再回頭看兩國的生產成本
以台灣的生產技術而論，自行生產8輛汽車需花費
20*8=160人(天)
而以美國的技術言，自行生產12台電腦+12輛汽車需花費
5*12+6*12=132人(天)
因此在比較利益法則下進行貿易，雙方都能以較低之成
本(120人)，取得較多之財貨，彼此皆能得利
31
Like Adam Smith, Ricardo was also an
opponent of protectionism for national
economies. He believed that protectionism
led towards economic stagnation, and that
protectionism by more economically
productive counties doomed less developed
countries to stagnation. He also influenced
generations of later economists in the belief
that protectionism is bad for the economy.
32
Ricadro is also known for his opposition to the
‘corn laws’, which protected British landowners
from foreign competition by guaranteeing them a
high price for their products. Ricardo did not
actually argue the case out of compassion to the
peasants or general population (who were starving,
due to insufficient production), but felt that this was
unfairly diverting a lot of resources from the
bourgeoisie (seen as a force of progress) towards
the landowners. Unfortunately, he was unable to
get Parliament to remove the law, which it later
repealed in 1846.
33
Other ideas associated with Ricardo:
Ricardian equivalence, an argument suggesting
that in some circumstances a government’s choice
of how to pay for its spending (i.e. whether to use
tax revenue or issue debt and run a deficit) might
have no effect on the economy. Ironically, while
the proposition bears his name, he does not seem
to have believed it. Robert Barro is responsible for
its modern prominence.
The iron law of wages, which asserted that real
income of workers would remain near the
subsistence level, despite any attempts to raise
wages.
34
Thomas Malthus (1776~1834)
The Rev. Thomas Malthus (February,
1776– December 23, 1834), who is
usually known as Thomas Malthus,
although he preferred to be known as
‘Robert Malthus’, was an English
demographer and political economist
best known for his pessimistic but
highly influential views. Although it is
popularly assumed that it was these
pessimistic views that gave
economics the nickname Dismal
Science, the phrase was actually
coined by the historian Thomas
Carlyle in reference to an anti-slavery
essay written by John Stuart Mill. 35
Life
Malthus was born to a prosperous family. His
father was a personal friend of the philosopher
and sceptic David Hume and an acquaintance of
Jean-Jacques Rousseau. The young Malthus was
educated at home until his admission to Jesus
College, Cambridge in 1784. There he studied
many subjects and took prizes in English
declamation, Latin and Greek. His principal
subject was mathematics. He earned a masters
degree in 1791 and was elected a fellow in Jesus
College two years later. In 1797, he was ordained
and became an Anglican country parson.
36
Malthus married in 1804; he and his wife had 3
children. In 1805 he became Britain‘s (and
possibly the world’s) first professor in political
economy at the East India Company College at
Haileybury in Hertfordshire. Here, he developed a
theory of demand supply mismatches which he
called gluts (供過於求). Considered ridiculous at
the time, his theory was later confirmed by the
Great Depression and works of John Maynard
Keynes.
Malthus refused to have his portrait done until
1833 because of embarrassment over a cleft
palate (裂顎), a birth defect common in his family.
The deformity was well hidden by the artist.
Malthus was buried at Bath Abbey in England.
37
Demography Theory
Malthus’s views were largely developed in
reaction to the optimistic views of his father
associates, notably Rousseau and William
Godwin. In An Essay on the Principle of
Population, published in 1798, Malthus
predicted population would outrun food
supply, leading to a decrease in food per
person. This prediction was based on the
idea that population if unchecked increases
at a geometric rate (i.e. 2, 4, 8, 16, 32, etc.)
whereas the food supply grows at an
arithmetic rate (i.e. 1, 2, 3, 4, 5, etc.). 38
Only natural causes (accidents and old age),
misery (war, pestilence and famine), moral
restraint (late marriage and sexual abstinence)
and vice (which for Malthus included
contraception, infanticide, homosexuality and
murder) could check excessive population growth.
