Group 5 Written Report: Classical School PDF

BEC 141 History of Economic Thought GROUP 5 (THE CLASSICAL SCHOOL— BENTHAM, SAY, SENIOR, AND MILL) Members: Apusaga, Aikeen Joy T. Maldigan, Kenneth P. Viray, Jennica L. Jeremy Bentham (1748–1832) Born: February 15, 1748, in London, England. Education: Entered Queen's College, Oxford, at age 12 a...

BEC 141 History of Economic Thought GROUP 5 (THE CLASSICAL SCHOOL— BENTHAM, SAY, SENIOR, AND MILL) Members: Apusaga, Aikeen Joy T. Maldigan, Kenneth P. Viray, Jennica L. Jeremy Bentham (1748–1832) Born: February 15, 1748, in London, England. Education: Entered Queen's College, Oxford, at age 12 and earned a bachelor's degree at the age of 15; later studied law at Lincoln's Inn. Philosophical Focus: Regarded as the founder of modern utilitarianism; advocated for the principle of "the greatest happiness of the greatest number of people." Utilitarianism “The principle of greatest happiness.” Hedonism - “People pursue things that provide pleasure and avoid things that produce pain; all individuals seek to maximize their total pleasure”. Utilitarianism added to hedonism the idea that actions should aim to create the greatest happiness for the greatest number of people. By emphasizing the importance of society's well-being, utilitarianism balanced hedonism's highly individualistic focus. Utility The ability of something, whereby it tends to produce benefit, advantage, pleasure, good, or happiness or to prevent the happening of mischief, pain, evil, or unhappiness to the the person or group affected. Principle of Utility Human beings are controlled by two main forces: pain and pleasure. The principle of utility means judging every action as good or bad based on whether it seems likely to increase or decrease the happiness of the people affected by it. In short, it supports actions that promote happiness and opposes those that reduce it. An action follows the principle of utility when it is more likely to increase the overall happiness of the community than to decrease it. Similarly, a  government decision follows this principle if it is more likely to increase the community's happiness than to reduce it. Diminishing Marginal Utility Wealth is a measure of happiness but that wealth has diminishing marginal utility as it increases. Implications of Bentham’s Ideas Bentham emphasized that legislators should work to increase the community's overall happiness. Rather than people serving the government, the government should serve the people. He did not worship laissez-faire as a principle to be blindly accepted. Bentham advocated the philosophy that if special reasons exist, the government ought to intervene. Bentham concluded that money is the instrument that measures the quantity of pleasure or pain. Advocated and supported the following democratic reforms: universal (male) suffrage or the right to vote, secret ballot, public schools, lending at interest, free trade, prison reform, etc. Criticisms Economic Criticisms Bentham recognized that assessments of pleasure and pain are subjective; they vary from person to person. His goal of promoting the greatest happiness for the greatest number of people required the making of interpersonal utility comparisons. Such comparisons necessitate the precise measurement of utility in cardinal terms. Bentham chose money as his unit of cardinal measurement. Philosophical and ethical criticisms Many critics of utilitarianism claim that it is deficient as a philosophy. Critics of utilitarianism argue that there are other explanations for why people behave the way they do, challenging the idea that people are only driven by the desire to maximize pleasure and avoid pain. Many people disagree with the idea that every society and government should focus on creating the most happiness for the most people. For example, Plato thought knowledge is more important than pleasure and that pleasure should come as a result of achievement. Thomas Hobbes (1588–1679) believed people are naturally selfish and conflict-driven, so a strong, absolute government is needed to keep them in check. Bentham’s Legacy to Economics Bentham’s view of human nature became the basis for the economic theories of Ricardo, John Stuart Mill, and the early marginalists, especially William Stanley Jevons. The concept of utility maximization, assuming that people make choices by comparing the satisfaction they get from different goods and the concept of diminishing marginal utility — that each additional unit of a good provides less satisfaction than the one before — are the heart of marginalist theory of demand. People were thought to be perfectly rational and to make careful decisions. Work was seen as something unpleasant that required compensation. To be as happy as possible, people would work just enough hours so that the benefit (utility) of their earnings matched the effort (disutility) of their labor. Entrepreneurs would aim to maximize their profits by balancing their revenues against their costs. JEAN-BAPTISTE SAY (1767–1832) Jean-Baptiste Say (1767-1832) was a Frenchman who popularized Adam Smith's ideas on the continent. His major work, A Treatise on Political Economy, was published in 1803. Say's career was temporarily delayed because Napoleon did not agree with his radical laissez-faire principles. Following Napoleon's defeat at Waterloo, Say became a professor of political economy after a long career in business. Value Theory, Costs of Monopoly, and Entrepreneurship Jean-Baptiste Say criticized the classical school's labor theory of value, replacing it with a focus on supply and demand, which he claimed was dictated by the cost of production and utility of goods. In this regard, his analysis was more advanced than that of David Ricardo. However, Say's approach to supply and demand was less precise than that of later economists such as Alfred Marshall, who did not create specific price-quantity relationships. Say also made significant contributions to the modern understanding of the costs of monopoly He emphasized that monopolists not only experience  efficiency losses, sometimes known as deadweight losses, but they also spend valuable resources in order to achieve and keep their monopoly positions. Furthermore, Say was one of the first economists to recognize entrepreneurship as a fourth factor of production, alongside land, labor, and capital. Although Richard Cantillon originated the concept of the entrepreneur, Say's emphasis on it was a significant