ECO 4119 POLITICAL
ECONOMY
Chapter 2
The History of Political Economy
Introduction
• Current political and economic issues cannot be fully
understood without an appreciation of the historical
evolution of both institutions and ideas.
• All history is subject to interpretation, and the history of
ideas is particularly controversial.
• No single interpretation of the history of political economy
commands universal agreement.
Origins of Political Economy
• Between the fourteenth and eighteenth centuries --a
“great transformation” in Western Europe as the impact of
commerce gradually eroded the feudal economy of the
Middle Ages
• The newly emerging market economy --provided
individual aspirations --encouraged entrepreneurial
behavior that had previously been suppressed by church,
state, and the community.
• The church struggled to maintain its control over society
by placing limitations on the accumulation and use of
property.
Origins of Political Economy
• Along with changes in production and trade, new ideas were
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emerging.
The Renaissance of the fourteenth century paved the way for
the scientific inquiries of Copernicus, Galileo, Bacon, and
Newton.
Another impetus for change came from the Protestant
Reformation initiated by Martin Luther in Germany.
By the early eighteenth century, the Age of Reason, or
Enlightenment, had arrived, and with it came a rejection of the
medieval view of society as a divinely ordered hierarchy in
which each person had a proper role and purpose.
The new worldview centered around the autonomous individual
and the human capacity for reason.
Origins of Political Economy
• The philosophers of Enlightenment such as Voltaire,
Diderot, believed that most human problems were
attributable to poorly structured institutions and to
uncritical acceptance of traditional authority emanating
from church and state.
• They blamed prejudice, intolerance, and emotions for
suppressing the human capacity to envision a better
society and to act accordingly.
• Enlightenment thinkers demanded the liberation of the
individual from all social, political, and religious bonds.
Origins of Political Economy
• A total restructuring of society
• The rising importance of science
• Revealing the universal laws that govern nature and society
• Liberating mankind from both material deprivation and social
oppression
• With advances in the understanding of human behavior,
Enlightenment thinkers began to anticipate a science of society.
If the laws and regularities of human interaction could be
understood, a scientific basis for identifying the ideal set of
social institutions would be established.
• This emergent science of society came to be known as political
economy.
Origins of Political Economy
• The actual term “political economy” was introduced in 1616 by
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a French writer, Antoine de Montchrétien (1575-1621), in his
book Treatise on Political Economy.
The first known English usage occurred in 1767 with the
publication of Inquiry into the Principles of Political Economy by
Sir James Steuart (1712-1780).
These early political economists sought to develop guidelines
and offer policy recommendations for government efforts to
stimulate commerce
Markets were still relatively undeveloped at the time, so
government took on significant responsibilities in opening new
areas for trade, offering protection from competition, and
providing control over product quality.
The ideas and policies developed for this early stage of
capitalism came to be known as “mercantilism”.
Origins of Political Economy
• By the late eighteenth century, however, many manufacturers and
merchants perceived government not as a beneficent director of
economic activities, but as a major obstacle to the pursuit of wealth.
• The formation of markets in England by the second half of the
eighteenth century along three lines
• First, the elimination of many single-family farms created a market
for cheap and mobile labor.
• Second, the accumulation of wealth through piracy, looting, and
early successes in commerce created a mass of financial capital
available for borrowing.
• Third, the confiscation and subsequent sale of church property and
public land that had previously been reserved for common use
created a market for land.
• Political freedom --the combination of the Magna Carta --the English
civil war, and the Glorious Revolution of 1688 greatly diminished the
power of the monarch and the aristocracy.
• The market would become the dominant institution for organizing
society.
What is Industrial Revolution and why it
started in Britain?
• Between 1770 and 1850 the economy of England changed
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from mostly agricultural to mostly industrial
This was the result not of one key invention but of technological
progress in different fields coming together
Its center is the development of factories (which hadn’t really
existed before this time), but they couldn’t have developed
without better transportation creating larger markets and better
transportation couldn’t have existed without the growth of the
iron industry, which couldn't have grown without steam engines
Society had a hard time adjusting to the new economic system
This is the beginning of technology changing quickly enough
that peoples lives were transformed by technology within their
lifetimes, not over many generations
What is Industrial Revolution and why it
started in Britain?
