History of Economics Thought II ch-2.pptx

UNIT TWO: HETERODOX ECONOMIC
THOUGHT
2.1.Early Critics of Neoclassical Economics
 Neoclassical economics did not come into being without
controversy.
 As it was emerging, the German historical school challenged its
methodological foundations, and throughout the late 1880s,
there was a vigorous debate between the Austrians (one
stream of neoclassical school), and some members of the
German historical school over the proper method for economics.
 There is also a critic or debate from American graduate students in
economics to study for their Ph.D.s in Germany.
 Many of these scholars returned home with a full knowledge and
sympathetic view of the position of the German historical school, called
institutional school. 1

2
The Historical School
The German historical school, which arose in the 1840s with
the publications of Friedrich List and Wilhelm Roscher and
ended in 1917 when Gustav Schmoller died, were generally
critical of neoclassical economics like that of the socialists
school.
Four principles were basic in the thinking of the German
historical economists: these are
 (1): Evolutionary approach to economics. The historical school
applied a dynamic, evolutionary perspective in its study of society. It
concentrated on cumulative development and growth.
 (2). Emphasis on the positive role of government: The historical
school was nationalistic, whereas classical economics was
individualistic and cosmopolitan.

cont’d
 (3). Inductive/historical approach: The economists of the historical
school emphasized the importance of studying the economy historically,
as part of an integrated whole, and criticized the abstract, deductive,
static, unrealistic, unhistorical qualities of classical and marginalist
methodology.
 (4): Advocacy of conservative reform. Political economy, said the
historical economists, must not merely analyze motives that prompt
economic activity but must weigh and compare the moral merit of these
actions and their outcomes
3

cont’d
The Older Historical School: The important writers of the older
historical school are Friedrich List (1789- 1846), Wilhelm
Roscher (1817-1894), Bruno Hildebrand (1812-1878), and Karl
Knies (1821-1898).
 They contended that classical economic theory did not apply to all times
and cultures and that the conclusions of Smith, Ricardo, and J. S. Mill,
though valid for an industrializing economy such as England’s, did not
apply to agricultural Germany.
 There was a great deal of nationalistic feeling in the economic analysis of
Germen historical school writers.
 Furthermore, they asserted that economics and the social sciences must
use a historically based methodology and that classical theory,
particularly in the hands of Ricardo and his followers, was mistaken in
attempting to ape the methodology of the physical sciences.
4

cont’d
 List expressed particularly strong nationalist views and
refused to admit that the conclusions of classical theory
regarding laissez faire were applicable to countries less
developed than England.
 While classical theory held that national well-being would
result from the pursuit of individual self-interest in an
environment of laissez faire, List argued that state guidance
was necessary, particularly for Germany and the United
States. He contended that whereas free trade would be
beneficial to England, given the advanced state of its
industry, tariffs and protection were necessary for Germany
and the United States.
 What was the historical method advocated by these writers?
Their works reflect a belief that the chief task of economics is to discover
the laws governing the stages of economic growth and development. the
writers did collect large quantities of historical and statistical
information to support their analyses of economic development. 5

cont’d
The Younger Historical School: The second generation of the
German historical school was represented by Gustav von
Schmoller (1838-1917). Like the members of the older historical
school, the writers of the younger historical school attacked
classical economic theory, particularly the view that it was
applicable to all times and places.
 They preferred to use inductive methods and the application of marginal
analysis and the construction of abstract deductive models by Menger,
Jevons, and Walras in the early 1870s had little or no influence in
Germany.
 They also were very interested in social reform through state action.

 The institutionalist school, an American contribution to
economic thought, began around 1900 and continues to the
present. Thorstein Bunde Veblen (1857-1929) is the intellectual
father of the branch of American heterodoxy that is often called
institutionalism.
 The social factors which lead to the rise of institutionalism may
be briefly stated as follows. In the nineteenth century though
American capitalism achieved tremendous success, the
conditions of the working class was rather bad. Their standard
of living and working conditions were miserable.
 These groups of economists lead by Thorstein Veblen and his
followers like Commons and Mitchell are referred to as
institutionalists. 7
The Old Institutional School

 There was the influence of the German historical school on
American institutionalist school.
 Most of the leaders of the American Economic Association,
which was founded in 1885, were familiar and friendly toward
the German movement and its methodology. But, both share
the inductive approach as superior over the abstract deductive
approach.
 Despite the methodological similarity the institutionalists were
not nationalists; they were more liberal and democratic in their
outlook.
8
Cont…;

The following were seven key ideas of institutional school:
 (1) Holistic, broad perspective: The economy must be examined
as a whole, rather than examined as small parts or separate
entities isolated from the whole.
 (2) Focus on institutions: This school emphasized the role of
institutions in economic life, not by economic laws.
 (3) Darwinian, evolutionary approach: The evolutionary
approach should be used in economic analysis, because society
and its institutions are constantly changing.
 (4) Rejection of the idea of normal equilibrium:
 (5) Clashes of interest:
 (6) Liberal, democratic reform:
 (7) Rejection of pleasure-pain psychology:
9
Cont…

 Veblen felt that both the classical and the neoclassical
approaches were unscientific. Veblen was not
interested in making small changes in the theoretical
structure and he struck at the heart of neoclassical
theory, asserting that the basic assumptions of its
doctrine were unscientific.
 Veblen said that all of orthodox economic theory from
Smith through Marshall was based on the same
assumption: that there is harmony in the system, or
what Veblen called a “meliorative trend.”
 To Veblen, the concept of equilibrium as used by orthodox theorists was
normative: they implied, without proof, that equilibrium is good and that
the results produced by markets in equilibrium are socially beneficial.
10
Cont…

 Other attacks of institutional on Neo-classical economics
includes on consumer sovereignty, and Static system.
government might be able to enhance overall well-being by
restricting “wasteful” consumption by everyone.
 Veblen “dynamics” essentially a deranged static condition.
 Veblen was concerned with social economics instead of the
business economics of price, profit, and ownership.
 Finally, Veblen attacked the notion of perfect competition,
which then dominated standard economic theory. He
recognized that most businessmen had some monopolistic
control over the prices they charged and that they used
advertising to strengthen their market positions. This
analysis, published in 1904, foreshadowed the rise of the
theory of monopolistic competition in 1933. 11
Cont…

Thorstein Bunde Veblen
(1857-1929)
 The Theory of the Leisure Class (1899)
 Theory of the Business Enterprise (1904)
 The Engineers and the Price System (1921)
Seehttp://www.hetwebsite.org/het/profiles/v
eblen.htm for a full list of Veblen’s
publications
12

Cont..
• Veblen was the founder of the American Institutionalism School
• He was a major critic of capitalism and of the analysis of
capitalism in neoclassical economics
• Veblen’s criticism of capitalism may be seen as a response to
– the rough, violent, predatory, lawless, and monopolistic
nature of American capitalism between the end of the
Civil War and the beginning of World War I, and also to
– the inability of neoclassical (or, marginalist) economics to
reflect the realities of contemporary capitalism
• Veblen coined the term ‘neoclassical economics’ to refer to the
economics of Alfred Marshall and likeminded economists
13

rationality
• Neoclassical economists saw consumer behavior as rational
behavior by people with stable tastes
• Veblen instead saw non-rational or instinctual behavior of people
under the sway of instincts that evolve according to Darwinian
rules
Business Motivations
 Neoclassical economists saw firms engaged in a clear-
sighted but honest and by-the-book pursuit of profit
maximization
 Veblen instead saw deep conflicts within firms between
businessmen, who wanted profits by hook or by crook, and
engineers and other technical people who were mainly
interested in making a good product. 14

Cont..
• Leisure Class; Veblen’s analysis of consumer behavior went along
the following lines:
• We instinctively seek high social status.
• We achieve high social status when our peers admire us, when they
regard us as winners and not losers.
• To be considered a winner we need to show that we have stronger
predatory abilities than others. To show our predatory abilities, we need to amass
more wealth than our peers.
• Moreover, that wealth must be acquired by force or by cunning and not by hard
work
– because the acquisition of wealth by hard work does not show any evidence
of one’s predatory abilities
– hard work is for wimps and losers.
• Consequently, capitalist societies tend to generate a leisure class that rises to the
top of the food chain by making money without having worked for the money.
15

Cont..
• Conspicuous Consumption;Not only must we acquire wealth
without doing any labor, we must make sure everybody knows how
wealthy we are.
• This leads to
– conspicuous consumption,
– conspicuous waste, and
– conspicuous leisure.
• An act of consumption creates more utility when that consumption
is observed by one’s peers than when it is done in private: what’s
the point of drinking an expensive wine if no one sees you doing
so?
– To a neoclassical economist who swears by rational consumer
behavior, this way of thinking would be considered perverse.
– But to Veblen, this way of thinking about consumer behavior is a
lot more realistic. 16

Cont…
• Ostentatious waste—as in arranging a lavish
wedding for one’s pet cats—would also help
convince people that a lot of unearned wealth
lies at the source of all the waste.
• Similarly, a visibly leisurely lifestyle would also
serve the same purpose.
• Women’s clothing needs to be highly elaborate
and obviously unsuitable for work in order to be
regarded as fashionable 17

Cont…
• Business Enterprise; Businessmen see the bizarre behavior of the
leisure class and realize that the way to make money is by taking
advantage of the whims of the leisure class and ripping them off.
• Moreover, the general social admiration of predatory behavior
leads businessmen to unscrupulous behavior.
– For example, they sabotage their rival producers so that reduced overall
output would create an artificial scarcity that would lead to high prices.
• On the other hand, the engineers who do the technical work in the
manufacturing industries are interested only in the quality of their
products.
– Their job satisfaction derives from simply doing a good job and producing
products that serve some genuine need.
• Veblen speculated that
– these conflicts between the corrupt ideas of the businessmen and the sense
of excellence of the engineers may be irreconcilable
– the only hope for capitalism lay in the engineers taking over.
18

