Week 1

From Scholastics, Physiocrats & Mercantilists to the Early Classical Economists:

Competing Views of Competition and the Rule of Markets

Readings:

Primary Sources:

Adam Smith, Theory of Moral Sentiments (1759) Part I, Section 1, Ch. 1, Ch. 3, Ch. 5;
Part I, Section 3, Ch. 2; Part IV, Ch. 1.Adam Smith, The Wealth of Nations (1776), Book
I: Chapters 1-10; Book II: Ch. 2, paragraphs 94-106.

Related Themes in Recent Economic Debates: Society, Polity & the Rule of Markets
Christ, Carl F. The Competitive Market and Optimal Allocative Efficiency ER

Hayek, "Competition as a Discovery Procedure." ERKarl Polanyi, The Great

Transformation, "Societies and Economic Systems," Ch. 4 ERMaurice
Dobb,
"Capitalism," Ch. 1, Studies in the Development of Capitalism
(1947) ER
Secondary Source & Historical Perspective

Charles E. Staley, History of Economic Thought: From Aristotle to Arrow, p. 3-16, 31-
40ER

Background:

Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, published in
1776, spells out a comprehensive theory of markets that becomes the basic framework for
modern microeconomics. A fundamental concept for Smith is the productivity-enhancing
nature of specialization. He provides a detailed description of production processes in which
the division of labor has reached particularly advanced stages entailing a remarkably minute
breakdown of tasks. The resulting productivity gains, we are told, work through multiple
channels.

Smith recognizes that the rise in specialization will create heightened interdependence. The
increased reliance on others, however, is no cause for concern; wants will be satisfied through
the pure self-interest of other buyers and sellers. The unrestricted workings of the market thus
provide the ultimate mechanism for coordinating a diverse set of economic desires.
Furthermore, the productivity-enhancing benefits of specialization will grow with the extent
of the market, thus making the expansion of trade a major engine of both economic growth
and improved consumption opportunities.

In this week, we also see another side of Smith revealed in his earlier
work The Theory of Moral Sentiments (1759). This manuscript was
written more than a decade before the Wealth of Nations. You may
want to compare Smith’s view of human psychology from Moral
Sentiments with his view of self-interested behavior in the realm of
markets. Is any way in which to reconcile the two perspectives? Or
has Smith’s thinking simply evolved in a totally new direction by the
time he writes the Wealth of Nations?

In order to encourage you to think more deeply about Smith’s

classical analysis and the subsequent neoclassical formulations, I
have included in this week’s readings material by Karl Polanyi
(1886-1964), Maurice Dobb (1900-1976), Hayek (1899-1992) and
Carl Christ (1923 - ). Polanyi suggests that the social relations and
behavioral motives described by Smith were neither natural &
"universal" nor historically typical. He offers an alternative view of
the division of labor and the self-regulating market. While Smith
emphasized the mechanical efficiency inherent in the division of
tasks, Polanyi looks at the social relations of production implied by
this increased specialization and "rule of the market." Polanyi’s
analysis starts from viewing man as a social being with the trait of
social orientation, not acquisitiveness, being the primary motivation
for human behavior. From Polanyi’s perspective, the division of
labor in pre-capitalist arrangements was very different from that
under capitalism. Under capitalism, increased specialization and
division of labor typically cut labor off from owning the tools of
production and, thus, from establishing any self-sufficiency separate
from the capitalist enterprise. Maurice Dobb reinforces the
importance of this new feature in the social organization of
production. His chapter on the definition of capitalism illustrates how
the meaning of the term itself has evolved along with changing
economic arrangements of production and exchange.

Carl Christ provides an updated, neoclassical version of the

conditions necessary for private markets to reconcile private and
public interests. Most of Christ’s conditions for perfect competition
can be found in Smith’s early chapters of the Wealth of Nations. You
might ask yourself what is simply a re-statement of Smith and what
is new? Likewise, Friedrich Hayek offers an interpretation of the
workings of the competitive process in unfettered markets. You
should think carefully about how Hayek’s view of competitive
markets compares with that of Smith and Christ?
The required secondary reading for this week, by Charles Staley, provides essential
background for our introduction to the history of economic thought. Staley, describes the
writings of both the Scholastics (c. 13th-14th centuries) and the Physiocrats (c. 18th century).
His overview of the Scholastics reveals that efforts to establish "economic truths" far pre-
dated Adam Smith, while his evaluation of the Physiocrats suggests that they deserved more
attention than they were typically given by the early classical thinkers. Staley also provides a
useful introduction to mercantilism, a topic which will be central to our discussion of trade
and treasure in Week 2.

Essay Assignment:

In writing your essay, make sure to demonstrate mastery of the assigned readings and be sure
to explain any technical terms that you use. Support your arguments with evidence from the
readings.

Your assignment for this week is to write an essay commenting on the following statement.

From each of the economists studied this week and from the varied schools of thought,
we seem to inherit starkly different views of competition and the rule of markets.
Economists seem unable to agree on exactly what of value emerges from competition
and on exactly how universal markets have been and need be in ordering human
interactions. In fact, we find what might be interpreted as dramatically altered views
even between the mature Adam Smith and his earlier, younger self! We are left with
little guidance as to why we should value competition and whether, as Smith implies, it
is always in the nature of man to be governed by market forces and to order human
relations according to market rules.

Essay Mechanics: All essays are due in class no later than the start of the Friday tutorials.
This is a strict deadline. Late papers and late arrivals to class disrupt the structure of the
tutorial. Please note that you must also upload your essay to TURNITIN.COM on Friday by
11pm. In order to sign up for our course in TURNITIN.COM, you will need the course
name: CSS220_FALL2010, the course password: ADAM1, and the class ID: 3388788

Essay Style: I strongly recommend that you outline your argument before you begin to write.
If you have difficulty starting, begin by using simple and standard expository style in
sketching your outline: Intro (Theme and organizational structure of points to be addressed);
Body of the Paper (Each paragraph has a point backed up by evidence from the readings);
Conclusion (Add no new arguments here; Simply reiterate the theme and major points in
compelling language). The intro and conclusion will form the first and last impression of
your paper. As such, these parts should be particularly well written. In fact, you may want to
refine these sections last. Please do not hand in an un-revised, un-edited first draft. Revise,
edit, and polish BEFORE you submit the final paper.