• Economy becoming more capitalist (free market), decline
of:
• Feudalism--farmers were no longer bound to the land
• Guild system--the guild for a particular trade could no
longer control who set up a new business
• The system of customary prices--the market is more
free, instead of the old system where changing the price
because of a shortage was seen as profiteering
• These changes were a necessary condition but not
perhaps the immediate cause
What is Industrial Revolution and why it
started in Britain?
• Agricultural changes
• Enclosure =the abolishment of the old system of communal farming
and its replacement with family farms. Supposedly everyone had
the same share of land as before, but the smallest farmers didn’t
have enough to survive as an independent farm and they went out
of business and went looking for work. Took place 16th century to
about 1820.
• Four field crop rotation--wheat, turnips, barley, clover or alfalfa
(turnips and hay crops make it possible to keep more livestock)
• New scientific approaches to farming (one of the pioneer scientific
investigators of agriculture was an Englishman named Jethro Tull)
• Average agricultural surplus per worker doubled from about 25% to
about 50%
• Workers no longer needed in agriculture were available for
industrial jobs (details on this argument)
What is Industrial Revolution and why it
started in Britain?
• Increasing population--but it didn’t really start increasing until the industrial
revolution began
• The scientific revolution--but it happened 100 years earlier
• England was a Protestant country and the protestant work ethic benefited the
economy (this idea was put forth by a sociologist named Max Weber in a book
titled The Protestant Ethic and the Spirit of Capitalism
• Many scientists and inventors were members of religious minorities
• Most professions were closed to them because in England you had to belong
to the Church of England in order to be a lawyer or hold a government job,
other kinds of protestants, called dissenters, were not allowed to hold such
positions or even to go to the best universities
• In England the dissenters also became the leaders of the industrial revolution
• France was Catholic--for a while it tolerated a protestant minority called the
Huguenots, but then they were told they would have to convert or leave the
country because the king feared they were disloyal
• But Hobsbawm points out that other Protestant countries did not industrialize
rapidly
• a domestic market with manufacturing already established
• expansion of trade, mercantile economic policy
Classical Political Economy
• Adam Smith (1723-1790)
• A Scottish professor of moral philosophy, was fascinated by the
market’s potential for promoting both individual freedom and
material prosperity.
• The Wealth of Nations (1776) presented the case for free
markets and formed the basis for classical political economy.
• This school of thought dates roughly from 1776 to the midnineteenth century and its proponents include, in addition to
Smith, Thomas Malthus (1766-1834), David Ricardo (17721823), Nassau Senior (1790-1864), and Jean Baptiste Say
(1767-1832).
• Classical political economy is linked with the Enlightenment,
demonstrating that when the shackles of religious and political
restrictions are removed, individuals will prosper and society
will remain orderly.
Classical Political Economy
• Optimism and pessimism of Classical political economists
in their visions of a market economy
• The optimism centers around the anticipation that the
market will generate both increasing wealth and individual
freedom without the need for supervision by church or
state.
• Malthus --population theory
• Ricardo --stationary state
Classical Political Economy
• With population growing rapidly and the available supply
of land relatively fixed, they predicted an inevitable future
of subsistence living for the vast majority of the
population.
• Landlords would prosper as they received ever-larger
rents due to the increasing demand for land on which to
grow food, but capitalists’ profits would dwindle as they
were forced to pay higher wages so workers could afford
to buy increasingly expensive food.
• Eventually profits would be insufficient to provide
capitalists with either the incentive or the means to
expand production, and the entire economy would settle
into a gloomy “stationary state”.
The Radical Extension
• The classical political economists were failing to carry out the mission of the
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Enlightenment.
Although the power of the state had been challenged and restrained, the power of
private property had actually increased due to the elimination of most government
restraints.
Central to the Radical call for a reconstruction of society was a strong
commitment to egalitarianism.
Radicals condemned private property for breeding selfish interests that conflict
with the common good of society. In a private property system, individuals have
opposing interests and social cohesion disintegrates as the owners of property
oppress those with little or no property.
The threat of starvation coerces propertyless people to work for subsistence
wages.
Radicals also condemned private property for alienating individuals from any
sense of community or control over their work.
They believed that people can join together to collectively direct their social
existence.
Radicals envisioned a classless society in which free individuals could live in
harmony with each other in their work, their communities, and their government.