Cont…
• Unions; Veblen’s view of labor unions wasn’t
very positive either.
• He argued that unions would be quite happy to
procure gains for their members even if those
gains come at the expense of non-union workers.
• This idea was later formalized as the so-called
insider-outsider theory of labor unions.
19

Cont..
• Darwin and Veblen; According to Veblen,
our instincts—such as the instinct to admire
predatory people—may have evolved according to
Darwinian laws during a primitive phase of human
society when might actually made right.
• The problem, however, is that our instincts, once they
are embedded in us, are hard to get rid of even after
the conditions that once made them helpful give way
to a new set of conditions under which they are a
hindrance. 20

Cont…
• Marx and Veblen; Veblen’s view of the evolution of our
instincts is somewhat similar to Karl Marx’s conception of
the inertial tendencies of the ideological superstructure.
• Veblen’s views on the business cycle were also very similar
to those of Marx.
• However, Veblen did not believe in any deadly conflict,
such as that envisioned by Marx, between the leisure class
and the working class.
• In fact, Veblen’s working class people admire the predatory
prowess of the leisure class and hope to one day become
members of the leisure class themselves.
21

Cont..
• A rising demand curve!; In 1950, Harvey
Leibenstein introduced Veblen’s ideas on conspicuous
consumption into formal demand theory and showed
the possibility of a rising demand curve.
• The leisure class does not want to be seen consuming
cheap stuff.
• Therefore, as the price of a product rises, it might
become more popular with such people!
Veblen is a pioneer of the relatively new discipline of
behavioral economics
– See http://myweb.liu.edu/~uroy/web/behav-econ/index.html for a taste of this
subject
22
Thorstein Veblen

The New Institutionalist School
 The traditional institutionalism associated with Veblen,
Mitchell, and Galbraith is generally critical of neoclassical
economics and supportive of government intervention.
 In contrast, new institutionalism tends to be theoretical,
market-oriented, and anti-interventionist.
 There are several identifiable strands of this new institutionalist thought, each emphasizing
the importance of institutions in understanding economic (or political) behavior and
outcomes. One strand is the work of Harold Demsetz (1930–) on the role of property rights in
promoting economic efficiency. A second strand is the analysis by Richard Posner (1939–) of
the relationship between law and economics. A third is the focus of Ronald Coase (1910–)
and Oliver E. Williamson (1932–) on transaction costs in explaining the organization and
behavior of firms. A fourth is the work of James Buchanan (1919–) and Gordon Tullock
(1922–) on public-choice theory, including analyses of rent seeking, interest groups, voting
rules, and constitutional economics.
24
The Development of Modern
Heterodox School

Cont..
 The most sweeping strand of new institutionalism, however,
is that associated with Douglass North (1920–)
 North criticizes neoclassical economics for its failure to
recognize the importance of institutional constraints in
economic decision making and its inability to explain the
permanence of diverse economic institutions throughout the
world.
 Unlike traditional institutionalists like Veblen, however, North embraces
the neoclassicist’s “choice theoretic” approach, which emphasizes
rational economic decision making.
 Institutions come into being because they minimize human interaction
costs. They can be formal (for example, constitutions and laws) or
informal (for example, unwritten codes of conduct).
 Institutions are the formal and informal rules that govern economic and
political behavior. 25

 The form that institutions take owes much to the bargaining
power of individuals and groups representing them. But once
institutions are in place, the behaviors and outcomes from
individual choices reinforce their continued presence.
 Institutional constraints thus vary both through time and across countries.
 Wealthy nations essentially are wealthy because their institutional
constraints define a set of payoffs to political and economic activity that
encourages education and skill acquisition, capital expansion, new
technology, and thus economic growth.
 Poor nations are poor because their institutions define a set of payoffs to
political and economic activity that discourages wealth creation. Property
rights are poorly defined and enforced, the brightest minds enter
government or emigrate, social and religious customs limit work and
disparage material gain, and wealth redistribution is given more emphasis
than wealth creation.
 North’s genius has been to wed traditional neoclassical analysis with the
analysis of institutions.
 By so doing, he explains how institutions affect economic choices and
how economic choices gradually alter institutions. 26
Cont…

The recent debate on
institutions
 There has been burgeoning literature within economics that
discusses and analyses institutions (see North 1990; Nugent and
Lin 1996; Nelson and Winter 1982; Jones and Hall 1998; Olson et
al. 1998; Robinson et al. 2001; Glaeser et al. 2004; Bardhan 2005;
Hodgson, 2007).
 Acemouglu et al., 2001
 Rodrik et al., 2004
 The attention of international organisations and policy makers
has focused more on the importance of institutions for
economic growth. Institutional economists, economic research
centres and international organisations have built indexes of
governance which measure an institutional quality of developing
and advanced countries.
27

Institutions and development
 The importance of institutions in the economy and on the
economic development is recognized from nearly all the
economists who worked on LDCs (Lewis, 1955; Myrdal
1968; Kutznets 1973; Sen 1981; Hirschman, 1990; Solow
1994).
 However the institutional economics remains too much
often outside from the analysis of the neoclassical
economic paradigm and from the greater part of the text
books, where the neoclassical assumptions (perfect
information, zero costs of transaction, profit maximizing
etc) prevents whichever debate on the role of institutions
in the economics.
28

Endogenous growth theory
 Also the recent contributions of the
endogenous growth theory (Romer 1986, Lucas
1988), take into consideration elements (such
as increasing return to scale, human capital,
externalities) whose origins it is not difficult to
make to go back to the economic relations that
are settled down between the agents, and
therefore to the institutions.
29

SOLOW RESIDUAL (1956)
Y- rK /Y *K - wL /Y *L= SOLOW RESIDUAL= TFP
SOLOW RESIDUAL IS A BLACK BOX WHICH CAN BE
EXPLAINED WITH INSTITUTIONS
Questions concerning institutions role;
 The role of the institutions in the economy;
 Existence of different institutions;
 The contribution of institutions on the productivity;
 The existence of inefficient institutions;
 The mechanisms of the institutional change
30

31
Questions..
 People say：“institutions matter.”
 Great!
 But, if institutions are nothing more than codified laws,
organizations and other such explicit, intentional devices, why
can’t badly-performing economies design (emulate) “good”
institutions and implement them?
 because they do not change so easily ...and they are informal…
How do institutions change?
“history matters” for development.

CENTRAL DILEMMA
32
The main problem in the
institutional economic analysis
is to establish what is the
fundamental paradigm of the
economic choices between the
two:

Formal institutions
Formal institutions are generally defined as the
law sphere, with constitutions, regulations and
organisations. There is a direct connection
between formal rules and a political economy
framework such as governance, property rights,
and judiciary system. Thus, reinforcing of the
formal institutions is guaranteed by the legal
system.
34

..
Informal institutions;They are a set of social norms,
conventions, moral values, religious beliefs, traditions and
other behavioural norms that have passed the test of the
historical time and that determine the individual behaviour.
35

Cont..
The informal institutions can be called the Old
Ethos or the Carriers of History. These
informal rules are part of the dynamic
evolution of a community and heritage of its
culture. In addition these rules or institutions
are self-reinforcing in course of time trough
mechanisms such as imitations, traditions and
other forms of teaching.
They also serve as sanctions that facilitate the
self-reinforcing process such as: community
membership, fear of expulsion, reputation and
fear to be the only one not to respect the rules.
There is an inbuilt threat in this Hobbesian type
Competition which allows the respect of the
rules because otherwise the social relationships
will become violent.(Solow R.. 1994) 36

A normative system
 This highlights the complexity of a normative system that
is characterized by one formal dimension and one
informal dimension, each with the own characteristic
 Hence, Institutions are “a set of social rules that
structure social interactions” (Knight, 1992:2)
37

A complex framework
38
Formal rules Informal rules
Conformity Legal sanctions Social obligation
Reinforcing Legal incentives Reputation
Motivation Functionality Orthodoxy
Prevalence
Tools Law,
organizations,
constitutions
Tacite conventions,
social normes,
habits
Legitimacy Judicial- state Cultural-traditional

What is an “institution” then?
 Arrangements that
coordinate the behavior
of individuals in society.
 Institutions are sets of
regulatory norms.
 An institution is a
stable, valued, recurring
pattern of behavior.
39
Where do we see
“institutions”?
1. Is family an institution?
2. Friendship?
3. Love?
4. Marriage?
5. School?
6. Exam?
7. Market?
8. Firm?
9. Contract?
10. Polls (voting)
11. Political party?
12. Constitution?
13. Exchange rate regime?
14. Central bank independence?
15. Currency?
16. Theatre?
17. Literature?
18. Cinema?
19. Cinematography?
20. Poverty?
21. Social stratification?
22. Casta system in India?
ONLY IF…An institution is a stable, valued, recurring pattern of
behavior.

