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ECON301: History of Economic Ideas

Unit 3: Classical Economics   The classical economics period spanned from 1776 to the mid-19th century. Economists of the time tried to explain the changes in their environment as workers moved from farms to factories. Markets became more developed, and new pricing models explained the value of goods and services. Adam Smith plays a special role in the transition from mercantilism to classical economics: his work is much like a pair of bookends. In the last unit, we examined the role that Adam Smith played in ending mercantilist thought. As you will learn in this unit, he also paved the way for intellectual inquiry into the classical era. His masterwork, titled An Inquiry into the Nature and Causes of the Wealth of Nations, was a clarion call for liberating human initiative and channeling it through the mechanism of the market, or what Smith metaphorically called theinvisible hand. 

Adam Smith influenced David Ricardo as he developed many of the principle ideas of classical economics, including the labor theory of value, the law of diminishing returns in agricultural production, and the law of comparative advantage. Jeremy Bentham later emerged as a prominent economic and social thinker; his theory of utilitarianism famously framed the role and nature of government. Meanwhile, another classical economist, Karl Marx, analyzed communal economics and the relationship between capital (factories and machines) and human labor. The works of these classical economists echo modern times: Ricardo’s theories form the basis for theories of globalization; Bentham’s philosophy is the bedrock of liberal democracy; and Marx’s ideas would famously constitute the foundation of communism. In addition, you will read the works of Jean-Baptiste Say, the French Ricardo, and will become acquainted with the thought of the United States’ Alexander Hamilton, all of whom wrote during this period.

Unit 3 Time Advisory
Completing this unit should take approximately 59.25 hours. ☐    Subunit 3.1: 27 hours

☐    Reading: 26 hours

☐    Lecture: 1 hour

☐    Subunit 3.2: 18 hours

☐    Subunit 3.3: 3.5 hours

☐    Subunit 3.4: 5.5 hours

☐    Subunit 3.4.1: 1 hour

☐    Subunit 3.4.2: 1.5 hours

☐    Subunit 3.4.3: 1 hour

☐    Subunit 3.4.4: 2 hours

☐    Subunit 3.5: 1 hour

☐    Subunit 3.6: 2.25 hours

☐    Assessment: 2 hours

Unit3 Learning Outcomes
Upon successful completion of this unit, you will be able to: - explain and apply classical economics concepts, including theinvisible hand, utilitarianism, labor theory of value, and communal economics; - compare and contrast as well as discuss concepts in classical economics; and - analyze economic ideas in relation to their historical environment.

3.1 Adam Smith Revisited   - Reading: Project Gutenberg: Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, Books I–III Link: Project Gutenberg: Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, Books I–III (PDF)
 
Instructions: Read the first three books of the Wealth of Nations on pages 7–412. In these books, you will see how Smith lays out his framework for a free market society. This reading is lengthy, so it is recommended that you break up the assigned reading over the course of one or two weeks. 
 
As you read, note how he breaks down the stock, or capital, into its constituent parts, and consider the following study questions and their implications: How does he view slavery from an economic perspective? What does Smith mean when he describes the free market as an invisible hand? What do you think about his ideas on division of labor?
 
Reading these books and answering the study questions should take approximately 25 hours.

 Terms of Use: *An Inquiry into the Nature and Causes of the Wealth
of Nations* is in the public domain.
  • Lecture: Yale University: Professor Douglas W. Rae’s “Lecture 3: Counting the Fingers of Adam Smith's Invisible Hand” Link: Yale University: Professor Douglas W. Rae’s “Lecture 3: Counting the Fingers of Adam Smith's Invisible Hand” (Flash, Mp3, HTML)

    Instructions: After reading Adam Smith’s first three books of the Wealth of Nations, watch the lecture by Professor Rae. In Rae’s lecture, pay attention to the difference he shows between Smith’s ideas and objectives and the common objectives of boardroom executives.
     