Think of the first essay as a trial run. We will use it as an example of what to do and not do in
your subsequent essays. Essays should be between 4-5 pages, double spaced, with one-inch
margins and 12-point font. Number the pages! Provide a title for your essay. Make sure that
your name is on the paper. You should use MLA format throughout your paper. Use in-text
citations where possible. (Please see Diana Hacker, A Pocket Style Manual, for guidelines on
this MLA style. You may purchase this very useful book at Broad Street Books. It has been
ordered for our course, and I will use it as a reference tool throughout the semester.)

Preparation of the Material: You should prepare for your essay and your tutorial by
considering the focus questions below. You need not address all of these questions in your
essay, but consideration of these questions should be a part of your groundwork for
preceptorial and tutorial discussions. For this reason, I strongly recommend that you jot down
thoughts on each question as you review this week’s material and prepare for tutorial.

Focus Questions: The following questions will help you focus your thoughts before you
begin to organize your essay and will also help you prepare for this week’s discussion.

Exactly how does the division of labor promote productivity according to Smith?

What does Smith mean by natural price? Market price? Use value? Exchange value? What
factors determine each of these?

How does the competitive market reconcile public and private interests? What specific
conditions are necessary?

Is Smith’s view of human psychology from Moral Sentiments

compatible with his view of self-interested behavior in the realm of
markets from Wealth of Nations? Is there any way in which to
reconcile the two perspectives?
Are free markets and unregulated trade always best in Smith’s view?
What does Smith mean by the extent of the market, and why does he find it important?

Does the increased interdependence inherent in specialization successfully mesh with

"egotistical" self-interested man in Smith’s view? How does this happen in Smith’s
framework?

What is new and what is simply "more of the same" when you compare Christ’s
understanding of competitive markets with that of Smith?

How does Hayek’s understanding of competitive markets compare with that of Smith?
Christ?

Do any aspects of Smith’s work show similarities with aspects of

a. Scholastic economic thought?

b. Physiocratic economic thought?

In what ways was Smith’s analysis different

c. From that of the Scholastics

d. From that of the Physiocrats

In evaluating Smith’s role in economic analysis, does Smith’s work represent evolution or
revolution in economic thought?

Week 2

Trade and Treasure

Readings:

Mercantilists

Malynes, Consuetudo vel lex mercatoria (1636) p. 45-48, 227-9; Ch 2, 262-3, 280, 283-4,
286-7 Mun, England’s Treasure by Forraign Trade (1664) Classical EconomistsHume,
" Of Money " and " Of the Balance of Trade " (1752) Smith, The Wealth of
Nations (1776), Book IV: Chapters 1-8Ricardo, Principles of Political Economy and
Taxation (1817), Chapters 7, 19, 22, 25, 28, 30Related Themes in Current Economic
Debates:

Stiglitz, Globalization & its Discontents, Preface-Ch.1 & Social Justice & Global Trade
(2006)Krugman, Does 3rd World Growth Hurt 1st World & "What do Undergrads Need to
Know" Faux, "Trade Policy and the American Worker," (2010)Culbertson, "A Realistic
International Economics" (1987) (Optional)
Secondary Sources:

Johnson, Gerard de Malynes & the Theory of Foreign Exchanges (JSTOR)Staley, Review
the pages from Tutorial 1 and add pages 17-30. (ER)

Background:

Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations spelled out a
specific scenario for the promotion of economic growth. His discussion was, in part, a
response to mercantilist strategies toward trade that had dominated policy in the seventeenth
and early eighteenth centuries. You will find these strategies represented in two of the
readings listed above. The first, published in 1636, is Consuetudo vel lex mercatoria by
Gerard de Malynes. The second is the tract England’s Treasure by Foreign Trade, written by
Thomas Mun (1571-1641) and published posthumously in 1664. Although the thinkers
labeled "mercantilists" by Adam Smith held disparate views, their writings generally agreed
on the need for a favorable balance of trade (i.e. the value of exports exceeds the value of
imports). The policy was said to increase the stock of "treasure" (gold and silver) and thus
enrich the nation.

Two strands of mercantilist thought (c. 17th-18th centuries) should be considered. According to
the "bullionist" position, the state should prohibit the export of gold and silver in order to
maximize the stock of treasure. In contrast, certain mercantilists maintained that a properly
directed outflow of treasure would ultimately add to the stock of precious metals held by the
state.

In reading this week’s material, you should decide which of these positions is taken by
Thomas Mun and why. Note that Mun was an official in the East India Company, a chartered
monopoly created in 1600. The Company held exclusive rights to all British trade to the east
of the Cape of Good Hope, including Asia, the Indonesian archipelago, and East Africa. It
was authorized to export annually up to 100,000 pounds of treasure.

Smith (1723-1790) offered a prescription for economic growth that called for the removal of
trade restrictions. Remember that Smith published his Wealth of Nations in 1776, about 100
years after Mun’s treatise. The two were not contemporaries. In fact, Smith was born more
than 150 years after Mun. While Mun lived in a world of transition toward a newly emerging
capitalist system, Smith observed a world in which the major traits of capitalist production
and exchange had become evident.

Smith’s call for free trade was consistent with arguments summarized earlier by David Hume
(1711-1776). Writing in the mid-eighteenth century, Hume argued that a serious flaw afflicted
that mercantilist thinking. He based his criticism upon the notion of a self-adjusting, specie-
flow mechanism. In the articles by Hume listed above, one finds Hume’s description of this
adjustment process along with the fundamental elements of the quantity theory of money.
This latter concept provided the foundations for the modern-day quantity theory, which
became a prime target in the writings of Keynes (1883-1946) and occupied the center of
many macroeconomic debates in the decades to follow. Keynes’ interpretation of mercantilist
thinking was more sympathetic. His contrasting interpretation of mercantilism, found in
Chapter 23 of The General Theory of Employment, Interest and Money, is included in your
readings for week VII of our tutorial.