Example of category of economic institutions
 Trust
 Information
 Property rights and Privatizations
 Rent-seeking, Groups of pressure and lobbies
 Bribe/corruption
 Reputation and Values
 Mechanisms of selection,
 Competition and cooperation
 Intermediary
 Bureaucracy
 Organizations
 Laws and constitutions
 Industrial relations
40

There has to be reciprocity
The important conclusion
 Social agents
 generate,
 influence
 and support institutions.
BUT
 Institutions create social agents.
A good institution must survive a dual test of “making
sense” and “being fit” for its mission.
41

Markets require non-market institutions to work
well
a. Markets are not self-creating
i. Property rights
ii. Contract enforcement
b. Markets are not self-regulating
i. Regulatory authorities
ii. Correction of market and coordination failures
c. Markets are not self-stabilizing
i. Monetary, fiscal and currency arrangements
d. Markets are not self-legitimating
i. Political democracy
ii. Social insurance
iii. Redistribution
42

Concluding remarks
Institution formation
43

Ind.assnt..Quasi- Institutionalists: Joseph
Schumpeter, Gunnar Myrdal, John Kenneth
Galbraith
Post-Keynesians
 The ideas of “post-Keynesian economists” were contend that
the contemporary neoclassical synthesis (synthesis between
Keynesian macroeconomics and neoclassical microeconomics)
is not only seriously flawed but also incompatible with
Keynes’s own ideas.
 Not all scholars of Keynes accepted this neoclassical synthesis.
Some denied both the IS–LM interpretation of Keynes and
standard microeconomics.
 Chief among these post-Keynesian critics was a group of economists at
Cambridge, England, including Piero Sraffa, Nicolas Kaldor (1908–1986),
Joan Robinson , and Luigi Pasinetti (1930–). John K. Galbraith, Sydney
Weintraub (1914–1983), and a handful of other economists contributed to
this school of thought in the United States.
 Many of the post- Keynesians drew heavily on the work of Polish economist
Michal Kalecki (1899– 1970), who in 1933 had offered a “Keynesian-like”
theory of total employment prior to The General Theory.
44

Cont..
The post-Keynesians are a small, yet diverse, group of
economists. Some of the ideas of each individual within
this paradigm differ from those expressed by others.
The followings are the major basic tenets of this school.
(1) Neo-Ricardian view of production, value, and
distribution: According to Sraffa, the pattern of demand
for various products does not affect the pattern of
prices; rather, it affects only the scale of output in each
industry..
45

 The real values (prices) of goods depend on the shares of
other commodities necessary to produce them.
 Relative values (prices) and profits (if wages are given) are
determined by the production techniques used to produce a
composite standard commodity, which consists of the basic
commodities in the economy.
 (2) Markup pricing: Prices are set by oligopolistic
corporations.
 These firms finance investment largely from retained profits,
and to achieve their desired levels of profits oligopolists set
prices above current costs.
46
Cont..

 Prices therefore “do not reflect current demand conditions;
rather they reflect the funds requirements for the planned
investment expenditure.
 When costs rise, firms increase their prices to maintain
their markups over their costs.
 (3) Endogenous money: Contrary to the view held by
Fisher and Friedman, post-Keynesians regard the stock of
money as being essentially endogenous to the economy,
changing in response to changes in the level of wages.
 The needs of trade dictate the supply of money (Keynes
himself pointed).
 (4) Pronounced cyclical instability: The economy is
inherently unstable. Investment must grow sufficiently to
keep national income and output growing at a steady rate.
47
Cont..

When investment is less than required to maintain the steady rate of
growth, the economy recedes and unemployment rises.
 (5) Need for an incomes policy: An incomes policy limits the
average annual wage increase to the nation’s annual rate of
productivity growth.
 Similarly, firms are constrained as to how much they can
raise prices.
 A successful incomes policy holds down inflation,
minimizes the redistribution of income from inflation, and
avoids the loss of output associated with anti-inflationary
fiscal and monetary policies.
 According to post-Keynesians, the “class struggle” for income
shares and the markup pricing by oligopolists necessitate a permanent
incomes policy 48
Cont..

END OF CHAPTER
2
THANK YOU.
49

 MONETARY ECONOMICS IN NEOCLASSICAL SCHOOL
50

THE NEOCLASSICAL SCHOOL-THE DEPARTURE
FROM PURE COMPETITION
 Piero
56

Cont…
 Chamberlin: The theory of monopolistic competition P MC
 The key concept is product differentiation: Assumptions - Cost
curves the same - Firms charge prices greater than their
marginal costs - Operate at average costs greater than
minimum - Inefficiency in allocation 57

 Joan Robinson: Introduced the nature of monopsony
market in product market and in resource market.
 Monopolistic competition can only be eliminated by pure
competition.
 Exploitation occurs when the worker’s wage is less than the
value of the marginal product of labor (VMP) Remedy by
58

NON MARXIAN HETERODOX ECONOMICS THE
GERMAN HISTORICAL SCHOOL
 Arose in 1840 with Friedrich List and Wilhelm Roscher and
ended in 1917 when Schmoller died.
-Like the socialists, this school is critical of classical economics.
Historical Background:
-Germany was divided, weak and agricultural
- Nationalism, militarism, paternalism, devotion to duty and
hard work, massive government intervention were the order
of the day.
- Germany was far behind England in industrial development
- Eonomists in Germany believed government intervention
59

 The evolutionary approach enabled explaining the departure
from laissez-faire in countries like England Lasting
contribution
Historical inductive method is generally accepted today. The
attack on laissez faire as unrestricted free enterprise does not
necessarily produce the best result.
THE INSTITUTIONALIST SCHOOL (THE OLD)
An American contribution to economic thought Began around
1900 and continues up to date The founder was Thorstein Veblen.
Historcial Background of the school - Inspite of impressive
developments of capitalism, improvements in living conditions of
many workers did not match their expectations.
60

 Inspite of impressive developments of capitalism,
improvements in living conditions of many workers did not
match their expectations. Long hours of work, low housing
condition, insecurity at times of sickness, unemployment, old
age, higher education and job security were not adequate or
accessible for most workers.
 - Health and safety regulations were non-existent or inadequate
- Monopoly began, conservative forces predominated every
where, state and federal government were using the force of the
police to solve industrial disputes, were establishing tariff
protection to businesses. The doctrine that minimum
government interference produces the maximum social well-
being seemed untenable.
 There were two methods recognized as methods of achieving
61

1.Reorganize society along socialism
2. Promote trade unionism
3. Undertake social reform by ameliorating the conditions
through government intervention and save capitalism
There was the influence of the German historical school on
American institutionalist school. Both share the inductive
approach as superior over the abstract deductive approach.
Despite the methodological similarity the institutionalists
were not nationalists; they were more liberal and
democratic in their outlook.
Major tenets:- - Holistic broad perspective
- the economy is like a complex organism
- Focus on institutions
- - economic life is regulated by economic institutions, not
by economic laws.
62

 Whom did institutionalism benefit? - The middle-class, agrarian interests,
small business and labour groups, government workers, reformers,
humanitarians, leaders of consumer’s organizations, union members, were
attracted to its ideas.
- Non-economist academicians praised the institutionalist interdisciplinary
approach.
 Usefulness and correctness of the school in its time. The school challenged
the rigid orthodoxy in economic thinking and helped to revise that type of
theory. The school added realism to economic analysis by incorporating the
institutional setting the evolutionary process and by looking at the economy
as a whole. The school urged closer integration of the social sciences. The
emphasis on inductive studies reduced the gap between economic theory
and practice. Gathering and analysing statistical data become popular and is
a monument to this method.
63

Lasting contributions
- The broader perspective
- - The reform movement
- - The influence on development economics
- Veblen : the founder of the institutionalist school
Contributions
- - The leisure class o Conspicuous consumption
- Propensity to avoid useful work
- Conservatism
- - Attacks on Neo-classical economics
- On consumer sovereignity o Static system
64

 Wesley Clair Mitchell
The importance of empirical investigation
Business cycles : conclusions
- Business cycles arise in a money economy (a society where
economic activities are mainly carried by making and spending
money)
- Business cycles are widely diffused throughout the economy -
Business fluctuations depend on the prospect for profit
- Fluctuation are systematically generated by the economy itself
The need for social planning to overcome the worst features of
business fluctuations
Readings on Quasi-Institutionalists: Joseph Schumpeter,
Gunnar Myrdal, John Kenneth Galbraith
65

The Austrian School
 The new institutionalist school
- Market oriented and anti-interventionsit
- Emphasis on rational economic decision making on:
- Various components
- The role of property rights
- The relationship between law and economics
- Transaction costs explaining the organization and behaviour of
firms
- Analysis of rent seeking, interest groups, voting roles and
constitutional economics
66

 Discovering principles for maximizing social well being
 Defines welfare optimality and means of achieving it
 Identify factors that impede the achievement of maximum well-
being and means of removing the impediments.
 Pareto-
-Refined Edgeworths indifference curve notion as well as Walras’s
general equilibrium analysis
- Arrived at the conditions for maximum welfare Pareto
optimality
67

cont’d
 - Maximum welfare occurs where there are no longer any
changes that will make some one better off while making no
other worse off.
 Pareto optimality implies-optimal distribution of goods among
consumers, optimal technical allocation of resources and
optimal quantities of outputs.
 Optimal distribution of goods Optimality condition: consumers
having identical marginal rates of substitution between two
goods MRSxy(A) = MRSxy(B), where A and B are individuals
and x & y are goods.
68

 Optimal technical allocation of resource
-Optimality condition: MRTSLK(X) = MRTSLK (Y) Optimal
quantities of output
-Optimality condition: MRSXY = MRTXY Criticisms :
-fails to address the issue of distributive justice, overall growth of
output vs. distributive impacts
- it is based on static view of efficiency
Pigou: Unlike Pareto’s general equilibrium analysis Pigou relied
on partial equilibrium analysis Income redistribution-greater
equality of income could increase economic welfare
69

 Divergence between private and social costs and benefits Externalities: spill
over effects lead to the divergence between social and private costs and
benefit.