    Watching this lecture and pausing to take notes should take approximately 1 hour.
     
    Terms of Use: This resource is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. It is attributed to Douglas W. Rae, and the original version can be found here.

  • Reading: Erasmus Journal for Philosophy and Economics 3, issue 1, (2010): Amartya Sen’s “Adam Smith and the Contemporary World” Link: Erasmus Journal for Philosophy and Economics 3, issue 1, (2010): Amartya Sen’s “Adam Smith and the Contemporary World” (PDF)
     
    Instructions: Read Sen’s essay, “Adam Smith and the Contemporary World.” In Sen’s paper, take note of how he shows the complexity of Smith’s framework in contrast to the popular and contemporary identification of Smith’s invisible hand with entirely free and unfettered market forces.
     
    Reading this essay should take approximately 1 hour.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

3.2 David Ricardo   - Reading: Project Gutenberg: David Ricardo’s *Principles of Political Economy and Taxation* Link: Project Gutenberg: David Ricardo’s Principles of Political Economy and Taxation (PDF)
 
Also available in:
Google Books

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON301-3.2.2-Principles-of-Political-Economy-and-Taxation-David-Ricardo.epub)  

 Instructions: Read *Principles of Political Economy and Taxation.*
This reading is lengthy, so it is recommended that you break up the
assigned reading over the course of one or two weeks. This text
provides a fundamental framework for describing a wide range of
economic activities. Ricardo’s *labor theory of value*, for example,
explains the concept of comparative advantage and specialization of
labor. These concepts can be applied to free trade among nations or
to the division of household labor. Staunch capitalists often cite
Ricardo and his work as evidence of the power of free markets.
Curiously, Marxists and communists have also pointed to Ricardo’s
work to justify their own theories. The flexibility of his theory is
a testament to his timeless contribution to economics.    
    
 As you read, consider the following study questions: How does
Ricardo assign value to labor and his description of how taxation
affects well-being? In what ways does Ricardo cite Smith in his
text?  
    
 Reading this text and answering the study questions should take
approximately 18 hours.  
    
 Terms of Use: *Principles of Political Economy and Taxation* is in
the public domain. 

3.3 Jeremy Bentham   - Reading: Jeremy Bentham’s An Introduction to the Principles of Morals and Legislation: “Preface and Chapters 1–5” Link: Jeremy Bentham’s An Introduction to the Principles of Morals and Legislation: “Preface and Chapters 1–5” (PDF)
 
Also available in:

[EPUB](http://www.saylor.org/site/wp-content/uploads/2011/07/ECON301-3.3.2-_An-Introduction-to-the-Principles_of-Morals-and-Legislation_-Jeremy-Bentham.epub)  
    
 Instructions: Read the preface and the first five chapters of
Bentham’s *An Introduction to the Principles of Morals and
Legislation* on pages 1–26*.* Bentham was a contemporary of
Smith. Note how Bentham introduces the concept of utility as it
relates to human perception. His later works, particularly *The
Rationale of Reward* (1825) and *The Rationale of Punishment*
(1830), go on to detail a type of calculus for measuring individual
and social happiness. These form the basis for much of modern
economic thought on choice theory and utility.  
    
 Reading the preface and these chapters should take approximately 1
hour and 30 minutes.  
    
 Terms of Use: *An Introduction to the Principles of Morals and
Legislation* is in the public domain. 

3.4 Karl Marx   3.4.1 Overview   - Lecture: Yale University: Professor Douglas W. Rae’s “Lecture 4: Karl Marx, Joseph Schumpeter, and an Economic System Incapable of Coming to Rest” Link: Yale University: Professor Douglas W. Rae’s “Lecture 4: Karl Marx, Joseph Schumpeter, and an Economic System Incapable of Coming to Rest” (Flash, Mp3, HTML)
 
Instructions: Watch this lecture, which gives an overview of Marx’s theories and framework, as well as the related theories by Joseph Schumpeter, an Austrian economist of the early 20th century.
 
