A Primer in Classical Economics
To fully understand the sociological perspectives we
will learn about in this course, we should know
classical economic thought and its influence on
sociology.
Therefore, this presentation provides an overview of
the philosophical perspectives of three classical
economists: Adam Smith, David Ricardo, and
Vilfredo Pareto.
The Invisible Hand of the Marketplace
Adam Smith (1723-1790)
• An Inquiry into the Nature and
Causes of the Wealth of
Nations.
• A strong economy and society
is achieved through individuals’ seeking to
maximize their self-interest.
Source: Helen Joyce: Adam Smith and the Invisible Hand.
Millennium Mathematics Project, University of Cambridge.
The Invisible Hand of the Marketplace
Adam Smith (1723-1790)
Smith described the mechanism by which
economic society operates.
• Each individual seeks to become wealthy.
• To do so, individuals must exchange with others.
• The public interest is advanced by each person
pursing their self-interest.
• This “invisible hand” improves the well-being of all.
The Invisible Hand of the Marketplace
Adam Smith (1723-1790)
The modern “invisible hand” has a broader
meaning.
• Economic outcomes are achieved through a
decentralized system of supply and demand, with
no explicit agreements among the acting agents.
• The maximization of well-being is not intentional.
Rather, it is the byproduct of individuals pursing
their own aims.
The Invisible Hand of the Marketplace
Adam Smith (1723-1790)
The invisible hand and the market economy:
• The invisible hand works as part of a free market.
• Consumers select equal products at the lowest
price.
• Producers create quality products at the lowest
cost possible.
• The market sets the price.
The Invisible Hand of the Marketplace
Adam Smith (1723-1790)
The invisible hand and society:
• People must think about what other people want.
• This serving society through serving oneself is
what is seen as “moral” about the invisible hand.
• Trading with others depends upon goodwill and
trust in the exchange relationship.
• This goodwill is achieved by knowing that the other
person will act in their self-interest.
Comparative Advantage
David Ricardo (1772-1823)
• On the Principles of Political
Economy and Taxation.
• All nations benefit by producing
according to their relative ratio of efficiency
and trading with one another.
Source: The Concise Encyclopedia of Economics.
Comparative Advantage
David Ricardo (1772-1823)
• Today, the principle of comparative advantage
is used to organize 151 nations within a global
capitalist economy.
• The rules of trade for these 151 nations are
written and administered by the World Trade
Organization.
• Further reading: Globalization.
Causes of Inflation
David Ricardo (1772-1823)
• The “bullion controversy” of England in the
early 1800’s.
• Ricardo stated that inflation was the result of
the Bank of England’s propensity to issue an
excess number of bank notes to repay
national debt.
• This principle is used today to control inflation.
Law of Diminishing Returns
David Ricardo (1772-1823)
• As more resources are used in production,
with fixed resources, the additional amount to
output will diminish.
• Today, this law is used as a key principle of
industrial relations and in the planning and
administration of production.
Theory of Rents
David Ricardo (1772-1823)
• As more land is cultivated, farmers
increasingly will use less productive land and
pay more in rent for more productive land.
• But the prices of commodities remain the
same, regardless of the rent paid for the land
because the price of a commodity is set by the
market, not by the amount of input.
Theory of Rents
David Ricardo (1772-1823)
• Thus, with greater production and higher rents
for land, land owners, not farmers, benefit.
• Today, this principle is used to understand
why agricultural price supports benefit land
owners (who more and more live off the farm)
rather than farmers.
The Political Economy
Vilfredo Pareto (1848-1923)
• Manual of Political Economy.
• Trattato di sociologia generale.
• Pareto Principle.
• Pareto Efficiency.
• Residues and Derivations.
Source: Wikipedia: The Free Encyclopedia.
The Pareto Principle
Vilfredo Pareto (1848-1923)
• The Pareto principle, or index, is used to
calculate the extent of income inequality
within a social system.
• Pareto found that, in advanced societies,
approximately 20% of the population earns
about 80% of the income.
• This ratio varies somewhat, but highlights
the need to monitor income inequality.
Pareto Efficiency
Vilfredo Pareto (1848-1923)
• Given a set of alternative resources, a shift
from one allocation to another that can
make at least one individual better off
without making any other individual worse
off is called a Pareto Improvement.
• The principle of Pareto efficiency is used to
evaluate the quality of economic systems.
Residues and Derivations
Vilfredo Pareto (1848-1923)
• Pareto agreed with Marx’s assessment of
the limitations of a capitalist economy, but
rejected Marx’s solution of communism as
just another form of rule by the elites.
• For Pareto, class struggle is inherent and
eternal. There would be no “classless”
society because new rulers would emerge.
Residues and Derivations
Vilfredo Pareto (1848-1923)
• In criticizing Marxism, Pareto realized that
the principles of economics depend upon
persons acting logically, with perfect
knowledge and their utilitarian goals in mind.
• Because much of human activity is nonlogical, however, Pareto saw the need to
integrate economic and sociological
thought.
Residues and Derivations
Vilfredo Pareto (1848-1923)
• Pareto posited that people act upon nonlogical sentiments (i.e., residues) and invent
justifications for these actions afterwards
(i.e., derivations).
• The derivations represent “moral” or
“rational” explanations of actions that are
undertaken for non-logical reasons.
Residues and Derivations
Vilfredo Pareto (1848-1923)
• Pareto posited society tended toward an
equilibrium of Class I and Class II persons.
• Class I persons rule by guile and are
calculating, materialistic, and innovating.
• Class II persons rule by force and are more
bureaucratic, idealistic, and conservative.
Residues and Derivations
Vilfredo Pareto (1848-1923)
• If Class I persons gain too much power,
then they inevitably ruin society by too much
cunning and corruption.
• If Class II persons gain too much power,
then they inevitably ruin society by creating
an overly bureaucratic, inefficient, and
reactionary mess.