In his Principles of Political Economy and Taxation, published in 1817, David Ricardo
(1772-1823) investigates international specialization and refines the gains-from-trade
argument. The concept of comparative advantage is central to his analysis. By numeric
example, Ricardo demonstrates that when wine made in Portugal exchanges for cloth made
in England, both countries increase total "enjoyments." This defense of free trade bolsters
Ricardo’s attack on the Corn Laws, restrictive tariffs imposed on the importation of grains.
British grain prices, at the time, far exceeded the prices of imported foreign grains. In
restricting grain imports through the Importation Act of 1815, the landed classes, who still
controlled Parliament, hoped to prop up grain prices and protect their income. The Corn
Laws were to stay in place until 1846. Their demise reflected a shift in political power away
from the landed class.

The 17th and 18th century trade debates lend themselves readily to comparisons with more
modern trade controversies. The readings by Paul Krugman, Joseph Stiglitz, and Jeff Faux
bring the debates over gains from trade up to date. In their essays, Krugman and Stiglitz
discuss what they consider the common misconceptions about trade made by people who, in
their view, are less versed in economics. Jeff Faux, commenting on what we call free trade
agreements today, argues that "This is not what Adam Smith, David Ricardo, and the
classical advocates of free trade had in mind." Another critic of free trade is John Culbertson
whose view is represented by the optional reading on your list for this week. John Culbertson
provides an iconoclastic approach, attacking the standard trade analysis of modern-day
economics and offering an alternative view of the State’s role in the promotion of national
interests. Culbertson’s unconventional stand (for an economist) resulted in his trade analysis
being condemned to obscurity. In fact, Culbertson’s work in this area was pointedly ignored
by most of the economics profession. He had to resort to publishing his own books as
standard publishers rejected his work. However, the article listed here was printed in a well-
known journal on the teaching of economics; his views, apparently, found a sympathetic ear
among some in the profession.

Essay Assignment:

Your assignment is to write an essay commenting on the following argument in light of the
material you have studied for this week. You need not address every point made in the
statement. Pick and choose so as to construct a cohesive argument. Support your argument
with evidence from the readings:

Generally speaking ... the mercantilist argument is NOT based on an intellectual

confusion but rather on a desire to promote growth through expansion of the money
supply and a wish to preserve sovereignty. Even today, a nation that permits
unregulated transactions across its borders reduces its power to manage and guide its
national economy, and to protect and advance the interests of its people. For example, if
a nation prohibits its factories from polluting, but permits unregulated imports,
competition will force businesses to shift their production to nations that permit
polluting. . . .Permitting unregulated imports thus limits the laws and regulations that a
nation can maintain without losing its industries and jobs to other countries. More
broadly, unrestricted movement of goods and money across national boundaries
…reduces the independence of a nation and the ability to carry out chosen policies in
pursuit of its goals and values. . . . By weakening the effectiveness of the nation as the
framework of human organization, and by putting nothing in its place, the free trade
espoused by … mainstream economists could do damage so great as to vastly outweigh
any benefits it could confer in technical production efficiency and broadened
consumption opportunities.

In writing your essay, make sure to demonstrate mastery of the assigned readings. The
following questions may help you focus your thoughts before you begin to organize your
essay.

1) According to the mercantilist analysis of foreign trade, what was the best path to economic
prosperity? Did the Physiocrats have the same point of view?

2) What factors might have motivated the mercantilist program?

3) According to Hume, what was the basic flaw in the mercantilist strategy?

a) What role did the specie-flow mechanism play in Hume’s criticism of mercantilism?

b) How did the quantity theory of money enter into this critique?

4) To what did Smith attribute the mercantilist policies? What did Smith’s attack on the
mercantilists consist of and how was this argument related to Smith’s notion of economic
growth and national wealth?

5) Were free markets and unregulated trade always best in Smith’s view?

6) What does Ricardo contribute to the trade analysis that was not already in Hume’s or
Smith’s discussion of trade?

7) In what significant ways does Ricardo’s approach to economic analysis contrast with
Smith’s manner of analyzing economic interactions?

8) What is the difference between absolute and comparative advantage, and what is the
importance of this distinction?

9) Is there anything new in the view of trade presented by Krugman or Stiglitz? Explain

10) Exactly what does Faux mean when he refers to agreements such as NAFTA as "so-
called" free trade agreements? Is there any merit to Faux’s analysis?

11) How might Smith respond to the ideas presented by Faux? Would he find any points on
which he and Faux might agree?

12) Do protectionist policies offer any elements of truth for modern-day macroeconomic
analysis or policy? Upon what criteria do you base your decision?

13) Are free trade principles appropriate regardless of the particular economic system or
historical period under consideration?

14) Are there any lessons to be learned in comparing the trade debates of the 18th century with
current controversies in international trade?

15) Did the progression from the Scholastics, mercantilists, and Physiocrats to the classical
school represent pure progress in the sophistication of economic analysis, or were some
elements of value for economic analysis lost with the decline of these three schools and the
ascendency of Smith and Hume?

Week 3

Sustainability and the Malthusian Question:

Classical-Era Debates on Sustainability and Progress:

Thomas Malthus, An Essay on the Principle of Population, (1778) Preface & Ch.
1,2,5,10William Godwin, Enquiry Concerning Political Justice, (1793) Ch 1, 3, 4. Marquis
de Condorcet, "Historical View of the Progress of the Human Mind" (1794) Link 2Jean-
Baptiste Say, Letters to Thomas Robert Malthus, Letter 1 & Letter 2.