Watching this lecture and pausing to take notes should take approximately 1 hour.
 
Terms of Use: This resource is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. This lecture is attributed to Douglas W. Rae, and the original version can be found here.

3.4.2 The Marxian Challenge   - Reading: Karl Marx’s A Contribution to the Critique of Political Economy: “Preface” Link: Karl Marx’s A Contribution to the Critique of Political Economy: “Preface” (HTML)
 
Instructions: Read the preface from Karl Marx’s A Contribution to the Critique of Political Economy, written in 1859. This reading constitutes a sketch of Marx’s framework for historical materialism. He argues that the nature of a society’s economic structure depends upon the degree of development of the productive forces or means of production, meaning human labor conjoined with technology. The nature of the economic structure explains the relations of production or superstructure, meaning the political and legal institutions of society. Revolution occurs, however, when the forces of production are stifled by the superstructure, which is replaced by a structure better suited to preside over the continued development of the forces of production.
 
Reading the preface should take approximately 15 minutes.
 
Terms of Use: A Contribution to the Critique of Political Economy is in the public domain.

  • Lecture: Yale University: Professor Ian Shapiro’s “Lecture 10: Marx’s Theory of Capitalism” Link: Yale University: Professor Ian Shapiro’s “Lecture 10: Marx’s Theory of Capitalism” (Flash, Mp3, HTML)
     
    Instructions: Watch this lecture, which presents Marx’s works on economics and society as definitively a part of the Enlightenment tradition in political and economic thought as that of Adam Smith or John Stuart Mill.
     
    Watching this lecture and pausing to take notes should take approximately 1 hour and 15 minutes.
     
    Terms of Use: This resource is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. This lecture is attributed to Ian Shapiro, and the original version can be found here.

3.4.3 Marx’s Theory of Capitalism   - Reading: Karl Marx’s A Contribution to the Critique of Political Economy: “Part 1: The Commodity” Link: Karl Marx’s A Contribution to the Critique of Political Economy“Part 1: The Commodity” (HTML)

 Instructions: Read part 1 of Marx’s *A Contribution to the Critique
of Political Economy.* Marx begins by establishing two necessary
conditions for commodity production: a market and a social division
of labor where people make different things. For Marx, commodities
both have a use-value and an exchange-value or price, but it is the
latter which is problematic. In coming to understand why one
commodity is priced differently than another, Marx derives his labor
theory of value.  

 Reading this section should take approximately 1 hour.  

 Terms of Use: *A Contribution to the Critique of Political Economy*
is in the public domain.

3.4.4 From Capitalism to Socialism to Communism   - Reading: Karl Marx’s Capital, volume III, part III: “Chapter 14: Counteracting Influences” Link: Karl Marx’s Capital, volume III, part III: “Chapter 14: Counteracting Influences” (HTML)
 
Instructions: Read chapter 14 of Marx’s Capital. Marx shows the effects of his law that within a capitalist economic structure, the tendency of the rate of profit must fall. This leads to increasing intensity of exploitation as well as other effects that contribute to the downfall of capitalism.
 
Reading this chapter should take approximately 30 minutes.
 
Terms of Use: Capital is in the public domain.

  • Reading: Karl Marx’s Critique of the Gotha Programme: “Part IV” Link: Karl Marx’s Critique of the Gotha Programme: “Part IV” (HTML)
     
    Instructions: Read part 4 of Marx’s Critique of the Gotha Programme. Marx describes the transitions from a capitalist to a socialist to a communist society, and he describes communism as a society in which each person should contribute according to their ability and receive according to their need.
     
    Reading this section should take approximately 30 minutes.
     
    Terms of Use: Critique of the Gotha Programme is in the public domain.