contribution to economic thought. Say’s Law of Markets Jean-Baptiste Say is well known for his theory that general overproduction is impossible, which became known as Say's Law of Markets. This concept was first proposed by Francis Hutcheson, who taught Adam Smith, and then was implied by Smith himself. However, it was Say who presented this theory in such a way that it was named after him, as John Maynard Keynes later attributed it to him. James Mill articulated this idea clearly in 1808, stating that a nation's ability to purchase goods is directly tied to its production; thus, increasing production naturally expands the market and purchasing power. Say proceeded to explain that once a product is created, it immediately creates a demand for other products of similar worth. The product, eager to sell the product to keep its worth from decreasing will also be quick to spend any money received, as the value of money may decrease with time. This continual cycle of production and consumption assures that new products create demand for existing products. As an economy expands, it increases the supply of goods while also increasing payments to workers and other inputs of production, which increases the demand for goods. This principle also applies to international trade: when a country's output increases, it may export more, allowing it to acquire more goods. Thus, in both local and international contexts, "supply creates its own demand" in the long run. However, in market-based economies, this principle may not always be true in the short run. Even if total payments to workers and other factors of production are sufficient to cover the cost of all products produced, there is no guarantee that people will spend their earnings on available goods. NASSAU WILLIAM SENIOR (1790–1864) Nassau William Senior (1790-1864) was the eldest son of a country clergyman with 10 children. In 1825, Senior became Oxford's first professor of political economy. The government nominated him for several royal commissions that studied major societal issues. In his economic thought, he departed significantly from classical economics, favoring the neoclassical approach that dominated after 1870. Positive Economics Nassau Senior aimed to separate studies on political economy from any value judgments, policy recommendations, or welfare-improving activities. This approach, now known as positive economics, focuses on examining and understanding economic phenomena rather than prescribing what should be done. In contrast, normative economics is concerned with what "ought to be" and applies economic ideas to advocate for public policies. Senior believed that economics should study the production and distribution of wealth rather than attempting to promote happiness or well-being. He argued that even if an economist's conclusions are correct and widely applicable, they do not give the economist the authority to provide advice. Senior believes that it is the responsibility of writers and statesmen to give recommendations after taking into account all elements impacting public welfare. The economist's role is to communicate fundamental ideas without recommending a specific course of action. Senior's Four Propositions Nassau Senior identified four major economic concepts that he believed were factually valid and could serve as the foundation for a complete economic theory: 1. **The Principle of Income or Utility Maximization:** People aim to increase their wealth while making as few sacrifices as possible. 2. **Principle of Population:** The world's population is restricted only by moral or physical problems, or by the fear of a scarcity of the things that each social class considers essential. 3. **Principle of Capital Accumulation:** The productive powers of labor and other resources can be endlessly expanded by reinvesting their products into new production. 4. **Principle of Diminishing Returns:** Assuming agricultural processes remain constant, adding more labor to a given area of land typically results in a less proportional gain in output. Although more labor will raise overall production, the increase in output will be less than the increase in labor. Abstinence Nassau Senior argued that the exchange value of goods is governed by both supply and demand. Demand is driven by the idea of diminishing marginal utility, which states that as a person gets more units of a good, the additional satisfaction (or utility) gained from every additional piece declines. This concept was further developed by the marginalists. On the supply side, value is related to the cost of production. The word "Abstinence" was a new term introduced by Senior to economics, referring to people's decision not to use their resources for immediate consumption instead of investing them for future gains.He viewed abstinence as the third productive principle, after labor and natural resources. Senior explained that without abstinence, work and natural resources would be less effective in generating wealth. He highlighted that abstinence is to profit what labor is to wages—it is a necessary factor in the creation of capital. Later, economist Alfred Marshall changed the term "abstinence" to "waiting," which simply meant postponing consumption. This new word was less controversial and did not imply that the wealthy faced any difficulties while acquiring wealth. Saving creates new investment spending. People save more as the interest rate (i) for postponing spending increases. Mathematically, S = f(i). Investment spending (I)—the purchase of capital goods—declines when the opportunity cost of investing (interest rate) rises. So, I = g(i). This results in an extension of Say's law: because saving is a positive function of interest rate and investment is a negative function, the interest rate will adjust to a level where all savings are invested. Productive Labor Senior disagreed with Adam Smith's view that service providers such as lawyers, doctors, and teachers were unproductive.  