Such a society would be egalitarian and communal.
The Radical Extension
• Examples of early Radical thinkers include William Godwin
(1756-1836) in England, Thomas Paine (1737-1809) in
America, and the Marquis de Condorcet (1743-1794) in
France.
• These writers were opposed not so much to the principle of
private property as to the excessive concentration of ownership
that restricted the opportunities and freedom of the majority of
the population.
• In the early 1800s, thinkers such as Robert Owen (1771-1858)
of England and Charles Fourier (1772-1837) and Henri de
Saint-Simon (1760-1825) of France popularized the idea of
eliminating private property.
• “Utopian socialists” formulated detailed plans for small
communities based on shared ownership of property
The Radical Extension
• Nineteenth century, industrialization, modernization, declining power of
tradition, urbanization
• Karl Marx (1818-1883), a German philosopher and political economist
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who constructed an impressive theoretical analysis of capitalism by
weaving together classical political economy, the ideas of the German
philosopher G. W. F. Hegel (1770-1831), and the communal vision of the
utopian socialists.
According to Marx capitalism would eventually crumble and be replaced
by a society in which the means of production were communally owned
and operated.
This new society, Marx claimed, was incubating within capitalism and its
birth would coincide with the death of the parent.
Unlike the utopian socialists who sought to turn their backs on capitalist
society, Marx portrayed capitalism as the essential precondition for a new
and better organization of society.
In capitalist factories, workers were acquiring the technical knowledge,
cooperative skills, and sense of solidarity that would enable them to
revolt and establish a communal society.
The Radical Extension
• The historical evolution of Radical thought (Marx and his influence)
• When a proletarian revolution failed to appear by the early twentieth century,
Russian theorists V. I. Lenin (1870-1924) and Leon Trotsky (1879-1940)
introduced into Marxism the notion of a “vanguard party” of intellectuals who
would lead the workers in the struggle for socialism. This strand of Marxism
served as the theoretical basis for the Soviet Union.
• In Western Europe and the United States, a different revision of Marx’s ideas
was formulated by theorists such as Edward Bernstein (1850-1932) in
Germany, and Eugene Debs (1855-1926) and Norman Thomas (1884-1968) in
the United States. Acknowledging the rising standard of living enjoyed by
workers in capitalist societies, these “social democrats” rejected the Marxian
concept of proletarian revolution. Instead, they defended socialism as a more
just and efficient economic system whose obvious appeal to the working class
would permit an evolutionary transition from capitalism to socialism through the
democratic political process. The task of the revisionists was not to foment
revolution, but to establish a working-class political party and to educate all
citizens about the attractions of socialism.
The Radical Extension
• The historical evolution of Radical thought (Marx and his
influence)
• Thorstein Veblen (1857-1929)
• Institutional economics --critique of Marx --critique of Classical
political economy --coined the term neoclassical economics --increasing the role of government in coordinating economic activity.
• Veblen rejected much of Marxism as being unscientific and
metaphysical, but he remained a trenchant critic of capitalism.
• His ideas became influential in the Progressive political movement
in the United States that sought to reform capitalism by enlarging
the role of government in coordinating economic activity.
The Conservative Response
• The attack on repressive social institutions broadened the
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scope for individual initiative and development, resulting in the
industrialization and urbanization of western Europe.
However, disintegration of the traditional social order created
both economic and emotional insecurity for many people.
Feudalism had been based on stable, hierarchical social
relations, with individual identity derived from one’s role within a
web of mutual expectations and duties. In contrast, the newly
emerging industrial society wrenched people out of their
accustomed roles.
Small farmers lost their lands
Factories took artisans’ jobs --guilds disappeared
Even aristocrats suffered declining power and status as capital
replaced land as the primary source of wealth.
The Conservative Response
• People formerly enmeshed in extended families, neighborhoods, churches,
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and communities now faced the impersonal forces of the market as isolated
entities.
The French Revolution of 1789 magnified concerns about a “dark side” of the
Enlightenment.
The ideals: “liberty, equality, fraternity”
To halt the corrosive impact of the Enlightenment, a renewed defense of
traditional society was needed.
Edmund Burke (1729-1797), an Irish member of the British parliament, was
among the first to develop a Conservative critique of the Enlightenment.
