Theme 3 Enlightenment Thought Political Economy Readings to

Theme 3. Enlightenment Thought: Political Economy Readings to class: A. An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Clarendon Press, 1976, Vol. I, pp. 13 -36 ØSmith J. Adam Smith's Conceptualization of Power, Markets, and Politics, in Review of Social Economy, 2000, Vol. 58, No. 4, pp. 429 -454 ØElliot ØRobertson J. The Enlightenment above National Context: Political Economy in Eighteenth-Century Scotland Naples, in The Historical Journal, 1997, Vol. 40, No. 3, pp. 667 -697

The Political Economy n The wealth and prosperity of people is a power of political body… (T. Hobbes) n The notion of wealth n The concept of social order favorable to the wealth creation n The concept of role of the state policies

The Early Political Economy Mercantilism n The nation’s wealth is constituted by the stock of money (gold and silver) n The universal purchasing power of gold & silver is natural and defined by the value as a property of those metals n The growth of the national monetary fund can be provided through positive balance of the foreign trade (exports more than imports) Protectionism n To increase the inflow of money the state has to stimulate national manufactures and traders to produce and export commodities n To diminish the outflow of money the state has to restrict imports closing domestic markets by laws or imposing more taxes on the imported commodities

Adam Smith (1723 -1790) n n n ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776) constituted classical political economy The real nation’s wealth is the annual production of the land labor of the society Three sources of value: labor force, capital, land The division of labor is economically productive and socially constructive The competition among people looking for their private interests and ignoring a nation’s interest leads by a natural way to the general prosperity of society

Division of Labor: Case Study and General Theory n n n One workman not educated to the pin-making can produce one pin in a day That work divided into about eighteen distinct operations and distributed among ten men can produce twelve pound (about 48000) of pins in a day The division of labor increases the productive power of labor and provides foundation for the general welfare of societies based on industries

‘Invisible Hand’ n n When the division of labor has been established, self-interested, egoistic individuals can reach their own ends only satisfying needs of other people Pursuing personal ends, people contribute to economic growth and to social relationship Civil society basically is a commercial society integrated by the exchange relations among people living under conditions of division of labor The private interests and competition lead to the society’s development without any governing

‘Night Guard’ n n The state should perform only functions providing conditions for the normal existence of the civil society The maintaining domestic order (preventing injuries among members of the nation) The maintaining the peace for the nation (preventing invasions of the other nations) The maintaining the infrastructures (communications, public institutions)

The State Policies n Providing the laissez-faire regime (free competition n Supporting the framework conditions (free competition n Compensation of the market insufficiencies (free through unrestricted market relationships) through easy access to markets and guaranties of equal rights for actors at the market-place) competition through prevention of monopolies)

Social Theory n Civil society arises as a natural order of people’s exchange relations and such ‘commercial society’ is self-regulated through the competition among self-interested people n Society’s evolution: Ø Ø Ø Society of hunters and fishers Pastoral society Civilized society (agricultural and industrial) n The political power arisen at the second stage with the necessity provide the property rights n Civilized society is divided into social classes according to sources of income: workers (salaries), entrepreneurs (profits), landlords (rent) and minor classes gaining their incomes from the shares of main classes n The social classes are differentiated by the moral attitudes: the commons are more rational and saving than aristocracy

Political Economy after Adam Smith The nation’s wealth depending on labor, full employment, and state regulation: n n n David Ricardo Karl Marx John Maynard Keynes The nation’s wealth depending on private interests, market equilibrium, and free competition: n n n Jean Batiste Say Frederick von Hayek Milton Friedman

Market Liberalism vs. State Interventionism n Poverty: free competition leads to the general growth of wealth vs. welfare system provides all with necessary living standard n Inequality: inequality of results is not a problem, differentiation of benefits motivates vs. inequality provokes conflicts, taxes and transfers provide equality of possibilities n Unemployment: reducing taxes and regulations stimulate entrepreneurs to create jobs vs. the government’s expenditures and state-owned enterprises allow to reach full employment

Market Liberalism vs. State Interventionism n Unfair competition: monopoly is the main problem, strong and independent justice resolves it vs. compensation of market failures by state control and regulation n Over-specialization: market provides mobile people with broad range of new activities vs. public re-training programs supply self-development possibilities to all people

Social Market Economy n ü ü Concept is based on principles borrowed from A. Smith: The most efficient instrument of providing welfare is competition The growth of productivity stimulated by the competition socializes profits: creates possibilities for all to be consumers The state preserves economy from monopolization (stability of market freedom) and inflation (stability of national currency) Social programs (welfare system) provide possibilities, not privileges and guaranties n Ludwig Erhard, minister of economy of Western Germany (1948 -1963) developed the concept of social market economy as the basis of policies contributing to the post-war recovery and rapid growth n EU is adopting the ‘German’ political economy