Political Economist

Research Note on Classical Political Economy

1. Adam Smith’s Theoretical Contributions to Classical Political Economy

The history of economics can be traced back to Plato and Aristotle, who tried to theorize the economic foundations for viable and socially desirable political communities. However, no one can deny that modern economics started with Adam Smith, because it was he who perceived modern capitalist economy as a dynamic system which was divided by social classes in conflict, and which had intrinsic tendencies toward continuous expansion. In this short essay, I would like to address the main theoretical contributions of Adam Smith to the development of classical political economy.

First of all, Adam Smith introduced systematic approaches to modern economic phenomena. He treated the introduction of the relationship between capital and labor as a totally new one in human economic history, and believed the division of labor in the process of production, with which he began his An Inquiry into the Nature and Causes of the Wealth of Nations, opened new era in the realm of modern economy. In order to grasp underlying principles in modern capitalist market economy, he examined the history of the introduction of money into the market.

Regarding this phenomenon, Smith raised the following questions: How can different goods and products which have different shapes and utilities be exchanged with each other on the market? How can we measure the value of various products in terms of money? At what point, and how can the price of goods be determined? While trying to answer these questions, Smith differentiated use value (‘value in use’) from exchange value (‘value in exchange’), ‘natural prices’ from ‘market prices’. With the help of Smith’s logical and genealogical inquiries, his theoretical successors such as David Ricardo and Karl Marx developed their own theoretical frameworks. From this perspective, Adam Smith can be justifiably regarded as the founder of classical political economy (Dobb, 1972, pp.53-54).

Smith is also the inventor of the ‘theory of labor value’ which was developed into the ‘theory of surplus value’ by other classical political economists. The main concept of the theory is that only labor can produce the value of a commodity. Without human labor, Mother Nature can only be either an alienated object or wild external threats to human existence. Only with the help of laborers’ productive activity can we buy and sell specific commodities and services on the market.

It was Smith who emphasized the significance of human labor in the production processes. While doing so, Smith also drew a sharp line between ‘wage’ and ‘profit’, between ‘profit’ and ‘rent’. With these distinctions, he revealed the secret sources of the modern concept of profit, which had been previously identified with other types of incomes (Meek, 1967, esp. pp.19-22). According to Smith, the source of an employer’s profit is originated from the employees’ productive labor. The profit is not at all a reward for the direction and/or inspection labor of the capitalist (Smith, 1999: Book Ⅰ, Ch. Ⅵ, p.151). In this very point, we can say that he was the inventor of the labor theory of value, and succeeded in providing us with systematic approaches to modern economic phenomena.

Finally, Adam Smith viewed the modern capitalist market as a continuously expanding economic system. Modern capitalist economy, according to his explanation, has tendencies toward unlimited expansion. Not surprisingly, the basic motive behind capital accumulation lies in capital’s insatiable instinct to amass profit. With the help of technological innovations – it was mainly the introduction of new machinery in Smith’s age –, and with the help of increased labor productivity based on the division of labor, capitalists can accumulate capitals continuously (Smith, 1999: Book Ⅰ, Ch.Ⅰ; Book Ⅱ, Ch. Ⅲ).

The only constraint on capital accumulation is associated with ‘equalization of the rate of profits’ in various production sectors which was forced by ‘market competition’ (Smith, 1999: Book Ⅰ, Ch.Ⅴ-Ⅶ). To put it in modern terms, Smith regarded competition in the market as the driving force of ‘effective resource allocation mechanism’ or ‘equilibrium condition for prices’, because he thought individual economic agents (i.e., laborers, capitalists and even landlords) could withdraw from or invest in particular production sectors their relative capital stock or land due to the existence of market competition. Upon this notion modern neoclassical economists laid their own economic doctrines or sacrosanct presuppositions such as ‘perfect market competition’, ‘transparency of market’ and ‘individual economic agents as utility maximizers’ and so on (For comparisons of different basic premises of neoclassical and post-Keynesian economics, see Shaikh, 2004). In this sense, Adam Smith can be considered one of founding fathers of modern mainstream orthodox economics.