Burke claimed that the Enlightenment effort to fundamentally restructure
society was destroying the authority and emotional attachments that unite
individuals into communities.
Human reason was not a reliable guide for redesigning society
The exercise of reason should be confined to efforts by individuals to improve
their private lives.
A stable social order (similar to the feudal system) must be grounded in
traditional institutions such as the church and the patriarchal family.
The Conservative Response
• From the Conservative perspective, the degeneration of the French
Revolution into violent anarchy was attributable to individualism and
the pursuit of self-interest.
• The Revolution foreshadowed an impending collapse of civilization
that could be averted only by strengthening traditional values and
institutions.
• Romanticism --German reaction to the Enlightenment: Having been
subjected to military conquest by France and the threat of economic
domination by British industry, many Germans expressed disdain
toward the cultures of their western neighbors. They wanted to avoid
disintegration of their own culture. Writers such as Johann Fichte
(1762-1814), August von Schlegel (1767-1845), Friedrich von
Schelling (1775-1854), and Johann Herder (1744-1803) expressed
their opposition to the effects of modernization on Germanic culture.
The Conservative Response
• The German romantics defended the unpredictability and irrationality
of humans, the importance of traditional culture in maintaining a
cohesive society, and a view of reality that includes spiritual and even
mystical elements. They believed that personal fulfillment could be
achieved only within the context of a stable culture based on widely
shared values.
• Even England, the most industrialized country in the world,
experienced a flourishing romantic movement. Partly inspired by their
German counterparts, British writers such as Samuel Taylor Coleridge
(1772-1834), William Wordsworth (1770-1850), and William Blake
(1757-1827) expressed the common theme that society had been
damaged by modernization and industrialization.
The Conservative Response
• Nationalism: The idea that a group of people sharing a
common language, culture, and heritage could collectively
determine their future lay at the root of the French Revolution.
• However, the alliance between nationalism and liberalism was
short-lived. Whereas liberalism stresses the rights of
autonomous individuals, nationalism demands submersion of
personal identity in the national group.
• By the mid-nineteenth century, Conservatives in Europe had
gained the upper hand in their battle against the forces
unleashed by the Enlightenment.
• Later in the nineteenth century, Bismarck in Germany and
Disraeli in England sought to gain popular support for
Conservative governments by establishing rudimentary welfare
programs. Government would replace the aristocracy in
dispensing charity.
The Conservative Response
• The
emphasis on cultural purity led Conservative
nationalists to oppose free trade. Any nation opening its
borders to the free flow of resources, products, and ideas
will gradually lose its unique identity.
• Only government can effectively oppose the cosmopolitan
influences of the international market economy. A strong
government enables a nation to be self-determining, free
from constraints imposed by other nations and by the
forces of the market.
• Nationalists also find war and imperialism to be useful in
diverting public attention away from internal problems and
toward the glory and prestige of the nation.
Neoclassical Economics
• The rise of Radicalism and Conservatism established
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alternatives to classical political economy.
Reactions to radicalism and conservatism
Radicalism aroused fears of the confiscation of private
property.
Conservatism was seen as a threat to democracy and
modernization.
The combination of an increasingly powerful working
class and social problems accompanying industrialization
created new demands for government intervention to
improve education, old-age security, public health, and
occupational safety.
Neoclassical Economics
• In the face of these pressures, the policy of laissez-faire
became increasingly unpopular.
• Marginalist revolution: Carl Menger (1840-1921) of Austria, W.
Stanley Jevons (1835-1882) of England, and Leon Walras
(1834-1910) of France
• Changed the focus of political economy from the classical
concern with distribution and growth to a “neoclassical”
orientation that dealt solely with the behavior of individual
consumers and firms operating in competitive markets.
• Neoclassical economists sought to construct a theory that
matched the scientific rigor of physics. To achieve this goal,
they applied mathematics as an analytical method to explain
the choices of individual consumers and producers.
Neoclassical Economics
• Disagreement among economists in Austria and England gave
rise to two separate traditions: Austrian economics and
Cambridge economics.
