Political Economy (part two)
part two
Phase 1: from 15th – middle of 17th century (1400 – 1650).
Commercial capitalism.
The mercantile economic thought.
1- Who practice trade??
-The merchants
-The state (men of public administration)
2- What was the main line of economic thought produced by them?
The economic thought had its independence; they were interested in the national economy. The economy of the nation as a whole.
3- What was the main problem??
The main problem was the wealth of nations.
4- What is the nature of wealth of the nation??
A- From the point of view of some early mercantilists:
Wealth is money made from precious metals was introduced under the influence of flow gold and silver through trade.
B- From the point of view of main stream of mercantile thought:
Wealth is the product of different economic activities as agriculture and industry. Money (precious metals) is the measure of wealth.
5- What's important of precious metals?
- Precious metals are important because money is fabricated out of them.
6- What is the advantage of foreign trade?
Because Europe doesn’t produce metals, so the foreign trade was important to bring precious metals to Europe to be transformed in to money to have accumulated money capital.
7- What is the role of precious metals (money)?
A- Necessary for the circulation of wealth.
B- Necessary for war.
C- Necessary for credit, lending money.
D- used for the expansion of production.
1- How could those countries increase money??
A- To bring precious metals (money) inside the country we have to export commodities as much as we can. And on the other hand import as little as we can.
B- When the export exceeds imports, the balance of the trade will have a surplus (we will get precious metals in returns).
C- To export as much as we can means: to create an extended market (conquer foreign markets) for our domestic abroad.
D- To import as little as we can means to keep our domestic market for our domestic products.
E- In the interest of the nation, to have a favorable balance of trade with a surplus, we must maximize the exports and minimize imports.
2- What is the role of the state in trading??
A- It must trade by itself.
B- Encourage private trade.
C- Widen the internal market to :
- Abolish barriers.
- Create roads, canals and means of transportation.
- Acquire new colonies for: being a market for domestic products, being a source of cheap raw materials and for being a source of cheap labour force.
3- What did the mercantilists think about the idea of price?
A- They look for the current price in the domain of exchange, but the exchange backed with commodity production.
B- In their thought, price converges with value.
C- They made distinction between utility of commodity and its value exists.
4- How could we determine the price on the market?
A- The quantity of money in circulation. OR
B- Demand and supply of the commodity. OR
C- The needs. OR
D- All the previous factors together.
5- What's the difference between nation and state?
A- Nation is a historical form of social groups.
B- State is a historical form of political organization.
Phase 2: from the middle 17th century – middle 19th century.
(1650 – 1850)
Industrial capitalism.
The forerunners of the classical school.
When the industrial revolution started, it was realized through qualitative transformation in: (aspects of industrial revolution):
1- production techniques:
- Application of science to production.
- Inventions and innovations.
- From manual to mechanical industry.
2- Modes of organization of enterprise:
- From workshop to factory.
- Division of labour within enterprise.
- Generation of wage labour.
3- Size of productive unit (increasing the size of enterprise) :
- Accumulation of money capital which became possible to borrow from the emerging banking system.
- This industrial revolution evokes a second agricultural one:
A- Agricultural activity uses industrial means of production.
B- Increase in productivity of agriculture labour.
C- Bigger agriculture surplus (more food and raw materials).
- On the level of economic thought, political economy was born during this phase, by the intellectual efforts of classical school and its forerunners.
The forerunners: - England: William pitty
- France: Francois Quesnay.
Francois Quesnay
The economic system analysed by Quesnay:
The economic system analysed by Quesnay shows it self in the domain of production and circulation (exchange).
1- Production:
The agriculture is not for Quesnay the traditional peasant agriculture but it’s carried out by Class of farmers employing wage labour and aiming at profit maximization.
2- Circulation:
The capitalist nature of this process is reflected in two characteristics:
A- The creation of a distinct product.
B- The crucial role of circulation and reproduction of social product.
The process of circulation having these 2 characteristics is of a capitalist type.
In the process of production and circulation the owner of the land appears as the true capitalist, because he is the one who appropriates the distinct product.
Le Tableau economique
We can see the scheme of Quesnay in those points:
1- The objective of the tableau:
The main objective of the tableau was showing the relations between three classes to which the nation has been produced.
He seeks:
-The origin of the social wealth.
-How the social product distributed between the classes.
-How the conditions of reproduction are realized through the process of circulation.
2- The nature of analysis underlying the tableau:
The analysis has certain characteristics:
-It is interested in the origin of social wealth.