Related Debates in Modern Economic Analysis:

Phyllis Deane, "The Demographic Revolution" Electronic

ReserveJoseph Persky, "Retrospectives: Classical Family Values," Electronic
ReserveGretchen Daily & Ehrlich, " Population, Sustainability... " BioScience, Nov.
1992John Tierney, "Betting on the Planet," Electronic Reserve(1990)Lebergott, "Per
Capita Consumption and the Angel of the Lord" Electronic Reserve (1993) Nafis
Sadik, "Poverty, Population, Pollution," Electronic Reserve (1992)John Simon,
"Population Growth, Economic Growth & Foreign Aid," The Cato Jour

Background:

Writing in 1778, Thomas Malthus (1766-1834) combined his theory of population growth
with his understanding of agricultural production and came up with a decidedly gloomy
conclusion. In the preface to his Essay on the Principle of Population, Malthus describes his
work as a response to the views of William Godwin (1756-1836), a philosophic anarchist,
and Marquis de Condorcet, a supporter of the early stages of the French Revolution (later
imprisoned for criticizing the tactics of the revolutionaries). In fact, Malthus was also reacting
against the opinions of his father who supported the optimistic view of human nature and
human progress espoused by Godwin and Condorcet. Henry Spiegel, in his book The Growth
of Economic Thought, describes the role of family dynamics as follows:
"The history of ideas abounds with views that were formed in
opposition to parental authority. Malthus, as well as Godwin and
Condorcet, is an example of this. Just as Malthus, when rebutting
Godwin and Concorcet, assailed the views of his father, so did
Godwin and Condorcet develop their views of the world in conflict
with their parents. Godwin, the grandson of dissident ministers and a
lapsed cleric himself, was repelled by the narrow Puritanism of his
father and never forgot the reprimand he received when, as a child,
he profaned the Sabbath by playing with a cat. Condorcet, educated
by Jesuits after having been brought up by a devout mother who
consecrated him to the Virgin and made him wear girls’ clothes until
he was nine, became an ardent follower of Voltaire in his twenties
and outdid him in his anticlericalism." (Speigel, Growth of Economic
Thought, p. 168)
Family dynamics aside, Malthus and the utopians found little common ground. Where
Godwin and Condorcet saw human achievement constrained by inequality and by the
existing institutions, Malthus found human conditions bound by the immutable laws of
nature, laws that no change in institutional arrangements could reverse. In fact, attempts to
improve conditions through the English poor laws, according to Malthus, only served to
exacerbate the recurrent population crises.

The English poor laws dated back to the early 1500s. In their earliest form, they established
the responsibility of each parish for its poor. Money was to come from a voluntary "poor
fund." Reformed multiple times over the ensuing years, the poor laws eventually relied on
taxes for funding. They also delineated separate categories of poor for differential treatment,
with some deemed deserving of aid and others not.

The population principles set forth by Malthus can be compared with what historians now
know about population trends of that period. Your reading by Dean provides background on
the population changes of the time and considers competing theories on possible causes and
consequences of those changes. From the Dean reading, one might conclude that models of
population growth require much more complexity than Malthus’ framework allows. Ask
yourself whether that is in fact the case or whether, instead, Malthus essentially succeeded in
distilling a complex phenomenon down to its fundamental components.

The remaining readings for this week bring the population debates up to date. We see
modern-day versions of the Malthusian perspective in sustainability discussions, in
development debates, and even in recent controversies over welfare reform. The reading by
Joseph Persky analyzes the 1996 U.S. welfare reform in light of its roots in Malthusian and
Classical Economics. Meanwhile, Daily and Ehrlich, surpassing Malthus in terms of gloomy
predictions, raise troubling questions about the earth’s carrying capacity. The reading by
Tierney describes the debate between modern-day Malthusians and "Cornucopians" and
introduces economist Julian Simon who questions the Ehrlich doomsday scenarios. Simon’s
arguments hinge on his unshakable faith in the ability of prices and profits to create as-yet-
unimagined solutions to resource problems. In his Cato publication "Population Growth,
Economic Growth and Foreign Aid," Simon takes us into the economic-development debates
on overpopulation. Nafis Sadik provides an example of the "populationists" being criticized
by Simon, while the excerpt from Lebergott’s book considers the deeper welfare implications
of births and deaths. In sum, you should have plenty to choose from in structuring this week’s
essay!

Assignment: Please comment on the following statement.

The analysis of population developed by Thomas Malthus does not hold any relevance
for modern-day issues of economic development, political economy or environmental
sustainability. Current theorists who hark back to Malthus have misunderstood his
analysis and failed to learn the lessons that should emerge from studying his thought.

As part of your essay, carefully explain Malthus’ population theory. As usual, be sure to
demonstrate mastery of the assigned readings. The following questions may help you focus
your thoughts before you begin to organize your essay.

1. How do geometric and arithmetic progression enter into the "Principles of Population"
according to Malthus?

2. Why do differences in the quality of land matter?

3. What does Malthus mean by preventive checks and positive checks, and what role to they
play in his theory.

4. When Malthus speaks of "oscillations," what does he mean?

5. How do wage and price adjustments figure into his analysis?

6. What are the impacts of the English poor laws according to Malthus?

7. In the views expressed by Malthus, are poverty and inequality necessarily negative
phenomena?

8. How do Godwin, Condorcet and Malthus compare in their views of the malleability of
human nature and the role of man-made institutions?

9. Do births enrich us or impoverish us?

Essay Style: Please see the assignment page for Week I to review the requirements for essay
style and mechanics.
 Week 4

On Value and Price

Early Classical Theory:Adam Smith, The Wealth of Nations, Ch. 11Malthus,

"Observations on the Effects of the Corn Laws" & "The Nature of Rent"Malthus,
Principles of Political Economy

Book I, Ch.1, section II, p.34-49, "On Productive Labour"This is also at Electronic
ReserveBook I, Ch. III, section VIII, p. 194-206, "On the strict and
necessary Connection of the Interests of the Landlord and of
the State"Book I, Ch. III, section IX, p. 207-217, "General
Remarks on the Surplus Produce of the Land"Book II, Ch. I,
section III, p. 314-330, "Of Accumulation, or the Saving from
Revenue to Add to Capital, considered as a stimulus to the
Increase of Wealth." D  avid Ricardo, The Principles of Political Economy and
Taxation, Ch1-6, 20, 32

The Utilitarians:

Jeremy Bentham, Intro to the Principles of Morals & Legislation,Chs. I-IV and Economic
Writings, Vol. 3, pp. 120-123 (on frugality & prices), 257-258 (on government), 440-443
(on inequality) Electronic ReserveJ. S. Mill, Ch. 2, "What Utilitarianism Is" & Principles of
Political Economy, Last 4 paragraphs of "Preliminary Remarks" & Book II, Ch. 1, "Of
Property" Thompson, Labour Rewarded, CSS Library, selected pages.E. K. Hunt,
"Utilitarianism & the Labor Theory of Value"Peter Davis, "Cooperatives, Labor & the
State: The English Labor Economists"

Background:

Early Classical Theory on Value:

In this week, we undertake an in-depth exploration of the concept of "value"and theory of

price determination. As you read the sections of Smith, Malthus, and Ricardo, please focus on
their individual efforts to explain rent, profit, and wages. Compare their theories on the
source of "value" and on the manner in which value relates to price.

