Classical Liberal Political Economy

Date @04/25/2024

Context: Adam Smith and David Ricardo

ADAM SMITH (1723-1790) DAVID RICARDO (1772-1823)

CONTEXT PRE INDUSTRIAL BRITAIN REVOLUTIONARY FERVOR

-Intertwined Systems: Mercantilism -Anti-absolutist Sentiments: people no
(Economic) + Feudalism (Political) longer want to be trapped
-Mercantilism: Tangible Wealth; Gold
(precious metals & stones) is what

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 determines wealth
-Feudalism: Taking care of lands of feudal
lordsà land is owned by lords à created a
model of political inequality
FREE MARKET ECONOMY
-Law of Supply & Demand (Invisible Hand)
-Balance into equilibrium of supply of
goods & services

FIRST INDUSTRIAL REVOLT

-Steam & mass production
-Worsened the political inequality that
emerged due to feudalism (i.e. unfair labor,
slavery, pollution, mismanagement of
resources)
ECONOMIC MODELING
-Theoretical Applications of economic
models to see systems that can be
applicable in other nations/ countries

-3 social classes: landlords, laborers, and

capitalists
INDUSTRIAL CONSEQUENCES (+) -tarrif
Innovation to unfair Labor

PRO-PARLIAMENT & PROTESTANT

BUSINESSMAN + ECONOMIST (LSE)

CLASSICAL LIBERAL CAPITALISM
· Capital, Labor, and Free Market
LIFE & TIMES POLITICIAN (BRITISH MP)
Believed that mercantilism is NOT
SUFFICIENT, capital labor should be instead
on to reached economic growth &
development in a free market political
economy

CLASSICAL LIBERAL POLITICAL ECONOMY

Started as Classical Liberalism

HUMAN NATURE BY ADAM SMITH

Theory of Moral Sentiment

Humans are rationally self-interested

Rationally Self-Interested Beings

Self-interestedness =/= selfishness

Universal Principal od Bettering Conditions (UPBC)

Full Circle Moment: Despite not thinking about reciprocity, when more people pursue self-interest, it will
lead to the ultimate outcome of helping other people because you end up bettering the conditions of other
people as you pursue your own interests.

Analogy of the Butcher: Regardless of your reasoning (i.e. for profit or for people), you ultimately end up
helping other people and bettering conditions. (the same analogy applies to various forms of work)

Self-interest à societal improvement in a free/ laissez fair market

Requires the invisible hand as a moral compass

ULTIMATE REALIZATION: You cannot work alone, everyone has a role to play in society.

These are the basis for achieving the free market

Economic growth stems from the realization that we all collectively have a role in society.

ECONOMIC GROWTH AND DEVELOPEMY BY ADAMM SMITH

Division of Labor (Dexterity, Efficiency, and Innovation or DEI)

Dexterity—focusing on what you do best

Efficiency—efficiency in working together with others

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 Innovation—making more solutions with others in solving societal problems

Value of labor = exchangeable value of most goods/services

Exchangeable Value: Reflects one’s wage/ salary

Value of Capital = “Stored Labor” as an economic investment

It’s like potential energy because you used wages as a form of capital. The better the wage, the better the
labor or output.

Capital is not only defined by money.

Economic Concerns: Monopolies, neglected labor, small populations

Monopolies are likely to happen because it stagnates/ or makes people too comfortable. People are not
motivated to improve the goods they receive.

Neglected Labor as a capitalist means lost investment, lost profit.

Laborers are capital—valuable and should be taken care of.

Quality of life should be improved, small population should be avoided because it means that overall
market will be affected.

Increased population = increased laborers

Capitalist Accumulation and Free Market Expansion

Capital is a transferrable and diversifiable

Transferrable—Capital can be transferred into laborers, and so investments are not only wages
but also laborers as capital increases.

Diversifiable—capital can change in form.