In conclusion, Adam Smith’s classical political economy can be described as the center of theoretical divergence. On the one hand, his systematic and holistic approaches to modern capitalism, especially his primitive labor theory of value, together with his basic concepts of prices, values, and profits, etc., were succeeded by David Ricardo and Karl Marx in the name of ‘radical’ political economy (Ricardo) and ‘critique’ of political economy (Marx). On the other hand, Smith’s distinctive premises such as the primary role of market competition, and the conceptualization of markets as autonomous orders (‘invisible hand’) implicit in his theoretical framework would be exploited by neoclassical economists about 150 years later. All in all, no one can ignore Adam Smith’s theoretical contributions to the development of economic thought. And in this respect we can say justifiably that Smith is still alive.

References

Dobb, Maurrice. “Classical Political Economy.” in Political Economy and Capitalism,

Connecticut: Greenwood Press, 1972, pp.34-54.

Meek, Ronald. “Adam Smith and the Classical Theory of Profits.” in Economics and

Ideology and Other Essays, London: Chapman and Hall, 1967, pp.18-33.

Shaikh, Anwar. “The Power of Profit,” Social Research, Summer 2004, Vol. 71

pp.371-381.

Smith, Adam. The Wealth of Nations Books Ⅰ-Ⅲ. Andrew S. Skinner, ed. London:

Penguin Books, 1999.

Paul Krugman, Peddling Prosperity – Economic Sense and Nonsense in the Age of Diminished Expectations, New York: WW. Norton & Company, 1994

http://www.amazon.com/exec/obidos/ASIN/0393312925/qid=1123532989/sr=2-1/ref=pd_bbs_b_2_1/002-4015594-3319237

Paul Krugman, an economics professor at Princeton University, is one of the most well-known scholars in the U.S. Unlike common sense, however, his fame is not from his journalist activities as an opinion editor of the New York Times, but from his ability to offer the most succinct and clearest explanations of current U.S economic affairs. Krugman succeeds in revealing his brilliant talent as an economist in another book, Peddling Prosperity – Economic sense and nonsense in the age of Diminished Expecations (New York: WW. Norton & Company, 1994).

This book deals with the interaction between economic ideas and politics in the U.S from 1973 to early 1990s. More specifically, the author focuses on “the interplay between economists and politicians, about how politicians try to find economists with ideas that they can package, and how economists both develop ideas and try to translate ideas into political influence.”(p.5)

In order to show this interplay, Krugman distinguishes “professional economists” doing research at universities from “economic entrepreneurs” who are ready to translate profound economic ideas into the simplistic version of policy prescriptions for politicians.

According to Krugman, the chosen period for research can be characterized by “the age of diminished economic expectations” in which economic growth and overall standard of livings of the U.S has decreased due to the continuous slowdown of labor productivity, rapid inflation and huge “twin (both trade and budget) deficits.”

In this sense, Paul Krugman’s previous book, The Age of Diminished Expectation – U.S Economic Policy in the 1990s (Cambridge, Massachusetts: The MIT Press, 1990, 1994, 1997, 1999) is a good source to understand what problems the U.S economy has faced and how the government tries to treat those issues. However, while his previous book deals mainly with economic problems and the government’s policy responses, this book focuses more on the underlying economic ideas from which certain economic policy packages have been developed.

From that year, according to Krugman, U.S academia has been influenced by conservative economic ideas such as “monetarism” and “rational expectation school” represented by Milton Friedman and Robert Lucas respectively. Krugman argues that under these conservative influences, a group of policy entrepreneurs, whom he calls “supply-siders” came to the forefront between the realm of academia and political parties as economic advisers to the President and other Republican politicians under both Reagan and Bush administrations.

But, according to Krugman, the ideas of supply-siders not only caused detrimental effects to the U.S trade deficits but also aggravated income inequality among social classes. The underlying policy prescription to the U.S slowdown of productivity and inflation was radical tax cuts and reduction of the government spending. They argue that the U.S Americans have been suffering from heavy burden of taxes, and this in turn reduced the potential source of investment. With its surplus budget, supply-siders argued, the unmonitored government wasted huge amounts of money for bureaucrats and the undeserving poor.

These policy packages were actually adopted by both Reagan and Bush administration. However, the result was a huge and widening income gap between the rich and the poor, as well as budget and trade deficits partly due to excessive military spending.

Due to these disappointing results, there emerged new liberal ideas emphasizing “imperfect market competition” and “the asymmetry of information” in the market. These liberal economists argued that the market was not exempt from turbulent business cycles even when we assumed the “rationality of economic agents.” Furthermore, every economic development has been influenced by its own institutional arrangement and past history. This “path-dependent” property of the market opens the door for the government’s active interventionist policy.