We will see that the Classical theorists, in analyzing value, factor payments and price
determination, provide some false starts as well as some enduring principles for the
subsequent development of neoclassical economics. While the Neoclassical theorists find
Smith’s theory of value wanting, the Ricardian theory of rent is of considerable importance
for future developments in the field. The beginnings of supply and demand analysis are also
here, although not with the sophistication provided later by marginal analysis associated with
neoclassical theory. These writings, then, set the stage for the development of the neoclassical
school of thought. At the same time, the seeds of radical and Marxian analysis are visible in
these texts. The use of the labor theory of value and the emphasis on conflicting class
interests prepares the way for economic theories that take a more critical view of the
emerging system of production. In the coming weeks, we will explore both threads that
emerge from this body of thought.

The Utilitarians on Value

Jeremy Bentham (1748-1832) viewed human behavior as a rational and calculated seeking of
pleasure and avoidance of pain. In 1789, he published An Introduction to the Principles of
Morals and Legislation, which, in many ways, provided the philosophical basis for
neoclassical economics. In it, he developed the "principle of utility" stating "all human
activity springs from the desire to maximize pleasure." With this view, he moved away from
the labor theory of value toward a utility theory of value. He hoped to obtain a scientific,
mathematical explanation of exchange value derived from a commodity’s use value. In his
later years, Bentham was not solely a theorist but also an advocate of significant social
reform. The assigned sections from Jeremy Bentham’s Economic Writings, assembled by W.
Stark in 1954, provide a brief look at Benthams’s later views. Both his early and late phases
provided the foundations for the Utilitarian school and influenced, among others, William
Thompson and John Stuart Mill.

William Thompson (1775-1833), like Bentham, was a reformer, but with a more radical
agenda. He was influenced by Robert Owen (1771-1858), the founder of the Owenite
cooperative movement. Owenites advocated creation of self-governing, industrial and
agricultural communities based on a sharing of the means of production and the elimination
of private property. Thompson combined his commitment to the Bethamite utilitarian theory
with a belief in the labor theory of value; only labor created value and wealth in his view.
Rejecting the economic insecurity that he believed inherent in private ownership of capital,
Thompson argued that workers should own their own capital and the materials necessary for
production. He also argued that competitive markets should be allowed to function freed
from the restrictions of monopoly and government protection of special interests. His
perspective can be seen as an early version of egalitarian, competitive market socialism. At
the same time, Thompson worried about the corrupting incentives that he felt were inherent
in the principle of individual competition. These negative consequences, he believed, would
emerge even under market socialism. In particular, he was concerned about the oppression of
women. This subjugation, he argued, would be relieved only by rejection of traditional
independent families and creation of cooperative arrangements to prepare food and raise
children.

John Stuart Mill (1806-1873), son of the political economist James Mill (1773-1836),
produced one of the leading books on economic theory of the mid 19th century. In it, he tried
to pay tribute to both Bentham and Ricardo by promoting a labor theory of value combined
with utilitarianism. However, he qualified both theories so extensively that the final product
was uniquely his own. In contrast to Frederic Bastiat (1801-1850), a contemporary who
extended Smith’s and Bentham’s theory to an unqualified defense of private property, profit
and the existing distribution of wealth, Mill took a more moderate stance. While Bastiat’s
writings prepared the way for the Austrian and Chicago schools of strict laissez-faire
capitalism, Mill set the stage for more reformist elements sympathetic to redistributive
policies and government intervention. Mill argued for theory to recognize the separation of
the laws of production from the laws of distribution. Although the laws of production were
unchangeable, in his view, the pattern of distribution was the result of man-made institutions
which could, therefore, be altered.

Assignment: For this week’s essay comment on the following statement:

Reflect on the process by which "value" is explained by the various thinkers in the
early Classical school of economics. Then consider the manner in which prices and
value are explained by the various Utilitarian thinkers. It seems that the various
perspectives on how value is created and the various views on how prices, wages, rents
and profits are determined would have implications for the appropriateness of
redistributing income.

It also seems that these views would naturally lend themselves to different views on
whether unfettered markets entail a harmonizing of interests or a conflict of classes.
This dichotomy is, in fact, what we tend to observe when we read Smith, Ricardo, and
Malthus in contrast to Betham, Mill, and Thompson.

In writing your essay, be sure to identify areas of agreement and areas of discord among the
three authors. As always, be sure to demonstrate mastery of the assigned readings. The
following questions may help you focus your thoughts before you begin to organize your
essay.

Focus Questions on Early Classical Theories of Value:

1. How is value created?

2. What is the distinction between "use value" and "exchange value?"

3. Where does "surplus" come from?

4. How is price determined? What is the difference between "natural price" and "market
price?"

5. What is meant by the "necessary" components of costs of production?

6. How do the authors compare in their interpretations of rent?

7. How does rent emerge and what does it represent? How would you summarize the
essential elements in the Ricardian theory of rent?
8. In the Ricardian theory of rent, what is the importance of the least productive plot brought
into production? What is the importance of equalization of returns to capital?

9. How do the authors compare in their evaluations of the owners of capital and the profit
collected by the owners of capital?

10. Does the evaluation of the land-holding class differ across the three authors?

11. Are the three authors in agreement on the labor theory of value and on the necessary
components of the costs of production?

12. In viewing the free market mechanism as integrative or divisive, do views of property
rights and the laws of ownership play a role?

Focus Questions Utilitarian Theories of Value and Policy:

1. What reformist themes, if any, do you see in the Utilitarian school? If they exist, do these
reformist themes have a theoretical basis? If so, what is it?

2. Are there anti-reformist elements in the Utilitarian approach? If they exist, what are they
and what is their theoretical basis.

3. What is Bentham’s view of government? Mill’s? Thompson’s? Do they favor a laissez-

faire approach or do they take a positive view of government intervention?

