Does Anybody Understand This Stuff?: Part 6, Classical Liberal Economics – A Thumbnail Sketch of 4,000 Years of Economics
Sourcing Wikipedia, originally, political economy meant the study of the conditions under which production or consumption within limited parameters was organized in the nation-states.
In this way, political economy expanded the emphasis of economics, which comes from the Greek oikos (meaning “home”) and nomos (meaning “law” or “order”); thus political economy was meant to express the laws of production of wealth at the state level, just as economics was the ordering of the home.
The phrase économie politique (translated in English aspolitical economy) first appeared in France in 1615 with the well-known book by Antoine de Montchrétien: Traité de l’economie politique.
Today, political economy most commonly refers to interdisciplinary studies drawing upon economics, law, and political science in explaining how political institutions, the political environment, and the economic system—capitalist, socialist, mixed—influence each other.
In a larger sense, political economy really encompasses the interrelationship of the fields of:
- Political Science
- Human Geography
- International Relations
- Cultural Studies
In our highly “division of labor and thought” world, I think it is important to stress the “connective-ness” of things in nature, meaning, how things really work, instead of the nice tidy little boxes where we put everything. Political economy is one such reminder.
Liberal (classical) Economics
This would naturally lead to the general populace having almost unlimited control of their own lives and being free to make their own mistakes, or in other words, individuals and families being responsible for themselves.
It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and private property in the means of production (see recent post – The Servile State). As there are a number of contributors to the philosophic underpinnings of this economic philosophy, it is safe to say that classical economic liberalism marginally supports government economic regulation regarding monopolies and corruption, but it tends to oppose government intervention in the free market.
Today, the adherents of economic liberalism promote and oppose the following:
- Private property
- Limited social welfare programs to compensate for the market inequalities that are inevitable in a free market
- Equality of opportunity
- Individual contracts motivated by self-interest
- Patents and copyrights to encourage innovation
Classical Liberalism developed roughly through the following phases:
Phase I – Rise of Measurement
Descartes, Hobbes, Bacon and others applied mathematical and statistical functions to measure economic facts. The goal was not to predict, but only to measure.
Phase II – Locke
Locke’s contributions were plentiful:
1. He was the First person since Aristotle to vigorously promote private property as a natural and inalienable right.
2. Promoted the use of interest on market value and a strong metallic money.
3. Only demand and supply, in the free market, can adequately determine prices (because prices are determined by buyer’s perception of utility and/or value in the matrix of supply and demand).
4. The Labor theory of Value: if a person works on a piece of unimproved land (or other commodity or natural resource), and his labor makes it more valuable than if he hadn’t touched it, then it is his property. A person may also contract with an owner and labor on the same parcel of land but can only receive compensation in the form of cash or commodity or equity.
Phase III – Adam Smith
Smith added to Locke with these concepts:
1. Man is commanded by God to care for self and family, then to care for others.
2. Men naturally seek wealth because of the desire to emulate those above them.
3. Man had a natural right to property (God-given + personal labor).
4. Government must protect private property; it must do nothing else. (This idea from laissez faire school of economics).
5. The Invisible Hand. The free market harmonizes competition into cooperation. Government is needed to curb man’s desire to find “an easier way” for self at the forced expense of others (monopoly, corruption, etc).
6. The Labor theory of value (same as locke).
7. A good economy is based on self-reliance and competition.
8. By pursuing their own interests, men generally promote the interest of society.
9. Division of Labor is natural, automatic, and good.
10. The Natural Price comes automatically in a free market where demand and supply coincide.
11. Wages are simply prices paid for labor; they follow the same rules for prices of goods.
12. Interest is simply the price paid for capital. It follows the same rule as those of prices for goods.
13. The invisible hand applies to foreign trade as well as domestic.
14. If the government is fulfilling its role and doing nothing more, taxes are reasonable and right.
15. The government’s role is to protect the rights to try, buy, fail and sell. It’s role is to protect property and man’s attempt to (rightfully and justly) obtain it.
Phase IV – Say, Malthus, and Ricardo
Say’s Law is “Production creates demand.”
Malthus’ Law is “Gains in property made by this generation will be nullified by the increase in population.”
Ricardo made economics it’s own branch, separate from political science and philosophy. He also contributed the principle of comparative advantage.
Phase V – Bastiat
There is too much to cover regarding Bastiat here, I recommend a great read entitled, Essays on Political Economy.
Phase VI – Mill
John Stuart Mill had the same basic views as other liberal economists, plus these contributions:
1. Actions are right to the extent that they promote happiness. They are wrong to the extent that they promote misery, sadness or unhappiness.
2. Moral convictions, not material interests, must govern societies (This is because when men govern [choose] based on material interests, they will often choose immediate rewards and advantages that are detrimental to happiness in the long run. The temptation to pragmatism is so great when material is pilot and moral convictions are co-pilot that future happiness is in real jeopardy. Moral convictions are usually aligned with the most enduring happiness—more so than material.
3. Freedom is paramount. And true freedom must have some restrictions, obligations, duties, and boundaries that maintain a proper level of order so that freedom can survive, otherwise a brief period of anarchy will be followed by a power vacuum and then a dominant leader who is apt to lay moral convictions aside for material wants.
4. Government’s role is to protect the individual from others.
5. Governments may do whatever is necessary to help the most people be happy.
Number 5 got Mill off track a bit. Although the concept may be theoretically solid, the application invites interventionist policies.
The next post will discuss the great fractionalization of economics. Economic laws make sense to most people, it is the application of the laws and the interpretation of the laws that split the debates so widely.