In this way, Krugman points out that the ideological pendulum swung from the prevalent attacks on Keynesian interventionist state to liberal Keynesianism. The theoretical hegemony, escaped from the hands of right-wing conservatives, once again became dominated by liberal economists.

However, there has been also another type of policy entrepreneur, one ready to offer a simplistic version of neo-Keynesianism for Democratic Party politicians. But at this time their focus is not on domestic policy but on international trade area.

Krugman names them “strategic traders” because their main argument is that the U.S government should subsidize certain corporations in value-added industry in order for them to compete with other firms abroad in the global market. In other words, they claim that it is necessary for the government to support strategic corporations in order to reduce trade deficits and raise domestic productivity.

Apart from some simple questions such as who can decide what the strategic firms are, and whether this kind of thinking is simply based on old-fashioned strategic decision making model for business corporations which boomed in the 1960-70s, in other words, whether this idea is based on simple analogy between the business firms in domestic market and national economy as a whole in global context, Krugman argues that strategic traders have the following serious problems.

Firstly, strategic traders overestimate the magnitude and the effects of international trade on the U.S economy. Even though the U.S has involved in global economy, the real percentage rate of the amount of international trade only amounts to 10% of GDP. Furthermore, even though the percentage rate of traditional manufacturing sectors measured in the GDP only accounts for 20%, strategic traders are misleading the reality and may distort the rational allocation of resources by paying exclusive attention to the significance of manufacturing sectors. Their common slogan is that the government should subsidize strategic manufacturing sector to let them win global competition.

Secondly, strategic traders unjustifiably link two unrelated points: the productivity growth and global competitiveness. Productivity growth is necessary for the overall increase in GDP and the improvement of the standard of living. But it has nothing to do with competition in global market. They argue government’s strategic support for selected corporations will bring about much more chance to win more market share in global market, and this in turn will be accompanied by domestic productivity growth. But according to Krugman it is not the case.

Finally, they also argue that strategic subsidies are necessary to develop high-value industry and secure job stability. But under what criteria can we decide which industry is better than others? Moreover, the increasing job instability stems not from aggravated global competitions but from the development of technology itself. Thus, “deindustrialization” or “industrial hollow” has nothing to do with globalization, and does not support strategic traders’ ideas.

In this way, Krugman criticizes various sheer economic non-senses advocated by policy entrepreneurs during two conservative administrations and the Clinton government. In so doing, he draws clear pictures of the history of the development of the U.S economic thinking.

On the whole, he seems to succeed in offering us how hegemonic shifts from the U.K to the U.S occur in the realm of economics. The most interesting point was that this process was not purely theoretical occurring in the ivory tower, but was also accompanied by the rise of the U.S economic hegemony after World War Ⅱ.

Considering the devastating repercussions of the Great Depression in the 1930s and the war, it was not surprising to see that both the theoretical pavement and barrier was Keynesian economics at that time. Krugman leads us to see how after-war-economists in the U.S have tried to overcome the Keynesian notion of active government policy in the name of monetarism and the rational expectation revolution since the 1970s.

He also shows us how the ideological pendulum swings from the myth of self-governing market to path-dependence approach to economic development. However, he introduces how so-called economic policy entrepreneurs have taken the place to access political power and mislead the reality in the name of self-righteous policy recommendations.

Written in plain English, Krugman’s book has strong merits with respect to its style and structure. Even ordinary readers will not find any serious difficulties in understanding the author’s main arguments. This book will be a useful guide for those who are interested in the history of U.S economic policy and real economic development process. Furthermore, readers interested in what kinds of economic policies the U.S government would likely adopt in the near future to deal with various global economic affairs will find this book a good guide.

* For those who want more information on current issues of the U.S economy, Joseph Stiglitz’s book, The Roaring Nineties – A new history of the World’s most prosperous decade will be a good supplementary material. You can compare these two famous economists’ arguments on current U.S economic affairs.

* If you are interested in the U.S financial and banking system, the book Secrets of the Temple – How the Federal Reserve runs the country will provide you with clear image of the operation and the function of the FED in the global context.

The following is an essay that I wrote for English Writing class. Most debates related with gay and lesbian marriage in the United States are based on the concept of morality derived from Christian religious principles. That is why the debates sometimes become over-politicized. In this essay, I approached the issue not from religious perspective, but from civil rights.