 Pigou on saving People’s telescopic faculty is defective and
tend to devote too much of their resources to present use and
too little to future use. Economic result is affected as a result.
The creation of new capital is checked and people use up the
present (existing) capital to such a degree that future
advantages are sacrificed for smaller present ones. Pigou
concluded that, to enhance economic welfare,
 -governments intervention that strengthen the tendency to
consume at present should diminish
 -taxes on saving, on property, progressive taxes on income be
avoided
 put heavy taxes on consumption
71

 Pigou’s effect: real balance effect of price falls The decline in the
general price level accompanying an economic down turn will
increase the real value of people’s assets. With increased asset
value people will save less and consume more, thus increasing
demand. This will restore full employment. The idea served as
explanation in macro economics why the aggregate demand is
downward sloping.
Pigou and price discrimination
-1st degree – all consumer surplus is taken away
-2nd degree – block prices charged, taking parts of the
consumer surplus
-3rd degree -price is charged on the basis of elasticity of
demand
72

 Debates on Welfare under socialism versus under capitalism
Ludwig von Mises:
Consumer goods:
-The same types of economic calculation that guide resources to
their highest valued uses under capitalism must be made by the
socialist planner who desires to maximize consumer welfare.
- Without private owner ship of resources, free markets and
entrepreneurs, such calculation is impossible to make.
Capital goods:
Relative prices in market economic reflect scarcities and
productive values.
73

 Prices of capital goods change quickly in response to changes in
consumer tastes, new technology, entrepreneurial expectations,
etc. Under socialism no such mechanism exists.
 the economy is on constant change and continuously
generating new Information Entrepreneurs best suited to and
have the ability to anticipate rewards.
 profits and loses select those who can best fulfil wants, they
smarten entrepreneurs
 socialism cannot duplicable the functions of the market
74

 Oscar Lange: Market socialism, would result in economic
efficiency and maximum social welfare.
 Market socialism is characterized by a) private ownership of
consumer goods a b) free choice of occupation c) state
ownership of the means of production.
 There are markets for goods, services and labor but not for
capital and intermediate goods.
 Shadow price, an index of the terms of exchange between two
items, exists rather than market price.
 A central planning board, through trial & error process can set
the prices of capital by adjustment of price to eliminate
shortages & surpluses. 75

 Workers are paid their market wage plus the social dividend.
 The trial and error process is much the same as that which
occurs under capitalism, but can work better under socialism
because central planners have better access to a greater range e
of information about shortages and surpluses than do
individual capitalists.
KENNETH ARROW
-How do we know if we are socially better off as a result of policy
choice?
-Individual choice versus collective choice, how do they relate?
- Is perfect democracy possible?
- Are there rules for determining what constitutes a just
distribution of income?
76

To ascertain the relationship between individual preferences and
social choices through democratic voting, Arrow establishes four
minimal conditions to be met by social choice:
 social choice must be transitive : if A is preferred to B and B to
C than A to C
 A group decision must hot be dictated by anyone inside or
outside the community
 social choices must not change in the opposite direction of
individual choice
 A social preference made between two alternatives must
depend only on preferences toward these two alternatives and
not on people’s opinions of other options.
 Arrow arrived at his impossibility theorem: that " perfect
democracy is impossible” 77

 Example: suppose a community has three voters (V1, V2, and
V3) and there are three alternative policies to choose from (A,
B, C).
78

 Comparing policy A to B, by majority rule, A wins (two individuals (V1
and V3) have chosen A to be better than B). Comparing the winner A with
C, C wins the majority. This choice implies that C is better than B if the
social choice respects the transitivity rule. But actually B is observed to be
better than C by the same majority-rule, violating the transitivity principle.
Thus, decisions on the basis of perfect democracy (majority rule) do not
simultaneously respect the four principles.
JAMES M.BUCHANAN
The public choice perspective
only individuals know their utility
individual have different tastes, capacities, expectations, knowledge but all
possess the commonality - pursuit of self interest
The pursuit of self interest leads to spontaneous order though the process
of exchange.
Buchanan extends the assumption of self interested behaviour to political
79

 the collapse of communism : Communist leaders promoted their own
interest not the idealized social good
 the rising of public debt in many industrial nations :Elected politicians will
seek any excuse to create budget defeats to provide public goods & services
so that they stay in power.
 the rent seeking behaviour of business & labour groups: they attempt to
persuade governments to limit competition and create special rules that
enhance private profit
 Bureaucracy is endemic to government and tends to beget more
bureaucracy
 Buchanan objects the idea in conventional welfare economics that:
o advocating ( posing) government officials as agents who can identify social
welfare function, and
o considers them as agents who identify and correct the 'bad' produced by
private sector to enhance society's welfare.
The reasons for the objection are:
o Utility can be known only individually; and individuals know their utility
preference when presented with real world choices, which means no one can
80

 The government sector consists of people who act on their own interest that
may not align with the social ideal, if at all that social welfare
 Although Buchanan is pro- individualist he is not an anarchist. Individuals
understand the need for government to constrain individual behaviour and
the need for constitutional rules to constrain the state.
 Mutual consent (unanimity) is desirable in establishing constitutional rules,
but efficiency considerations may necessitate majority voting rule. Even
majority rule is not sacrosanct. An optimal voting rule is that minimizes the
sum of
 (a) the costs to those opposing the proposition and
 (b) Society bargaining and decision making costs associated with gaining
greater consensus.
81

MATHEMATICAL ECONOMICS AND EMPERICAL METHODS IN ECONOMICS
 Mathematical economics refers to the expression of economic principles and
analyses using mathematical symbols and methods. It does not constitute a
separate school of economic thought but a distinct method of expression
and analysing economic theories, principles and conclusions. Algebra,
geometry, calculus, difference equations, differential equations, linear
algebra, topology are used in economic analysis and theorizing.
 Mathematical economics was used in three general ways
 (a) to derive and state economic theory
 (b) to expose inconsistencies in verbally expressed theories and corrected
logical errors
 (c) to develop testable hypothesis
 Static and Dynamic Optimization, linear programming, partial equilibrium,
general equilibrium, input output analysis, game theoretic analysis, are
applications of mathematics in economics.
82

Perpetual questions and Issues in scientific investigation
- Is there any way to relate theory to reality?
- - If there is a way, is there more than one way?
 Assessing the reality on the ground to confirm or refute theories is known as
empirical analysis. Historically the empirical methods followed to relate
theory to reality were:
-Common sense empiricism (arm chair empiricism)
- Statistical Analysis (measurement of reality without theory) - Classical
econometric analysis
- - Bayesian Econometric analysis
- How are Mathematical Economics, Statistics and Econometrics related in
modern economic science?
- Mathematical economics: - Application of maths to develop hypotheses and
clarify their implications
- Statistics: - Collection of numerical observations and statistical analysis, use
tests derived from probability theory to gain insight into those numerical
83

 Econometrics: -Combination of mathematical econometrical
and statistical analysis
THE DEVELOPMENT OF MODERN MICROECONOMICS
-Historically Cournot, Walras, Pareto, and Edgeworth unseated Marshall
to become the forefathers of modern graduate microeconomics,
relegating Marshallian economics to a role in undergraduate education.
-Marshall focused on partial equilibrium. Modern microeconomics focused
on general equilibrium that was pioneered by Walras.
-Though geometry was used in Marshallian analysis to some extent, it
heralded the beginning of the end of Marshallian economics.
In modern microeconomic after 1930s expositions using the various
geometric tools and mathematical formalizing intensified.
History and institutions gave way to argumentations abstracted from any
actual setting.
Because many economists had acquired the requisite analytic equipment,
the late 1930s and early 1940s witnessed a revolution in microeconomics,
84

 Formalization of economic theory went through:
(1) Extending the marginal analysis of households, firms, and markets to make
it more internally consistent, with the use of general equilibrium and higher
mathematical analysis.
(2) (2) Reformulating the questions in manner consistent with the tools and
techniques available for dealing with them.
(3) (3) Adding new techniques to clarify unsolved questions. This process has
continued to date.
These processes followed different paths
1) European roots
o Generalizing and formalizing general equilibrium theory. Arrow & Debru
addressing Adam Smith’s question " will the invisible hard promote social
good?”
85

 2) The other path is that of Paul Samuelson which focussed on the
implications of economic theory in the following statement "the existence of
analogies between central features of various theories unifies the existence
of a general theory which underlies the particular theories and unifies them
with respect to those essential features“
 Accordingly Equilibrium and stability conditions emerge as the two part
structure underlying economic theory.
The conditions of equilibrium for comparatives statics can be put in the
maximization frame work.
For dynamic analysis specification of the dynamic properties are required to
assess the stability.
-As advances in mathematical economics and general equilibrium approach
relegated Marshallian approach to a subordinate level, what happened to the
monopolistic competition theory, which was a departure from Marshallian
86

 Monopolistic competition theory failed to be embraced in the new
microeconomics for reasons of difficulty in formalizing.
 -Chamberlains monopolistic competition analysis was a Marshallian partial
equilibrant analysis and it was not amenable to integration in the general
equilibrium analysis that relied on the competitive model.
 -Monopolistic competition was countered as an unnecessary appendage. It
does not add to pure monopoly or to pure competition explanations as no
power of prediction as the polar models.
Milton Friedman and the Chicago Approach to Microeconomics
Topics in modern microeconomics
-Topics in Modern Microeconomics have expanded to two general areas : i.e.,
in terms of issues( domains) and methods (techniques)
87