• Austrian economists were undoubtedly influenced by the
political climate in their country during the late nineteenth
century. As the Hapsburg empire crumbled, the working class
grew increasingly receptive to socialist ideas. In this
environment, a group of academic economists in Vienna,
including Carl Menger, Friedrich von Wieser (1851-1926), and
Eugen von Böhm-Bawerk (1851-1914) sought to demonstrate
the appeal of a free-market economy with virtually no
government intervention.
• In addition to defending the virtues of capitalism, Austrian
economists have been harsh critics of Marxism and socialism.
Neoclassical Economics
• Ludwig von Mises (1881-1973) claimed that without the forces
of supply and demand operating in a free market, prices could
not accurately reflect consumer preferences or the relative
scarcity of different resources.
• Socialist planners, he argued, could not possibly gather
enough information about resource availability and consumer
preferences to permit calculation of appropriate prices for all
products and resources. As a result, shortages and surpluses
for different commodities would inevitably plague a socialist
economy and inefficiency would be rampant.
• Only capitalism provides incentive for gathering the information
required for efficient choices by allowing individuals to reap the
rewards of their own foresight, initiative, and innovation.
Neoclassical Economics
• In contrast to Austrian economists, Stanley Jevons and
subsequent economists at Cambridge University
recognized a more positive role for government.
• Although committed to preserving the freedom of
individual choice, their analysis of market failures
provided rationales for government intervention to
improve the workings of the market.
• The most prominent of the early Cambridge economists,
Alfred Marshall (1842-1924), demonstrated that economic
efficiency could be enhanced by taxing those industries in
which average costs rose as output expanded and using
the revenue to subsidize those industries, such as utilities
and transportation, in which average costs fell as they
served more customers.
Neoclassical Economics
• Another Cambridge economist, Arthur C. Pigou (1877-
1959), developed the analysis of externalities in which the
market fails to allocate resources efficiently because the
actions of one person or firm create costs or benefits that
are not reflected in market prices.
• Pigou recommended taxation of those actions creating
external costs and subsidies for actions creating external
benefits. Since externalities pervade society, the scope for
government intervention created by this market failure is
potentially quite large.
Neoclassical Economics
• In 1933, Cambridge economist Joan Robinson (1903-
1982) showed that the absence of perfect competition will
cause an inefficient allocation of resources and
exploitation of workers.
• She suggested that government could intervene either to
promote competition or to directly respond to the
problems caused by lack of competition.
• Three years later, the most significant contribution of
Cambridge economics occurred with John Maynard
Keynes’s (1883-1946) powerful claim that laissez-faire
capitalism is inherently prone to depression and
unemployment. To remedy this problem, he proposed
active government policies to stimulate the market.
Modern Political Economy
• Within
the field of political economy, four broad
perspectives currently contend for prominence: Classical
Liberalism, Radicalism, Conservatism, and Modern
Liberalism.
• The persistence of these dramatically different viewpoints
attests to an irreducible ideological element in political
economy.
• Scientific methods cannot resolve the disputes among
alternative perspectives because their differences are
ultimately based on commitments to conflicting values.
• To understand these divisions within political economy, we
need to briefly review the historical evolution of ideological
labels.
Modern Political Economy
• The
ideas associated with the Enlightenment have
traditionally been called “liberal”.
• Liberalism stands for individual freedom and rights
against the arbitrary exercise of power by church, state,
and other persons.
• In the French National Assembly of 1789, the defenders
of aristocratic privilege and hierarchy stood on the right
side of the chamber, while the proponents of greater
equality and individual freedom stood on the left. As a
result, proponents of equality have since been called
“leftists”, while those who defend hierarchy are called
“rightists”.
Modern Political Economy
• Rightists claim that hierarchical social relations are essential to
a good society. Individuals need distinctions of status to
differentiate themselves from others.
• A society lacking sufficient hierarchy will fail to provide
incentives for citizens to excel, resulting in a stifling mediocrity
and dragging the entire society into economic stagnation,
boredom, and apathy.
• Rightists also defend hierarchy as essential to organize the
complex social processes needed to maintain prosperity and
order.
• Just as armies rely on hierarchical chains of command to wage
war, other institutions such as corporations, schools, and
families also must be hierarchically structured to achieve their
objectives.
Modern Political Economy
• Leftists claim that human development flourishes when
individuals engage in cooperative, mutually respectful
relations that can thrive only when excessive differences
in status, power, and wealth are eliminated.
