Introduction Adam Smith provided the main arguments against mercantilism and its political obstacles to industrial capitalism.

In his book The Wealth of Nations [177 ! he claimed their removal" and thus the free operation of competitive markets" #ould bring the nation #ealth. Smith$s ideas #ere not ne# but his achievement #as to pull together the various strands in an anal%sis of the economic s%stem and an understanding of the operation of the market and ho# all the components are interdependent. Smith provided a frame#ork #hich later classical economists developed.

&icardo on foreign trade [comparative advantage! 'althus on population [the dismal science! (entham and a theor% of human nature [ie utilit%....and it still underlies economic theor%! 'ill" the s%nthesis for classical political econom% [#ages set b% po#er not subsitence! 'ar) * #ithin the classical tradition * his interpretation of historical change emphasised significant differences bet#een his and earlier classical accounts of capitalism.

+,ASSI+A, -+.N.'I+S 1. +lassical economics #as more concerned #ith long*period d%namic change in relation to income distribution among $the various orders of societ%$/ 0. looks at the big picture and the flo# of mone% through the economic s%stem/ 1. It is concerned #ith [a! #hat produces value/ [b! #here does it lie/ [c! distribution throughout the s%stem. 2. a.. It e)plains the #hole s%stem and ho# each part is dependent on the rest" ie interdependent 3. 4ollo#ing 'ill in 1536s and 15 6s economics profession taking hold. N-.+,ASSI+A, -+.N.'I+S turned attention to the details of the econom% ............to the $separate$ issues ie micro economics" focus is on the process through #hich a market s%stem allocates an econom%$s resources I- focus is on market behaviour #ithin time span -conomists turned to the sciences to make their theor% more reliable. In this #a% the% produced models" abstract models" of the economic s%stem These changes of focus #ere the result of social changes Western economies had en7o%ed unprecedented prosperit% #ithout the problems 'ar) predicted/.

neoclassicism concerned itself #ith sho#ing this and debunking 'ar)/ It appeared as if economic gro#th #ould continue in the same vein" taking care of itself/ Improvements in real #ages ran contrar% to predictions for #orking class conditions made b% classical economics/

industries had gro#n8#ielded gt unchecked po#er trade 9nions becoming involved in #age setting faith in progress AN: a benevolent outcome/ 'ore optimism no# * ;rogress appeared to be resolving social tensions rather than making them #orse.

Neoclassical focus turned to economic behaviour of [a! households [b! firms [c! industries ho# #ere choices made here converted into orderl% process< microeconomics came centre stage [rather than aggregate income and its share*out bet#een profits" #ages" rents! the area of stud% no# #as * the functioning of the market s%stem and its role as allocator of resources/ primar% focus #as on the factors affecting price [theor% of market price! see handout #hich e)plains ho# prices are formed.

[=immel#eit" S. Simonetti" &. [0662! $Nature for Sale$" in =inchliffe" S. And Wood#ard" >. [eds! The Natural and the Social? uncertaint%" risk" change" ,ondon" &outledge8.pen 9niversit%.!

The fascination #ith and focus on price theor% meant that neoclassical economists took the measure of value to be #hat the public #ould bu% [services8material goods! unlike classical economists" #ho had pursued a material theor% of value * agreeing that labour produces value"neoclassical economist Alfred 'arshall said" 'an cannot create material things....." he reall% onl% produces utilities/ or in other #ords" his efforts and sacrifices result in changing the form or arrangement opf matter to adapt it better for the satisfaction of #ants.$ [@uoted in (arber" W. [1A 7! p171 and taken from 'arshall8Buillebaud [1A 1! neoclassical economics makes a ma7or departure from classical and 'ar)ian labour* based account of value/

demand [based on utilit%! and suppl% [based on costs of production! e)plained market prices [not a theor% of value based on labour! under neoclassical economics ....linked income pa%ments to the productive contribution of the various factors/ ie suppl% and demand forces in the market are the basis on #hich re#ards to the suppliers of productive services #ere established [(arber"1A 1" p175! it #as assumed full emplo%ment #ould naturall% flo# from free operation of mkt * (9T realit% changed perceptions of neoclassical economics * :epression meant 9nemplo%mentC ASS9';TI.NS that agents are rational and in pursuit of o#n advantage/ consumers seek ma)imum satisfactions/ suppliers seek ma)imum re#ards/ rationalit% is a reasonable basis for the stud% of groups of people/ tastes of consumers remain unchanged/ mone% incomes remain unchanged/ prices of other goods remain unchanged/ operates on consumer purchase of 1 good onl% [rather than a market full of goods! full emplo%ment is an econom%$s normal operating level. John Maynard Keynes A product of his times/ influenced b% ideas and values from social democratic political tradition/ he came from a == #here taken for granted that intellectual elite #ould guide8govern. This #as a departure from the liberal idea that the market #ould #ork best left alone With people pursuing o#n interests/ the @uestion is #hether #e can move out of the nineteenth centur% laisseD*faire state into ... a s%stem #here #e can act as an organised communit% for common purposes and to promote social 7ustice" #hilst respecting and protecting the individual [@uoted in 'oggridge" 1A7 " pp2 *7!social democrac% emerging out of socialism

not revolutionar% not #ishing to replace capitalist private o#nership #ith public o#n#ership of means of production %es to a more e@ual societ% and all to prosper regardless of origins social development" social provision" social 7ustice" through democratic means ma7or role for state * redistribution via ta)ation" s%stem of #elfare and active planning of econom% to secure gro#th. >e%nes still influenced b% his liberal classical economics background too (ut felt [social dem influence! possible to $soften the edges$ of capitalism -conomic intervenetion to eliminate povert% and unemplo%ment E but basicall% leave the capitalist structure [pvte o#nership of means of prodn! in place.