 The domain of Microeconomics :
 Microeconomics is expanding to other areas, which were traditionally
considered outside the realm of economics, such as the analysis of decisions
of family on the number of children, marriage, crimes, , social choice and
constitutions, law and economics etc.
 The techniques of microeconomics :
New mathematical tool kits and inclusion of uncertainty and game theory
Topics in modern micro economics in two specific areas
o Demand theory:
Indifference curve approach ( preference based ),
Revealed preference approach ( choice based ) Critiques on the claims of the
law of demand The existence of Giffen goods and the counter explanation
The argument on Inadequate psychological foundation of utility maximization
as a basis for demand analysis. 88

 Welfare economics
 The fundamental theorems of welfare economics
 Measures of change in consumer welfare
 Consumer surplus
 DEVELOPMENTS IN MODERN MACROECONOMICS
 Historical forerunners of Macroeconomics
- MERCANTILISTS The possibility of divergence Actual and Potential level of
output as a result of :
- Private interest leading to monopoly that restricts output
- Individuals saving and hence deficiency of domestic demand
- Imports crowding out domestic products
The accumulation of Gold and silver as the measure of wealth of a country
Balance of payments
- The outflow of gold and silver leads to unfavourable balance of trade
- The need for restriction of imports and promotion of exports
- Government intervention is required to regulate domestic and foreign
trade and maintain positive balance of payments 89

 CLASSICAL
-Invisible hand would lead to attainting the potential output (under lasses faire)
-A. Smith agreed with Mercantilists on the effects of monopoly but the method
of removal of monopoly is not government but competition.
-Mercantile unconsumption arguments were countered by “Says law
-Mercantilist argument for amassing gold was countered by the idea that a
countries wealth is measured not in precious metals but in real output (under
free trade, & foreign competition )
-Markets (even not perfect) worked better than the alternatives
-Classical thinkers’ focus of inquiry shifted from monitory and financial forces to
real forces. The dichotomy between real and nominal forces was accepted
-Non mainstream economist such as Karl Marx asserted that the economy had
an aggregate or macroeconomic problem
90

NEOCLASSICAL ECONOMICS
 Orthodox economics was interested mainly on one macro issuethe general
price level and to some extent on business cycles. To explain the forces that
determine the general level of prices, quantity theory of money in the
version of equation of exchange and transaction version were developed.
 The most famous theory of money, , was developed by Marshall M = kPY,
where M is currency plus demand deposits PY is money income,k is the
proportion households desire to hold income in the form of money , it was
known as the equation of exchange version.
 Irving fisher developed transaction version of the, Quantity theory of money
– MV =PT, where M- Quantity of money, P- price level, V=velocity, T
transaction level. Both assumed full employment.
 All attempts to explain business cycle were not successful because they
were based on a solid belief in self equilibrating properties of the market
economy and saw aggregate fluctuation as temporary co-ordination
problems. No one was able to show that equilibrium was possible at less
than full employment.
91

Marshallean framework has problems with macroeconomics because of the partial
equilibrium nature of supply and demand analysis. The only way to extend the
arguments from partial to general equilibrium is to use complicated mathematics.
Early neoclassical economists used little mathematics.
Few Swedish economists anticipated that the problem to come. They argued that a
difference between ex ante and ex post savings and investment affect the aggregate
economy. These works were ignored until the great depression, after which they
were reconsidered and known as disequilibrium monetary theory. British economists
influenced by these events maintained that there could be temporary monetary
disturbances in which the flow of savings would not equal the flow of investment.
These temporary disturbances would cause fluctuations in real income.
Ultimately the economy would right itself but there would be a sequence of
time periods with in which the interconnected flows could be in
disequilibrium. In connection with this theory it was suggested that the
velocity of money could fluctuate in the short run and that there would be
temporary unemployment.
92

 Most neoclassical economists of this period were not disequilibrium
monetarist. Founded on supply and demand approach in a partial
equilibrium frame work, they focused on disequilibrium in labor markets as
the cause of extended unemployment. The underlying belief was that
wages were above equilibrium wages due to influences of union’s power.
To reduce unemployment it necessitates reducing union power. The
Depression of 1930’s changed the context under which the market was
seen. Economists began to analyze the aggregate economy in greater
detail becoming aware of the short comings of neoclassical theory and
policy prescription.
93

Classical school cont’d
 Whom did the school benefit
 Classical ideas helped to promote the political , social and economic
climate that encouraged industry, trade and profit.
 How was the school valid, useful or correct in its time?
 It rationalized the practice of enterprising people.
 It justified the overthrow of mercantilism
 Reliance on competition was a timely view point
 Restricting the role of wasteful and corrupt government
was valid and well grounded.
 It helped to remove the remnants of feudalism and
enhanced investment in agriculture and industry
94

Classical School cont’d
 Lasting Contributions Of the Classical School
 The several laws are now thought as the principles
of economics
 The law of diminishing returns
 The law of comparative advantage
 The notion of consumer sovereignty
 The importance of capital accumulation to growth
 The market mechanism for reconciling the interest of
individuals to that of society
95

4.5. Precursors of Classical Economic thought
• Sir William Petty as a precursor of the classical school
(He Was a pioneer statistician)
 Velocity of money
 velocity of money can be as important as the quantity of money
 Division of labor
 Recognized the economics associated with the specialization of labor
and division of tasks e.g. Cloth must be cheaper when one cards,
another spins, and another weaves
 Rent theory
 Arrived at a primitive theory of rent saying that a farmer planting a
corn taking out the seed out of the proceed of his harvest and also
what himself has eaten and given to others in exchange for clothing
and other natural necessities, the remainder of corn is the natural
and true rent of the land for that year.
96

Sir William Petty cont’d
 What were the shortcomings of this analysis?
 the failure to separate the return to capital from the return to land
 The failure to show rent to be a differential return arising at the
intensive extensive margin of cultivation.
 Petty did realize that land nearer to the market yielded a higher rent
 Importance of capital
 Argued that the use of tools is much productive than simple labor
 Labor theory of value
 The value of a bushel of corn will be equal to that of an ounce of
silver if the labor necessary to produce each is the same.
 Refer books for more discussions
97

Sir Dudley North as a precursor of the classical
school
 Trade is not for one side benefit
 Trade’s object is not to accumulate specie
 Wealth should not be measured by the stock of precious metals
 What matters is not money but bread
 Laissez faire in intra and inter national trade enables maximum gains
 Not complete harmony in interests( this makes him different
from most classical thinkers)
 Disagreed that war and conquest enrich a country( in
opposition to mercantilist) and undermined service and
emphasized on goods production( Not akin to a classical)
 Saw Industry as less important ( Not akin to a classical)
 Refer books for more discussions 98

Richard cantillon as a precursor of the
classical school
 Used the concept entrepreneurship for the first time.
 Predates Quesnay in recognizing the circular flow of resources
 Developed the theory of value and price ( Intrinsic value and market
price )
 He had a theory of population growth where population growth is
endogenous to the economic prosperity
 Analyzed interest as a reward for risk taking in lending
 Supported the export of surplus( Like the mercantilists)
 Believed that gold and silver mined at home would not bring wealth
rather raise domestic prices rather emphasized production of goods
and selling abroad.
 Stated that export surplus cannot be maintained for long
 Refer books for more discussions 99

David Hume as a precursor of the classical school
 Discussed the price-specie mechanism( like Cantillon)
 Price adjustment would not take place instantaneously, it
follows indirect routes)
 Imbalance of trade tends to correct itself
 Promoted a cooperative game in trade
 Stated that international trade will not perpetuate the
differences between advanced and less advanced nations
 Opposed the the physiocratic idea of tax on workers getting
passed to land lords
 Displayed insight to the Recardian Rent theory.
Refer books for more discussions
100

Adam Smith( 1723-1790)
The founder of the classical school
 The key influences on Adam Smith
 The general Intellectual Climate of the time known
as the enlightenment ( Enlightenment thinkers were
optimists of the human progress)
 His close friendship with Quesnay and Turgot
during his stay in France for more than two years
( For Adam Smith Physiocracy was the “nearest
approximation to the truth”
 Francis Hutchison’s ( Adam Smith’s
Instructor)moral philosophy and David hums
philosophy and economic ideas 101

Important works of Adam Smith
 The theory of moral sentiments ( published 17 years
before the “Wealth of Nations”
 The book discussed the moral forces that restrain
selfishness ( Sympathy and benevolence restrain selfishness)
 An Enquiry into the Nature and Cause of the Wealth of
Nations
 The book discussed various economic issues
 The division of labor:- that the division of labor increases the
quantity of output produced for three reasons.
 Develops increased dexterity in performing one single task
 Saves time through reduced movement
 Simplifies tasks for use of machinery and increases productivity.
102

Important works of Adam Smith
 The Harmony of interests
 “It is not from the benevolence of the butcher , the brewer, or the
baker that we expect our dinner but from their regard to their own
interest…. By pursuing his own interest each individual frequently
promotes that of society more effectually than when he really intends
it.’
 The action of each producer or merchant who is attempting to gain
profit is restrained by the other producers or merchants who are
likewise attempting to make money. Competition drives down prices
and reduces profit. The pursuit of self interest restrained by
competition thus tends to produce Smiths social good- maximum
output and economic growth: Social good arising from the harmony
of interests
103

Important works of Adam Smith cont’d
 Limited government and laissez faire
 As long as there exists harmony of interests government
intrusion is unneeded and undesirable.
 According to Smith governments are wasteful, corrupt inefficient and
the granters of monopoly privileges to the detriment of the society as
a whole. Laissez faire was promoted by Smith.
 However Smith saw a significant but limited role for government
involvement.
 To protect society
 To administer justice
 To erect and maintain public works that private entrepreneurs
can not undertake profitably
104

