A Primer in Classical Economics

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A Primer in Classical Economics
To fully understand the sociological perspectives
we will learn about in this course, we should
know classical economic thought and its influence
on sociology. Therefore, this presentation
provides an overview of the philosophical
perspectives of three classical economists Adam
Smith, David Ricardo, and Vilfredo Pareto.
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The Invisible Hand of the Marketplace
Adam Smith (1723-1790)

• An Inquiry into the Nature and
• Causes of the Wealth of
• Nations.
• A strong economy and society
• is achieved through individuals seeking to
  maximize their self-interest.

Source Helen Joyce Adam Smith and the Invisible
Hand. Millennium Mathematics Project, University
of Cambridge.
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The Invisible Hand of the Marketplace
Adam Smith (1723-1790)

• Smith described the mechanism by which economic
  society operates.
• Each individual seeks to become wealthy.
• To do so, individuals must exchange with others.
• The public interest is advanced by each person
  pursing their self-interest.
• This invisible hand improves the well-being of
  all.

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The Invisible Hand of the Marketplace
Adam Smith (1723-1790)

• The modern invisible hand has a broader
  meaning.
• Economic outcomes are achieved through a
  decentralized system of supply and demand, with
  no explicit agreements among the acting agents.
• The maximization of well-being is not
  intentional. Rather, it is the byproduct of
  individuals pursing their own aims.

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The Invisible Hand of the Marketplace
Adam Smith (1723-1790)

• The invisible hand and the market economy
• The invisible hand works as part of a free
  market.
• Consumers select equal products at the lowest
  price.
• Producers create quality products at the lowest
  cost possible.
• The market sets the price.

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The Invisible Hand of the Marketplace
Adam Smith (1723-1790)

• The invisible hand and society
• People must think about what other people want.
• This serving society through serving oneself is
  what is seen as moral about the invisible hand.
• Trading with others depends upon goodwill and
  trust in the exchange relationship.
• This goodwill is achieved by knowing that the
  other person will act in their self-interest.

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Comparative Advantage
David Ricardo (1772-1823)

• On the Principles of Political
• Economy and Taxation.
• All nations benefit by producing
• according to their relative ratio of efficiency
  and trading with one another.

Source The Concise Encyclopedia of Economics.
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Comparative Advantage
David Ricardo (1772-1823)

• Today, the principle of comparative advantage is
  used to organize 151 nations within a global
  capitalist economy.
• The rules of trade for these 151 nations are
  written and administered by the World Trade
  Organization.
• Further reading Globalization.

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Causes of Inflation
David Ricardo (1772-1823)

• The bullion controversy of England in the early
  1800s.
• Ricardo stated that inflation was the result of
  the Bank of Englands propensity to issue an
  excess number of bank notes to repay national
  debt.
• This principle is used today to control inflation.

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Law of Diminishing Returns
David Ricardo (1772-1823)

• As more resources are used in production, with
  fixed resources, the additional amount to output
  will diminish.
• Today, this law is used as a key principle of
  industrial relations and in the planning and
  administration of production.

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Theory of Rents
David Ricardo (1772-1823)

• As more land is cultivated, farmers increasingly
  will use less productive land and pay more in
  rent for more productive land.
• But the prices of commodities remain the same,
  regardless of the rent paid for the land because
  the price of a commodity is set by the market,
  not by the amount of input.

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Theory of Rents
David Ricardo (1772-1823)

• Thus, with greater production and higher rents
  for land, land owners, not farmers, benefit.
• Today, this principle is used to understand why
  agricultural price supports benefit land owners
  (who more and more live off the farm) rather than
  farmers.

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The Political Economy
Vilfredo Pareto (1848-1923)

• Manual of Political Economy.
• Trattato di sociologia generale.
• Pareto Principle.
• Pareto Efficiency.
• Residues and Derivations.

Source Wikipedia The Free Encyclopedia.
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The Pareto Principle
Vilfredo Pareto (1848-1923)

• The Pareto principle, or index, is used to
  calculate the extent of income inequality within
  a social system.
• Pareto found that, in advanced societies,
  approximately 20 of the population earns about
  80 of the income.
• This ratio varies somewhat, but highlights the
  need to monitor income inequality.

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Pareto Efficiency
Vilfredo Pareto (1848-1923)

• Given a set of alternative resources, a shift
  from one allocation to another that can make at
  least one individual better off without making
  any other individual worse off is called a Pareto
  Improvement.
• The principle of Pareto efficiency is used to
  evaluate the quality of economic systems.

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Residues and Derivations
Vilfredo Pareto (1848-1923)

• Pareto agreed with Marxs assessment of the
  limitations of a capitalist economy, but rejected
  Marxs solution of communism as just another form
  of rule by the elites.
• For Pareto, class struggle is inherent and
  eternal. There would be no classless society
  because new rulers would emerge.

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Residues and Derivations
Vilfredo Pareto (1848-1923)

• In criticizing Marxism, Pareto realized that the
  principles of economics depend upon persons
  acting logically, with perfect knowledge and
  their utilitarian goals in mind.
• Because much of human activity is non-logical,
  however, Pareto saw the need to integrate
  economic and sociological thought.

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Residues and Derivations
Vilfredo Pareto (1848-1923)

• Pareto posited that people act upon non-logical
  sentiments (i.e., residues) and invent
  justifications for these actions afterwards
  (i.e., derivations).
• The derivations represent moral or rational
  explanations of actions that are undertaken for
  non-logical reasons.

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Residues and Derivations
Vilfredo Pareto (1848-1923)

• Pareto posited society tended toward an
  equilibrium of Class I and Class II persons.
• Class I persons rule by guile and are
  calculating, materialistic, and innovating.
• Class II persons rule by force and are more
  bureaucratic, idealistic, and conservative.

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Residues and Derivations
Vilfredo Pareto (1848-1923)

• If Class I persons gain too much power, then they
  inevitably ruin society by too much cunning and
  corruption.
• If Class II persons gain too much power, then
  they inevitably ruin society by creating an
  overly bureaucratic, inefficient, and reactionary
  mess.