4. What role does diminishing marginal utility play in the analysis? What policy is implied by
this concept according to Bentham?

5. What role does individualistic analysis play in Utilitarian theory? How does this mesh with
the view of government?

Week 5

Invisible Hand or Invisible Chains - Efficiency or Exploitation

Secondary Source:

Barber, Chapter 5 Include the preface to chapter 5 and the epilogue to chapter 5

Marx: Karl Marx, Capital, Volume I, Chapter 10 (sections 1-4 and section 6), Capital,
Volume I, Chapters 26-32, Capital, Vol I, Ch 1 (sect 1, 2); Ch 4, 6, 8, 9, 12,13, 14 (sect 1,2,
5); Ch 15 (sec 1-5, 9); Ch 16-18, 22, 23; Ch 25 (sect1-4).

Background:
I recommend that you start the Marx material by readings Barber, Chapter 5 for an overview.
In addition, you might want to consult other secondary sources to get a variety of views and
interpretations. However, when you write your essay, you should use your own words and
select your own sections of the text to cite.

Your readings this week are mostly from Volume I of Capital written by Karl Marx (1818-
1883) and published in 1867. Marx built upon the foundations of the Classical theorists while
mounting an acerbic attack on their general conclusions. It is difficult to get the flavor of
Marx without reading a good portion of his material. For that reason, the reading assignment
for this week is rather hefty. Start early! Here is the order in which I suggest you tackle the
assigned pages of Capital.

First read Marx’s description of the battle over the length of the work day along with his
portrayal of child labor and overall working conditions. (Volume I, Chapter 10, sections 1-4
and section 6). Ask yourself what is the importance of this chapter in Marx’s analysis. You
may wish to return to that question after completing the more technical sections of this
week’s readings.

Next, I suggest that you read Marx’s chapters on "The So-Called Primitive Accumulation."
(Volume I, Chapters 26-32) This shows Marx as historian. The history, however, has a
particular importance. It serves to illustrate the forces that spawned the capitalist system that
will, in turn, lead to its demise. Feudalism gives rise to the forces that turn against it, just as
Capitalism gives rise to the forces that bring about its own destruction. As you read these
chapters, think about how Marx, the historian, and Marx, the economist, inform and
complement each other. Again, you may wish to return to that thought after completing the
more technical sections of Capital.

Finally, tackle Marx the economist and the technical details of his economic analysis. Do not
simply rely on secondary sources, although they will prove helpful. Instead, read the assigned
sections carefully and draw from the original source when writing your essay. The details of
Marx’s economic structure can be gleaned from the final set of assigned chapters: Volume I,
Chapter 1 (sections 1 and 2); Chapters 4, 6, 8, 9, 12,13, 14 (sections 1,2, and 5); Chapters 15
(sections 1-5, 9); Chapters 16-18, 22, 23; Chapter 25 (section 1-4).

Keep yours eyes open for the entertaining bits amidst the turgid prose. For example, if you
read carefully, you will find the following remark buried within less engaging material. "If
we may take an example from outside the sphere of production of material objects, a
schoolmaster is a productive labourer when, in addition to belabouring the heads of his
scholars, he works like a horse to enrich the school proprietor. That the latter has laid out his
capital in a teaching factory, instead of in a sausage factory, does not alter the relation."

Based on your readings for this week, explain the essential features of Marx’s economic
argument in Capital. Point out similarities with the other economists that you have
studied so far in the tutorial. Then comment on the following statement: "Marx is
basically obsolete and unimportant for modern day analysis. This is true whether we
look at his economic analysis, his analysis of historical change, or his analysis of class."
Guidelines: Use your own words. Define all technical terms. In advance of writing your
essay, be sure to review definitions of the following concepts and their importance in Marx’s
analysis. Use value, exchange value, socially necessary labor time, C-M-C and M-C-M’,
labor power, surplus value, exchange value of labor power, necessary labor time,
surplus labor time, constant capital, variable capital, rate of surplus value, rate of
profit, primitive accumulation, crisis and stagnation. As always, be sure to demonstrate
mastery of the assigned readings.

Week 6

Marginalism and The Birth of Neoclassical Economics: What is old? What is new?

Neoclassical Theory: The Marginalist Revolution

W. Stanley Jevons, The Theory of Political Economy. (1871) Preface and Chapters II-
IVCarl Menger, Principles of Economics (1871) Chapter 2George J. Stigler, "Development
of Utility Theory" ONLY Section 1 of Part I (1950)

Neoclassical Theory: Welfare Economics

George J. Stigler, "The Development of Utility Theory" Part I (Sections II-IV) (1950)J. B.
Clark, The Distribution of Wealth Preface & Chs. 12 & 13 (1899)Pareto, Manual of Political
Econ. Ch.3, para.14-37, 116; Ch. 6, para.32-37 CSS Library (1906)A. C. Pigou, Economics
of Welfare, Part I: Chapter VIII (1920)Lionel Robbins, "Interpersonal Comparisons of
Utility: A Comment" (1938)Nicholas Kaldor, "Welfare Propositions of Economics &
Interpersonal Comparisons" (1939) Hal R. Varian, Intermediate Microeconomics: Modern
Approach Ch. 30, 32 CSS Library

Background:

Where Marx saw increasing concentration of capital, a series of more conventional

economists found Smith’s atomistic view of the market and Bentham’s individualistic utility
framework more appealing and worthy of further elaboration. Three economists in particular,
in the early 1870s, published texts which are often credited with giving birth to modern-day
neoclassical theory. Working separately, but publishing in rapid succession, their works
established the school of economics associated with Marginalism, the decision-making
process based on marginal analysis.

In his text, Theory of Political Economy, published in 1871, William Stanley Jevons (1845-
1882), used Bentham’s utility theory as a starting point and developed a comprehensive
utility theory of value. In the same year, Carl Menger (1840-1921) distinguished between
total utility and marginal utility and linked marginal utility decision-making to price
determination. Soon after, Leon Walras (1834-1910) published Elements of Pure Economics
(1874) in which he introduced the concept of general equilibrium analysis, a fundamental
component of modern-day economic thought. In fact, the Marginalist school emerged from a
broad range of theorists all moving toward a view of value and behavior based on
incremental changes in utility.

