Questions for Review with Answers
Chapter 5. History of Economic Thought I. Classical Economics
I. Basics
Chapter 5 – Question 1
Explain what classical economics is and name the leading classicists.
* Classical economics was the first systematic analysis of the economy; it was pioneered by Adam Smith and refined by Townsend, Bentham, Malthus, Say, Ricardo and Mill until it was superseded in the 1890s by neo-classical economics.
II. Preliminary Remarks on the Zeitgeist
Chapter 5 – Question 2
Classical economics was one of the revolutions that ushered in the Modern Era. Please list the other ones.
* The Scientific Revolution, the Enlightenment, the Agrarian Revolution, the Industrial Revolution, and the Great Transformation.
Chapter 5 – Question 3
What were the major changes that the revolutions at the beginning of the Modern Era brought about?
* The major changes consisted in the replacement of the Catholic creed, which had permeated the whole of European life in the Middle Ages, by scientific approaches, and the replacement of feudalism by a new social, political and economic order. The new social order was the abolition of all medieval welfare. The new political order was the nation state. The new economic order was capitalism.
Chapter 5 – Question 4
Name some of the hallmarks of modern thinking which resulted from these revolutions.
* We have confidence in science and reason; we believe in continuous progress; we attribute high importance to liberty; we believe that social standing should depend on merit or money rather than rank; we take the sanctity of private property for granted; we have doubts about the existence of God, and we question the usefulness of welfare measures.
III. Adam Smith
Chapter 5 – Question 5
Which causes of the wealth of nations did Smith identify?
* There were six: the division of labour, free trade, the pursuit of individual self-interest, competition to check self-interest, obedience to a system of economic laws and laissez-faire.
Chapter 5 – Question 6
Smith's Wealth of Nations is the most important book that has ever been written in economics. Can you explain why?
* Adam Smith was the father of modern economics. The 1776 publication of The Wealth of Nations marked the beginning of economics as a subject of separate study. Smith was the first to put together all previous economic theories into a new comprehensive system. The Wealth of Nation mapped out what economics was to deal with in future.
The findings of The Wealth of Nations turned all previous thinking upside down: Self-interest was appraised; the economy became a separate system governed by inherent laws; wages were determined by supply of and demand for labour rather than by customs and regulations; government intervention in the economy was seen as harmful.
These views have been reiterated so often since they were postulated by Smith that today they seem self-evident to people who have never read a book about economics and do not have the slightest idea who Adam Smith was.
IV. A. Robert Jacques Turgot
Chapter 5 – Question 7
Explain Turgot's law and its historical and present impact on economics.
* Turgot's law of diminishing returns states that, when inputs are increased but one factor is held constant, output still does increase but by ever smaller amounts. Its historical impact was its role in the anti-welfare debate in the early days of capitalism. Its impact on today's economics is its dominant role in supply theory. On the basis of this law, economists postulate that unit costs rise as output rises. Turgot's law has been proved wrong both for agriculture and manufacturing.
V. Joseph Townsend
Chapter 5 – Question 8
Which demographic facts in Third World countries and in highly advanced countries have proved Townsend's theory on overpopulation wrong?
* There seems indeed to be a relationship between the quantity of food and human fertility. But, in contrast to what Townsend stated, it is an inverse relationship. History shows that, when living standards are high, population growth is usually low and vice versa.
VI. Jeremy Bentham
Chapter 5 – Question 9
What are the major theories of utilitarianism?
* The central notions of utilitarianism are utility, happiness and efficiency. Its aim is "the greatest happiness of the greatest number". All policies and institutions must be subjected to investigations in order to find out whether they are optimally efficient in achieving this aim.
Chapter 5 – Question 10
Utilitarianism has exerted enormous influence on economics. Which economic theories go back to utilitarianism?
* Well, you have seen in previous chapters that utility and efficiency play a central role in microeconomics. Bentham's economic agent with the "felicific calculus", a theoretically and practically completely unfeasible method to quantify and count units of happiness, has been transformed into the rational, selfish maximiser of utility, which, like happiness, cannot be counted or quantified. You will learn in later chapters that "the greatest happiness of the greatest number" has been transformed into maximum total surplus, i.e. maximum consumer and producer surplus, which is equated with economic efficiency.
VII. Thomas R. Malthus
Chapter 5 – Question 11
What did Malthus's population law postulate? Why has it been proved wrong?
* Malthus's population law states that "population, when unchecked, increases in a geometrical ratio. Subsistence only increases in an arithmetical ratio." Geometrical ratio means that figures are multiplied by the same number; arithmetical means that the same number is always added.
Malthus's fears rested on Turgot's law of diminishing returns and on a wrong understanding of the relationship between poverty and fertility. Both assumptions have been proved wrong by history.
VIII. Jean Baptiste Say
Chapter 5 – Question 12
Quote and explain Say's law and describe how Keynes refuted it.
* Say's law states that supply creates its own demand because A's costs are B's revenues. The problem revealed by Keynes is that, when supply and hence incomes rise, some of the increments are saved rather than spent. As a result, demand grows less than supply and incomes, output is reduced and workers are laid off.
IX. David Ricardo
Chapter 5 – Question 13
What were Ricardo's major contributions to economics?
* Ricardo is said to have turned economics into a science. His only lasting contribution is the theory of comparative advantage.
X. John Stuart Mill
Chapter 5 – Question 14
In what way did Mill wish to redistribute wealth?
* Mill wished to redistribute wealth by changing inheritance law; a man's right to bequeath his fortunes was to remain unrestricted, but the amount that a single individual was allowed to inherit should be limited.
Chapter 5 – Question 15
What solution did he propose to cure the schism between employers and employees?
* The establishment of co-operatives. Where this was impossible, he demanded statutory protection of labour.
Chapter 5 – Question 16
Mill was, together with Bentham, the founder of utilitarianism. What were his ideas about the pursuit of happiness?
* Mill had learnt that happiness is a by-product of a meaningful life devoted to something that is greater than oneself.
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