Classical school of economics, assignment of Classical school of economic, Recurdian model, Adam smith's thought, Research paper on Classical school of economic
AbstractThis paper contains the main idea of the Classical school though of economics.It is that markets work best in which there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economics development Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources to where they are best employed.
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Introduction
Classical theory was the first modern school of economic
thought. It began in 1776 and ended around 1870 with the beginning of neoclassical
economics. Notable classical economists include Adam Smith, Jean-Baptiste Say,
David Ricardo, Thomas Malthus, and John Stuart Mill. During the period in which
classical theory emerged, society was undergoing many changes. The primary
economic question involved how a society could be organized around a system in
which every individual sought his own monetary gain. It was not possible for a
society to grow as a unit unless its members were committed to working
together. Classical theory reoriented economics away from individual interests
to national interests. Classical economics focuses on the growth in the wealth
of nations and promotes policies that create national expansion. During this
time period, theorists developed the theory of value or price which allowed for
further analysis of markets and wealth. It analyzed and explained the price of
goods and services in addition to the exchange.Classical
Theory Assumptions
Classical
theory was developed according to specific economic assumptions:v Self-regulating markets: classical theorists believed that free
markets regulate themselves when they are free of any intervention. Adam Smith referred to the market's ability to
self-regulate as the "invisible hand" because markets move towards
their natural equilibrium without outside intervention.
v Flexible prices: classical economics assumes that prices are
flexible for goods and wages. They also assumed that money only affects price
and wage levels.v Supply creates its own demand: based on Say's Law, classical
theorists believed that supply creates its own demand. Production will generate
an income enough to purchase all of the output produced. Classical economics assumes that there will
be a net saving or spending of cash or financial instruments.v Equality of savings and investment: classical theory assumes
that flexible interest
rates will always maintain
equilibrium.v Calculating real GDP: classical theorists determined that the real GDP can be calculated
without knowing the money
supply or inflation rate.v Real and Nominal Variables: classical economists stated that real and nominal
variables can be analyzed separately.Fundamental discussion of classical model:
v Value theory:
Classical economists developed a theory of value, or
price, to investigate economic dynamics. Use value or value in use is the
utility of consuming a good—the want-satisfying power of a good or service in
classical political economy. In Marx's critique of political economy, any product has a labor-value and a use-value, and if it is
traded as a commodity in markets,it additionally has an exchange value, most often expressed as a money-price. Marx acknowledges that commodities being traded also have a general utility, implied by the
fact that people want them, but he argues that this by itself tells us nothing
about the specific character of the economy in which they are produced and
sold.
v Division of labour:
Narrow specialization of tasks within a production process so that each worker can become a specialist in doing one thing, especially on an assembly line. In traditional industries (see sunset industries), division of labor is a major motive force for economic-growth. However, in the era of mass customization (which requires multiple skills and very short machine change-over time), division of labor has become much more
flexible. Also called specialization of labor.Advantages of division of labour are gives below:1. Right person in the right Job: Every worker is assigned the task for which he is
best suited. This helps to provide, opportunities for the best utilization of
natural talents as a person performs the job which he likes he gets pleasure in
work.2. Greater Efficiency:
Division of labour helps to increase the efficiency of workers due to two
reasons. First, every worker is assigned a job that suits his skills,
experience, training and aptitude.3. Better Quality of Work: Division of labour not only increases the quantity of work it also improves
the quality of production. Better and modern machines and equipment are used.
Better quality products help to increase the goodwill and profits of business.4. Saving of time: Division
of labour helps to avoid waste of time and effort caused by changes from one
type of work to another. The worker does not have to shift from one process to
another.5. Economies of large scale production: Division of labour facilitates mass production. Large
scale production provides economies in the use of resources, such as raw
materials, labour, tools etc. Optimum use of means of production helps to
reduce cost of production.6. Less learning period: Under division of labour a worker needs to learn only a part of the
whole task. Therefore, lesser time and expenditure is involved in training
workers.7. Inventions and Innovations: A worker doing the same task again and again tries to
find new and better ways of doing the job. Small and simple parts of a task can
easily be done by machines. Thus, division of labour increases scope for
inventions and innovations.8. Less Strain: Division
of labour makes tasks small and simple Workers can perform them without much
strain and physical tiredness is reduced. Less skilled labour is required to
perform the divided and sub-divided tasks.9. Wider Market: Division
of labour makes available cheaper goods of a wide variety. As a result demand
for goods and services increases.10. Benefits to society: Society is benefited due to (a) reduced cost on account of large scale
production (b) higher productivity which leads to economic growth (c)
employment of unskilled workers and (d) better quality of goods and services
for consumers.
v Wage: Smith
observes that in the struggle between “master” and employee, the masters
typically have the upper hand, and will pay wages as low as they can manage .