Those who oppose same sex marriage claim that gay and lesbian marriage will bring about the collapse of the traditional concept of family and marriage, thereby leading to moral decadence. However, their concept of morality is based on prejudice against social minorities and may lead to the violation of basic human rights. In this essay, I will address this issue focusing especially on the concept of the traditional family and marriage, morality and future implications of same sex marriage.

Firstly, most opponents of same sex marriage are inclined to draw their argument based on the traditional concept of marriage and family. They argue same sex marriage will bring about the deconstruction of the traditional family and the concept of marriage. But it is not so easy to understand what their images of traditional family and marriage are. Sometimes, they seem to be based on the idealized image of the monogamous family which is composed of one male husband/father and one female wife/mother and their children. Admittedly, this type of marriage and family can be justifiably attributed to the traditional concept of family because it has a long history in the modern world.

However, it is also true that this traditional family is becoming obsolete due to various socio-economic changes; the number of single parents with children, and those who want to live alone among adult persons are increasing in the most advanced capitalist countries partly because of high divorce rates and various economic reasons. For example, those who are worried about the deconstruction of the traditional family should consider the fact that only 15% of the whole U.S family can be categorized as traditional family. If it is true, the main threat of so-called traditional family is not same sex marriage itself but various socio-economic changes of the society. Then why should same sex marriage be blamed for the collapse of traditional family value?

Secondly, another critique of same sex marriage is based on the narrow concept of morality. Those who do not want to accept same sex marriage claim that the homosexuality is the violation of morality of the society. But I cannot understand what they are talking about morality. The homosexuality is just about the difference of sexual preferences of individuals. It has nothing to do with morality.

If they really want to argue that the homosexuality is the violation of the underlying principle of morality, then they should offer their own definition of morality. Whatever they say, however, their own concepts of morality will turn out to be different from those of the advocates of same sex marriage. From this juncture, the collision between different moralities can become a legal issue.

In other words, the homosexuality should not be judged by the narrowest concept of self-righteous morality of the opponents. The homosexuality is about different sexual preferences, and same sex marriage is about the legal protection for the minority. There is no such a thing as privileged moral authority in discussing the issue of the homosexuality and same sex marriage.

Finally, those who oppose same sex marriage argue that the legal protection for gay and lesbian couples would open the door to various kinds of heterosexual couples, thereby in extreme cases leading to the polygamy. Thus, the Massachusetts Supreme Court’s ruling on the rights of same sex marriage should be banned by the Federal Supreme Court of Justice.

However, there is no logical causal relationship between same sex marriage and the polygamy in the first place. The argument that same sex marriage is a sort of slippery slope leading to polygamy is an extreme argument without any substantial evidence.

Furthermore, even though we admit this unsubstantial assumption that allowing legal protections for gay and lesbian couples may induce polygamous family, there is no legal legitimacy for the Court to ban same sex marriage in advance if that marriage does not do any harm to public health, safety and welfare. It is common sense that any legal and political authorities can only be justified or legitimatized when they protect civil rights based on an appropriate legal framework.

Finally, the polygamy is another traditional type of marriage based on individuals’ own moral, sexual judgment like the monogamy. It is a quite common phenomenon even in certain states of the U.S. If it causes sexual abuses, discrimination against gender, then it should be punished by appropriate laws. But there is no rational reason to ban the polygamy in the name of the conservation of traditional family values. Nobody can justifiably argue that the monogamy is superior both morally and sociologically to the polygamy.

Most ordinary Americans seem to be over-politicized over the same sex marriage issue. But once they recognize the fact that the homosexuality is not a moral issue but a different sexual preference, they will realize that same sex marriage is a simple matter of legal statement. And if so many gay and lesbian couples are really suffering from lack of proper legal protection, then this issue should be viewed as a serious violation of basic human rights. In sum, those who have homosexual preferences deserve to have their own family and should be protected by the same laws like heterosexual family.

Comment 1 (from one of my friends) I like your essay organization. It was clearly divided. But I did not understand your concept of morality and are you pro-polygamy? I am not sure but maybe you should talk about ‘civil right’ instead of ‘human right.’ If you are pro-same sex marriage, you should not bring up the polygamy issue that is very polarizing.

Comment 2 (from the instructor): The problem with the argumentation is that we know what the idea of morality is based on. It is based on the Bible which rejects polygamy and homosexual relations – the question is whether this is what should define morality rather than what morality is based on.