-It is presented in both real and monetary terms (commodity and money flows)
-The analysis runs in micro-economic terms: in terms of social relations between large social units, between social classes.
-it’s a simple reproductive scheme.
The year is taken as a temporal dimension of the process of social production.
This implies no addition to capital over time.
3- The level of abstraction:
A- While taking the whole national economy as one system, Quesnay abstracts it from international trade.
B- Only exchange between social classes is traced.
Abstraction from exchanges that take place within each class is made.
C- All exchanges between classes are summed up at the end of the period enabling the disposition of commodities produced during the year and at the same time placing all factors of production when they are wanted as the new production period begins.
D- The system is supposed to function in an atmosphere of free competition.
E- Prices are supposed to remain unalterable.
4- The process of social labour and its mechanism:
The tableau economique shows the social product is produced – distributed and circulated.
Tableau Economique.
1- Production process.
Land lords | Productive class | Sterile class |
Rents the lands to productive class for 2 milliards. | They have: 1 milliards (fixed capital). 2 milliards (circulating capital). 2 milliards (distinct product). | They have: 1 milliards (circulating capital). 1 milliards (food products). |
| Total=5 milliards. 3 go for circulation. 2 remain for the next year after circulation. | Total=2 milliards. All go for circulation. |
2-Circulation process.
Buy agriculture commodities by (1 milliards). | Sell agriculture commodities by (1 milliards). | |
Buy consumption commodities by (1 milliards). | | Sell consumption commodities by (1 milliards). |
| Sell agriculture means of subsistence by (1 milliards). | Buy agriculture means of subsistence by (1 milliards). |
| Buy manufactured commodities by (1 milliards) | Sell manufactured commodities by (1 milliards). |
| Sell agriculture raw materials by (I milliards) | Buy agriculture raw materials by (1 milliards) |
From this scheme we notice that:
1- Agriculture activity is the basis of all economic activities of the society.
2- The social product is created in the process of production circulation adds nothing.
3- Exchange implies 2 flows:
- Monetary.
- Real.
4- Capital takes different forms: money – productive – commodity – fixed capital – and circulating capital.
5-The agriculture output = 5 milliards.
The sterile output = 2 milliards.
Therefore the national income is =7 milliards which is the supply.
From the previous scheme we can notice that the demand is equal the supply which means that the exchange or circulation happened is equal to the supply.
Therefore the demand is equal the supply which means that the whole national economy will be in equilibrium.
The supply:
1- The productive class produces (5 milliards), 2 of them will be paid for the land owners and 3 will go in circulation process.
2- The sterile class produces (2 milliards); all of them will go in the circulation process.
3-The landowners have the land.
The demand:
3- The land lords demand 2 milliards from the productive class in order to rent them the land. (2 milliards).
4- The productive class buys from the sterile class 1 milliard manufactured commodities. (1 milliard).
5- The sterile class buys 1 milliard agriculture means of subsistence from the productive class and demand 1 milliard agriculture raw materials from the agriculture class too. (2 milliards).
6- And two milliards the productive class keeps it for the next year to be paid for the land owners in order to take the land. (2 milliards).
5-The equilibrium realized:
-Equilibrium is one of the terms that are most used but least précised.
-What concerns us is equilibrium in political economy.
In political economy, a system is said to be in equilibrium when each of its elements that tend to deviant from its initial position comes back to such position due to the action of the forces of the system.
-For Quesnay, we find that he conceived equilibrium, he did have the concept of the general interdependence of all sectors in which nothing stands alone and all having together.
-The general equilibrium is in the economy as a whole, Quesnay seeks in the tableau the quantitative relations of exchange that have to take place between classes, between total production and total demand.
The founders of the classical school
The main contributions were made by:
-Adam smith (Britain).
-David Ricardo (Britain).
1- The object:
It is related to the economic phenomena of production and distribution of social product.
A- Wealth of nation which should be increased.
B- Prices nature and determination on the market.
C- Problem of value.
D- Distribution of product among social classes with shares.
E- Role of state in economic life.
F- External trade.
G- Development over time of capitalist economy.
H- Influenced by natural system, they constitute eternal economic system.
I- Influenced by individualist philosophy, they relate economic phenomena to needs of a self interest of economic man who looks for maximizing his interest.
J- All this happens in the frame work of society:
Three classes = capitalist class, working class, land lords.
2- The theoretical ideas:
1- A theory of production: based on labour theory of value and a theory of capital.
2- A theory of market price: based on a labour theory of value through the idea of natural price.
3- A theory of distribution: of social product among social classes.
4- Theory of money.
5- A theory of foreign trade: looked at within the economic development.