Nonetheless there exists a floor below which the masters cannot long depress
wages I’ll call this the “reproduction minimum”: it is the lowest (real) wage
that permits the workforce both to survive and to reproduce over time, the
lowest wage consistent with a stable size of labor force over the long run. If
the masters push wages below this level they’re cutting their own throats.Wages are an example
of expenses that are
involved in running a business.
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v Rent: Adam
smith describes it as a ‘monopoly price’. he include the rent of land as an
element of cost of the production. Therefore, a
high or low rent is the effect of high or low product price. He believed
that the interest of the landlords coincided with the interest of the society.
and land did arise only when society was progressing .
v Profits and
interest:Adam smith made certain expectations
to the statement that wags and profits moved in opposite directions. but in new
colonies both wages and profits may be high and in a ‘stationary state’ both
may be low. according to him interest is the compensation which the borrower
pays to the lender, for the profits which he has an opportunity of making by
the use of money.
v Capital:Adam Smith was aware of the fact
that capital accumulation is essential for the economic development of the
nation. In smith’s ‘wealth of nation’ capital appears in three forms:1. as an instrument of production2. as a fund of maintaining the workmen and3. as a source of revenueSmith classified capital into three portion;1. The first potion is used for immediate consumptions. It
affords no revenue and profits2. the second capital is the fixed capital which affords
revenue only by circulating or changing masters.3. Third portion is the
circulation capital which affords revenue only by circulating or
changing mastersv The role of
money:According to Smith, a nation’s
true wealth consists ‘not only the in its gold and silver but in its lands ,
hoses and consumable goods of all different kinds ‘. Money only serves as an
instrument of value. He believed that paper money was preferable to the gold
and silver.
v Laissez- fair
and the harmony of interests:Smith believed that in the
natural organization of the economic order under the influence of personal interest.
He was a great advocate of laissez fair non intervention of government in
business. According to him, governments are wasteful , corrupts and
incompetent.Smith also believed that interest
of the individual coincided with interest of the society. ‘ It is not from
benevolence of the butcher, the brewer or the baker. that wr expect our dinners
but from their regards to their interest.Smith advocated free trade. He
always attacked government Intervention on behalf of special interest of
businessmen.
v The role of
Government:Adam smith said that the state
could perform only the following three major functions: 1. To protect society
from foreign attack 2. To establish the
administration of justice within the country and 3. To maintain the public works and
institutions that private entrepreneurs can not undertake privately.
v Cannon of
taxation:1. Canon of equity: it based on the principles of justice and
ability.2. Canon of certainty: things like time of the payment, the
manner payment and the quantity to be paid should plain and clear to the
tax-payer. Tax should not be arbitrary.3. Canon of convenience : A tax should be levied in such a
manner or in such a time that is convenience for tax-payer.4. Canon of economy: Taxes should be collected at minimum cost
to the govt.
Criticism:1.
Unrealistic Assumption of Full Employment
Condition: Keynes considered the
fundamental classical assumption of full employment equilibrium condition as
unrealistic. To him, there is the possibility of equilibrium condition of
underemployment as a normal phenomenon.
2.
Undue Importance to the Long Period: Keynes opposed the classical insistence on
long-term equilibrium; instead, he attached greater importance to short-term
equilibrium. To him, “in the long run, we are all dead.” So, it is no use to
say that in the long run everything will be all right.3. Keynes’ Denial of Say’s Law of Markets: Classical economists rest on Say’s Law
which blindly assumed that supply always creates its own demand and affirmed
the impossibility of general overproduction and disequilibrium in the economy.
Keynes totally disagreed with this view and stressed the possibility of supply
exceeding demand, causing disequilibrium in the economy and pointed out that
there is no automatic self-adjustment in the economy.4.
Keynes’ attack on Interest Rate to be strategic
variable: Keynes also attacked the classical theory in regard
to saving and investment. He objected to the classical idea of saving and
investment equilibrium through flexible rates of interest. To him saving and
investment equilibrium are obtained through changes in income rather than in
the interest rate.5.