• According to leftists, a society without substantial equality
will distort the development of not only deprived persons,
but also those whose privileges undermine their
motivation and sense of social responsibility.
• This suppression of human development, together with
the resentment and conflict engendered by sharp class
distinctions, will ultimately reduce the efficiency of the
economy.
Modern Political Economy
• The right/left dichotomy is often treated as synonymous
with the conservative/liberal dichotomy. Although this
usage of ideological labels may have been appropriate for
analyzing political debate in the late eighteenth century,
modern discourse has become more complex.
• In addition to the dispute over hierarchy and equality, both
rightists and leftists have developed internal splits over
another question: should the private interests of
individuals take precedence over the interests of society?
• Individualists defend the priority of individual interests,
while communitarians defend the priority of society's
interests.
Modern Political Economy
• Individualists claim that a community has no interests other
than the aggregation of the individual interests within it.
• The good community is one that allows individuals to freely
pursue their private interests.
• In contrast, communitarians view human development as a
function of the quality of the social environment and therefore
expect the community to provide a supportive and nurturing
environment.
• By themselves, individuals are rather helpless in the face of
social forces over which they have no control, but the
community as a whole can consciously engage in actions to
facilitate the development of individual interests and shape
individual character.
Modern Political Economy
• Individualists and communitarians have sought to discredit
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each other through caricature.
Communitarians are portrayed as supporting “anthill” or
“beehive” societies in which members simply serve their
assigned role with no room for individual creativity or
expression.
Individualists, on the other hand, are accused of advocating an
amoral society in which selfish, isolated persons pursue their
narrow interests, constrained only by laws and the threat of
punishment.
Yet communitarians are vigorous defenders of individual
dignity, claiming that a nurturing community enables individuals
to achieve their full potential.
Conversely, individualists value healthy communities but argue
that communities are most peaceful and prosperous when
individuals are permitted to freely pursue their interests.
Value Commitments of Perspectives in
Political Economy
Value Commitments of Perspectives in
Political Economy
• The debate between individualists and communitarians has
occurred on both the right and left sides of the political
spectrum, resulting in four major perspectives within political
economy.
• In the top-right quadrant, the Classical Liberal perspective is
associated with both hierarchy and individualism.
• Although the earliest forms of liberal thought were highly
egalitarian, by the beginning of the nineteenth century, many
liberals concluded that the pursuit of individual freedom results
in hierarchy and that hierarchy is essential for economic
prosperity.
• Classical Liberalism was clearly articulated in the early
nineteenth century by classical political economists and was
later reinvigorated by neoclassical economists, particularly
those of the Austrian school.
Value Commitments of Perspectives in
Political Economy
• In
the bottom-right quadrant, the Conservative
perspective defends both hierarchy and community.
• Conservatives from Burke onward have stressed the
importance of a harmonious community in molding
virtuous persons, but they also view hierarchy as
essential to provide leadership by those with superior
abilities.
• A hierarchical community not only establishes the
authority and traditions essential for inspiring loyalty and
allegiance among citizens, but it also provides the social
context within which individuals can successfully find
meaning and purpose in their lives.
Value Commitments of Perspectives in
Political Economy
• The bottom-left quadrant shows the Radical perspective
combining commitments to both equality and community.
• Radicals uphold the original egalitarian impulse
associated with early liberalism but view this goal as
achievable only when the entire community is empowered
to collectively establish institutions and allocate
resources.
• Radicals believe that when all citizens participate in
constructing society, both personal development and
economic prosperity will advance.
Value Commitments of Perspectives in
Political Economy
• The top-left quadrant illustrates the Modern Liberal
perspective’s simultaneous commitments to equality and
individualism.
• Like Classical Liberals, Modern Liberals view individual
autonomy as essential to guaranteeing both human
dignity and a thriving economy; however, they also defend
substantial equality as necessary for all persons to
develop their capacities fully.
• Although Modern Liberals recognize potential conflicts
between the values of individualism and equality, they
remain confident that the two values can reinforce each
other when the powers of government and the market are
appropriately balanced.
Value Commitments of Perspectives in
Political Economy
• As John Maynard Keynes observed:
• “The ideas of economists and political philosophers, both
when they are right and when they are wrong, are more
powerful than is commonly understood. Indeed, the world
is ruled by little else”.