 To finance these government activities Smiths recommended
Taxation. Taxes should be
 Proportional to the revenue enjoyed under protection
 Predictable and uniform as to the time of payment, the manner of
payment and the amount of payment
 Collected at minimum cost to the government
 Extension of harmony of interests and laissez faire to
International trade
 “ If a foreign country can supply us with a commodity
cheaper than we can make it, better buy it of them with
some part of the produce of our own industry, employed in
a way which we have some advantage.”
 The law of absolute advantage in international trade 105

 The market laws of competitive economy
 Value (there are two kinds of value)
 Value in use ( the utility of some commodity)
 Value in exchange( the power of purchasing other goods)
 Smith didn’t solve the paradox of value ( why objects
having high value in use may possess little value in
exchange(like water) and why objects having little value
in use may possess high value in exchange(like diamond)
 He focused on exchange value and the source or
determinant of exchange value for him was the cost of
production
106

 Smith examined exchange value under two circumstances
 “An early and rude state” where labor is the only scarce
resource(capital and land are either non existent of free goods)
 Advanced economy where capital had accumulated and land
commanded a positive price.
 Labor theory of value in primitive society:
 In a society where labor is the only resource the relative value of a
good ( exchange value) would be determined by the amount of labor
necessary to produce it. This is the labor cost theory of value (
remember William Petty)
 The value of any commodity to the person who possesses it , if he
wishes to exchange it for other commodities,is equal to the quantity
of labor which it enables him to purchase or command.This is is
referred as labor commanded theory of value
107

 Labor theory of value in advanced economy:
 The growth of capital invalidates the simple labor cost theory of
value
 The real value of commodities can no more be measured by the
labor contained in them
 In societies where capital investment and land resources become
important goods will normally be exchanged for other goods , for
money or for labor at a figure high enough to cover wages rents and
profits
 However the real value can still be measured by the quantity of labor
which they can purchase or command
 The quantity of labor that a commodity can buy exceeds the quantity
of labor embodied in the in its production by the total profits and
rents.
108

 For A. Smith Demand does not influence the value of
commodities
 The cost of production i.e., wages , rent and profits are the
only determinants of value in the long run
 The Implicit assumption of Smith is that production expands and
shrinks at constant cost per unit output
 Competition drives down prices to cost that include normal profits
 Any increase in demand will not increase value because the
cost of producing each unit of the good remains unchanged
 Note that if the assumption was that unit cost of production changes
as production increases and shrinks, then Smiths principle becomes
untenable.In that case changes in demand will affect changes in
production and hence changes in prices. 109

 Market price:- Smith like Cantillon makes a distinction between:
 Intrinsic or natural price-( realized in the long run )
 The long run price below which entrepreneurs will not sell their
goods. Such prices just( exactly) cover average rates of wages,
rents and profits.If they sale below these prices in a desperate
situation they would not continue in their business
 Market price(realized in the short run) –
 The actual price any commodity is sold. It tends to fluctuate around
the natural price depending on the short run supply and
demand.When it happens to be above the natural price more goods
come in to the market depressing prices and when lower some
productive factors will be withdrawn, the quantity supplied falling and
market price rising to the natural rate.
 Short run demand and supply are not fundamental determinants of
prices( exchange value) but are simple causes of fluctuations of the
market price around the natural or intrinsic price. 110

 Smith distinguishes between Real and Nominal price.
 Increases in the stock of money increases the money price of
commodities
 Real price of a commodity is its command over labor, not its command
over money.
 Wages : Smith addresses
 The aggregate level of wages
 The growth of wages overtime
 The structure of wages
 The aggregate level of wages
 Average annual wage =(Wage fund)/(number of laborers)
 The wage fund is a part of stock of circulating capital out of which present
wages are paid. The stock consists of the the savings of the capitalists from
previous production and sales. The wage fund is fixed in the short run but
can expand from year to year.
111

 The minimum wage rate must be that which enable a worker with a
family to survive and perpetuate labor supply
 The growth of wages overtime
 When demand for labor rises, wages will rise above the minimum.
The rate of increase of national wealth determines the demand for
labor and the wages by influencing the size of the wage fund.
 Smith also laid the basis for the modern concept of economies
of high wages or efficiency wage theory where high wages
increase the health and strength of workers and induce more
labor supply
 If the wealth is stationary population and labor supply will depress
wages. His emphasis is on Capital accumulation and economic growth in
opposition to the low wages doctrine o0f Mercantilists
 Bargaining play a role in determining wages
112

 The structure of wages
 With the underlying assumption of a society with perfect liberty to
choose and change occupations, advantages and disadvantages of
every type of employment would be equal or tend toward equality(
the theory of equalizing differences or compensating wage
differentials)
 According to the theory of equalizing differences or compensating
wage differential theory actual wage rates for different jobs, the
actual wage structure, would vary according to the five factors:
 Agreeableness of occupation
 Cost of acquiring the skill(Knowledge):embryonic human capital
theory
 Regularity of employment
 Level of trust and responsibility attached
 Probability or improbability of success
113

 Profit :
 is a compensation for the risk of losses and a return for
entrepreneurial effort ; hence, Smith argues, the lowest profit must
be high enough to compensate risk of loss plus some surplus( gross
profit). Net profit is the surplus alone.
 In countries that are advancing rapidly in wealth, competition among
businesses lowers the rate of profit.
 The low rate of profit in such countries offset the effect of high
wages and these countries sell goods as cheaply as those having
lower wage rates.
 Interest :was not treated as a separate distributive share. It was
handled simply as a deduction from profit. The lowest rate of interest
a little higher than the losses that sometimes occur through lending
and generally lower than the rate of profit. As profits rise borrowers
seek more money and interest rate rises. 114

 Rent:Smith presents several theories of rent
 Rent as a component of the cost of production and
constituent of price and determinant of price.
 Rent as a price paid for the use of land the amount of which
is determined by the price of the agricultural produce from
that land.Here rent is not the component of price of
agricultural produce.It is the highest price the tenant can
afford to pay after deducting wages , the wear and tear of
capital, average profit and other expenses of
production.Rent therefore is a surplus or a residual.High
prices high rents.
 Rent as a monopoly return
 Rent as an opportunity cost of using land for one purpose
rather than another. 115

 Smith’s view on wages, profits and rents constitute an
attempt to formulate a theory of factor share (functional)
distribution of income.
 Money:
 is vital as a means of payment but does not add to the
output or to the wealth of a society
 Paper money would do equally well as gold and silver.
 Public debt and taxes required to pay the interest were
detrimental to the economy as they induce the merchants
and manufacturers to invest abroad and growing debt would
in the long run probably ruin great nations of Europe.
116

 Economic development
 The division of labor spurs capital accumulation
and increase labor productivity; capital
accumulation and high wages also increase labor
productivity
 High wages arise from high wage fund which in
turn increases with capital accumulation
 Increased productivity increases national output
and increased wealth of a nation.
117

Thomas Malthus
 Influences on Malthus’s thinking
 The negative impacts of the Industrial Revolution and
growing urbanization were beginning to appear
 Controversies on growing poverty and what to do about it
 The legislation in 1795 of the latest of the series of “poor
laws” that stipulated the minimum income for the poor
families, and the following heated debate.
 The corn laws that placed tariff on imported grain and
the controversy
 The growing population and the pressure on food supply
118

Thomas Malthus
 The rising necessity to import food to England while the
Napoleonic wars kept the imports of food low and the
extreme prices of grains and land rent, which was
favorable to English Landlords
 The growing concern, after the defeat of Napoleon, of
English land lords on the surge of imported grain that
would depress grain prices
 the urge by the landlords to lift up the floor prices of
imported grains, which stood against the business
interest that spoke against high tariffs
 The arguments that followed to repeal Corn Laws
119

Thomas Malthus
 The Intellectual Setting that influenced Malthus
 William Godwin
 A minister who turned anarchist and atheist.
 He opposed all coercion by the state and all collective action by
citizenry,
 relied on the voluntary goodwill and sense of justice of the
individual guided by the ultimate rule of reason
 Believed that the human race is perfectible through continuous
advance to rationality and increased well being
 A person’s character depends on the social environment and
perfect society will produce perfect people.
 The major obstacles to progress are private property, economic
inequality and the coercive state
 Population growth is not a problem as humanity will refuse to
propagate when population reaches its limits. 120

Thomas Malthus
 The Marquis de Condorcet
 An eminent French mathematician of an aristocratic family, who was
skeptic in religion, a democrat in politics,a physiocrat in economics, and
a pacifist
 He welcomed and supported the French revolution
 He favored universal suffrage for men and women, opposed the
property qualification for voting and election to office
 He was persecuted by the revolution and went hiding for nine years .
 He wrote his most important work while hiding He wrote about social
progress based on three fundamental principles
 Equality among nations( which abolishes wars )
 Equality of individuals within nations( which overcomes social evils
and leads to perfections)
 The perfectibility of humanity
 Population would increase as a result of these beneficent reforms but
the food supply would increase even more rapidly. If not birth control
may have to be used. 121

Thomas Malthus
 Malthus rebelled against these ideas of Goodman and Condorcet
 He argued that misery is rooted in the prolific fertility of human race,
not in evil human institutions.
 Goodwin and Condorcet were promoting ideas such as the abolition
of War and hunger, which are remedies of overpopulation.
 Malthus’s Population Theory
 was an explanation to account for much of that poverty and misery
observable in the lowest classes of every nation
 His law of population states
 Population When un checked increases geometrically( 1, 2, 4, 8, 16,…)
 Subsistence increases at best arithmetically(1,2,3,4,5,6,7,8,9,…………..)
 Types of checks to population growth
 Preventive checks( reduce the birth rate)
 He approved Moral restraint such as postponing marriage, never
marry, strict moral conduct before marriage
 He disapproved what he called vice such as prostitution and
mechanical birth control
122