Keynes’ Attack on Laissez-faire Policy: Keynes
strongly attacked the classicists for their unrealistic approach to the
problems of contemporary capitalist economic system. Pigou’s plea for a return
to free perfect competition to solve the problem of unemployment seemed
‘obsolete’ in the changed conditions of the modern world.
AbstractThis paper contains the main idea of the Classical school though of economics.It is that markets work best in which there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economics development Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources to where they are best employed.
Introduction
Classical theory was the first modern school of economic thought. It began in 1776 and ended around 1870 with the beginning of neoclassical economics. Notable classical economists include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus, and John Stuart Mill. During the period in which classical theory emerged, society was undergoing many changes. The primary economic question involved how a society could be organized around a system in which every individual sought his own monetary gain. It was not possible for a society to grow as a unit unless its members were committed to working together. Classical theory reoriented economics away from individual interests to national interests. Classical economics focuses on the growth in the wealth of nations and promotes policies that create national expansion. During this time period, theorists developed the theory of value or price which allowed for further analysis of markets and wealth. It analyzed and explained the price of goods and services in addition to the exchange.Classical Theory Assumptions
Classical theory was developed according to specific economic assumptions:v Self-regulating markets: classical theorists believed that free markets regulate themselves when they are free of any intervention. Adam Smith referred to the market's ability to self-regulate as the "invisible hand" because markets move towards their natural equilibrium without outside intervention.
v Flexible prices: classical economics assumes that prices are flexible for goods and wages. They also assumed that money only affects price and wage levels.v Supply creates its own demand: based on Say's Law, classical theorists believed that supply creates its own demand. Production will generate an income enough to purchase all of the output produced. Classical economics assumes that there will be a net saving or spending of cash or financial instruments.v Equality of savings and investment: classical theory assumes that flexible interest rates will always maintain equilibrium.v Calculating real GDP: classical theorists determined that the real GDP can be calculated without knowing the money supply or inflation rate.v Real and Nominal Variables: classical economists stated that real and nominal variables can be analyzed separately.Fundamental discussion of classical model:
v Value theory:
Classical economists developed a theory of value, or price, to investigate economic dynamics. Use value or value in use is the utility of consuming a good—the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets,it additionally has an exchange value, most often expressed as a money-price. Marx acknowledges that commodities being traded also have a general utility, implied by the fact that people want them, but he argues that this by itself tells us nothing about the specific character of the economy in which they are produced and sold.
v Division of labour:
Narrow specialization of tasks within a production process so that each worker can become a specialist in doing one thing, especially on an assembly line. In traditional industries (see sunset industries), division of labor is a major motive force for economic-growth. However, in the era of mass customization (which requires multiple skills and very short machine change-over time), division of labor has become much more flexible. Also called specialization of labor.Advantages of division of labour are gives below:1. Right person in the right Job: Every worker is assigned the task for which he is best suited. This helps to provide, opportunities for the best utilization of natural talents as a person performs the job which he likes he gets pleasure in work.2. Greater Efficiency: Division of labour helps to increase the efficiency of workers due to two reasons. First, every worker is assigned a job that suits his skills, experience, training and aptitude.3. Better Quality of Work: Division of labour not only increases the quantity of work it also improves the quality of production. Better and modern machines and equipment are used. Better quality products help to increase the goodwill and profits of business.4. Saving of time: Division of labour helps to avoid waste of time and effort caused by changes from one type of work to another. The worker does not have to shift from one process to another.5. Economies of large scale production: Division of labour facilitates mass production. Large scale production provides economies in the use of resources, such as raw materials, labour, tools etc. Optimum use of means of production helps to reduce cost of production.6. Less learning period: Under division of labour a worker needs to learn only a part of the whole task. Therefore, lesser time and expenditure is involved in training workers.7. Inventions and Innovations: A worker doing the same task again and again tries to find new and better ways of doing the job. Small and simple parts of a task can easily be done by machines. Thus, division of labour increases scope for inventions and innovations.8. Less Strain: Division of labour makes tasks small and simple Workers can perform them without much strain and physical tiredness is reduced. Less skilled labour is required to perform the divided and sub-divided tasks.9. Wider Market: Division of labour makes available cheaper goods of a wide variety. As a result demand for goods and services increases.10. Benefits to society: Society is benefited due to (a) reduced cost on account of large scale production (b) higher productivity which leads to economic growth (c) employment of unskilled workers and (d) better quality of goods and services for consumers.