Agriculture + Manufacturing + Transportation + Trade (AMT^2)

Agriculture: natural raw materials

Manufacturing: initial capital (i.e. fertilizer à crops) is turned into objects (i.e. woodà furniture)

Higher economic growth = higher capital = higher investments (i.e. transportation & trade)

MINIMAL STATE FUNCTIONS BY ADAM SMITH

Distrust should be avoided as this leads to isolation à self-centeredness (=/= self-interest)à selfishness

Why minimal? Minimal in a sense that the state should not take over the law of supply and demand.
Overregulation should be avoided because it might corrupt the market.

How does the state do these functions?

“Night Watchman” Minimal Functions

Public safety, public contracts,

Prevention of Crime for Justice, ad public goods

Public Goods—anything to help the conducive atmosphere so that the free market could work
education, healthcare, public infrastructure

State Taxation Principles (INTM)

Income Proportionate

Non-Arbitrary

Timely—do everything to encourage people to pay taxes

Least Costly (managemable)

DIFFERENTIAL RENT BY DAVID RICARDO

Rent (periodic payment) and Differential Rent (land quality)

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 Rent: right to a gain access and use of a facility or equipment.

Differential Rent: quality in a land you lend (i.e. quality/ fertility of land) implies higher price of rent

Law of Population: Land is a fixed res

Landlords—rent

Laborers—wages

Capitalist—profit

Theoretical Scenario of Differential Rent’s Causes and Effects

Population (increase) à Demand for goods (increase) à Need for land (increase)

Need for land increases because more people want to flee

Capitalists need top pay higher rent and higher wages

Prices of commodities ultimately increases

Increasing Capitalist Input à Less Economic Benefit

The Capitalist Dilemma

Need to appease the demands of their laborers (wages) and the demands of landlords (quality of
rent)

Capitalist needs to pay high differential rent to ensure high quality land, while ensuring they pay
wages to their laborers

Tendency: Landlords are also the capitalists (no need to pay rent), causing more inequality and
abuse towards the laborers

Who’s the true kawawa? Capitalist or Consumers?

Consumers are the real victims because the increase in rent results to increased wages, and
ultimately HIGH PRICES. Sadly, consumers buying these pricey products are also the laborers.

Ultimately, it is the landlords that abuse their power.

P = Capitalist – (R+W)

More rent (R ) + Wages (W) à Less and Less profit (P)

The more wages and rent you pay, the lesser and lesser the profit becomes

[LABOR AND WAGES BY DAVID RICARDO]

ADAM SMITH’S PRINCIPLE OF

DAVID RICARDO’S PRINCIPLE OF COMPARATIVE ADVANTAGE
ABSOLUTE ADVANTAGE

Export Capacitty = Produce more goods with less opportunity

cost

Opportunity Cost (Decrease in 1 good à Increase in output for

another good)
When you let go of one good, to produce another good
Letting go of something, to be super great at another
INTERNATIONAL Export Capacity = Produce More Ex: You have apples and mangoes. et go of apples to invest in
TRADE goods with less inputs/ costs producing more mangoes because your climate is more conducive
for mangoes

State specialization on producing goods

The result of OC

international free trade à INCREASE MARKET SIXE (COOPERATIVE

STATES

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 SAMPLE CRITIQUES
Adam Smith

(Marx) Proletariat exploitation

(Miranda) Passive vs. Active Societal Beneficence

We’re not pursuing equality, but only hopes that equality will emerge

(Mele and Canton + Persky) Homo Economicus on their Bounded Rationality and Societal Altruism

We practice rationality without knowing everything

We only decide based on the facts that we know — imperfect information

On altruism - there are people out there who are willing to help people for the sake of helping

When you feel good about helping then you still benefited from helping

David Ricardo

(Miranda) Elite Entanglement

(Walras) Institutional benefits of Effective Government Regulatory Function

Ex: minimum wage set by the govt

(Marx) Wealth Redistribution as a Social Myth

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