Thomas Malthus
 Positive checks( increase the death rate )
 These include famine, misery, plague and war, which
Malthus elevated to natural laws.
 He promoted the idea of facilitating these unfortunate evils
to increase mortality of the poor and control population
 He openly discouraged benevolent people who think they
are doing a service to mankind as mistaken.
 There must be no government relief for the poor( abolish
the poor laws)
 Accordingly the poor laws were amended in 1834. The law
aimed at making public assistance so unbearable that most
people would rather starve quietly than submit to its
indignities
 Malthus ideas rendered Political economy the “dismal
science”
123

Thomas Malthus
 Malthus’s theory of market gluts
 Malthus developed the theory of the potential insufficiency of effective
demand
 Workers’ wages < value of the production by the amount of profit
 Capitalists buy some of the extra output in the form of capital goods there by
increasing production but not in the habit of consuming all their profit
 Investment is undertaken in the final analysis only to provide for
consumption, but if the final product cannot be sold no further investment
will be forthcoming
 Spending by land lords and their retinue is essential to avoid the
glut(overproduction ) of the market.(the need for Un productive
consumption)
 Rent is surplus over the cost of production and its expenditure would add to
effective demand without adding to the cost of production.
 The policy implications was the Retention of the corn laws, which were
important to enrich the landlords and foster unproductive consumption
124

Thomas Malthus
 Malthus’s theory of diminishing returns in agriculture
 Improvements made to a fixed amount of land would provide
increasingly smaller rises in yields
 Appreciation of demand and supply, rather than cost of production
alone, as determinants of price
 Assessment of Malthus
 Over rated the significance of rent
 His distinction between productive and unproductive consumption is inaccurate
 Over rated the significance of population growth relative to that of persistence
 He underestimated the possibility of enlarging agricultural produce
 Wages have been rising rather than being driven by biological subsistence
 He was moralizing than analyzing the means to limit population growth
 How ever his theory of population is still relevant to developing world
125

David Ricardo
 Was a contemporary of Malthus who further developed the
ideas of the classical school.
 Was the leading figure in demonstration of the possibilities
of using the abstract method of reasoning to formulate
economic theories.
 He was an outstanding example of a deductive thinker.He
called his broad generalizations economic laws the operation
of which in economics are as valid as the laws of physics in
the natural sciences.
 Although he was well acquainted with the facts of business
and economic life, he did not use the inductive method of
reasoning.
126

David Ricardo
 Ricardos ideas on the currency issue
 Amidst the prolonged war between France and England, when a panic
induced run on gold depleted the reserves in the Bank of England, the
Bank stopped paying gold on demand and people holding paper money
could not redeem it for gold.
 The price of gold gradually exceeded its mint parity price, a general price
inflation followed and “the currency question” was an issue of worry and
discussion.
 In his conclusion on “the currency question” he reaffirmed the quantity
theory of money. The Bank was over issuing paper currency because it
no longer was checked by the requirement to pay gold on demand By
increasing the money supply the Bank of England drove up prices of
commodities, thereby reducing the value of currency.
 The problem, according to Ricardo, was not the high price of gold,
rather the low value of the pound sterling.
 He suggested a return to the gold standard and after years of argument
his suggestion was passed by the parliament as law.
127

David Ricardo
 Ricardo’s theory on diminishing returns and rent
 The law of diminishing returns and theory of rent developed
in response to the debate on the corn laws.
 Recardo was the first to use the concept of diminishing
returns to develop the theory of rent
 His definition of rent in perspective
 Rent is that portion of the produce of the earth, which is paid to
the land lord for use of the original and indestructible powers of
the soil
 Rent is the return on long run capital investment that are
amalgamated with the land and increase its productivity.
 Rent arises at both the extensive and intensive margin of
cultivation
128

David Ricardo c ont’d
 THE THEORY OF EXCHANGE AND RELATIVE PRICES
 Recardo was concerned on relative( ratio of exchange between
commodities) rather than absolute value.
 Utility( subjective want satisfying power) or use value is not the measure
of exchange value, although it essential to it.
 Commodities derive their exchange value from two sources.
 Scarcity
 The value of non reproducible commodities( such as rare works of art, classic
books, coins etc where the supply is fixed) is determined by scarcity alone. Their
Value is independent of the quantity of labor originally necessary to produce
them.
 The quantity of labor required to obtain them
 Most commodities are reproducible, and the value of reproducible commodities is
determined by the labor time necessary to produce it.
 Unlike Smith who stated ‘labor theory of value’ for primitive society and needed
‘labor commanded’ theory for advanced society, Recardo applied his labor theory
of value to advanced economy as well.
129

David Ricardo
 The labor time includes not only the work done in making the
commodity itself but the work embodied in the raw materials and
capital goods used up in the process of production.
 This approach, according to Ricardo, explains the causes of changes
of exchange value overtime.
 Ricardo attempted to account for differences in:
 capital labor ratio,
 the combination of skilled and unskilled labor( labor quality
differences)
 Wages, profit rates and rent among producers
 Two capitalists may employ the same quantity of labor in the production
of their goods and yet the goods they produce differ in value because of
the different quantities of fixed capital used by each. A commodity will
sell at more than its labor time value if more than average capital is
invested in its production.
 Ricardo recognized that not all labor is of equal quality. We can simply
think of the an hour of labor of a skilled labor as being double or triple
of the labor time of less skilled labor
 130

David Ricardo
 Exchange value does not depend on wages, profits , what matters
for exchange value is labor time required to produce the good.
 Rents does not figure in to the exchange value of a commodity.
Prices determine rent.
 Wages and profits vary inversely
 Labor does not have to receive the whole product simply because
labor is the source and measure of value.
 Ricardo makes a distinction between market prices and value(
natural price).
 Market prices deviate from the natural price due to accidental or
temporary fluctuations of demand and supply.
 Higher market prices lead to higher profits and attract capital , if
market prices fall below the natural price capital flows out of the
industry. These actions tend to equalize the rate of profit and tend to
keep market prices proportional to values.
 Short run prices depend on demand and supply while long run values
depend on real cost of production.
131

David Ricardo
 Ricardo on Distribution of income
 For Ricardo political Economy is a subject of enquiry in to
the laws which determine the division of the produce of
industry among the classes who concur in its formation,
rather than the enquiry in to the cause of wealth.
 His concern was for understanding the forces that determine
the shares of the national income accruing as wages , profits
and rents.
 Wages
 Labor, like all other goods that are bought and sold, has
natural price and market price.
 The natural price of labor is that that enables workers to subsist
and perpetuate themselves. It depends on the price of the
necessities of life
 Market price depend on supply and demand.
132

David Ricardo
 In the long run both the natural and market prices of labor rise
because of increased difficulty in producing food.
 However in the long run the worker gets a minimum wage of
subsistence( the Iron law of wages)
 Profits
 the rate of profit in different industries with in a country
tend to equalize.
 Higher profits come at the expense of wages and higher
wages come out of profits not passed on prices.
 The reason lies
 In the equation of exchange and
 in the international balance of payments.
133

David Ricardo
 The long run trend for the profit rate and the share of profit from
the national income would fall because of the increasing difficulty
of growing food for expanding population
 As population increases the increased demand for food raises it
prices and poorer land goes in to cultivation and better land will be
more intensively cultivated.This will raise rents, and nominal wages
to maintain subsistence wage.
 Falling rates of profit would curb accumulation and investment of
capital and would ultimately produce a stationary state.
 The stationary state would be reached when new investment
ceases, population no more expands,as the limit of food production
has been reached, and every available surplus goes as rent.
 Ricardo saw conflict of interest between workers and capitalists and
even deeper conflict between landlords and the rest of society.
134

David Ricardo
 Policy implications of Ricardo’s theory of distribution
 Wages should be deregulated( opposed the poor laws)
 Tax rent would affect only rent ( agreed with Physiocrats)
 Rebuff and removal of the corn laws would benefit society( opposed
to Malthus)
 Ricardo’s theory of comparative costs
 He made a strong argument for free trade based on the efficiency gains it
confers.
 Even if one country is more efficient than another in producing all
commodities trade between the two could be of mutual benefit ( Theory of
comparative advantage)
 Each Nation should produce the product for which it has a relative
advantage; that is, the product for which it has the lowest domestic
opportunity cost.
 In formulating this theory, Ricardo assumed immobility of factors(that
capital and labor did not flow between countries)
135

David Ricardo
 He implicitly assumed that cost will remain constant as
output increased.Otherwise specialization would not
proceed to its fullest extent
 Ricardo on unemployment
 He maintained that full production and employment
normally would prevail.
 He raised the possibility of technological unemployment
in the short run
136

David Ricardo
 Evaluation of Ricardo
 Lasting Contributions to economic analysis
 The use of abstract thinking
 The theory of comparative advantage
 Employment of marginal analysis
 The presentation on the law of diminishing returns in agriculture
 Extending economic analysis to include distribution of income
 Weaknesses
 Overemphasis on the law of diminishing returns in agriculture and
disregarded the role of technology and fast accumulation of capital
ion pushing total product up[wards
 Overemphasis of the idea that the land lords as a whole have no
interest in increased productivity of the land.
 The wrong assumption that land has only one use and has no
opportunity cost, therefore is not part of cost of production.
137