v Wage: Smith observes that in the struggle between “master” and employee, the masters typically have the upper hand, and will pay wages as low as they can manage . Nonetheless there exists a floor below which the masters cannot long depress wages I’ll call this the “reproduction minimum”: it is the lowest (real) wage that permits the workforce both to survive and to reproduce over time, the lowest wage consistent with a stable size of labor force over the long run. If the masters push wages below this level they’re cutting their own throats.Wages are an example of expenses that are involved in running a business.
v Rent: Adam smith describes it as a ‘monopoly price’. he include the rent of land as an element of cost of the production. Therefore, a high or low rent is the effect of high or low product price. He believed that the interest of the landlords coincided with the interest of the society. and land did arise only when society was progressing .
v Profits and interest:Adam smith made certain expectations to the statement that wags and profits moved in opposite directions. but in new colonies both wages and profits may be high and in a ‘stationary state’ both may be low. according to him interest is the compensation which the borrower pays to the lender, for the profits which he has an opportunity of making by the use of money.
v Capital:Adam Smith was aware of the fact that capital accumulation is essential for the economic development of the nation. In smith’s ‘wealth of nation’ capital appears in three forms:1. as an instrument of production2. as a fund of maintaining the workmen and3. as a source of revenueSmith classified capital into three portion;1. The first potion is used for immediate consumptions. It affords no revenue and profits2. the second capital is the fixed capital which affords revenue only by circulating or changing masters.3. Third portion is the circulation capital which affords revenue only by circulating or changing mastersv The role of money:According to Smith, a nation’s true wealth consists ‘not only the in its gold and silver but in its lands , hoses and consumable goods of all different kinds ‘. Money only serves as an instrument of value. He believed that paper money was preferable to the gold and silver.
v Laissez- fair and the harmony of interests:Smith believed that in the natural organization of the economic order under the influence of personal interest. He was a great advocate of laissez fair non intervention of government in business. According to him, governments are wasteful , corrupts and incompetent.Smith also believed that interest of the individual coincided with interest of the society. ‘ It is not from benevolence of the butcher, the brewer or the baker. that wr expect our dinners but from their regards to their interest.Smith advocated free trade. He always attacked government Intervention on behalf of special interest of businessmen.
v The role of Government:Adam smith said that the state could perform only the following three major functions: 1. To protect society from foreign attack 2. To establish the administration of justice within the country and 3. To maintain the public works and institutions that private entrepreneurs can not undertake privately.
v Cannon of taxation:1. Canon of equity: it based on the principles of justice and ability.2. Canon of certainty: things like time of the payment, the manner payment and the quantity to be paid should plain and clear to the tax-payer. Tax should not be arbitrary.3. Canon of convenience : A tax should be levied in such a manner or in such a time that is convenience for tax-payer.4. Canon of economy: Taxes should be collected at minimum cost to the govt.
Criticism:1. Unrealistic Assumption of Full Employment Condition: Keynes considered the fundamental classical assumption of full employment equilibrium condition as unrealistic. To him, there is the possibility of equilibrium condition of underemployment as a normal phenomenon.
2. Undue Importance to the Long Period: Keynes opposed the classical insistence on long-term equilibrium; instead, he attached greater importance to short-term equilibrium. To him, “in the long run, we are all dead.” So, it is no use to say that in the long run everything will be all right.3. Keynes’ Denial of Say’s Law of Markets: Classical economists rest on Say’s Law which blindly assumed that supply always creates its own demand and affirmed the impossibility of general overproduction and disequilibrium in the economy. Keynes totally disagreed with this view and stressed the possibility of supply exceeding demand, causing disequilibrium in the economy and pointed out that there is no automatic self-adjustment in the economy.4. Keynes’ attack on Interest Rate to be strategic variable: Keynes also attacked the classical theory in regard to saving and investment. He objected to the classical idea of saving and investment equilibrium through flexible rates of interest. To him saving and investment equilibrium are obtained through changes in income rather than in the interest rate.5. Keynes’ Attack on Laissez-faire Policy: Keynes strongly attacked the classicists for their unrealistic approach to the problems of contemporary capitalist economic system. Pigou’s plea for a return to free perfect competition to solve the problem of unemployment seemed ‘obsolete’ in the changed conditions of the modern world.
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