>-FN-SIAN :-'AN: 'ANAB-'-NT >e%nes identified the root of the problem of unemplo%ment as uncertaint% 9ncertaint% due to the volatilit% of the capitalist s%stem What he meant b% this #as that business leaders" #hen making decisions about investing in ne# factories and machiner% have to think about profits that these ne# capital goods [factories and machines! #ill earn this means predicting the future course of demand for the ne# goods to be produced but the future is unkno#able If #e speak frankl%" #e have to admit that our basis of kno#ledge for estimating the %ield 16 %ears hence of a rail#a%" a copper mine" a te)tile factor% ... amounts to little and sometimes to nothing. [>e%nes" 1A1 81A 2" pp12A*36! In circumstances of uncertaint%" investment decisions depend on the mood of the business communit% *** #hich could s#ing rapidl% from confidence to caution....from optimism to pessimism and this tended to be cumulative...... spreading throughout business #orld. The effects of this G reduced orders for goods....leading to 7ob losses/ unemplo%ed cut back e)penditure" and a fall in demand spreads through econom%

>e%nes defined this as the econom% trapped in a situation of aggregate demand deficienc% [no demand for goods!/ -ven if #orkers offered to #ork for nothing it #ould be pointless to emplo% them because no prospect of selling these goods/ >e%nes$s conclusion contradicted the prevailing orthodo)%" #hich" reflecting the liberal political principles of economists at the time" held that unemplo%ment #as the conse@uence of reluctance b% #orkers to accept #age cuts" or the% #ere reluctant $to price themselves back into #ork$ in the labour market.

Neoclassical economists argued that this #as ho# the markets #ork? unless %ou #ant to be left #ith unsold stock" drop %our asking price. -conomists advising the government in 1A0A argued that the same logic applied to labour? unemplo%ment is simpl% another e)ample of e)cess suppl% and #ages are 7ust another price ..... the price of labour. In order for the unemplo%ed to get 7obs it #as necessar% and sufficient to reduce the asking price * offer #ork for lo#er #ages. >e%nes succeeded in rethinking economic polic% he focused on #ages and sa# them in a different #a%/ from a market point of vie# #ages are simpl% the price of labour. H9-STI.N #hat are #ages from the standpoint of the #age earner" and his8her famil%< To them" #ages are a source of income/ no #ages....no spending/ s#itch perspective no# from ....a market to.... the national econom% as a #hole. S-- +I&+9,A& 4,.W :IAB&A' Imagine the national econom% as a circuit aI a.. households receive #ages from firms bI and return most of them to firms in pa%ment for goods and services

cI firms use this sales revenue to pa% #ages to the #orkers #ho made the goods.. and so on dI from vie#point of national econom% #ages are the most important source of income for consumption eI #ages enable consumers to turn #ants into effective demand in the market fI firms emplo% labour to produce goods and services gI ultimatel%" the demand for labour [and hence the level of emplo%ment! depends on effective demand for goods and servicesC

the level of consumer demand depends on the level of #ages the level of emplo%ment" and hence #ages" depends on the level of consumer demand/ the constituent parts of the national econom% are mutuall% dependent change one of them and it has repercussions on the others.

H9-STI.N? at the time most economists thought that unemplo%ment #as a form of e)cess suppl% in a market and #anted to reduce #ages. According to >e%nes $s anal%sis #hat #ould be the effect [of a #age cut! for the #hole econom%< Ans#er? Wage cuts #orse than unfair or irrelevant * Would make unemplo%ment #orse * ,o#er #ages G fall in consumption G fall in demand for goods8services G fall in demand for labour * Wage cuts #ould lead to further 7ob losses more unemplo%ment" probabl% unrest and disorder T=- ANSW-& 4.& >-FN-S **** >-FN-SIAN :-'AN: 'ANAB-'-NT

government e)penditure pla%s a role government bu%s the services of drs nurses" police" teachers" members of armed forces" local authorit% #orkers/ also bu%s tanks" chalk" invests in buildings" roads etc if government increases its spending" sa% on building" then unemplo%ed #orkers find 7obs " earn income" spend on goods8services...creating more demand for these ..... more 7obs etc etc demand management as a solution to unemplo%ment #as about

a.. raising government e)penditure b.. increase aggregate demand c.. hence increase in emplo%ment d.. more secure" peaceful" orderl% societ% unemplo%ment for >e%nes #as a collective responsibilit%/ this is a social democratic idea unemplo%ed not laD% or stubborn but victims of malfunctioning of capitalist econom% in times of uncertaint% and volatilit% of capitalism Refs: (arber" W.J. [1A 7! A =istor% of -conomic Thought" ,ondon ;enguin (ooks ,td :o#d" :. [0666! +apitalism and its -conomics? A +ritical =istor%" ,ondon" ;luto ;ress.