Other important classical thinkers
 Jeremy Bentham
 Bentham boasted that he was the spiritual father of James mill,
James was the spiritual father of Ricardo and there he was the
spiritual grandfather of Ricardo
 The central theme of Bentham’s thought is Utilitarianism( the principle
of the greatest happiness to the greatest number of people)( Note that
hedonism centers on the individual)
 Money is the instrument that measures the quantity of pleasure or pain
 ( cardinal utility)
 Bentham argued that wealth is a measure of happiness but it has
diminishing marginal utility as it increases.This idea supported the
distribution of income.However the tendency towards equality by
redistribution creates insecurity and loss of incentive. When ever
equality and security are in opposition equality should give way.
 Individuals themselves , not government, are generally the best judge
of their interest and well being.
138

Bentham
 Criticism
 Economic
 Pleasure and pain are subjective and is extremely
difficult to make interpersonal comparison of utility and
using money paid in the market as a measure is not
satisfactory as what people are willing to pay are greater
than what they actually pay.
 Philosophical and ethical criticisms
 Good life is more than the narrow definition of happiness
 It is better to be a human being dissatisfied than a pig satisfied.
 Happiness is not the object of life.Life has no object. Life is an
end in itself.
139

 Jean Babtist Say
 On value , costs of Monopoly, and entrepreneurship
 Opposed the labor theory of value and replaced it with supply and
demand, which in turn are regulated by cost of production and utility
(though more advanced thinking than Ricardo he didn’t how ever show the price and
quantity schedules as A. Marshall)
 Monopoly Costs are efficiency losses,( deadweight losses) plus use of
scarce resources to protect monopoly interests
 He emphasized Entrepreneurship as a fourth factor of production on
top of the traditional factors land labor and capital
 Law of markets
 general Overproduction is impossible . Supply creates its own
demand
140

 Nassau William Senior
 He wished to separate the science of political economy from all :
 value judgments,
 policy pronouncements and
 efforts to promote welfare
 ( In today’s thinking it is Known as the separation of positive and normative
economics)
 Senior put forward four “empirically verifiable” principles of economics from
which integrated theory could be deduced
 The principle of income or utility maximization
 Principles of population
 Principle of capital accumulation
 Principle of diminishing returns
 The exchange value of goods depends on supply and demand underlying the
concept demand is the concept of diminishing utility of goods(a concept that was
later developed by Marginalists ).Supply depends on the subjective cost of
production,i.e., the sum of sacrifices required to produce goods. That were the
labor of workers and the abstinence of the capitalists ( abstinence is anew
term in economics lexicon contributed by Senior)
141

 Senior disagreed with the distinction of productive and
unproductive labor of Smith who thought producers of
service were unproductive workers.
 To senior the proper distinction is between productive
and unproductive consumption. In the class of
Unproductive consumption were the use of jewelry,
tobacco, beer etc which diminish the power to produce.
 Falling out from his own prescription on what an
economist should do ( should not give any advice apart
from telling the truth alone) he had policy positions on
the :
 poor laws
 trade unions
 Factory acts 142

 John Stuart Mill(The last great Economist of the Classical school)
 Production( the productive factors, labor , capital and land)
 He defined wealth as all useful things that possess exchange value.Only
material are included
 Productive labor is the exertion that produces( directly and indirectly) utilities
embodied in the material objects.
 Unproductive labor is that which does not terminate in the production of
material wealth.
 Capital is the accumulated stock of the produce of labor.
 Increase in capita depends on surplus and the disposition to save.
 Every increase of capital is capable of giving additional employment to labor.
 If the capitalist spend less on luxury consumption and more on investment,
the wage fund and the demand for labor would rise.
 If population rises the increased demand for necessities by wage earners
offsets the decreased demand for luxuries by capitalists
 If population rises in less proportion to capital accumulation wages would
rise and luxury consumption of the workers would supplement that of
employers
143

 Thus the limit of wealth is never the deficiency of consumers but of
producers and productive powers.
 What are the limits to production?
 Labor is not one of them because population increases geometrically,
though population is limited by fear of want rather than by want itself.
 Since the increase of capital depends on the surplus produced and the
disposition to save, the greater the profit that can be made from
capital the stronger the motive for accumulation. Hence the limit
does not from capital.
 Land and its limited productiveness is the real barrier to increases in
production. There is increasing returns to scale in manufacturing while
there is decreasing returns to scale in agriculture( applied the short
run law of diminishing returns only on agriculture) This distinction
arise from the assumption that capital can be increased indefinitely
while land cannot.
 The distinction between the short run concept of diminishing returns
and the long run concept of returns to scale was important insight.
144

Other important classical thinkers,
John Stuart Mill
 On Distribution
 The laws and conditions of production of wealth partake of the
character of natural laws, but that does not hold for distribution since
they are a matter of solely human intuitions
 On profit: profit is composed of three parts:- interest( the reward for
abstinence), insurance( rewards to risk) and wages of superintendence
 Allowing for differences in risk and other reasons behind the
components of profit, the profit in all spheres of the employment of
capital tend to be equal. In the long run profit will tend to diminish.
 On Wage Fund
 Wages depend mainly on labor supply and demand
 Demand for labor depends on the wage fund( capital kept aside for the
payment of wages), presupposes unitary elasticity of demand for labor
 Supply of labor depends on the number of people seeking work.
 Minimum wage set by government above the equilibrium wage doesn’
have the effect of increasing the total wage payment
145

John Stuart Mill
 Mill recognized, like Smith did, Expenditures on education partly
represent present investment justified by later wage returns( human
capital theory)
 On Exchange
 Price expresses the value of a thing in relation to money.
 The value of a commodity is measured by its general power to
purchase other commodities
 The value of a commodity cannot rise higher than its estimated
use value to the buyer
 Effectual demand (desire plus purchasing ability) is one
determinant of value
 But differing quantities are demanded at different values
 Since demand depended on value and value depended on
demand it led Mill to introduce the demand schedule and
this was a great leap in the theory of value.
146

John Stuart Mill
 Mill understood supply schedules and elasticity of supply as well.
 He classified goods in to three types
 Goods absolutely limited in quantity (goods of inelastic supply
where demand is of greater importance to determine value)
 Goods the supply of which is perfectly elastic( the majority of
goods fit in this category; value is determined by cost of production, production
can expanded without limit at constant cost)
 Goods where a limited quantity can be produced at a given cost( goods that fall
in between the above two categories, those with a relative elastic supply; if more
is wanted it has to be produced at higher costs; the value of such goods depends
on the most costly portion of the supply required)
 In his contribution on international trade , Mill introduced the concept of
elasticity of demand to explain how the gains from trade would be
divided among countries; Ricardo’s trade theory was incomplete in this
respect
147

The Socialist thought
 Historical background
 The industrial revolution and advent of large factories brought to an end
to the agricultural village handcraft economy
 Around the factories misery was a way of life
 Industrial accidents brought little or no compensation
 Political rights did not exist and unions were illegal
 Poverty of the great masses was dominant
 It was questionable whether the mechanical invention reduced the day’s
toil of human beings.
 Types of Socialism
 Utopian Socialism
 State socialism
 Christian socialism
148

The Socialist thought
 Anarchism
 Marxian Socialism( scientific socialism)
 Communism
 Revisionism
 Syndicalism
 Guild socialism
 Commonalities of Socialism
 Repudiation of class harmony
 Opposition to laissez faire( anarchists were exceptional)
 Rejection of Say’s Law( capitalism is doomed to crisis or stagnation)
 Belief in the perfectibility of people and their ability to be free of
selfish interest
 Advocacy of collective action
149

Whom did socialism benefit?
 The moderate groups ( utopian,
Christian and Gild socialists) claimed to
represent every body with emphasis on
workers.
 The extreme groups (Anarchists,
Syndicalists, Marxists ) proclaimed class
struggle against the rich, to promote
the interest of the working class.
150

The validity of socialism in its time
 The socialists concentrated on the problems
that the status quo failed to address: poverty
and recurring business crises .
 The socialists promoted factory laws, unions,
sanitary reforms, cooperative associations,
workers compensation laws, pensions etc
which were opposed by the classical thinkers.
 Addressing these issues were valid concerns
151

Lasting contributions of socialism
 Many of the tenets of socialism have not stood the test of time. The reorganization
of society along socialist lines has not brought about the hoped for:
 freedom,
 increased collective activity for the common good
 Better standards of morality and justice
 Greater security for the individual etc
 More over the predictions that the working class will be more impoverished
under capitalism has not occurred
 However socialist have left behind lasting economic ideas of:
 the socialist economic thought of state planning and the ownership of the means
of production
 policy recommendations now institutionalized in capitalist countries, such as
social security, workers compensation, unemployment compensation, minimum
wage, overtime pay rules, etc
 the analysis of the growth of monopoly power, problems of income distribution,
and the reality of the business cycle
152

Utopian Socialists : Henri Comte de Saint Simon
 He developed his socialist ideas before the working class movement took
shape in France and hence didn’t appeal to the workers to rise against
their employers
 Made a religion of work
 Suggested an industrial parliament consisting of three chambers,
invention( composed of artistes and engineers), reviewing( composed of
scientists), execution 9 composed of leaders of industry)
 This was one of the earliest proposals for central planning
 The prosperity of France can only exist through the effects of the
progress of the sciences, fine arts, and professions. The Princes, the great
household officials , the Bishops, marshals, the idle landowners contribute
nothing directly to the progress of the sciences, fine arts and the
professions, rather they hinder their progress by depriving them of what
they should have been entitled.
 He has enthusiasm for large scale industry
153

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