Senior stated that these professionals are productive because they contribute to an overall increase in wealth. For example, just as a military defends farmers, resulting in increased productivity, According to Senior, the key distinction is not between productive and unproductive labor, but between productive and unproductive consumption. He defined unproductive consumption as products such as lace, embroidery, jewelry, tobacco, gin, and beer—things that lower the number of goods produced while not improving workers' ability to produce more. Policy Positions Despite his prior claim that economists should not provide policy advice, Nassau Senior frequently expressed his opinions on public matters during his career. He never said whether these proposals were fully supported by his economic views. Poor Laws: Senior was a significant member of the Poor Law Commission in 1832, drafting most of the report that led to the Poor Law Amendment of 1834. This harsh law was intended to discourage able-bodied people from seeking help by assuring that welfare beneficiaries lived in worse conditions than the poorest laborers. These laws stayed in effect for 70 years. Trade Unions: Senior, a strong supporter of limited government, economic freedom, and labor mobility, Senior was strongly opposed to the trade union movement. He recommended prohibiting all labor conspiracies and trade barriers, severely punishing those who encouraged the establishment of unions, restricting and punishing picketing, seizing union funds, and compensating persons who were harmed while opposing unions. Factory Acts: In 1837, Senior issued a pamphlet opposing the English Factory Acts, which limited the working day to 12 hours in industries that employed children. He supported regulating child labor but opposed limiting adult working hours. His economic analysis of shorter workdays was in error since he failed to account for the potential savings in raw materials, heating, lighting, depreciation, and the likelihood of greater production per hour with a shorter workday..His erroneous reasoning led him to believe that all profit came from the final hour of work. He argued that if the workday was reduced by more than an hour, capitalists would lose profits, and England would be unable to compete with foreign  producers. His primary purpose was to resist the growing demand for 10-hour workdays. John Stuart Mill 1806-1873 -Early life: father denied the role of genetics in human potential -Mill was a boy wonder, pushed to be one by dad -Greek 3, latin 8, calculus 12, history of rome 11, edited 5 volumes of Bentham’s works at 18, publishing own work at 19, Equality and Social Reform Support for Worker Rights: Mill was concerned about income inequality and supported worker cooperatives and profit-sharing arrangements between workers and capitalists. He believed these reforms could address the exploitation of labor and ensure fairer distribution of wealth. Gender Equality: Mill was also an advocate for women's rights, arguing in his work The Subjection of Women that women should have equal opportunities in the labor market and political life. John Stuart Mill's Principles of Political Economy, published in 1848, is one of his major works and is divided into five books. Each book covers different aspects of economic theory and reflects Mill's integration of classical economics with his own insights on social and political issues. Here's an overview of the five books: 1. Production This book covers the fundamental principles of production. It discusses how wealth is created through labor, capital, and natural resources, the factors of production. Mill addresses several key topics here: The Role of Labor: Mill highlights the importance of labor as the primary source of wealth. Capital: He explains the role of capital in production and its accumulation through savings. Nature: The role of natural resources in production is also emphasized. Division of Labor: Mill explores how specialization and division of labor can increase productivity.  Technology and Innovation: He discusses how technological progress and innovation contribute to economic growth. 2. Distribution Mill distinguishes between the laws governing production and distribution, arguing that while production is governed by natural laws, distribution is subject to human institutions and policies. Key topics in this book include: The Distribution of Wealth: Mill argues that wealth distribution is determined by laws and customs of society, and can be changed through legislation. Wages, Profits, and Rent: He discusses the distribution of income among labor (wages), capital (profits), and land (rent). The Role of Institutions: Mill emphasizes the importance of social institutions in determining how wealth is distributed. 3. Exchange In this book, Mill examines the principles governing trade and markets. He addresses the following concepts: Value and Price: Mill refines the classical theory of value, explaining that prices are determined by both the cost of production and the forces of supply and demand. International Trade: He builds on David Ricardo's theory of comparative advantage, advocating for free trade and explaining how it benefits nations. Money and Credit: Mill explores the role of money in facilitating exchange and the effects of credit on the economy. 4. Influence of the Progress of Society Mill discusses how economic progress affects different aspects of society, particularly focusing on long-term economic development and changes in the structure of the economy. Some of the main ideas include: The Stationary State: Mill predicts that, eventually, economic growth will slow, leading to a "stationary state" where the accumulation of wealth ceases. Unlike some earlier economists, Mill sees this as a potentially positive development, with more focus on social welfare and quality of life. Income Inequality: He considers how economic progress can lead to widening inequality, and the need for social reform to address it.  The Role of Government: Mill supports the idea that government intervention can promote social justice in the context of a progressing economy. 5. On the Influence of Government Mill elaborates on the role of government in the economy, addressing both its positive and negative impacts. Key points include: Laissez-Faire vs. Government Intervention: While Mill generally supports the principle of laissez-faire (non-intervention), he also argues that government intervention is justified in cases where it can promote social welfare, correct market failures, and reduce poverty. Taxation: Mill discusses the importance of a fair taxation system and advocates for progressive taxation. Public Goods and Services: He emphasizes the role of the state in providing public goods, such as education and infrastructure, that are necessary for economic and social development. Reference: BRUE, S., & GRANT, R. (2007). The evolution of economic thought: 8th Edition (8th ed.). Cengage Learning.