6- A theory of public finance: concerning financial activity of the state.
7- A theory of economic development: of a new capitalist economy.
These theories imply the economic laws of the science of political economy.
As the object of the science concerned phenomena having an eternal nature.
Phase 3: from middle 19th century up till now (1850-now).
The financial capitalism.
Characteristics:
-The industrial activity is becoming the dominant one with the concentration of industries and workers in the urban centers.
-As for the social classes, a development happens for the capitalist class and working class and a relative decline happens for the land lords class.
-The development of international economy with a capitalist international division of labour.
-For the development of political economy, the starting point was the classical theoretical building, inherited especially from Adam smith and d.Ricardo.
Out of it 2 currents emerges:
- Karl Marx and Marxists.
- Neo classical school (marginalist school).
1-Karl Marx and the Marxists (1818-1883).
Marx starts from the writings and theories of classics and studies them critically with a different method (dialectical materialism) on the basis of huge knowledge of social events.
A-The object of political economy (differentiate between Marx and classics):
-For the classics: the process of economic activity with its intervening and interacting circles which oscillates around the process of social labour with its division.
-For Marx: he accepted the idea of the classics about the process of economic activity but for him its based in social labour and oscillates around the cycle of capital.
The cycle of capital is the intermediary of the cycle of social production.
-The economic phenomena:
For the classics: -It has an independent material existence.
-Governed by objective laws.
-Defined starting from the needs of individuals having the characteristics of economic man.
-Have an eternal existence.
But for Marx: -Have an independent material existence.
-Governed by objective laws.
-Defined from the effective economic relations between social classes.
-They are changeable. (For Marx no social formation is eternal) they are relevant to societies.
-They are studied as they exist in real life.
-The social classes in the society:
There are two classes rising with the new society:
1- A capitalist class: - owns the means of production.
- dominates the decisions.
2- A working class: - Having only their labour power to be sold and bought as commodities on the market.
3- A third class which is the vanishing historically with the development of the capitalist economy which is the class of landed aristocracy.
4- A fourth class which will eventually disintegrate which is the middle class.
The economic activity takes place through a continual struggle between social classes; this struggle gives the market its competition.
B- The theoretical construction:
The economic theoretical set up cannot be separated from the social theoretical set up.
But still we can distinguish some theories:
1- Theory of production.
2- Theory of value.
3- Theory of money.
4- Theory of price.
5- Theory of distribution, reproduction and development.
6- Labour theory of value.
-Comparison between Marx and the classics on value:
1- To what sort of economy value belongs?
For classics: the exchange economy.
For Marx: the exchange economy.
2- What is the role of use value with respect to value?
For classics: it’s the condition of value.
For Marx: it’s the condition of value.
(For the commodity to have value, it must be useful to others).
3- What is the source of value?
For Marx: the social labour.
4- What is the measure of value?
For classics: -For smith: it’s the quantity of labour which the commodity commands when it is exchanged.
-For Ricardo: labour time of effectively open in production.
For Marx: labour time socially necessary for the production of the commodity.
5- What is the regular of value?
For classics: -For smith: it differs from the ancient society to the modern society.
For him it’s the amount of labour spent on the production of commodity + profit + rent.
-For Ricardo: the amount of labour time effectively spent in the production of commodities.
For Marx: it’s the labour time socially necessary for the production of commodities and not effectively spent time.
6- What is the relation between value and the productivity of labour?
For Marx: inversely proportional, why??
Because the higher the productivity of labour the less labour time socially necessary for production is spent (less value).
7- How the value of labour power as a commodity is determined?
For Marx: it is determined according to the same principle of measure, source and regulator. But there is something specific which is related to man, it’s a living commodity, so it’s determined by the amount of labour time socially necessary for the production of means of subsistence necessary for the life of its owner and his family being the reproducer of labour force.
The neo classical school
(The Marginalist school).
It emerged in the west European countries especially:
(England – France – Austria)
The ideas were elaborated by the efforts of:
- Britain: S.jevons – A. Marshall
- France: S.walras – V.parets.
- Austria: K.menger – F.von weiser V.bohm
Their visions concerning the object:
- The centre of preoccupation is shifted to the domain of exchange viewed from the angle of consumers utility.
- The economic phenomenon is behavioristic one.
- On the market, the type of economic man appears.
Consumer: needs utility but must be armed with purchasing power = buyer (demand). MOTIVE IS UTILITY. | Entrepreneur: has commodities with utility, doesn’t consume it = seller (supply). MOTIVE IS MONEY PROFIT. |
- The economic phenomena finds its essence in the relation between the individuals (type of economic man) and the commodities.