Building on this Marginalist framework while harking back to Smith and Ricardo, Alfred
Marshal (1842-1924) developed his own foundational view of economic theory in his
Principles of Economics (1890) which eventually replaced Mill’s Principles as the major
English textbook in economics classrooms in this period. He combined the emerging
Marginalist understanding of market mechanisms with a reformist perspective more
reminiscent of John Stuart Mill. At the same time, he is largely credited with deriving the
most successful link between demand analysis and the concept of diminishing marginal
utility. Despite his reformist sympathies, Marshal was a believer in incremental reforms. He
had faith in "economic chivalry" on the part of the rich for ridding the market of "the worst
evils of poverty"

J. B. Clark (1847-1938) extended the marginal utility analysis to a theory of income

distribution. While Marshal’s theory relied on fixed input ratios, Clark recognized the
importance of variable input ratios and the associated payments to the factors of production.
Labor received its "value of marginal product" (output price x marginal product of labor) and
capital earned a similar payment (output price x marginal product of capital). After all
payments to factors of production were made, the expenditure on the total product was
accounted for and no Marxian exploitative surplus needed to be explained.

The work of the Marginalists, sometimes referred to as "the Marginalist revolution" in

economics, laid the groundwork for the developing field of "welfare economics" represented
in your readings below by the readings from Vilfredo Pareto (1848-1923), Francis Edgeworth
(1845-1926), A.C. Pigou (1877-1959), and Lionel Robbins (1898-1984). Pareto’s work
defined an optimal point as one in which no person could be made better off without another
suffering a decrease in utility. Edgworth is best known in modern-day textbooks for his
diagram illustrating the locus of such optimal points called "the contract curve." The specific
optimum chosen depends on the initial distribution of endowments along with the shape of
individual preferences in the face of relative prices. Pigou suggests that distributional issues
may be addressed by the assumption of diminishing marginal utility of income. This view,
however, violates the condition prohibiting interpersonal comparisons of utility. These
debates are discussed in your readings by Robbins and Nicholas Kaldor (1908-1986).

The complex nature of the welfarist theories and debates makes secondary sources
particularly helpful for this week of readings. Feel free, as always, to consult outside sources.
I have provided some options for you. They include the remainder of the Stiglitz article, a
modern textbook view of welfare economics from Hal Varian (Chapters 30 & 32) and the
readings by Sen and Atkinson. Sen offers a critique of the standard view of "economic man"
embodied in the welfare literature. Atkinson provides another overview of welfare economics
along with a review of both Sen’s critique and Sen’s alternative to utility theory called
"capability theory."
Assignment: Comment on the following statement:

When we speak of the "Marginalist revolution" and "welfare economics," the two
words, "revolution" and "welfare" are both misnomers. In fact, Marginalism is little
more than old-school utilitarianism embellished with a large doses of mathematics, and
"welfare economics," because of its restrictive design, cannot really tell us anything
about the nature of social welfare.

Guidelines: Remember to use your own words. Define all technical terms. As part of your
essay, you would be well advised to touch upon at least some of the following terms: cardinal
utility, ordinal utility, total utility, marginal utility, indifference curves, diminishing marginal
utility, Edgeworth box, contract curve, general equilibrium, Pareto optimal. As always, be
sure to demonstrate mastery of the assigned readings.

Feel free to consult outside sources on this week’s material. Here are some to start with:

George J. Stigler, "The Development of Utility Theory" Part I (1950)

gives an overview of utility theory.

Amartya Sen."Rational Fools" (1977) offers a critique of the

standard view of "economic man."

Anthony Atkinson "The Contributions of Amartya Sen to Welfare

Economics" (1999) provides more recent overview of welfare
economics, along with Sen’s critiques and his alternative to utility
theory called "capability theory"

Alexander Gray & A.E. Thompson The Development of Economic

Doctrine, 2nd ed. pp. 314-366 offers an introduction the Austrian-
school origins of marginalist analysis.

Hal Varian, Intermediate Microeconomics: A Modern Approach, Ch.

30 "Exchange" and Ch. 32 "Welfare" is a modern-day textbook
treatment of welfare economics including the Edgeworth box and
Pareto Equilibrium.

Week 7

The Nature of Capitalism - Part A:

 Is Free Market Capitalism Inherently Unstable?

Capitalism and Theories of Macroeconomic Crises

Essential Reading for the EssayJohn Maynard Keynes, The General Theory Chapters 1-3,
8-14, 17-19, 21, 22, 23, 24Joseph Schumpeter, "Review of The General Theory; and
Capitalism, Socialism, and

Democracy (1942) Ch. 6-8, 13,14 Required Text (If time permits, also read Ch. 1-4)J. R.
Hicks, "Mr. Keynes’ Theory of Employment "Jacob Viner, "Mr. Keynes on the Causes of
Unemployment "James Tobin, Price Flexibility and "An Overview of the General Theory,"
CSS Library

Modern-Day Relevance of the Macroeconomic Debates"Deflation Danger: Of Debt,

Deflation & Denial" (Oct 12, 2002) Electronic ReserveFloyd Norris High & Low Finance:
Determining Who Rides the LifeboatStiglitz FreeFall, "Preface" and pp. 1-76 CSS
Library John Cassidy, After the Blowup CSS Library

Radical Critiques from the Right on Macroeconomic Stability and Growth

Debate on Monetarism: Arthur Burns, "Money Supply in the Conduct of Monetary Policy,"
and  Friedman, "Response to Burns" CSS LibraryDebate on Supply-Side Economics:
"Guide to Supply-Side Economics," and Herbert Stein, Some Supply-Side Propositions CSS
Library

Background:

This week we examine three approaches to understanding macroeconomic instability, that of

Joseph Schumpeter (1883-1950), that of John Maynard Keynes (1883-1946) and that of
Milton Friedman (1912-2006). In a unique manner, Schumpeter’s view, while largely
influenced by the Austrian tradition in economic thought, also reflects the influence of Marx.
Hoping to capture the attention of those familiar with Marx’s work, Schumpeter uses a
similar approach and similar concepts to present a very non-Marxist, non-Keynesian view of
capitalist crises. Schumpeter, like Keynes, sees macroeconomic instability as endemic to
capitalist growth. However, where Keynes sees these crises as problems requiring
government action, Schumpeter views the crises as healthy aspects of a dynamic capitalist
system.