  • Lecture: Yale University: Professor Ian Shapiro’s “Lecture 11: Marxian Exploitation and Distributive Justice” Link: Yale University: Professor Ian Shapiro’s “Lecture 11: Marxian Exploitation and Distributive Justice” (Flash, Mp3, HTML)
     
    Instructions: Watch this lecture, which focuses on the technical – as opposed to the normative – aspects of Marxian exploitation and how a socialist economic structure is the logical successor to a capitalist economic structure, which would develop into a communist economic structure.
     
    Watching this lecture and pausing to take notes should take approximately 1 hour.
     
    Terms of Use: This resource is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. This lecture is attributed to Ian Shapiro, and the original version can be found here.

3.5 Jean-Baptiste Say   - Reading: Jean-Baptiste Say’s A Treatise on Political Economy: “Of the Right of Property” and “Of the Demand or Market for Products” Link: Jean-Baptiste Say’s A Treatise on Political Economy: “Of the Right of Property” (PDF) and “Of the Demand or Market for Products” (PDF)
 
Also available in:

[EPUB](http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=2474&Itemid=28) (“Of
the Right of Property”)  
 [EPUB and
Kindle](http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=2495&Itemid=28) (“Of
the Demand or Market for Products”)  
    
 Instructions: Select the EBook PDF links to download the PDF files
of these chapters. Read these two chapters from Say’s *Treatise on
Political Economy.* Say, referred to as the French David Ricardo, is
most commonly known for *Say’s law*, which comes in a variety of
formulations but generically as *supply creates its own demand*, a
concept that is not appreciated in its complexity when taken out of
context.  
    
 Reading these chapters should take approximately 1 hour.  
    
 Terms of Use: *A Treatise on Political Economy* is in the public
domain.

3.6 Early American Economic Thought   - Reading: The Federal Reserve Bank of Minneapolis: Madeline Christensen’s “Cement to Our Union: Hamilton’s Economic Vision” Link: The Federal Reserve Bank of Minneapolis: Madeline Christensen’s “Cement to Our Union: Hamilton’s Economic Vision” (HTML)
 
Instructions: Read this brief essay on the economic views of Alexander Hamilton and Thomas Jefferson and the effect of those ideas on the drafting of the US Constitution and the antagonists’ subsequent public service. Generally speaking, Hamilton followed contemporary British thought, whereas Jefferson considered himself to be a French Physiocrat.
 
Reading this article should take approximately 15 minutes.
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Alexander Hamilton’s *The Federalist* Link: Alexander Hamilton’s The Federalist (HTML)
     
    Instructions: Read the following sections from The Federalist: “1. General Introduction,” “12. The Utility of the Union with Respect to Revenue,” “13. Advantage of the Union in Respect to Economy in Government,” and “30–36 General Power of Taxation.” The entries from The Federalist provide an insight into Hamilton’s economic and political views with regard to taxation, national debt, trade, and a strong federal government.
     
    Reading these articles should take approximately 2 hours.
     
    Terms of Use: The Federalist is in the public domain.

Unit 3 Reading Questions   - Assessment: The Saylor Foundation’s “Unit 3 Reading Questions” Link: The Saylor Foundation’s “Unit 3 Reading Questions” (PDF)

 Instructions: Complete this set of reading questions, referring to
the primary texts for this unit as needed in order to support your
ideas. Try to locate a passage which you can draw from and expand
upon in order to answer each question, and in your own words, sketch
out a brief interpretation of the passage’s meaning. Post your
responses to these questions on the [ECON301 discussion
forum](http://forums.saylor.org/topic/unit-3-reading-questions/), as
well as review and respond to one or two other students’ posts. When
you are done – or if you are stuck – check your work against The
Saylor Foundation’s [“Guide to Responding to Unit 3 Reading
Questions”](http://www.saylor.org/site/wp-content/uploads/2013/09/ECON301-Unit3GuidetoReadingQuestions-PR-FINAL-RV-FINAL.pdf)
for some notes on possible answers.  

 Completing this assessment should take approximately 2 hours.