- Out of the previous scheme, we know the forces of market that are contradictory by their actions.
The entrepreneur:
In order to show on the market of consumption of goods as a seller, he must appear first on the market of factors of production as a buyer to make a small and simple technology process at the factory.
Buyer | Process of production | Seller |
Market of factors of production | Factory | Market of consumption goods |
cost | | revenue |
- In order to study the behavior of seller, we have to study his behavior on the markets of factors or production and market of consumption of goods.
Object of economics in their views is:
The study of behavior of individuals of type of economic man as exchanges is it on the market of consumption goods and market of factors of production.
I.e. be buyer or seller.
As for the method:
What are the main characteristics of capitalist economy?
The main characteristics are:
A- Market economy (production for exchange).
B- The means of production (capital) are owned privately (privately managed).
C- Wage labour.
D- Immediate objective of economic decisions by different groups of people is monetary gains.
E- The functioning (operation) of economic activity takes place in a spontaneous manner through the mechanism of market (the price system).
I.e. in the capitalist economy there is no conscious attention given to the whole social activity in advance (under capitalism, no general planning).
What are the general basics on what economic decisions are taken?
Prices
I.e. prices are beside other factors are the basis elements upon which the economic decisions are taken.
What is the economic unit?
It differs from the point of view; it may be a production or a unit of consumption.
Define price and market?
Price: is the number of monetary units paid for one single commodity.
Market: place of reencounter.
What are the different forms of market?
1- perfect competition market and it has conditions:
A-a big number of sellers.
B-a big number of buyers.
C-entry and exit.
D-no intervention from state.
E-homogenous units of commodities.
2- Imperfect competition market: it must fulfill the previous conditions except homogenous commodities.
3- Monopolistic market: it must fulfill the conditions except a big number of sellers which is replaced by a single seller.
4- Oligopolistic: it fulfills the conditions except a big number of sellers which is replaced by a few numbers of sellers.
The micro analysis of neo classical school concerning the market price is usually presented on the market competitive market.
Hint: Demand and supply are the products of the behavior of individuals.
If behave as seller: supply.
If behave as buyer: demand.
-The buyer’s behavior is conducted by the principle:
Maximization of utility and maximization of monetary sacrifice.
How to realize the quantity of total demand and total supply?
In order to determine the total demand (market demand) or the total supply (market supply) we try to determine first the demand of the individual consumer in order to shift at a second stage to the market demand, and the same method adopted to the supply.
The negative aspects of the capitalist economy:
There are four negative aspects:
1- The uneven pattern of income distribution:
The net national income = national income – (current material inputs + depreciation of fixed capital).
Example:
National income = 10 000000.
Depreciation of fixed capital = 1 000000.
Current material inputs = 500 000.
There fore the net national income will be =
10 000000 – (1 000000 + 500 000) = 8 500000.
The determinates of distribution of national income among the social classes:
- Property of means of production.
- Participation of labour.
- Political power.
- Corruption.
2- The waste of productive force
Productive forces
Human(labour force) | Productive capacity. | Material resources. |
A- Waste of labour force:
Unemployment. | Under unemployment. |
- Unemployment:
The first aspect of waste of human resources is the unemployment.
Examples: The technological unemployment when the machines replace the man, disguised unemployment when the labour force exceeds the production needs, chronicle unemployment when the demand of the high technical employment exceeds the demand of the lower technical employment and the frictional unemployment when the individuals move from region to region looking for a better opportunity.
- Under unemployment:
When the working hours or days become lower than what the worker can give.
B- Waste of productive capacity:
It occurs in the monopoly system when the entrepreneur reduces the supply and leaves certain part of production capacity idle so as to increase his profit.
C- Waste of material recourses:
It occurs when u use the material resources to produce harmful products as drugs and alcohols.
It occurs due to the exploitation of the exhaustive national resources.
It occurs due to the use of productive resources in destructive activities as in wars.
3- The unbalanced development of capitalist economy:
- Over time:
The development through the crisis and cyclical fluctuations.
The economic cycle.
Machine stops (crisis). | Depression. | Recovery. | Expansion. |
- Over space:
Some sectors have great development than others.
Some branches of activities have a great development than others.
On an international level there were some advanced capitalist countries and UN advanced capitalist countries.
4- Continuous disturbance of environment:
- Air pollution, noise pollution and water pollution, all these factors will decrease the conditions of healthy life for human being.
- The open destruction of environment.
- Destruction of climatic conditions as the continuous destruction of ozone layer.