The General Theory, by John Maynard Keynes, revolutionized the field of economics and
gave birth to modern-day macroeconomic analysis. While Keynes’ significance is beyond
question, understanding Keynesian economics is made difficult by the fact that we often see
three very different faces of Keynes: the one speaking to us from the General Theory, the one
pieced together by the "neoclassical-Keynesian synthesis" promoted by J. R. Hicks (1904-
1989), and the one less compatible with neoclassical analysis reflected in your readings by
Nobel-prize winner James Tobin (1918-2002). Although the Hicksian approach is the model
that entered the text books, it is that very same approach that was labeled "Bastardized
Keynesianism" by economist Joan Robinson, a well-known contemporary of Keynes

I have added several readings illustrating the modern-day relevance of the macroeconomic
debates. After finishing the essential readings for the essay, these are the selections that rank
second in importance.

Finally, if you have time, the last readings introduce some radical critiques from the right on
macroeconomic stability and growth. You will read a debate on inflation illustrating the
monetarist perspective of Milton Friedman along with a more mainstream view of inflation
from Arthur Burns. You will also read a debate on supply-side economics with the minority,
supply-side view expressed in the Business Week article and a skeptical evaluation offered by
mainstream, conservative economist Herbert Stein.

Assignment: For this week’s essay, please comment on the following quote:

"Free-market capitalism is inherently unstable, but this instability arises from factors
that cannot be effectively countered by macroeconomic fiscal and monetary policies."

In writing your essay, make sure that you explain the Keynesian, Schumpeterian and
Monetarist frameworks sufficiently for the purposes of your argument. As always,
demonstrate mastery of the assigned readings. The following questions may help you focus
your thoughts before you begin to organize your essay.

1. In the various readings, are the hypothesized origins of the instability the same?

2. Do all of the readings put equal weight on short-term and long-term analysis?

3. Are the policy prescriptions drastically different?

4. What are the impacts of entrepreneurship and investment behavior in each of the theories?

5. Are any of the approaches more in line with the Classical school of economic analysis?

6. Are any of the approaches more compatible with modern-day neoclassical analysis?

7. Can you identify the differences among the various interpretations of Keynesian
economics. 

Week 8
 The Nature of Capitalism – Part B:

Are Consumers Sovereign Under Free-Market Capitalism?

Competing Views of Consumer Sovereignty: T  horstein Veblen,

The Theory of the Leisure Class (1899), Chs. 1-4, 7, 14Hayek, "The
Use of Knowledge in Society" AER V. 35 p. 519 (1945) PDF sent by
emailGalbraith "Myth of Consumer
Sovereignty"(1958)&"Countervailing Power" (1952) CSS
LibraryTibor Scitovsky, "Income and Happiness" (1976) CSS
LibraryAmartya Sen "Rational Fools" (1977)Friedman, Free to
Choose, "Who Protects the Consumer," Go to LINK and click on
"Volume 7" (1980)Lebergott,
"Consumers+Critics;Happiness+Welfare;Consumer Choice:
Advertising"(1993) CSS LibraryAnthony Atkinson "Contributions
of Amartya Sen to Welfare Economics" (1999)Juliet Schor,
Interview on Born to Buy. Go to the following LINK and click on
"Listen" (2004)Amartya Sen "The Uses and Abuses of Adam
Smith" Go to LINK and start at minute 3:15 ( 2010)
Background:

According to the concept of consumer sovereignty, the market

delivers what consumers want. But how are those wants themselves
determined and, once they are satisfied, are individuals happier?
Does economic growth translate into more satisfied lives? The
readings in this week raise questions about what the capitalist system
can be expected to deliver. Thorstein Veblen (1857-1929) sees the
emergence of a leisure class, but not one that is particularly
attractive. In fact, capitalism, by promoting exploit and honoring
plunder, fuels a competition of conspicuous consumption. The
picture that emerges is one of supercilious waste.

John Kenneth Galbraith (1908-2006) is known for his "institutional"

approach to economic analysis. He weighs in on the concept of
consumer sovereignty and finds it wanting. In another classic
Galbraith piece, Galbraith argues that the performance of modern-
day capitalism needs to be understood as a process of continuing
tension among distinct countervailing powers. One of those
countervailing powers comes from union activity. Although
neoclassical theory elevates the consumer to a sovereign power, it
has much less to say about the satisfaction of the individual-as-
worker. Yet the typical individual is both consumer and producer. In
fact, many consumers spend more than half of their adult lives at
work. As such, the circumstances of the consumer and the conditions
of the worker might deserve equal importance in the economic
analysis of well being.

Tibor Scitovsky (1910-2002) investigates the supposed link between

higher income and increased happiness, raising serious questions
about the impact of income on contentment with life. Meanwhile,
Stanley Lebergott (1918-2009) harks back to a more traditional faith
in free market capitalism. Legergott claims that competitive-market
responsiveness to consumer choice serves as the basis for the most
favorable outcomes. A very different view comes from Nobel-award
winner Amartya Sen. In "Rational Fools: A Critique of the
Behavioral Foundations of Economic Theory," Sen offers a
penetrating critique of the standard view of "economic man"
embodied in neoclassical analysis. Anthony B. Atkinson provides an
overview of Sen’s critique and an introduction to Sen’s alternative to
utility analysis, an approach called "capability theory." Sen’s
capability theory suggests a distinctly new perspective on issues of
economic development and well-being. Behind the capability
approach is a definition of freedom that is quite opposed to that put
forth by the Chicago school of economics and laissez-faire
philosophy.

Assignment: For this week’s essay, please comment on the

following statement.
"Modern-day capitalism is best characterized by the supreme rule of
the consumer. This has the happy result of encouraging the
production of goods most relevant for satisfying individual wants and
promoting personal happiness. We need only look at the
improvement in comforts available to humankind in general and to
the U.S. population in particular in order to convince ourselves of the
heightened living standards that this consumer sovereignty makes
possible."