Classical

Theories of
Development
Sunny Jose

Origins

Christianity: Work as a punishment to

virtue
16th cent Protestant: glorifying god to
work
Calvinist: Gods calling is glorified via
ardent, selfless labour
Idlness is dishonour to God
These new ideals were championed by
artisans, craftsmen & manufacturers

Mercantilism
Lasted for 3 centuries, from 15th cent
Ideas, institutions & economic
practices that supported absolutist
state, monarchy & aristocratic classes
Aimed at increasing power of the state
States power rests on economic
means, not bravery

Mercantilism
Money & precious metals are wealth
Core of mercantilism: balance of trade
A country with a favourable balance of
trade is prosperous & powerful
Export more than import, leading to
the inflow of precious metals, esp. gold
To achieve this, trade was controlled by
the state

Mercantilism
Why? Trade is a zero-sum game
Manufacturing was protected
Export was promoted
Import was restricted
Rationalist: promotes rational thinking
Science (not God) as a solution to
material problems

Enlightenment
Eurocentric term
Revolution in thinking occurred in 17th
and 18th centuries
Reason can end ignorance,
superstition and tyranny in making a
better world
Main opponent was catholic church
Aristocracy dominated the society
through force and tradition

Enlightenment
Philosophers advanced ideas against
the politico-economic system
Against feudalism and landed nobility
Supported the cause of small
producers, artisans, small farmers
Whose toil formed the basis of
mercantilist state power
Thomas Hobbes, John Locke, David
Hume

Enlightenment
Introduced the ideas of self-interest,
natural rights, property rights
Hobbes: Self-interest as the basis of
social morality, organisation of society
Locke: Humans have the right to
preserve their lives and right to have
subsistence derived from earth
Such products have to be made from
earth through labour, individuals have
natural rights over their person

Enlightenment
Rights over ones efforts and products
By applying labour, individuals convert
and improve natural environment
That land, improved through labour,
can be considered as private property
These concepts became powerful tools
for development of economic ideas
later

Classical economics
Emerged from congruence of these
ideas
Rationality and rejection of
superstitions, religious beliefs
Work as a cherished value/virtue
Rejection of feudal, hierarchical system
Promotion of self-interests, individual
rights
Favoured the entrepreneurs the most

Classical economics
Adam Smith to John Stuart Mill
Smith: Humans possess an inherent
urge to trade
As traders, humans are self-interested
For what?: to make money
Harness self-interest as an economic
motive, key to wealth & prosperity

Adam Smith
Labour theory of value
Value originates from labour, not utility
Labour as the measure of
exchangeable value of commodities
Early society: physical labour used to
produce goods determined the price
Money from the sale went to labourer,
savings of labourers created capital

Adam Smith
Capital could be used to hire
additional workers, who also produced
value
Capitalists use the capital to employ
industrious people
They take new initiatives, which also
involve risks
Profit had to be given to risk taker (the
capitalist employer), not the labourer

Adam Smith
Common land becomes private
property, rent to owner of land/factory
Advanced society: natural price or
exchangeable value should consist of:
Wages (labourers), rent (factory
owners) and profit (capitalists)
Competition determines the relation
between natural and market prices

Adam Smith
When market price is higher than natural
price, capitalists convert capital & land
into more profitable employment
Eco growth: comes from capital via
savings from revenues through hard work
EG also required a culture rooted in
morality

A system of natural liberty that

respected higher virtues

Adam Smith
There should be no artificial impediment
to trade, markets and exchange
Based on these ideas, Smith explained
why some nations prosper others not
Found the answer in division of labour
DL: breaking the total labour effort into
different components
DL leads to specialisation

Adam Smith
Just economy also had to provide high
wages for workers
Specialisation, markets and trade are
the bases of the prosperity of nations
Free trade and well functioning
markets will lead to efficient allocation
of scarce resources

Adam Smith
Specialisation promotes efficiency, saves
time, increases production
Society organised by self-interest needs a
regulating mechanism
Competition, not the state, is the
regulating mechanism
Long run: free markets & competition
would drive prices towards natural or
socially just levels

Adam Smith
The web of self-regulating markets is the
invisible hand which:
Organise the economy efficiently and
Transform private self-interest into public
virtue
Markets as virtuous institutions of:
Social efficiency,
Drivers of invention and innovation and
Risk taking