Malthus favoured ‘moral restraint’ as a check on
population growth. However, it is worth noting
that Malthus proposed this only for the working
and poor classes. Thus, the lower social classes
took a great deal of responsibility for societal ills,
according to his theory. Essentially what this
resulted in was the promotion of legislation which
degenerated the conditions of the poor in
England, lowering their population but effectively
decreasing poverty.
39
The influences of Malthus
The influence of Malthus's theory of population
was very great. Previously, high fertility had been
considered an economic plus since it increased
the number of workers available to the economy.
Malthus, however, looked at fertility from a new
perspective and convinced most economists that
even though high fertility might increase the gross
output it tended to reduce output per capita. Many
20th century economists, such as Julian Simon,
have criticised such conclusions. They note that
despite the predictions of Malthus and the Neo-
Malthusians, massive geometric population growth
in the 20th century has not resulted in a
Malthusian catastrophe, largely due to the
influence of technological advances (especially the
green revolution). 40
Eight major points regarding evolution
subsistence severely limits population-level
when the means of subsistence increases, population
increases
population-pressures stimulate increases in productivity
increases in productivity stimulate further population-
growth
since this productivity can not keep up with the potential
of population growth for long, population requires strong
checks to keep it in line with carrying-capacity
individual cost/benefit decisions regarding sex, work, and
children determine the expansion or contraction of
population and production
checks will come into operation as population exceeds
subsistence-level
the nature of these checks will have significant effect on
the rest of the sociocultural system — Malthus points
41
specifically to misery, vice, and poverty
In the 1830s his writings strongly influenced Whig
reforms which overturned Tory paternalism and
brought in the Poor Law Amendment Act of 1834.
Malthus's theory was also a key influence on both
of the co-founders of modern evolutionary theory
Charles Darwin and Alfred Russel Wallace.
Darwin, in his book The Origin of Species, called
his theory an application of the doctrines of
Malthus in an area without the complicating factor
of human intelligence. Wallace considered it ‘the
most interesting coincidence’ that both he and
Darwin were independently led to the theory of
evolution through reading Malthus. Ironically,
given Malthus's own opposition to contraception,
his work was also a strong influence on Francis
Place (1771–1854), whose Neo-Malthusian
movement was the first to advocate contraception. 42
Concerns about Malthus's theory also helped promote the
idea of a national population Census in the UK.
Government official John Rickman was instrumental in the
first Census being conducted in 1801.
Recent research and significant empirical evidence have
showed Malthus to be wrong. For example, the population
has continued to grow, yet the prices of resources and
foods relative to wages has decreased, indicating the
supply of food (and resources) has grown relative to
population size. This apparent paradox can be easily
resolved because Malthus made two flawed assumptions.
First, population growth is almost never exponential, but
instead influenced by so many factors that no simple model
can describe it. Second, the growth of food is also not
linear (in particular, due to technological advances, such as
the Green Revolution, food has outgrown the human
population).
43
Critics of Malthus
Theoretical and political critiques of Malthus and
Malthusian thinking emerged soon after the
publication of the first Essay on Population, most
notably in the work of the reformist industrialist Robert
Owen and the essayist William Hazlitt. The highpoint
of opposition to Malthus's ideas in the middle of the
nineteenth century was the writings of Karl Marx and
Friedrich Engels who argued that what Malthus saw
as the problem of the pressure of population on the
means of production was, in fact, that of the pressure
of the means of production on population. They thus
viewed it in terms of their concept of the labour
reserve army. 44
In other words, the seeming excess of
population that Malthus attributed to the
seemingly innate disposition of the poor to
reproduce beyond their means was actually a
product of the very dynamic of capitalist
economy. For a review of the historical
development of Malthusian thinking and its role
in the evolution of capitalist society through the
course of the nineteenth and twentieth century,
see Eric B. Ross's The Malthus Factor: Poverty,
Politics and Population in Capitalist
Development (1998).
45